##### Table of Contents



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 EXCHANGEACT OF 1934
for the fiscal year ended December 31, 2002                    
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934
for the transition period from ____________ to ____________

Commission File No. 0-20619

MATRIA LOGO

MATRIA HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)


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

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.   o

Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act).   Yes   o     No   
x

As of June 28, 2002, the last business day of the registrants most recently
completed second fiscal quarter, there were 9,018,914 shares of common stock
outstanding. The aggregate market value of common stock held by nonaffiliates
was approximately $70,163,914 based upon the closing sale price on June 28,
2002. As of March 11, 2003, there were 10,104,100 shares of common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III.





---

TABLE OF CONTENTS



|                                                  |                                                                                                          |  |  |  |  |  |  | 
|------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. Business.                                                                                       
|                                                  | Item 2. Properties.                                                                                     
|                                                  | Item 3. Legal Proceedings.                                                                              
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                             
|                                                  | Special Item. Executive Officers of the Company.                                                        
|PART II                                          
|                                                  | Item 5. Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters.
|                                                  | Item 6. Selected Financial Data.                                                                        
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.          
|                                                  | Item 7a. Quantitative and Qualitative Disclosure about Market Risk.                                     
|                                                  | Item 8. Financial Statements and Supplementary Data.                                                    
|                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.           
|PART III                                         
|                                                  | Item 10. Directors and Executive Officers of the Registrant.                                            
|                                                  | Item 11. Executive Compensation.                                                                        
|                                                  | Item 12. Security Ownership of Certain Beneficial Owners and Management.                                
|                                                  | Item 13. Certain Relationships and Related Transactions.                                                
|                                                  | Item 14. Controls and Procedures.                                                                       
|PART IV                                          
|                                                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.                               
|SIGNATURES                                       
|CERTIFICATIONS                                   
|EX-3.3 AMENDED BYLAWS                            
|EX-4.10 SUPPLEMENTAL INDENTURE                   
|EX-4.11 SUPPLEMENTAL INDENTURE                   
|EX-4.12 SUPPLEMENTAL INDENTURE                   
|EX-4.13 AMENDMENT NO. 1, TO THE LOAN AND SECURITY
|EX-10.27 SPLIT DOLLAR TERMINATION AGREEMENT      
|EX-10.28 SPLIT DOLLAR TERMINATION AGREEMENT      
|EX-10.29 SPLIT DOLLAR TERMINATION AGREEMENT      
|EX-10.30 SPLIT DOLLAR TERMINATION AGREEMENT      
|EX-10.31 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN  
|EX-10.32 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN  
|EX-10.33 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN  
|EX-10.34 CHANGE IN CONTROL SEVERANCE COMPENSATION
|EX-10.35 CHANGE IN CONTROL SEVERANCE COMPENSATION
|EX-10.36 EMPLOYMENT LETTER AGREEMENT             
|EX-10.37 TRUST UNDER THE SUPPLEMENTAL EXECUTIVE  
|EX-10.38 LOCKUP AGREEMENT                        
|EX-11.0 COMPUTATION OF EARNINGS (LOSS) PER SHARE 
|EX-21.0 LIST OF SUBSIDIARIES                     
|EX-23.0 ACCOUNTANTS' CONSENT                     



---



##### Table of Contents



MATRIA HEALTHCARE, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

|               |                                                                                                         |  |    |    | 
|-------------- | ------------------------------------------------------------------------------------------------------- |  | -- | -- | 
|PART I         |                                                                                                         |  |    |   
|               | Item 1. Business                                                                                        |  |    | 3  | 
|               | Item 2. Properties                                                                                      |  |    | 12 | 
|               | Item 3. Legal Proceedings                                                                               |  |    | 13 | 
|               | Item 4. Submission of Matters to a Vote of Security Holders                                             |  |    | 13 | 
|               | Special Item Executive Officers of the Company                                                          |  |    | 13 | 
|PART II        |                                                                                                         |  |    |   
|               | Item 5.
Market Price of and Dividends on the Registrants Common Equity
and Related Stockholder Matters |  |    | 15 | 
|               | Item 6. Selected Financial Data                                                                         |  |    | 17 | 
|               | Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations           |  |    | 18 | 
|               | Item 7a. Quantitative and Qualitative Disclosures About
Market Risk                                     |  |    | 29 | 
|               | Item 8. Financial Statements and Supplementary Data                                                     |  |    | 29 | 
|               | Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure            |  |    | 29 | 
|PART III       |                                                                                                         |  |    |   
|               | Item 10. Directors and Executive Officers of the Company                                                |  |    | 30 | 
|               | Item 11. Executive Compensation                                                                         |  |    | 30 | 
|               | Item 12. Security Ownership of Certain Beneficial Owners
and Management                                 |  |    | 30 | 
|               | Item 13. Certain Relationships and Related Transactions                                                 |  |    | 30 | 
|               | Item 14. Controls and Procedures                                                                        |  |    | 30 | 
|PART IV        |                                                                                                         |  |    |   
|               | Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K                                |  |    | 32 | 
|SIGNATURES     |                                                                                                         |  | 38 |   
|CERTIFICATIONS |                                                                                                         |  | 40 |   

2



---



##### Table of Contents






PART I




Item 1. Business.

General.Matria Healthcare, Inc., a Delaware corporation (Matria or the
Company), is a comprehensive, integrated disease management company, offering
its services to patients, health plans and employers. Disease management
encompasses a broad range of services aimed at controlling healthcare costs
through proactive management of care. Matrias strategy is to provide
cost-saving solutions for the five most costly chronic diseases and episodic
conditions in the nation: diabetes, obstetrical conditions, cancer, respiratory
disorders and cardiovascular disease. In addition, the Company has added
programs for depression and chronic pain to its service offerings. Matrias
disease management programs seek to lower healthcare costs and improve patient
outcomes through a broad range of disease management, mail-order supply and
clinical services. Matria contracts with managed care organizations and
self-insured employers for the provision of its services for which the Company
is generally compensated on a fee-for-service basis. The Company is also a
leading designer, developer, assembler and distributor of products
for the diabetes market.

Matria was incorporated on October 4, 1995 for the purpose of the merger
of Healthdyne Maternity Management and Tokos Medical Corporation. The
effective date of the merger was March 8, 1996. Matrias headquarters are
located in Marietta, Georgia.

Acquisitions and Expansion of Services.On February 6, 2002, the Company
purchased certain of the assets of ChoicePoint Health Systems, Inc.
(ChoicePoint), a direct-to-consumer laboratory testing facility located in
Kansas. The assets of ChoicePoint were transferred to the Companys
subsidiary, Matria Laboratories, Inc., a Delaware Corporation (Matria Labs).
Matria Labs is engaged in the business of direct-to-consumer laboratory testing
serving the diabetes, cardiovascular and hypertension patient populations.

On June 14, 2002, the Company acquired MarketRing.com, Inc.
(MarketRing), an Atlanta, Georgia based healthcare information technology
company. MarketRing has certain proprietary technology that the Company
previously licensed and currently utilizes with its Trax disease management
system.

Effective October 1, 2002, the Company acquired certain assets of
LifeMetrix, Inc., including its subsidiary, Quality Oncology, Inc. (QO). QO
is a national provider of cancer disease management programs with locations in
Virginia, Florida and California.

In April 2002, the Company introduced its cardiovascular disease
management program, which includes the management of patients with coronary
artery disease and congestive heart failure.

In November 2002, the Company added disease management programs for
depression and chronic pain to its product offerings.

Business Segments and Geographic Areas. In 2002, the Companys operations
consisted of two reportable business segments: Health Enhancement and Womens
Health. Information regarding revenues, operating earnings, and identifiable
assets (including intangibles) of each of the business segments in which the
Company operated in fiscal years 2000 through 2002, 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 13 of Notes to Consolidated
Financial Statements on pages F-23 through F-24 of this report.

Health Enhancement.The Health Enhancement segment has two components:
disease management and diabetes product design, development and assembly
operations.

The disease management component of the Health Enhancement segment
currently offers disease management services for diabetes, cancer, respiratory
disorders, cardiac disease, depression and chronic pain. The Companys disease
management programs improve health outcomes through identification,
stratification,

3



---



##### Table of Contents



risk assessment, patient education, support and compliance management for
specified conditions and associated co-morbidities. Some programs also include
care or case management.

As part of the diabetes and respiratory disorder compliance management
process, the Company sells prescription and non-prescription drugs and supplies
used by diabetes and respiratory patients in the management of their
conditions. These sales are made primarily on a mail-order basis through the
Companys pharmacy, laboratory and supplies subsidiaries of the Health
Enhancement segment. Effective February 2002, Matria Labs, a
direct-to-consumer laboratory testing facility headquartered in Lenexa, Kansas,
serves the diabetes, cardiovascular and hypertension patient populations. The
disease management programs for chronic conditions serve patients in the United
States through the Companys facilities in Atlanta, Georgia; Roanoke, Virginia;
Irvine, California and Lenexa, Kansas, and in Germany through its main
facilities in Neumünster and Dresden, Germany.

With the acquisition of QO effective October 2002, the Company began to
provide cancer disease management programs directly through QO. QO serves
patients nationwide through its call centers located in Virginia, Florida and
California. Services include 24-hour-a-day, seven-day-a-week phone access to a
team of experienced cancer nurses who help patients understand and manage their
cancer and treatment. QOs proprietary cancer patient website,
www.cancerpage.com, delivers high-quality clinical and lifestyle information
for patients and their families.

The Health Enhancement segment also includes Facet Technologies, LLC
(Facet), a leading designer, developer, assembler and distributor
of products for the diabetes market. Facet has a significant presence in each
of the three major products used by patients with diabetes for testing blood
glucose levels: standard lancets, lancing devices and safety lancets. Facet
operates from facilities in Marietta, Georgia; McDonough, Georgia, and Milton
Keynes and Northants, England. Its products are shipped primarily to North and
South America, Europe and Asia.

Approximately 28%, 29% and 34% of the Health
Enhancement segments revenues were derived from customers
outside of the United States in 2002, 2001 and 2000, respectively, of
which approximately 23%, 22% and 26% of the segments revenues
in 2002, 2001 and 2000, respectively, were from shipments to Germany.

Womens Health.The Womens Health segment offers a wide range of
services designed to assist physicians and payors in the cost-effective
management of maternity patients. These services include risk assessment,
patient education, hypertension management, infusion therapy for the
management of hyperemesis, anticoagulatation disorders and preterm
labor, gestational diabetes
management, fetal surveillance, home uterine activity monitoring and other clinical services as prescribed by the
patients physician. The Womens Health segment is headquartered in Marietta,
Georgia and has 41 sites of service throughout the United States, nine of which
are monitoring centers. All 41 sites are fully accredited as home care
organizations by the Joint Commission on Accreditation of Health Care
Organizations. In addition, the segment has two after-hours centers.

Discontinued Operations.Effective February 1, 2001, the Company sold the
business and assets of Quality Diagnostic Services, Inc. (QDS), a cardiac
diagnostic company that comprised the Companys former Cardiovascular segment.
This business is unrelated to the Companys current cardiac disease management
business, which continues to operate as part of the Companys Health
Enhancement segment.

Customers, Suppliers and Third-Party Payors.In 2002, the Companys
revenues from continuing operations were derived from the following types of
customers: approximately 48% from third-party private payors (including
employers), 23% from original equipment manufacturers and
distributors, 15% from domestic
government payors and 14% from foreign healthcare systems.

The Company markets its disease management services to patients,
physicians, other healthcare providers and third-party payors through its
employee sales force. In addition, from time-to-time, the diabetes mail-order
supply component utilizes television and direct mail advertising.

The Companys clinical services and pharmacy, laboratory and supply
businesses are reimbursed on a fee-for-service or per item basis.
Disease management services, however, are paid for primarily on the
basis of monthly fees for each employee or member enrolled in a health plan, each member
identified with a particular chronic disease or condition under contract, or
each member enrolled in the Companys program or on a case-rate basis.

4



---



##### Table of Contents



Facet markets its products to large medical device manufacturers through
its employee sales force. Its customers include original equipment
manufacturers and distributors of blood glucose and other point-of-care test kits. Four major
original equipment manufacturer customers represented approximately 85% of
Facets total sales in 2002.

Seasonality.Revenues of the Womens Health segment tend to be seasonal.
Revenues typically begin to decrease with the onset of the holiday season
starting with Thanksgiving, causing the fourth quarter and first quarter
revenues of each year to be less than those of the second and third quarters.
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.

Additionally, the Company holds patents or has an exclusive, perpetual
right to use the only uterine activity monitors that have 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.

Patents owned by Nipro 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 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.

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 disease management businesses compete with a large number of
competitors. Competitors of the Companys Womens Health segment include
national, regional and local home health agencies, hospitals and other
companies devoted primarily to providing services for the management of
maternity patients. The Companys disease management businesses compete with
pharmaceutical companies, case management companies and other companies engaged
principally in the business of providing disease management services for one or
more diseases or conditions. Additionally, the disease management components
pharmacy, laboratory and supplies operations compete with retail pharmacies,
pharmacy benefit companies and traditional laboratories. These businesses
compete on a number of factors,
including quality of care and service, reputation within the medical community,
scope of products and services, geographical scope and price.

5



---



##### Table of Contents



Competition in the diabetes product design, development and assembly
component of the Companys Health Enhancement 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.

The Company believes that its clinical expertise, advanced technology and
coordinated approach to patient services will enable its Womens Health segment
and the disease management component of its Health Enhancement segment to
compete effectively. Similarly, the Company believes that the quality of
Facets products, as well as its strong distribution system, value-added
approach to customer service, and design and development expertise will
continue to enable this business to maintain its significant market share,
notwithstanding the highly competitive environment in which it operates. There
can be no assurance, however, 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 the Company 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 Marietta, Georgia. This businesss
research and development activities are key factors in its ability to stay
abreast of its competition.

Program development and refinements in the Womens Health segment and the
disease management component of the Health Enhancement segment result from the
cooperative efforts of the businesses information technology, clinical,
operating and marketing staff.

The costs of all of the Companys research and development efforts are
charged to earnings when incurred. However, the Company capitalizes
development costs incurred for internal-use software under the
provisions of AICPA Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use.

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 home health
agencies and to have medical waste disposal permits. In addition, the
operations of Matrias diabetes and respiratory disease management businesses
require Matria to be licensed as a pharmacy or durable medical equipment
provider in several states. Matria Labs is a licensed clinical laboratory in
Kansas. Also, many states require QO to be licensed as a utilization review
provider. 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.

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

6



---



##### Table of Contents



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, the FDA allows physicians to prescribe
drugs and medical devices for such off-label indications under the practice
of medicine doctrine. In fact, a significant percentage of drugs taken by
women in pregnancy are used off-label. Nevertheless, publicity concerning
the off-label use of drugs and devices may adversely affect the Companys
Womens Health segments business.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
governs electronic healthcare transactions and the privacy and security of
medical records and other individually identifiable patient data. Regulations
issued by the Secretary of Health and Human Services, acting pursuant to HIPAA,
establish standards for the protection of the privacy of personal health
information maintained by health care providers, hospitals, health plans and
health insurers, and health care clearinghouses. In general, the privacy
regulations prohibit the use and disclosure of medical records and other
individually identifiable health information held or disclosed by health care
providers and other affected entities in any form, whether communicated
electronically, on paper, or orally, subject only to certain limited
exceptions. In addition, the regulations provide patients with significant new
rights to understand and control how their health information is used. These
regulations do not preempt more stringent state laws and regulations. Health
care providers and other affected entities have until April 2003 to comply with
the privacy regulations. Additional regulations requiring the use of uniform
standards for electronic health care transactions have been issued. The
Company requested and obtained an extension of time to comply with the
electronic transactions regulations until October 2003. Further regulations
establishing health care information security requirements have been issued
with compliance required by April 2005. Failure to comply with HIPAA can
result in criminal penalties and civil sanctions.

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.

Employees.As of December 31, 2002, the Company employed a total of 1,175
full-time employees and 56 regular part-time employees. In addition, the
Company employs an additional 982 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 good.

Business Strategy.The Companys strategy is to (i) expand its disease
management business through the addition of new product lines as well as the
development and expansion of relationships with health plans and employers and
(ii) to grow the pharmacy, laboratory and supplies component of its Health
Enhancement segment through more effective marketing measures and improved
customer retention. The Company expects these efforts to be aided by its
technologically advanced TRAX system for disease management and the
state-of-the-art infrastructure system recently implemented in the pharmacy,
laboratory and supplies division.

Risk Factors.The Companys business is subject to certain risks,
including the risks described under the headings Seasonality, Trademarks,
Licenses and Patents, Competition and Regulation and Healthcare Industry
Changes in this Item 1 and those described below. Readers of this Annual
Report on Form 10-K should take such risks into account in evaluating any
investment decision involving the Company.

7



---



##### Table of Contents



This Item 1 does not describe all
risks applicable to the Companys business and is intended only as a summary of
certain material factors that affect the Companys operations in the industries
in which it operates. More detailed information concerning these and other
risks is contained in other sections of this Annual Report on Form 10-K.

The disease management business is a relatively new component of the overall
healthcare industry.

Disease management services are relatively new components of the Companys
business and of the overall healthcare industry. Accordingly, payors have not
had significant experience in purchasing, evaluating or monitoring such
services, which generally results in a lengthy sales cycle. The success of the
Companys business plan relative to its disease management operations depends
on a number of factors. These factors include:



| |  |  | The Companys ability to differentiate its products and
service offerings from those of its competitors;                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The extent and timing of the acceptance of the Companys
services as a replacement for, or supplement to, traditional managed
care offerings;
|
| |  |  | The Companys ability to implement new and additional
services beneficial to health plans and employers; and                                 
|
| |  |  | The Companys ability to effect cost savings for health plans
and employers through the use of its programs.                                 

Since the disease management business is continually evolving, the Company
may not be able to anticipate and adapt to a developing market. Moreover, the
Company cannot accurately predict the future growth rate or the ultimate size
of the disease management market.

The Company is highly dependent on payments from third-party healthcare payors,
which may implement cost reduction measures that adversely affect the Companys
business and operations.

In 2002, the Companys revenues from continuing operations were derived from
the following types of customers: approximately 48% from third-party private
payors (including employers), 23% from original equipment
manufacturers and distributors, 15%
from domestic government payors and 14% from foreign healthcare systems.
Third-party private and governmental payors exercise significant control over
patient access and increasingly use their enhanced 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 and governmental payors (whether initiated by the payor or
legislatively mandated) could have an adverse impact on the Companys Womens
Health and disease management businesses.

Facet is substantially dependent on a few customers.

Facets revenues are substantially dependent on sales to four customers.
In 2002, these four customers represented approximately 85% of Facets
revenues, which in turn represented approximately 21% of the Companys total
revenues. The Company has multiple contracts with these customers covering
various products. The remaining term of these contracts range from six months
to two years. There is no guarantee that these contracts will be renewed.

8



---



##### Table of Contents



The profitability of the Companys pharmacy, laboratory and supplies division
depends on recurring customer orders.

Due to the marketing and regulatory compliance costs associated with
initial customer qualification, the pharmacy, laboratory and supplies division
of the Companys Health Enhancement segment generally incurs losses with
respect to the first order of drugs and supplies from a new customer.
Accordingly, the profitability of this component depends in large part on
recurring and sustained reorders. Reorder rates are inherently uncertain due
to several factors, many of which are outside the Companys control, including
changing customer preferences, competitive price pressures, customer transition
to extended care facilities, customer mortality and general economic
conditions.

Facet and the Companys Womens Health segment are both highly dependent on
supplies from limited sources.

Facets business is highly dependent on its exclusive supply relationship
with Nipro Corporation, from which it purchases virtually all of the components
for its products on terms the Company views as favorable. Under the agreement,
some terms, such as pricing, are negotiated annually while others, such as the
exclusivity arrangement, are renewable after longer periods. The exclusivity
provisions of the Companys agreement with Nipro will expire in November 2003.
Although Nipro has been a supplier to Facets business for more than 15 years,
there can be no assurance that the Company will be able to negotiate a renewal
of the exclusivity arrangement on favorable terms. In addition, there are an
extremely limited number of suppliers of terbutaline sulfate, a prescription
drug used in large supply by the Companys Womens Health segment, and price
increases in this drug during the second and third quarter of 2002 adversely
affected the segments cost of revenues. In September 2002, the Company
entered into an arrangement for the supply of this drug which has reduced its
cost to the Company. Termination of any of these supply arrangements or
failure to continue any of them on favorable terms could have a material
adverse effect on the business of Facet or the Womens Health segment, as
applicable, as would any interruption in the supply or significant increase in
the price of these products, whatever the cause.

The Companys data management and information technology systems are critical
to maintaining and growing its business.

The Companys disease management services are dependent on the effective
use of information technology. The Company uses its proprietary TRAX system
and QOs Integrated Care Management System in the provision of its disease
management services. In the fourth quarter of 2002, the Company installed a
state-of-the-art computer system to support the growth of the pharmacy,
laboratory and supplies division of the Health Enhancement segment. Although
the Company believes that its systems provide it with a competitive advantage,
the Company is exposed to technology failure. In addition, data acquisition,
data quality control and data analysis, which are a cornerstone of the
Companys disease management programs, are intense and complex processes
subject to error. Untimely, incomplete or inaccurate data or flawed analysis
of such data could have a material adverse impact on the Companys business and
revenues.

The development of improved technologies for glucose monitoring that eliminate
the need for consumable testing supplies could adversely affect the Companys
business.

Most of the revenues from the Companys pharmacy, laboratory and supplies
business and all of Facets revenues are from the sale of consumable testing
supplies used to draw and test small quantities of blood for the purpose of
measuring and monitoring blood glucose levels. Numerous research and
development efforts are underway to develop more convenient and less intrusive
glucose measurement techniques. Although the Company does not believe such
events are imminent, the commercialization and widespread acceptance of new
technologies that eliminate or reduce the need for consumable testing supplies
could negatively affect the Companys pharmacy, laboratory and supplies
business.

Many of the Companys disease management fees are contingent upon performance.

Many of the Companys existing disease management agreements contain a
savings guarantee, which typically provides that the Company will repay all or
some of the Companys fees if the payors cost savings as

9



---



##### Table of Contents



a result of the
Companys disease management programs do not meet expectations or if other
quality performance measures are not met. Some contracts also provide that the
Company will receive bonus compensation by meeting certain performance
criteria. There is no guarantee that the Company will meet the performance
criteria necessary to receive the designated bonus compensation or to avoid
repayment of fees under the agreements.

The Companys foreign operations are subject to additional risks.

Although the majority of the Companys operations are in the United
States, the Health Enhancement segment derives substantial revenue from outside
of the United States. The risks of doing business in foreign countries include
potential adverse changes in the stability of foreign governments and their
diplomatic relations, hostility from local populations, adverse effects of
currency fluctuations and exchange controls, deterioration of foreign economic
conditions and changes in tax laws. Due to the foregoing risks, any of which,
if realized, could have a material adverse effect on the Company, the Company
believes that its business activities outside of the United States involve a
higher degree of risk than its domestic activities.

The Company may face costly litigation that could force it to pay damages and
harm its reputation.

Like other participants in the healthcare market, the Company is subject
to lawsuits alleging negligence, product liability or other similar legal
theories, many of which involve large claims and significant defense costs.
Although the Company currently maintains liability insurance intended to cover
such claims, there can be no assurance that the coverage limits of such
insurance policies will be adequate or that all such claims will be covered by
the insurance. In addition, these insurance policies must be renewed annually.
Although the Company has been able to obtain liability insurance, such
insurance may not be available in the future on acceptable terms, if at all. A
successful claim in excess of the insurance coverage could have a material
adverse effect on the Companys results of operations or financial condition.
Claims, regardless of their merit or eventual outcome, also may have a material
adverse effect on the Companys business and reputation.

Past and future acquisitions may cause integration problems, disrupt the
Companys business and strain the Companys resources.

In the past the Company has made several significant business
acquisitions, and may continue with such acquisitions in the future. The
Companys success will depend, to a certain extent, on its ability to smoothly
integrate any acquired business entities. These acquisitions, either
individually or as a whole, could divert management attention from other
business concerns and expose the Company to unforeseen liabilities or risks
associated with entering new markets and integrating those new entities.
Further, the integration of these entities may cause the Company to lose key
employees. Integrating newly acquired organizations and technologies could be
expensive and time consuming and may strain the Companys resources.
Consequently, the Company may not be successful in integrating these acquired
businesses or technologies and may not achieve anticipated revenue and cost
benefits.

If the Company does not manage its growth successfully, its growth and
profitability may slow or stop.

If the Company does not manage its growth successfully, its growth and
profitability may slow or stop. The Company has expanded its operations
rapidly and plans to continue to expand. This expansion has created
significant demands on the Companys administrative, operational and financial
personnel and other resources. Additional expansion in existing or new markets
could strain the Companys resources and increase the Companys need for
capital. The Companys personnel, systems, procedures, controls and existing
space may not be adequate to support further expansion.

If the Companys costs of providing products or services increase, the Company
may not be able to pass these cost increases on to its customers.

In many of the Companys markets, due to competitive pressures or the fact
that reimbursement rates are set by law, the Company has very little control
over the price at which it sells its products and services. If the
Companys costs increase, the Company may not be able to increase its
prices, which would adversely

10



---



##### Table of Contents



affect results of operations. Accordingly, any
increase in the cost of such products and services could reduce the Companys
overall profit margin.

The Companys operating results have fluctuated in the past and could
fluctuate in the future.

The Companys operating results have varied in the past and may fluctuate
significantly in the future due to a variety of factors, many of which are
outside of the Companys control. These factors include:



| |  |  | Impact of substantial divestitures and acquisitions;       
| | - |  | -----------------------------------------------------------
|
| |  |  | Loss or addition of customers and referral sources;        
|
| |  |  | Investments required to support growth and expansion;      
|
| |  |  | Changes in the mix of the Companys products and customers;
|
| |  |  | Changes in healthcare reimbursement policies and amounts;  
|
| |  |  | Increases in operating expenses;                           
|
| |  |  | Increases in selling, general and administrative expenses; 
|
| |  |  | Increased or more effective competition; and               
|
| |  |  | Regulatory changes.                                        

In addition, revenues from the Companys Womens Health segment are
historically less during the fourth and first calendar quarters than during the
second and third calendar quarters. The seasonal variability of demand for
these services significantly affects, and the Company believes will continue to
affect, its quarterly operating results.

The Companys stock price and trading volume may be volatile.

Stock prices of healthcare companies and the Companys stock price in
particular may be volatile. The price of the Companys stock may be influenced
by a number of factors, including variations in the Companys financial
results, changes in earnings estimates by financial analysts and general
economic, industry and market conditions. Many of these factors are beyond the
ability of the Company to control. In addition, the Companys stock is not
heavily traded, and therefore the ability of shareholders to achieve relatively
quick liquidity without a negative impact on the stock price may be limited.

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 (the Exchange Act), 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 mandated; (ii) the loss of major customers or failure to receive
recurring orders from customers of the mail-order supply business; (iii)
termination of the Companys exclusive supply agreement with Nipro 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

11



---



##### Table of Contents



with existing laws and
regulations; (viii) increased exposure to professional negligence liability;
(ix) difficulties in successfully integrating recently acquired businesses into
the Companys operations and uncertainties related to the future performance of
such businesses; (x) losses due to foreign currency exchange rate fluctuations
or deterioration of economic conditions in foreign markets; (xi) changes in
company-wide or business unit strategies and changes in patient therapy mix;
(xii) the effectiveness of the Companys advertising, marketing and promotional
programs; (xiii) market acceptance of the Companys disease management
products; (xiv) inability to successfully manage the Companys growth; (xv)
acquisitions that strain the Companys financial and operational resources;
(xvi) inability to forecast or effect cost savings and clinical outcomes
improvements under the Companys disease management contracts or to reach
agreement with the Companys disease management customers with respect to the
same; (xvii) inability of the Companys disease management customers to provide
timely and accurate data that is essential to the operation and measurement of
the Companys performance under its disease management contracts; (xviii)
increases in interest rates and (xix) 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, 2002. 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 72,500 square
feet. The facility is leased through February 28, 2010. Matria also leases
46,611 square feet at 2161 NewMarket Parkway, Marietta, Georgia, for its call
center operations.

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 400 and 5,500 square feet of space with
an average of approximately 2,200 square feet. Total square footage for these
facilities is approximately 79,000 square feet. These facilities are leased
for various terms through 2008.

Facets assembly and packaging facility consists of approximately 70,000
square feet of office and warehouse space in McDonough, Georgia. The lease
term on this facility will expire in 2008. Facet also occupies approximately
9,000 square feet of space in the Matria headquarters building. This lease
expires on February 28, 2010. In addition, Facet 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
August 2003 with automatic annual renewals.

The pharmacy and supplies component of the Companys Health Enhancement
segment maintains its United States headquarters in Roanoke, Virginia, where
its facility consists of approximately 32,000 square feet of office and
warehouse space, which is leased through August 2006. The Irvine, California
operation of this business leases approximately 7,000 square feet of office and
warehouse space, under a lease that expires in March 2008. Matria Labs leases
approximately 6,000 square feet of space in Lenexa, Kansas through May 31,
2005.

The Companys foreign
disease management operations lease
office facilities in Neumünster and Dresden, Germany, consisting of
approximately 3,000 and 8,00 square feet, respectively. The Neumünster
facility, which also includes warehouse space, is leased through July
2004. The Dresden facility, which also houses a retail shop, is leased
for a term expiring in 2005. The business also leases an approximately
900 square foot office, warehouse and training facility in Kobande,
Germany under a lease expiring in July 2004. In addition, this
business operates numerous retail, training and footcare facilities
throughout Germany in leased space ranging from 100 to 1,700 square
feet with remaining lease terms of two years or less. The business
also leases warehouse space throughout Germany ranging from 125 to
6,300 square feet under leases with terms expiring in two years or
less.

12



---



##### Table of Contents



QO has three locations totaling approximately 23,150 square feet, with its
main call center facility located in Sunrise, Florida. These facilities have
lease terms through October 2005. MarketRing occupies offices of approximately
7,000 square feet in Alpharetta, Georgia, with a lease term expiring August
2004.

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 the Company, (ii) Matrias prior
experience with respect to the disposition of its litigation is representative
of 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. There are no pending legal or governmental
proceedings to which the Company is a party that the Company believes would, if
adversely resolved, have a material adverse effect on Matria.




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

Not applicable.




Special Item. Executive Officers of the Company.

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

|                       |  |     |    |                           |  |                                                             
|---------------------- |  | --- | -- | ------------------------- |  | ------------------------------------------------------------
|Name                   |  | Age |    | Position with the Company
|                       |  |     |    |                          
|Parker H. Petit        |  |     | 63 |                           |  | Chairman of the Board, President and
Chief Executive Officer
|                       |  |     |    |                           |  |                                                             
|Thomas S. Hall         |  |     | 42 |                           |  | Executive Vice President and Chief Operating Officer        
|                       |  |     |    |                           |  |                                                             
|Stephen M. Mengert     |  |     | 53 |                           |  | Vice President  Finance and Chief Financial Officer        
|                       |  |     |    |                           |  |                                                             
|Yvonne V. Scoggins     |  |     | 53 |                           |  | Vice President  Financial Planning and Analysis            
|                       |  |     |    |                           |  |                                                             
|Roberta L. McCaw       |  |     | 47 |                           |  | Vice President  Legal, General Counsel and Secretary       
|                       |  |     |    |                           |  |                                                             
|Thornton A. Kuntz, Jr. |  |     | 49 |                           |  | Vice President  Administration                             

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 between
Healthdyne Maternity Management and Tokos Medical Corporation 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, Inc. and served as
its Chairman of the Board of Directors and Chief Executive Officer from 1970
until the stock of the last of its operating subsidiaries were
distributed to its shareholders in 1996. Mr. Petit is also a director of Intelligent Systems Corp.
and Logility, Inc.

13



---



##### Table of Contents



Mr. Hall was appointed Executive Vice President and Chief Operating
Officer of the Company on October 22, 2002. From 2000 to 2002, he was
President and Chief Executive Officer of TSH & Associates, an independent
consulting and management services company. From 1997 to 1999, Mr. Hall held
executive positions that included President of ADP TotalSource, a division of
Automated Data Processing, Inc. (ADP).

Mr. Mengert was appointed Vice President  Finance and Chief Financial
Officer of the Company on September 3, 2002. Since 2000, he has been a partner
with Tatum CFO Partners, L.L.P., and prior to joining the Company, served as
Chief Financial Officer of Tatum client companies in the technology and
healthcare sectors. From 1996 to 1999, Mr. Mengert served as Senior Vice
President of Finance and Chief Financial Officer of Pediatric Services of
America, a company specializing in pediatric homecare for medically fragile
children.

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.

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.

14



---



##### Table of Contents






PART II




Item 5. Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters.

(a)  Market Information.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 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, 2001 through December 31, 2002:

|        |  |     |       |      |  |   |       | 
|------- |  | --- | ----- | ---- |  | - | ----- | 
|Quarter |  | Low |       | High
|        |  |     |       |     
|2001    |  |     |       |      |  |   |       | 
|First   |  | $   | 9.25  |      |  | $ | 16.63 | 
|Second  |  |     | 12.25 |      |  |   | 16.10 | 
|Third   |  |     | 15.05 |      |  |   | 25.15 | 
|Fourth  |  |     | 21.45 |      |  |   | 36.67 | 
|        |  |     |       |      |  |   |       | 
|2002    |  |     |       |      |  |   |       | 
|First   |  | $   | 15.75 |      |  | $ | 40.00 | 
|Second  |  |     | 7.00  |      |  |   | 25.59 | 
|Third   |  |     | 5.89  |      |  |   | 9.15  | 
|Fourth  |  |     | 6.25  |      |  |   | 12.80 | 

(b)  Holders.The approximate number of stockholders of the Company as of
March 11, 2003 was 1,750 record holders and 5,500 street holders.

(c)  Dividends.Matria has not paid any cash dividends with respect to
its common stock and does not intend to declare any dividends in the near
future. The Company is a party to a Loan and Security Agreement and an
Indenture, each of which contains covenants restricting the payment of
dividends on and repurchases of the Companys common stock.

15



---



##### Table of Contents



(d)  Equity Compensation Plan Information.

The following table gives information about the Companys common stock
that may be issued upon the exercise of options, warrants and rights under all
existing equity compensation plans as of December 31, 2002.

|                                                               |       |            |                   |            |                   |         |                    |       |                     |  |                     |         | 
|-------------------------------------------------------------- | ----- | ---------- | ----------------- | ---------- | ----------------- | ------- | ------------------ | ----- | ------------------- |  | ------------------- | ------- | 
|                                                               |       |            |                   |            |                   |         |                    |       |                     |  | Number of          
|                                                               |       |            |                   |            |                   |         |                    |       |                     |  | Securities         
|                                                               |       |            |                   |            |                   |         |                    |       |                     |  | Remaining Available
|                                                               |       |            | Number of         |            |                   |         |                    |       | for Future Issuance
|                                                               |       |            | Securities to be  |            |                   |         |                    |       | Under Equity       
|                                                               |       |            | Issued Upon       |            | Weighted-Average  |         | Compensation Plans
|                                                               |       |            | Exercise of       |            | Exercise Price of |         | (Excluding        
|                                                               |       |            | Outstanding       |            | Outstanding       |         | Securities        
|                                                               |       |            | Options, Warrants |            | Options, Warrants |         | Reflected in 1st  
|Plan Category                                                  |       | and Rights |                   | and Rights |                   | Column)
|                                                               |       |            |                   |            |                   |        
|Equity compensation
plans approved by
security holders         |       |            | 1,291,038         |            |                   | $       | 17.74              |       |                     |  | 572,620             | (1)    
|Equity compensation
plans not approved
by security holders (2) |       |            | 83,854            |            |                   | $       | 22.36              |       |                     |  |                    |        
|                                                               |       |            |                   |            |                   |         |                    |       |                     |  |                     |        
|                                                               | Total |            |                   | 1,374,892  |                   |         | $                  | 18.02 |                     |  |                     | 572,620 | 
|                                                               |       |            |                   |            |                   |         |                    |       |                     |  |                     |        



|(1) |  | Includes securities available for future issuance under shareholder
approved compensation plans as follows: 175,752 shares under the 2002
Stock Incentive Plan, 58,314 shares under the 2001 Stock Incentive Plan,
76,250 shares under the 2000 Directors Non-qualified Stock Option Plan,
207,491 shares under the 2000 Stock Incentive Plan, 34,855 shares under
the 1997 Stock Incentive Plan, 13,958 shares under the 1996 Directors
Non-qualified Stock Option Plan and 6,000 shares under the 1996 Stock
Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | This total includes options for: (1) 15,000 shares granted to Robert F.
Byrnes, former President and CEO of the Company, on October 1, 1997
pursuant to the terms of a settlement agreement between Mr. Byrnes and the
Company. These options were immediately exercisable by Mr. Byrnes. (2)
29,502 shares granted to certain key employees (other than executive
officers) on October 20, 1997 and 20,000 shares granted to non-employee
members of the Companys Board of Directors on February 24, 1998. All of
these options were granted at exercise prices which were the fair market
value of a share of the Companys stock on the date of grant and all
expire ten years from the date of the grant. The October 20, 1997 grants
vested 33% a year and became exercisable on October 20, 2000. The
February 24, 1998 grants vested on February 24, 1999. (3) 19,352 shares
assumed by the Company in connection with the acquisition of MarketRing,
which options were granted by MarketRing under the MarketRing 1999 Stock
Option and Stock Appreciation Rights Plan prior to the acquisition. The
exercise price for these options, originally set by MarketRing, has been
determined by reference to the exchange ratio prescribed for converting
shares of MarketRing common stock into shares of the Companys common
stock pursuant to the acquisition. The number of shares subject to these
assumed options will be increased by up to 2,053 shares, in the aggregate,
upon the release, if any, of certain shares held in escrow by the Company
through June 14, 2003 as security for certain indemnification obligations
of MarketRing. The assumed options generally vest in increments of 25%
annually, beginning on the second anniversary of the date of grant, with
such options expiring five to ten years from the date of grant or upon
termination of employment.

16



---



##### Table of Contents






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, 2002
and the related balance sheet data have been derived from the audited
consolidated financial statements of the Company.

|                                                             |         |   |                          |       |      |   |                                       |      |      |   |         |      |  |   |         |      |  |   |          |        |  
|------------------------------------------------------------ | ------- | - | ------------------------ | ----- | ---- | - | ------------------------------------- | ---- | ---- | - | ------- | ---- |  | - | ------- | ---- |  | - | -------- | ------ | -
|                                                             |         |   | Years Ended December 31,
|                                                             |         |   |                         
|                                                             |         |   | 2002                     |       | 2001 |   | 2000                                  |      | 1999 |   | 1998   
|                                                             |         |   |                          |       |      |   |                                       |      |      |   |        
|                                                             |         |   |                          |       |      |   | (In thousands, except per share data) |      |      |   |        
|Consolidated statements of operations data:                  |         |   |                          |       |      |   |                                       |      |      |   |         |      |  |   |         |      |  |   |          |       
|Revenues                                                     |         | $ | 277,631                  |       |      | $ | 263,983                               |      |      | $ | 225,767 |      |  | $ | 231,739 |      |  | $ | 128,572  |       
|Earnings (loss) from continuing operations                   |         |   | (15,644                  | )     |      |   | 7,925                                 |      |      |   | 13,694  |      |  |   | 31,366  |      |  |   | (100,406 | )     
|Earnings (loss) from continuing operations per
common share: |         |   |                          |       |      |   |                                       |      |      |   |         |      |  |   |         |      |  |   |          |       
|                                                             | Basic   |   | $                        | (1.68 | )    |   | $                                     | 0.78 |      |   | $       | 1.10 |  |   | $       | 3.05 |  |   | $        | (10.98 | )
|                                                             | Diluted |   |                          | (1.68 | )    |   |                                       | 0.76 |      |   |         | 1.05 |  |   |         | 2.82 |  |   |          | (10.98 | )

|                                               |  |              |         |      |  |      |         |      |                |      |         |  |  |   |         |  |  |   |        | 
|---------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | ---- | -------------- | ---- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |         | 2001 |  | 2000 |         | 1999 |                | 1998
|                                               |  |              |         |      |  |      |         |      |                |     
|                                               |  |              |         |      |  |      |         |      | (In thousands) |      |         |  |  |   |         | 
|Consolidated balance sheets data:              |  |              |         |      |  |      |         |      |                |      |         |  |  |   |         |  |  |   |        | 
|Total assets                                   |  | $            | 291,407 |      |  | $    | 260,623 |      |                | $    | 268,850 |  |  | $ | 285,713 |  |  | $ | 97,304 | 
|Long-term debt, excluding current installments |  |              | 118,215 |      |  |      | 114,575 |      |                |      | 76,996  |  |  |   | 91,090  |  |  |   | 18,385 | 
|Redeemable preferred stock                     |  |              |        |      |  |      |        |      |                |      | 41,446  |  |  |   | 41,005  |  |  |   |       | 

17



---



##### Table of Contents






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

General

Matria Healthcare, Inc. (the Company) is a comprehensive, integrated
disease management services company, offering its services to patients, health
plans and employers. The Companys strategy is to provide cost-saving
solutions for the five most costly chronic diseases and episodic conditions in
the nation: diabetes, obstetrical conditions, cancer, respiratory disorders and
cardiovascular disease. In addition, the Company has added programs for
depression and chronic pain to its service offerings. The Companys disease
management programs seek to lower healthcare costs and improve patient outcomes
through a broad range of disease management, mail-order supply and clinical
services. The Company is also a leading designer, developer, assembler and
distributor of products for the diabetes market.

The Company has two reporting segments: Health Enhancement and Womens
Health. The Health Enhancement segment is comprised of the Companys disease
management programs and the diabetes product design, development and assembly
operation. The Company currently offers disease management services for
diabetes, cancer, respiratory disorders, cardiac disease, depression and
chronic pain. As part of the diabetes and respiratory disorder compliance
management process, the Company sells prescription and non-prescription drugs
and supplies used by diabetes and respiratory patients in the management of
their conditions. These sales are made primarily on a mail-order basis through
the Companys pharmacy, laboratory and supplies subsidiaries of the Health
Enhancement segment. The Health Enhancement segment also includes
Facet Technologies, LLC (Facet), a leading designer,
developer, assembler and distributor of products for the diabetes
market. The Womens Health segment offers a wide range of services designed to assist physicians and payors in the
cost-effective management of maternity patients. These services include risk
assessment, patient education, hypertension  management, infusion
therapy for the management of hyperemesis, anticoagulation disorders
and pre-term labor, gestational
diabetes management, fetal surveillance, home uterine activity
monitoring and other clinical services.

The Company acquired three new businesses in 2002. In February, the
Company acquired substantially all of the assets of ChoicePoint Health
Systems, Inc. (ChoicePoint), a direct-to-consumer laboratory testing
facility headquartered in Kansas, which serves the diabetes, cardiovascular
and hypertension patient populations. These assets are held by the Companys
subsidiary, Matria Laboratories, Inc. (Matria Labs). In June, the Company
acquired MarketRing.com, Inc. (MarketRing), a healthcare information
technology company. MarketRing has certain proprietary technology that the
Company had previously licensed and currently utilizes with its TRAX disease
management system. The Company intends to utilize this technology to
facilitate the development of sophisticated website portals for patients,
physicians, payors and employers under its current and future disease
management contracts. The Companys financial statements include the
operations of Matria Labs effective February 7, 2002 and those of MarketRing
commencing on June 14, 2002.

On September 30, 2002, the Company completed its acquisition of all of the
issued and outstanding stock of Quality Oncology, Inc. (QO), a national
provider of cancer disease management programs, from LifeMetrix, Inc.
(LifeMetrix). This acquisition broadened the Companys capability to offer
health plans and employers a single source for multiple disease management
services. In this acquisition, the Company also acquired from LifeMetrix its
Integrated Care Management System and its rights in Cancerpage.com and other
assets related to its cancer disease management business. Results of
operations of QO were reflected in the Companys financial statements effective
October 1, 2002.

In April 2002, the Company introduced its cardiovascular disease
management program, which includes the management of patients afflicted with
coronary artery disease and congestive heart failure.

In November 2002, the Company added disease management programs for
depression and chronic pain to its service offerings.

In October 2002, the Company implemented a new information system in the
pharmacy, laboratory and supplies component of the Health Enhancement segment.
This $8 million project consisted of the integration of software applications
for customer service, inventory, shipping and receiving management, electronic
billing and a paperless storage system. Software flaws in the inventory,
shipping and receiving management

18



---



##### Table of Contents



application caused
the system to crash in daily use during the first 43 days of operations. These
problems caused a loss in revenue and substantial additional expenses
associated with manually tracking business processes.

In the fourth quarter of 2002, the Company consolidated and expanded the
disease management call center in Atlanta, Georgia. In addition to capital
costs for leasehold improvements, expenses were incurred for personnel and
other start-up costs in advance of the January 2003 initiation of new disease
management contracts.

On December 31, 2002, the Company terminated and restructured its
retirement plan for certain former and current employees. The decision to
terminate the program, which utilized split-dollar life insurance as the
funding mechanism, was prompted in part by concerns that such a vehicle may no
longer be permitted for some current officers under certain provisions of the
Sarbanes-Oxley Act of 2002, as well as anticipation that additional funding, in
excess of amounts originally contemplated, would have been required under the
former plan.

In February 2001, the Company sold the business and certain assets of
Quality Diagnostic Services, Inc. (QDS), a cardiac event monitoring company.
The Companys consolidated financial statements reflect QDS as a discontinued
operation for all periods presented.

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. 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

2002 Compared to 2001.

Revenues increased $13.6 million, or 5.2%, in 2002 compared to 2001. This
increase resulted from growth in the Health Enhancement segment, where revenues
increased $19.7 million, or 12.3%. The disease management component of this
segment contributed revenue growth in excess of 20% in 2002, while
Facets revenues were slightly
lower in 2002 compared to 2001. Revenues in the Womens Health segment
decreased $6.1 million, or 5.8%, in 2002 compared to 2001 due primarily to a
continued decline in the patient census for preterm labor management services.

Cost of revenues as a percentage of revenues increased to 59.2% in 2002
from 55.2% in 2001. The increase in this percentage was due to a significant
price increase in one of the primary drugs used in the preterm labor
management program of the Womens Health segment, combined with a change in
this segments patient drug therapy mix. Also, cost of revenues as a
percentage of revenues increased in the Facet division of the Health Enhancement segment due to packaging
inefficiencies experienced prior to the installation of a new automated
packaging line in July and August 2002, and in the disease management
component of this segment due to additional labor costs incurred during the
implementation phase of new disease management contracts. Facet also experienced higher
costs of revenues as a percentage of revenues due to price concessions
provided to customers that exceeded supplier cost reductions.

Selling and administrative expenses as a percentage of revenues increased
to 33.1% for 2002 compared to 28.9% for 2001. The increase in this percentage
was primarily due to increases in customer service and other costs associated
with manually tracking business processes resulting from the software flaws
encountered upon implementation of the new information system in the pharmacy,
laboratory and supplies component of the Health Enhancement segment. This
percentage also increased in 2002 because of higher amortization of
direct-response advertising costs and increased customer service expenses
needed to support higher revenue levels in the Health Enhancement segment.
Selling and administrative expenses included a one-time, non-cash charge of

19



---



##### Table of Contents



$2.5 million related to the retirement of a $3.5 million note receivable from
a former executive acquired from a predecessor organization. The note, which
matured on June 30, 2002, stipulated that the balance could be settled in full
by surrender of collateral consisting of 125,000 shares of the Companys
common stock, generating a charge equal to the difference between the book
value of the note and the closing market value on June 30, 2002 of the 125,000
shares. Selling and administrative expenses for 2002 also included $2.9
million of severance costs. Excluding the charges related to the retirement
of the note and severance costs, selling and administrative expenses as a
percentage of revenues was 31.0% for 2002 compared to 28.9% for 2001 due to
the increases in customer service and direct-response advertising costs
described above. Selling and administrative expenses as a percentage of
revenue decreased in the Womens Health segment in 2002 compared to 2001 due
to consolidation of patient service centers.

On December 31,
2002, the Company terminated and restructured its split-dollar
insurance retirement plan for certain former and current employees
and recorded charges totaling approximately $14.2 million. The
plan was terminated for the group including certain former employees
and the Companys Chairman, President and Chief Executive
Officer. The plan for the other current employes was replaced by a
Supplemental Executive Retirement Plan. The expense of
$14.2 million represents the net present value of the targeted
benefits under the plan (including tax mitigation amounts) of
approximately $13.6 million, and $575,000 related to transaction
costs and the net shortfall in the refund of cumulative premiums paid
by the Company. The Company satisfied its obligations to
participants by relinquishing its collateral interests in the
split-dollar policies and through net incremental payments of
approximately $3.1 million (the effect of which is mitigated by
the elimination of future premium obligations of $3.7 million).
An additional $1.0 million is expected to be expensed over the
next nine years of expected service by the respective current
employees.

The Company provides for estimated uncollectible accounts as revenues are
recognized. The provision for 2002 included an addition to reserves of $2.0
million, which increased the provision for doubtful accounts for both segments.
As a result, the provision for doubtful accounts as a percentage of revenues
in the Health Enhancement segment was 2.6% in 2002, compared to 1.5% in 2001.
The provision for doubtful accounts as a percentage of revenues in the Womens
Health segment was 5.4%, compared to 5.0% in 2001. Excluding this $2.0 million
accrual, the provision for doubtful accounts as a percentage of revenues for
each segment in 2002 was consistent with 2001. The provision is adjusted
periodically based upon the Companys quarterly evaluation of historical
collection experience, recoveries of amounts previously provided, industry
reimbursement trends, audit activity and other relevant factors.

As a result of implementing SFAS 142 in January 2002 (see Recently Issued
Accounting Standards below), the Company discontinued amortization of goodwill
in 2002. Amortization of goodwill was approximately $9.3 million in 2001. The
Company continued to amortize identifiable intangible assets in 2002; such
expense was $560,000 in 2002 and 2001.

Interest expense increased by $3.7 million, or 35.1%, in 2002 compared to
2001 due to having a full years interest on the Companys 11% senior notes in
2002 compared to approximately six months of interest in 2001 (issued in July
2001) and lesser principal amounts outstanding at a lower average interest
rate under the Companys former bank credit facility in the first half of
2001. The proceeds from the senior notes were used to repay all amounts
outstanding in July 2001 under the bank credit facility and to repurchase all
shares of preferred stock (and thereby eliminate their dividend requirements),
common stock warrants and subordinated acquisition notes. This increase was
net of the $1.5 million benefit in 2002 and $633,000 benefit in 2001 from the
Companys interest rate swap arrangements (discussed below in Liquidity and
Capital Resources). The weighted average interest rate on outstanding
indebtedness was 11.89% in 2002 and 10.70% for 2001.

Other income (expense) for 2002 included the write-off of approximately
$2.5 million related to the original Trax platform, which was made obsolete
due to the latest generation of this software, which was put into production
on July 1, 2002. The 2002 amount also included a charge of $692,000 to
write-off unamortized loan origination costs associated with the cancellation
of the Companys former bank credit agreement (see Liquidity and Capital
Resources below where the new facility is discussed).

The income tax benefit of $4.5 million for 2002 reflected a lower benefit
than the statutory tax rate due to various non-deductible permanent differences
between tax and financial accounting. The tax provision

20



---



##### Table of Contents



recorded for 2001 was
$6.1 million. Cash outflows for income taxes in 2002 and 2001 totaled $247,000
and $1.2 million,
respectively, being comprised of federal alternative minimum taxes, state
and foreign taxes. As of December 31, 2002, the Companys remaining net
operating losses of $58.8 million, the tax effect of which is reflected in the
deferred tax asset, will be available to offset future tax liabilities.

The operating results of the Companys former Cardiovascular segment, QDS,
have been reported, net of tax, as discontinued operations. In 2001, the
Company reflected an estimated loss from discontinued operations and a loss on
disposal of discontinued operations totaling approximately $1.2 million. An
additional loss of approximately $700,000 was recorded in 2002 as a result of
greater than expected costs of collection and lower than expected cash receipts
from the retained receivables.

2001 Compared to 2000.

Revenues increased $38.2 million, or 16.9%, in 2001 compared to 2000 due
to the strong growth in the Health Enhancement segment, where revenues
increased $43.7 million, or 37.7%. Both components of this segment, disease
management and Facet,
achieved revenue growth in excess of 25% in 2001. Revenues in the Womens
Health segment decreased by $5.5 million, or 5.0%, due primarily to a decline
in the patient census for preterm labor management services.

Cost of revenues as a percentage of revenues increased to 55.2% in 2001
from 51.5% in 2000. The increase in this percentage was primarily the result
of the relative variances in revenues between the two segments noted above,
since the gross profit margin of the Health Enhancement segment was lower than
that for the Womens Health segment. Also, the cost of revenues as a
percentage of revenues in the Womens Health segment increased in 2001
compared to 2000 due to this segments decline in revenues with relatively
fixed costs of labor.

Selling and administrative expenses as a percentage of revenues decreased
to 28.9% for 2001 compared to 30.3% for 2000. The decrease was also due
primarily to the relative variances in revenues between the two segments noted
above, since the percentage of selling and administrative expenses to revenues
for the Health Enhancement segment was lower than that of the Womens Health
segment. Selling and administrative expenses for 2000 included a $1.2 million
severance payment to a former senior executive of the Company.

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 5.0% in 2001 and 2000. The provision for
doubtful accounts as a percentage of revenues in the Health Enhancement segment
was 1.5% in 2001 and 2000.

Amortization of goodwill was approximately $9.3 million and amortization
of identifiable intangible assets was $560,000 in both 2001 and 2000.

In 2000, the Company recorded restructuring expenses of $1.6 million
related to its decision to exit its clinical patient record software business,
Clinical-Management Systems, Inc.

Interest expense increased by $1.8 million, or 20.8%, in 2001 compared to
2000 due to the six-month effect of the Companys 11% senior notes offering
(issued in July 2001). This increase was net of the $633,000 benefit in 2001
from the Companys interest rate swap arrangements (discussed below in
Liquidity and Capital Resources). The weighted average interest rate on
outstanding indebtedness was 10.70% for 2001 and 9.43% for 2000.

Other income for 2000 included 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 in 2000
from the 1999 sale of assets of the Companys infertility practice management
business, National Reproductive Medical Centers, Inc. (NRMC).

21



---



##### Table of Contents



The tax provisions recorded for 2001 and 2000 were $6.1 million and $9.1
million, respectively. Cash outflows for income taxes in 2001 and 2000 totaled
$1.2 million and $2.2 million, respectively, being comprised of federal
alternative minimum taxes, state and foreign taxes.

Liquidity and Capital Resources

As of December 31, 2002, the Company had cash and short-term investments
of $5.6 million. Net cash provided by continuing operations increased from
$7.9 million in 2001 to $19.9 million in 2002. This increase in cash flows
from continuing operations was due to the relative improvement in collections
of accounts receivable, increases in accounts payable and accrued liabilities,
and from proceeds related to the terminations of two interest rate swap
agreements. Lower net earnings (adjusted to exclude non-cash charges)
negatively impacted cash flows from continuing operations in 2002. Net cash
provided by continuing operations was $20.1 million in 2000.

The Companys accounts receivable days sales outstanding were 62 days as
of December 31, 2002 compared to 67 days as of December 31, 2001. The 2002
amount consists of 60 days sales for the Health Enhancement segment and 68
days sales for the Womens Health segment.

Effective August 2001, the Company entered into an interest rate swap
transaction with a bank involving a notional amount of $60 million. In June
2002, the Company terminated this agreement and received proceeds from the
counter party bank of approximately $2.4 million. At the same time, the
Company entered into a new interest rate swap arrangement with this bank in the
notional amount of $60 million. In August 2002, the Company terminated the
June 2002 interest rate swap arrangement and received proceeds from the counter
party bank of approximately $700,000. The cash proceeds of $3.1 million from
the terminations of the two interest rate swap agreements will be amortized
into income as a reduction of interest expense over the remaining term of the
senior notes (through May 2008).

Net cash flows provided by (used in) operating activities related to the
discontinued operations of QDS were $642,000, $3.1 million and $(623,000) in
2002, 2001 and 2000, respectively. The amounts for 2002 and 2001 represent
collections of accounts receivable, less payments of salary costs of personnel
retained to collect the accounts receivable and other costs. As of December
31, 2002, approximately $125,000 of accounts receivable remain to be
collected.

Net cash provided by (used in) investing activities totaled $(19.6)
million in 2002, $9.7 million in 2001 and $(3.6) million in 2000. Capital
expenditures for continuing operations of $16.1 million in 2002, $8.4 million
in 2001 and $7.4 million in 2000 relate primarily to the replacement and
enhancement of computer information systems. The increase in capital
expenditures in 2002 was due to the implementation of a new $8 million
information system in the pharmacy, laboratory and supplies component of the
Health Enhancement segment. Capital expenditures incurred by QDS were $3.5
million in 2000, relating primarily to purchases of patient equipment.

The 2002 cash used in investing activities included $3.5 million for the
acquisition of two businesses. In February, the Company acquired
substantially all of the assets of ChoicePoint for $650,000 in cash. After a
120-day period, ChoicePoint reimbursed the Company $143,000 under a guarantee
of collection of acquired accounts receivable. On September 30, 2002, the
Company completed the acquisition of QO for approximately $20 million,
consisting of $3 million in cash and approximately 890,000 shares of common
stock. The common stock is reflected on the Companys balance sheet at a
price of $18.818 per share. The price is the 5-day average of the closing
stock prices between June 3 and June 7, 2002, based on a measurement date of
June 5, which was the date that the closing stock price fell below the $19.148
minimum price in the purchase and sale agreement and the number of shares
became fixed. An additional 42,000 shares were issued in February 2003
pursuant to a purchase price adjustment. Additional consideration will be
paid in 2004 based upon QOs 2003 operating results. Management currently
estimates that the additional consideration could be between $20 million and
$25 million, although the amount could be more or less depending on 2003
performance. The additional consideration will be payable, at the Companys
option, in cash, common stock or a combination

22



---



##### Table of Contents



thereof, provided that the
lesser of 20% of the payment or $10 million must be paid in cash. In
2002, the Company recorded goodwill of approximately $19.3 million in
connection with this transaction.

In addition, the Company acquired MarketRing in June 2002 in a non-cash
transaction. The Companys Chief Executive Officer and four other directors
of the Company were stockholders of MarketRing. The terms of the MarketRing
acquisition were negotiated by an independent committee of the Companys Board
of Directors and approved by the vote of the Companys disinterested
directors. The purchase price was paid by the issuance of approximately
267,000 shares of common stock valued at approximately $3.8 million (based on
the average closing price of the Companys common stock during the three-day
trading period ended June 14, 2002). The Company is holding an additional
28,500 shares, issuable in connection with the acquisition, in escrow through
June 2003 as security for certain indemnification obligations of MarketRing
under the related merger agreement. In addition, the Company may issue up to
21,500 shares of common stock upon the exercise of MarketRing stock options
assumed and a warrant issued by the Company in connection with the
acquisition. The Company recorded goodwill of approximately $2.8 million
related to this acquisition.

The 2001 cash provided by investing activities included the $18.1 million
of proceeds from the sale of the business and certain assets of QDS. The
proceeds from the sale were used to repay a portion of the Companys former
term loan facility. During 2000, the Company sold 203,393 shares of WebMD,
resulting in proceeds of $7.3 million. These sales were in
addition to sales in 1999 of 561,030 shares of WebMD, resulting in
proceeds of $20.7 million. No shares were sold in 2001 or 2002.
At December 31, 2002, the Company had a remaining investment in WebMD of
16,423 shares.

In July 2001, the Company issued $125 million of 11% senior notes at a
discount of 6.5% from the principal amount. The senior notes are unsecured
and will mature on May 1, 2008. Interest is payable semi-annually in arrears
on May 1 and November 1. Among the covenants under the bond indenture is a
requirement to repurchase notes from the Companys annual excess cash flow, as
defined, or from the proceeds received from the sale of assets. In August
2001, the Company repurchased in the open market $3.0 million principal amount
of outstanding senior notes, leaving $122 million outstanding under the senior
notes as of December 31, 2001. Such repurchases in the open market are
permitted under the bond indenture and may be applied to reduce the amount
required to be repurchased, at 100% of the principal amount, under the annual
excess cash flow repurchase covenant. The August 2001 repurchase fully
satisfied the excess cash flow repurchase covenant for 2001. The annual
excess cash flow repurchase covenant required no repurchases in 2002 and no
principal was otherwise repaid. The senior notes indenture sets forth a
number of covenants binding on the Company. Negative covenants in such
instruments limit the ability of the Company to, among other things, incur
indebtedness and liens, pay dividends, repurchase shares, enter into merger
agreements, make investments, engage in new business activities unrelated to
the Companys current business or sell assets.

In July 2001, from the proceeds of the senior notes, the Company completed
the repurchase of all outstanding shares of its preferred stock, retired one
million common stock warrants and repaid all amounts outstanding under its
former bank credit facilities and subordinated acquisition notes. The
resulting net gain of $739,000 was included in net earnings available to common
shareholders in 2001.

In September 2002, the Company terminated its then existing revolving bank
credit facility. In October 2002, the Company entered into a new revolving
credit facility with a borrowing capacity of the lesser of $35 million or 80%
of eligible accounts receivable. The facility is collateralized by cash,
accounts receivable, inventories, intellectual property and certain other
assets of the Company. Borrowings under this agreement bear interest at the
LIBOR rate plus 2.9% and the facility requires a non-utilization fee of 0.5% of
the unused borrowing capacity. Interest and the commitment fee are payable
monthly. The facility has an initial two-year term. Thereafter, the term will
be automatically extended for annual successive periods unless either party
provides notice not less than 60 days prior to the end of the period. There
was no balance outstanding under this agreement as of December 31, 2002. Under
the revolving credit facility, the Company is required to maintain certain
financial ratios. As of December 31, 2002, the Company was in compliance with
the financial covenants in its revolving credit facility and the senior notes.

23



---



##### Table of Contents



Proceeds were received from participants under the Companys stock
purchase and stock option plans totaling $1.9 million, $3.9 million and
$579,000 in 2002, 2001 and 2000, respectively.

The following sets forth the Companys future minimum annual payments for
the five years subsequent to December 31, 2002 under its various debt and
noncancelable lease agreements:

|               |  |                         |     |           |  |   |       | 
|-------------- |  | ----------------------- | --- | --------- |  | - | ----- | 
|               |  | Long-term               |     | Operating
|(in thousands) |  | Debt and Capital Leases |     | Leases   
|               |  |                         |     |          
|2003           |  | $                       | 743 |           |  | $ | 4,507 | 
|2004           |  |                         | 98  |           |  |   | 3,855 | 
|2005           |  |                         | 47  |           |  |   | 3,387 | 
|2006           |  |                         | 35  |           |  |   | 2,906 | 
|2007           |  |                         |    |           |  |   | 2,690 | 

In March 2003, the Company entered into an interest rate swap agreement
with a bank involving a notional amount of $50 million. This transaction,
which terminates in May 2008 if early termination rights beginning in May 2005
are not exercised, is considered to be a hedge against changes in the fair
value of the Companys fixed-rate debt obligation and is used to lower the
Companys overall borrowing costs. Under the arrangement, the bank will pay
the Company an 11% fixed rate of interest semi-annually in arrears on May 1 and
November 1. The Company will pay the bank semi-annually in arrears on May 1
and November 1 a variable rate of interest based on the six-month LIBOR rate
plus 7.535%, such rate being determined in arrears. The Company was required
to pay the bank collateral in cash under this agreement.

Capital expenditures of approximately $10 million are estimated in 2003
as the Company continues to enhance its computer information systems. The
Company paid $4.0 million in the first quarter of 2003 as a result of the
termination and restructuring of the split-dollar insurance retirement plan.
Offsetting this amount, the Company will receive approximately
$900,000 from the surrender of the policies in the second quarter of
2003. The termination and restructuring relieved the Company of future premium
obligations of $3.7 million, $2.2 million of which would have been payable in
January 2003.

The Company believes that its cash, other liquid assets, operating cash
flows and revolving credit facility, taken together, will provide adequate
resources to fund ongoing operating requirements and planned capital
expenditures.

Critical Accounting Estimates

A critical accounting estimate meets two criteria: (1) it requires
assumptions about highly uncertain matters; and (2) there would be a material
effect on the financial statements from either using a different, also
reasonable, amount within the range of the estimate in the current period or
from reasonably likely period-to-period changes in the estimate. The
Companys critical accounting estimates are as follows:

Revenue Recognition and Allowances for Uncollectible Accounts.Revenues
for the Womens Health segment are generated by providing services through
patient service centers. Revenues from this segment are recognized as the
related services are rendered and are net of contractual allowances and
related discounts. The Health Enhancement segment provides services through
its patient service centers, provides supplies to patients primarily on a
mail-order basis, and assembles, packages and distributes diabetes products.
Revenues for services are recognized when
services are provided and revenues from product sales are recognized when
products are shipped. Revenues from this segment are recorded net of
contractual and other discounts.

The Companys clinical services and supply business are reimbursed on a
fee-for-service per case or per item basis. Other aspects of disease
management, however, are paid for primarily on the basis of monthly

24



---



##### Table of Contents



fees for
each employee or member enrolled in a health plan, each member identified with a particular chronic
disease or condition under contract, or each member enrolled in the Companys
program or on a case-rate basis. Some of the contracts for these services
provide that a portion of the Companys fees is at risk subject to the
Companys performance against financial cost savings and clinical criteria.
Thus, a portion of the Companys revenues is subject to confirmation of the
Companys performance against these financial cost savings and clinical
criteria. Estimates for performance under the terms of these contracts and
other factors affecting revenue recognition are accrued on an estimated basis
in the period the services are provided and adjusted in future periods when
final settlement is determined. These estimates are continually reviewed and
adjusted as information related to performance levels and associated fees
become available. As of December 31, 2002, less than 5% of the Companys
revenues are at risk under these arrangements.

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, recoveries of amounts previously
provided, industry reimbursement trends, audit activity and other relevant
factors which, in the opinion of management, deserve recognition in estimating
the allowance for uncollectible accounts.

Goodwill and Other Intangible Assets.See Recently Issued Accounting
Standards below for a description of two new accounting pronouncements which
have significantly changed the Companys accounting for goodwill and other
intangible assets in 2002 and beyond. As of December 31, 2002, the Company
had unamortized goodwill of $129.0 million and unamortized intangible assets
of $1.6 million, which represented approximately 45% of total assets. Under
the new accounting standards, the Companys goodwill is no longer being
amortized to expense, but instead will be tested for impairment at least
annually. Other intangible assets are continuing to be amortized over their
respective estimated useful lives and reviewed for impairment.

In testing for impairment, the Company will evaluate the financial
earnings prospects of the acquired companies to which the goodwill and other
intangibles relate and determine whether changed circumstances indicate that
any portion of the carrying value of the goodwill or other intangible assets
may no longer be recoverable.

Accounting for 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.

The income tax benefit of $4.5 million for 2002 reflected a lower benefit
than the statutory tax rate due to various non-deductible permanent
differences between tax and financial accounting. The tax provisions recorded for 2001 and 2000 were $6.1 million
and $9.1 million, respectively. Cash outflows for income taxes in 2002, 2001
and 2000 totaled $247,000, $1.2 million and $2.2 million, respectively, being
comprised of federal alternative minimum taxes, and state and foreign taxes
for jurisdictions where net operating losses were not available. As of
December 31, 2002, the Companys remaining net operating losses of $58.8
million, the tax effect of which is reflected in the deferred tax asset, will
be available to offset future tax liabilities. Based on projections of
taxable income in 2003 and future years, management believes that, more likely
than not, the Company will fully realize the value of the recorded deferred
income tax assets.

The above listing is not intended to be a comprehensive list of all of
the Companys accounting policies. In many cases, the accounting treatment of
a particular transaction is specifically dictated by generally accepted
accounting principles, with no need for managements judgment in their
application. There are also areas in
which managements judgment in selecting any available alternative would
not produce a materially

25



---



##### Table of Contents



different result. See the Notes to Consolidated
Financial Statements which contain additional accounting policies and other
disclosures required by generally accepted accounting principles.

The Companys senior management has discussed the development and
selection of the accounting estimates, and this disclosure, with the Audit
Committee of the Companys Board of Directors.

Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations
(SFAS 141) and Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets(SFAS 142). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 and specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.

The Company adopted the provisions of SFAS 141 in 2001 and SFAS 142
effective January 1, 2002. SFAS 141 required, upon adoption of SFAS 142, that
the Company evaluate its existing goodwill and intangible assets that were
acquired in prior purchase business combinations and make any necessary
reclassifications in order to conform with the new criteria in SFAS 141 for
recognition apart from goodwill. Upon adoption of SFAS 142, the Company also
was required to reassess the useful lives and residual values of all intangible
assets acquired and to make any necessary amortization period adjustments.

As of January 1, 2002, the date of adoption of SFAS 142, the Company had
unamortized goodwill of $107.5 million and unamortized identifiable intangible
assets of $2.1 million, all of which were subject to the transition provisions
of SFAS 141 and SFAS 142. During the first quarter of 2002, the Company
evaluated the fair values of the business segments identified under the
provisions of SFAS 141 and SFAS 142 and concluded that no impairment of
recorded goodwill existed. Likewise, such an evaluation was performed as of
December 31, 2002, again resulting in a conclusion that no impairment existed.
As a result, no amortization of goodwill was recorded in 2002. Amortization
expense related to goodwill was approximately $9.3 million in both 2001 and
2000. Also, the Company reassessed the useful lives, residual values and
classification of identifiable intangible assets and determined that they
continue to be appropriate. Amortization expense related to identifiable
intangible assets was $560,000 in 2002, 2001 and 2000.

Also, in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations(SFAS 143).
An asset retirement obligation refers to any type of closure or removal costs
that are incurred at any time during the life of an asset. SFAS 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted
to its present value each period, and the capitalized cost is depreciated over
the useful life of the related asset. Upon settlement of the liability, the
entity either settles the obligation for its recorded amount or incurs a gain
or loss upon settlement. SFAS 143 was effective for the Company beginning
January 1, 2003. The Company does not expect SFAS 143 to have a significant
effect on its financial statements.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections(SFAS 145). SFAS 145 rescinded
FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that Statement, FASB Statement No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 concludes that debt extinguishments are often
a routine, recurring part

26



---



##### Table of Contents



of an entitys risk management strategy and may not
meet the criteria for classification as extraordinary items in Accounting
Principles Board Opinion No. 30, Reporting the Results of OperationsReporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. It also rescinded FASB
Statement No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS 145
amended FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. It also amended other
existing authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions.
SFAS 145 had no impact on the Companys financial statements.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullified Emerging Issues Task
Force Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)(Issue 94-3). The principal difference between SFAS 146
and Issue 94-3 relates to its requirements for recognition of a liability for a
cost associated with an exit or disposal activity. This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability for
an exit cost as defined in Issue 94-3 was recognized at the date of an entitys
commitment to an exit plan. A fundamental conclusion reached by the FASB in
SFAS 146 is that an entitys commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability.
Therefore, SFAS 146 eliminates the definition and requirements for recognition
of exit costs in Issue 94-3. It also establishes that fair value is the
objective for initial measurement of the liability. The provisions of SFAS 146
are effective for exit or disposal activities that are initiated after December
31, 2002.

In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and
Disclosurean amendment of FASB Statement No. 123(SFAS 148). SFAS 148
amended Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS 123), to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. This
Statement permits two additional transition methods for entities that adopt the
fair value based method of accounting for stock-based employee compensation.
Both of those methods avoid the ramp-up effect arising from prospective
application of the fair value based method. In addition, to address concerns
raised by some constituents about the lack of comparability caused by multiple
transition methods, SFAS 148 does not permit the use of the original
SFAS 123 prospective method of transition for changes to the fair value based method
made in fiscal years beginning after December 15, 2003.

In addition,
SFAS 148 amended the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. In the absence of a single
accounting method for stock-based employee compensation, SFAS
148 requires
disclosure of comparable information for all companies regardless of whether,
when, or how an entity adopts the preferable, fair value based method of
accounting. SFAS 148 improves the prominence and clarity of the pro forma
disclosures required by SFAS 123 by prescribing a specific tabular format and
by requiring disclosure in the Summary of Significant Accounting Policies.
In addition, SFAS 148 improves the timeliness of those disclosures by requiring
their inclusion in financial reports for interim periods. The Company has
elected to not adopt the fair value based method of accounting, and therefore
provides the pro forma disclosures required by SFAS 123 and SFAS 148. The
Companys disclosures in the Notes to Consolidated Financial Statements contain
all of the new disclosure requirements.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34 (Interpretation
45).Interpretation 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. Interpretation No. 45 also clarifies that a guarantor
is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The
initial recognition and measurement provisions of Interpretation 45 are
applicable to guarantees issued or

27



---



##### Table of Contents



modified after December 31, 2002 and are not
expected to have a material effect on the Companys financial statements. The
disclosure requirements were effective for the quarter ended December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51(Interpretation
46).Interpretation 46 addresses the consolidation by business enterprises of
variable interest entities, as defined. Interpretation 46 applies immediately
to variable interests in variable interest entities created after January 31,
2003, and to variable interests in variable interest entities obtained after
January 31, 2003. The application of Interpretation 46 is not expected to have
a material effect on the Companys financial statements. Interpretation 46
requires certain disclosures in financial statements issued after January 31,
2003 if it is reasonably possible that the Company will consolidate or disclose
information about variable interest entities when Interpretation 46 becomes
effective.

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 (the Exchange Act), 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 mandated; (ii) the loss
of major customers or failure to receive recurring orders from customers of the
mail-order supply business; (iii) termination of the Companys exclusive supply
agreement with Nipro 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)
increased exposure to professional negligence liability; (ix) difficulties in
successfully integrating recently acquired businesses into the Companys
operations and uncertainties related to the future performance of such
businesses; (x) losses due to foreign currency exchange rate fluctuations or
deterioration of economic conditions in foreign markets; (xi) changes in
company-wide or business unit strategies and changes in patient therapy mix;
(xii) the effectiveness of the Companys advertising, marketing and promotional
programs; (xiii) market acceptance of the Companys disease management
products; (xiv) inability to successfully manage the Companys growth; (xv)
acquisitions that strain the Companys financial and operational resources;
(xvi) inability to forecast or effect cost savings and clinical outcomes
improvements under the Companys disease management contracts or to reach
agreement with the Companys disease management customers with respect to the
same; (xvii) inability of the Companys disease management customers to provide
timely and accurate data that is essential to the operation and measurement of
the Companys performance under its disease management contracts; (xviii)
increases in interest rates and (xix) 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, 2002. 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

28



---



##### Table of Contents



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 7a. Quantitative and Qualitative Disclosure about Market Risk.

As of December 31, 2002, the Company is exposed to market risk from
foreign currency exchange rate risk. The Companys non-U.S. operations with
sales denominated in other than U.S. dollars (primarily in Germany) generated
approximately 14% of total revenues in 2002. 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. Based on 2002 results of operations, a 10% change in the currency
exchange rate of the euro would impact pre-tax earnings by approximately
$331,000.




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-31 of this Annual Report on Form 10-K:

|                                                                                                                                         |  |      |     | 
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                         |  | PAGE
|                                                                                                                                         |  |     
|Independent Auditors Report                                                                                                             |  |      | F-1 | 
|Consolidated Balance Sheets   December 31, 2002 and 2001                                                                                |  |      | F-2 | 
|Consolidated Statements of Operations   Years Ended
December 31, 2002, 2001 and 2000                                                    |  |      | F-3 | 
|Consolidated Statements of Common Shareholders Equity and
Comprehensive Earnings (Loss)   Years Ended December 31, 2002, 2001 and 2000 |  |      | F-4 | 
|Consolidated Statements of Cash Flows   Years Ended
December 31, 2002, 2001 and 2000                                                    |  |      | F-5 | 
|Notes to Consolidated Financial Statements                                                                                               |  |      | F-6 | 




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

None.

29



---



##### Table of Contents






PART III




Item 10. Directors and Executive Officers of the Registrant.

Information concerning the directors of the Company is included under the
caption Election of Directors of the Companys Proxy Statement for the 2003
Annual Meeting of Stockholders to be held May 21, 2003, to be filed with the
Commission pursuant to Exchange Act Rule 14a-6(c), and 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.




Item 11. Executive Compensation.

Information required by this item is contained in the Companys Proxy
Statement for the 2003 Annual Meeting of Stockholders to be held May 21, 2003,
to be filed with the Commission pursuant to Rule 14a-6(c), and incorporated by
reference herein.




Item 12. Security Ownership of Certain Beneficial Owners and Management.

Information required by this item is contained in the Companys Proxy
Statement for the 2003 Annual Meeting of Stockholders to be held May 21, 2003,
to be filed with the Commission pursuant to Rule 14a-6(c), and incorporated by
reference herein.

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 rules of the Commission.




Item 13. Certain Relationships and Related Transactions.

Information required by this item is contained in the Companys Proxy
Statement for the 2003 Annual Meeting of Stockholders to be held May 21, 2003,
to be filed with the Commission pursuant to Rule 14a-6(c), and incorporated by
reference herein.




Item 14. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, as defined in
Rule 13a-14 promulgated under the Exchange Act, that are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Commissions rules and forms
and that such information is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its management,
including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures. Based on the evaluation of these disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures were effective.

30



---



##### Table of Contents



Changes in Internal Controls

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect the Companys internal controls
subsequent to the date of this evaluation.

31



---



##### Table of Contents






PART IV




Item 15. 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-31 of this Annual Report on Form 10-K:

|                                                                                                                                         |  |      |     | 
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                         |  | PAGE
|                                                                                                                                         |  |     
|Independent Auditors Report                                                                                                             |  |      | F-1 | 
|Consolidated Balance Sheets   December 31, 2002 and 2001                                                                                |  |      | F-2 | 
|Consolidated Statements of Operations   Years Ended
December 31, 2002, 2001 and 2000                                                    |  |      | F-3 | 
|Consolidated Statements of Common Shareholders Equity and
Comprehensive Earnings (Loss)   Years Ended December 31, 2002, 2001 and 2000 |  |      | F-4 | 
|Consolidated Statements of Cash Flows   Years Ended
December 31, 2002, 2001 and 2000                                                    |  |      | 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 |  |      | 42  | 

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     |  | Purchase and Sale Agreement, dated December 21, 1998, by and between
Matria Healthcare, Inc. 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).
|2.2     |  | 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 (incorporated by
reference to Exhibit 2.5 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2000).                    

32



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                            
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                            
|2.3     |  | Asset Purchase Agreement, effective 12:00 Midnight (E.S.T.) on February
6, 2002, among Matria Healthcare, Inc., ChoicePoint Services, Inc. and
ChoicePoint Health Systems, Inc. (incorporated by reference to Exhibit 2.5
to the Companys Form 10-K for the year ended December 31, 2001).                                                                                                                
|2.4     |  | Purchase and Sale Agreement, dated April 29, 2002, among Matria
Healthcare, Inc., LifeMetrix, Inc. and Quality Oncology, Inc.
(incorporated by reference to Appendix A to the Prospectus/Proxy
Statement/Solicitation Statement filed as part of the Companys
Registration Statement No. 333-90944 on Form S-4 filed June 21, 2002).                                                                      
|3.1     |  | Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Companys Annual Report on Form 10-K for the year ended
December 31, 1995, Commission File No. 20619).                                                                                                                                                                                                              
|3.2     |  | Certificate of Amendment of Restated Certificate of Incorporation of
Matria dated December 5, 2000 (incorporated by reference to Exhibit 3.4 to
the Companys Annual Report on Form 10-K for the year ended December 31,
2000).                                                                                                                                                                            
|4.1     |  | Amended and Restated Rights Agreement, dated April 27, 1999 between
Matria Healthcare, Inc. and SunTrust Bank Atlanta (incorporated by
reference to Exhibit 4 to the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999).                                                                                                                                                        
|4.2     |  | Indenture, dated as of July 9, 2001, by and among Matria Healthcare,
Inc., the Guarantors named therein and Wells Fargo Minnesota, National
Association as Trustee, relating to the Registrants 11% Senior Notes due
2008 (incorporated by reference to Exhibit 99.2 to the Companys Current
Report on Form 8-K dated July 19, 2001).                                                                    
|4.3     |  | Registration Rights Agreement, dated as of July 9, 2001, by and among
Matria Healthcare, Inc., the Guarantors named therein and the Initial
Purchasers named therein, relating to the Companys 11% Senior Notes due
2008 (incorporated by reference to Exhibit 99.3 to the Companys Current
Report on Form 8-K dated July 19, 2001).                                                                     
|4.4     |  | Amendment No. 1 to Amended and Restated Rights Agreement, dated as of
October 5, 2001, between Matria Healthcare, Inc. and Sun Trust Bank
Atlanta (incorporated by reference to Exhibit 4(b) to the Companys Form
8-K/A dated October 29, 2001).                                                                                                                                                          
|4.5     |  | Interest Rate Swap Agreement, dated July 18, 2001, between First Union
Bank and Matria Healthcare, Inc. (incorporated by reference to Exhibit 10
to the Companys Form 10-Q for the quarter ended September 30, 2001).                                                                                                                                                                                     
|4.6     |  | Waiver and First Amendment to First Amended and Restated Credit
Agreement, dated June 13, 2002, among Matria Healthcare, Inc. and certain
Lenders named therein, Wachovia Bank, National Association as the
Administrative Agent and Harris Trust and Savings Bank as Co-Agent
(incorporated by reference to Exhibit 4 to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002).
|4.7     |  | Loan and Security Agreement, dated October 22, 2002, between Matria
Healthcare, Inc. and HFG Healthco-4, LLC (incorporated by reference to
Exhibit 4 to the Companys Quarterly Report of Form 10-Q for the quarter
ended September 30, 2002).                                                                                                                                                             
|4.8     |  | Standstill Agreement, dated September 30, 2002, by and among Matria
Healthcare, Inc., LifeMetrix, Inc., and the stockholders listed therein
(incorporated by reference to Exhibit 99.1 to the Companys Current Report
on Form 8-K filed with the Commission October 8, 2002).                                                                                                                             
|4.9     |  | Registration Rights Agreement, dated September 30, 2002, by and among
Matria Healthcare, Inc., LifeMetrix, Inc. and the preferred stockholders
of LifeMetrix listed therein (incorporated by reference                                                                                                                                                                                                     

33



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                        
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                        
|Number  |  | Description                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                        
|        |  | to Exhibit 99.2 to
the Companys Current Report on Form 8-K filed with the Commission October
8, 2002).                                                                                                                                                                                
|*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   |  | 2002 Employee Stock Purchase Plan (incorporated by reference to                                                                                                                                                                                                                        
|        |  | Appendix D to the Proxy Statement/Prospectus/Solicitation Statement
filed as a part of the Companys Registration Statement No.
333-90944 on Form S-4 filed June 30, 2002).                                                                                                            
|*10.4   |  | 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 Companys
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).                     
|*10.5   |  | 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 Companys
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).                  
|*10.6   |  | 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
Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).   
|*10.7   |  | 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
Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
|*10.8   |  | 1997 Stock Incentive Plan (incorporated by reference to Exhibit A                                                                                                                                                                                                                      
|        |  | to the Companys Definitive Proxy Statement filed with the
Commission on April 16, 1998).                                                                                                                                                                                              
|*10.9   |  | 2000 Stock Incentive Plan (incorporated by reference to Exhibit A                                                                                                                                                                                                                      
|        |  | to the Companys Definitive Proxy Statement filed with the
Commission on April 14, 2000).                                                                                                                                                                                              
|*10.10  |  | 2000 Directors Non-Qualified Stock Option Plan (incorporated by                                                                                                                                                                                                                       
|        |  | reference to the Companys Definitive proxy Statement filed with
the Commission on April 14, 2000).                                                                                                                                                                                    
|*10.11  |  | 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).                                                                            
|*10.12  |  | 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).                                                               
|*10.13  |  | Amendment to the 1996 Directors Non-Qualified Stock Option Plan
approved by the Companys stockholders on May 18, 1998
(incorporated by reference to Exhibit 10.23 to the Companys Form
10-K for the year ended December 31, 2000).                                                  
|*10.14  |  | Change in Control Severance Compensation and Restrictive Covenant
Agreement between the Company and Parker H. Petit, dated October 4,
2000 (incorporated by reference to Exhibit 10.24 to the Companys
Form 10-K for the year ended December 31, 2000).                               

34



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                     
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                     
|Number  |  | Description                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                     
|*10.15  |  | Amendment to the 2000 Directors Non-Qualified Stock Option Plan,
approved by the Companys stockholders on May 24, 2001
(incorporated by reference to the Companys Definitive Proxy
Statement filed with the Commission April 26, 2001).                                          
|*10.16  |  | 2001 Stock Incentive Plan (incorporated by reference to the                                                                                                                                                                                                                         
|        |  | Companys Definitive Proxy Statement filed with the Commission
April 26, 2001).                                                                                                                                                                                                     
|*10.17  |  | 2002 Stock Incentive Plan (incorporated by reference to Appendix C                                                                                                                                                                                                                  
|        |  | to the Prospectus/Proxy Statement/Solicitation Statement filed as
part of the Companys Registration Statement No. 333-90944 on Form
S-4 filed June 21, 2002).                                                                                                                      
|*10.18  |  | MarketRing.com, Inc. 1999 Stock Option and Stock Appreciation
Rights Plan, effective September 30, 1999, assumed by the Company
(incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).                     
|*10.19  |  | MarketRing.com, Inc. Amendment No. 1 to 1999 Stock Option and Stock
Appreciation Rights Plan, dated July 14, 2000, assumed by the
Company (incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).           
|*10.20  |  | Change in Control Severance Compensation and Restrictive Covenant
Agreement between the Company and Parker H. Petit, effective
February 19, 2002 (incorporated by reference to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).    
|*10.21  |  | Change in Control Severance Compensation and Restrictive Covenant
Agreement between the Company and Jeffrey D. Koepsell, effective
February 19, 2002 (incorporated by reference to Exhibit 10.4 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).
|*10.22  |  | Change in Control Severance Compensation and Restrictive Covenant
Agreement between the Company and George W. Dunaway, effective
February 19, 2002 (incorporated by reference to Exhibit 10.5 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).  
|10.23   |  | Agreement and Plan of Merger, dated May 30, 2002, among Matria
Healthcare, Inc., MRDC Acquisition Corp. and MarketRing.com, Inc.
(incorporated by reference to Exhibit 10.6 to the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).                    
|10.24   |  | Employment Letter Agreement, dated August 5, 2002, between the Company
and Stephen M. Mengert (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended September
30, 2002).                                                  
|10.25   |  | NewMarket Building Lease Agreement, dated September 4, 2002, between
Matria Healthcare, Inc. and Trizec Realty, Inc. (incorporated by reference
to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002).                           
|10.26   |  | One Parkway Center Lease Agreement, dated November 8, 2002, between
Matria Healthcare, Inc. and Atlanta Parkway Investment Group, Inc.
(incorporated by reference to Exhibit 10.3 to the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).         

The following exhibits are filed as part of this Report:

|     |  |                                                                                                      
|---- |  | -----------------------------------------------------------------------------------------------------
|3.3  |  | Amended Bylaws of Matria Healthcare, Inc., effective February 20, 2003.                              
|4.10 |  | Supplemental Indenture, dated June 21, 2002, between the Company and
Wells Fargo Bank Minnesota, N.A.

35



---



##### Table of Contents



|       |  |                                                                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|4.11   |  | Supplemental Indenture, dated August 1, 2002, between the Company and
Wells Fargo Bank Minnesota, N.A.                                       
|4.12   |  | Supplemental Indenture, dated October 4, 2002, between the Company and
Wells Fargo Bank Minnesota, N.A.                                      
|4.13   |  | Amendment No. 1, dated December 31, 2002, to the Loan and Security
Agreement, between Matria Healthcare, Inc. and HFG Healthco-4, LLC.       
|*10.27 |  | Split Dollar Termination Agreement between the Company and Roberta L. McCaw, dated January 1, 2003.                                          
|*10.28 |  | Split Dollar Termination Agreement between the Company and Thornton A. Kuntz, Jr., dated January 1, 2003.                                    
|*10.29 |  | Split Dollar Termination Agreement between the Company and Parker H. Petit, dated January 1, 2003.                                           
|*10.30 |  | Split Dollar Termination Agreement between the Company and Yvonne V. Scoggins, dated January 1, 2003.                                        
|*10.31 |  | Supplemental Executive Retirement Plan between the Company and Roberta L. McCaw, dated January 1, 2003.                                      
|*10.32 |  | Supplemental Executive Retirement Plan between the Company and Thornton A. Kuntz, Jr., dated January 1, 2003.                                
|*10.33 |  | Supplemental Executive Retirement Plan between the Company and Yvonne V. Scoggins, dated January 1, 2003.                                    
|*10.34 |  | Change in Control Severance Compensation and Restrictive Covenant Agreement between the Company and Thomas S. Hall,
dated March 14, 2003.    
|*10.35 |  | Change in Control Severance Compensation and Restrictive Covenant Agreement between the Company and Stephen M. Mengert,
dated March 17, 2003.
|*10.36 |  | Employment Letter Agreement, dated October 22, 2002, between the Company and Thomas S. Hall                                                  
|*10.37 |  | Trust Under the Matria Healthcare, Inc. Supplemental Executive Retirement Plan, dated February 4, 2003.                                      
|10.38  |  | Lockup Agreement, dated June 13, 2002, between the Company and Robert W. Kelley, Jr.                                                         
|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).                                                                               

*     Management contract or compensatory plan or arrangement

36



---



##### Table of Contents



(b)  Reports on Form 8-K.

The Company did not file any Current Report on Form 8-K during the quarter
ended December 31, 2002.

37



---



##### Table of Contents






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 28, 2003 |  | By:                     |  | /s/ Parker H. Petit                                                                                       
|               |  |                         |  |                                                                                                           
|               |  |                         |  | Parker H. Petit
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
|               |  |                         |  |                                                                                                           
|               |  |                         |  | /s/ Stephen M. Mengert                                                                                    
|               |  |                         |  |                                                                                                           
|               |  |                         |  | Stephen M. Mengert, 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

Parker H. Petit         |  | Chairman of the Board,
President and Chief Executive Officer |  | March 28, 2003
|                                             |  |                                                              |  |               
|/s/ Frederick E. Cooper

Frederick E. Cooper |  | Director                                                     |  | March 28, 2003

38



---



##### Table of Contents



|                                                         |  |          |  |               
|-------------------------------------------------------- |  | -------- |  | --------------
|Signature                                                |  | Title    |  | Date          
|                                                         |  |          |  |               
|/s/ Guy W. Millner

Guy W. Millner                       |  | Director |  |               
|                                                         |  |          |  |               
|/s/ Carl E. Sanders

Carl E. Sanders                     |  | Director |  |               
|                                                         |  |          |  |               
|/s/ Thomas S. Stribling

Thomas S. Stribling             |  | Director |  | March 27, 2003
|                                                         |  |          |  |               
|/s/ Donald W. Weber

Donald W. Weber                     |  | Director |  | March 27, 2003
|                                                         |  |          |  |               
|/s/ Morris S. Weeden

Morris S. Weeden                   |  | Director |  | March 26, 2003
|                                                         |  |          |  |               
|/s/ Frederick P. Zuspan, M.D.

Frederick P. Zuspan, M.D. |  | Director |  | March 26, 2003

39



---



##### Table of Contents






CERTIFICATIONS

I, Parker H. Petit, certify that:

1.     I have reviewed this annual report on Form 10-K of Matria Healthcare,
Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the Audit
Committee of registrants Board of Directors (or persons performing the
equivalent function):



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|               |  |                                                                             
|-------------- |  | ----------------------------------------------------------------------------
|March 28, 2003 |  | /s/ Parker H. Petit                                                         
|               |  |                                                                             
|               |  | Parker H. Petit
Chairman of the Board, President and
Chief Executive Officer

40



---



##### Table of Contents



I, Stephen M. Mengert, certify that:

1.     I have reviewed this annual report on Form 10-K of Matria Healthcare,
Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the Audit
Committee of registrants Board of Directors (or persons performing the
equivalent function):



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|               |  |                                                                        
|-------------- |  | -----------------------------------------------------------------------
|March 28, 2003 |  | /s/ Stephen M. Mengert                                                 
|               |  |                                                                        
|               |  | Stephen M. Mengert
Vice President  Finance and Chief
Financial Officer

41



---



##### Table of Contents



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

|                                |  |            |        |            |  |                |       |            |  |               |     |            |  |  |        |  |  |   |       | 
|------------------------------- |  | ---------- | ------ | ---------- |  | -------------- | ----- | ---------- |  | ------------- | --- | ---------- |  |  | ------ |  |  | - | ----- | 
|                                |  |            |        |            |  | Additions      |       |            |  |               |     |            |  | 
|                                |  |            |        |            |  |                |       |            |  |               |     |            |  | 
|                                |  | Balance at |        | Charges to |  |                |       |            |  |               |     |            |  |  |        | 
|                                |  | Beginning  |        | Costs and  |  | Charges to     |       |            |  |               |     | Balance at
|Description                     |  | of Period  |        | Expenses   |  | Other Accounts |       | Deductions |  | End of Period
|                                |  |            |        |            |  |                |       |            |  |              
|Allowance for doubtful accounts |  |            |        |            |  |                |       |            |  |               |     |            |  |  |        |  |  |   |       | 
|Year ended December 31, 2000    |  | $          | 11,963 |            |  |                | 7,043 |            |  |               |    |            |  |  | 12,069 |  |  | $ | 6,937 | 
|Year ended December 31, 2001    |  | $          | 6,937  |            |  |                | 7,575 |            |  |               |    |            |  |  | 7,487  |  |  | $ | 7,025 | 
|Year ended December 31, 2002    |  | $          | 7,025  |            |  |                | 9,955 |            |  |               | 551 |            |  |  | 9,374  |  |  | $ | 7,661 | 



---

|1 |  | Represents beginning balances in allowance for doubtful accounts of acquired
companies.
|- |  | ---------------------------------------------------------------------------------------

42



---



##### Table of Contents



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, 2002 and 2001, and the
related consolidated statements of operations, common shareholders equity and
comprehensive earnings (loss), and cash flows for each of the years in the
three-year period ended December 31, 2002. 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, 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.

As discussed in note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.

|                                   |  |              
|---------------------------------- |  | -------------
|                                   |  | /s/  KPMG LLP
|                                   |  |              
|Atlanta, Georgia
February 14, 2003 |  |              

F-1



---



##### Table of Contents



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

|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |          |         | 
|--------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------- | ------------ | ------- | ---- | ------- | -------- | ------- | 
|                                                                |                                                                                                                                               |                                   |         | December 31,
|                                                                |                                                                                                                                               |                                   |         |             
|                                                                |                                                                                                                                               |                                   |         | 2002         |         | 2001
|                                                                |                                                                                                                                               |                                   |         |              |         |     
|ASSETS                                                          |                                                                                                                                               |                                   |         |              |         |      |         |         
|Current assets:                                                 |                                                                                                                                               |                                   |         |              |         |      |         |         
|                                                                | Cash and cash equivalents                                                                                                                     |                                   | $       | 5,500        |         |      | $       | 1,983    |        
|                                                                | Short-term investments (note 15)                                                                                                              |                                   |         | 140          |         |      |         | 116      |        
|                                                                | Trade accounts receivable, less allowances of $7,661 and
$7,025 at December 31, 2002 and 2001, respectively                                   |                                   |         | 49,693       |         |      |         | 52,054   |        
|                                                                | Other receivables (note 14)                                                                                                                   |                                   |         | 2,547        |         |      |         | 4,597    |        
|                                                                | Inventories                                                                                                                                   |                                   |         | 26,757       |         |      |         | 21,306   |        
|                                                                | Prepaid expenses (note 1.h)                                                                                                                   |                                   |         | 7,582        |         |      |         | 5,575    |        
|                                                                | Deferred income taxes (note 5)                                                                                                                |                                   |         | 5,018        |         |      |         | 3,868    |        
|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |         
|                                                                |                                                                                                                                               | Total current assets              |         |              | 97,237  |      |         |          | 89,499  | 
|Property and equipment, net (note 1.i)                          |                                                                                                                                               |                                   | 26,716  |              |         |      | 18,722  |         
|Intangible assets, net (note 1.j)                               |                                                                                                                                               |                                   | 130,571 |              |         |      | 109,634 |         
|Deferred income taxes (note 5)                                  |                                                                                                                                               |                                   | 30,848  |              |         |      | 24,715  |         
|Other assets (note 8)                                           |                                                                                                                                               |                                   | 6,035   |              |         |      | 18,053  |         
|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |         
|                                                                |                                                                                                                                               | $                                 | 291,407 |              |         | $    | 260,623 |         
|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |         
|LIABILITIES AND SHAREHOLDERS EQUITY                            |                                                                                                                                               |                                   |         |              |         |      |         |         
|Current liabilities:                                            |                                                                                                                                               |                                   |         |              |         |      |         |         
|                                                                | Current installments of long-term debt (notes 3 and 10)                                                                                       |                                   | $       | 743          |         |      | $       | 615      |        
|                                                                | Accounts payable, principally trade                                                                                                           |                                   |         | 35,177       |         |      |         | 22,651   |        
|                                                                | Accrued liabilities (notes 1.n and 8)                                                                                                         |                                   |         | 18,761       |         |      |         | 11,619   |        
|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |         
|                                                                |                                                                                                                                               | Total current liabilities         |         |              | 54,681  |      |         |          | 34,885  | 
|Long-term debt, excluding current installments (notes 3 and 10) |                                                                                                                                               |                                   | 118,215 |              |         |      | 114,575 |         
|Other long-term liabilities (note 8)                            |                                                                                                                                               |                                   | 4,731   |              |         |      | 6,266   |         
|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |         
|                                                                |                                                                                                                                               | Total liabilities                 |         |              | 177,627 |      |         |          | 155,726 | 
|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |         
|Common shareholders equity (note 7):                           |                                                                                                                                               |                                   |         |              |         |      |         |         
|                                                                | Common stock, $.01 par value. Authorized 25,000 shares; issued and
outstanding  10,051 and 8,927 at December 31, 2002 and 2001,
respectively |                                   |         | 101          |         |      |         | 89       |        
|                                                                | Additional paid-in capital                                                                                                                    |                                   |         | 311,052      |         |      |         | 290,070  |        
|                                                                | Accumulated deficit                                                                                                                           |                                   |         | (197,361     | )       |      |         | (181,035 | )      
|                                                                | Accumulated other comprehensive loss, net of income taxes                                                                                     |                                   |         | (12          | )       |      |         | (692     | )      
|                                                                | Note receivable and accrued interest from shareholder                                                                                         |                                   |         |             |         |      |         | (3,535   | )      
|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |         
|                                                                |                                                                                                                                               | Total common shareholders equity |         |              | 113,780 |      |         |          | 104,897 | 
|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |         
|Commitments and contingencies (notes 3, 8, 10 and 11)           |                                                                                                                                               |                                   |         |              |         |      |         |         
|                                                                |                                                                                                                                               | $                                 | 291,407 |              |         | $    | 260,623 |         
|                                                                |                                                                                                                                               |                                   |         |              |         |      |         |         

See accompanying notes to consolidated financial statements.

F-2



---



##### Table of Contents



MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)

|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |       |         | 
|-------------------------------------------------------------------------- | -------- | -------------------------------------------------------------- | ------- | ------------------------ | ------- | ---- | ------- | ----- | ------- | - | ------ | ----- | ------- | 
|                                                                           |          |                                                                |         | Years ended December 31,
|                                                                           |          |                                                                |         |                         
|                                                                           |          |                                                                |         | 2002                     |         | 2001 |         | 2000 
|                                                                           |          |                                                                |         |                          |         |      |         |      
|Revenues                                                                   |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Net revenues from services                                     |         | $                        | 209,350 |      |         | $     | 195,113 |   |        | $     | 171,579 | 
|                                                                           |          | Net sales of products                                          |         |                          | 68,281  |      |         |       | 68,870  |   |        |       | 54,188  | 
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Total
revenues                                                 |         |                          | 277,631 |      |         |       | 263,983 |   |        |       | 225,767 | 
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|Cost of revenues                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Cost of services                                               |         |                          | 117,035 |      |         |       | 101,789 |   |        |       | 81,181  | 
|                                                                           |          | Cost of goods sold                                             |         |                          | 47,263  |      |         |       | 43,896  |   |        |       | 34,998  | 
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Total
cost of revenues                                         |         |                          | 164,298 |      |         |       | 145,685 |   |        |       | 116,179 | 
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|Selling and administrative expenses                                        |          |                                                                | 91,970  |                          |         |      | 76,249  |       |         |   | 68,468 |      
|Charges from termination of retirement plan (note 8)                       |          |                                                                | 14,247  |                          |         |      |        |       |         |   |       |      
|Provision for doubtful accounts                                            |          |                                                                | 9,955   |                          |         |      | 7,575   |       |         |   | 7,043  |      
|Amortization of intangible assets                                          |          |                                                                | 560     |                          |         |      | 9,827   |       |         |   | 9,803  |      
|Restructuring charges (note 9)                                             |          |                                                                |        |                          |         |      |        |       |         |   | 1,599  |      
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Total
operating expenses                                       |         |                          | 281,030 |      |         |       | 239,336 |   |        |       | 203,092 | 
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Operating earnings (loss) from continuing operations           |         |                          | (3,399  | )    |         |       | 24,647  |   |        |       | 22,675  | 
|Interest income                                                            |          |                                                                | 416     |                          |         |      | 384     |       |         |   | 444    |      
|Interest expense                                                           |          |                                                                | (14,042 | )                        |         |      | (10,392 | )     |         |   | (8,600 | )    
|Other income (expense), net (note 15)                                      |          |                                                                | (3,119  | )                        |         |      | (639    | )     |         |   | 8,275  |      
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Earnings (loss) from continuing operations before income taxes |         |                          | (20,144 | )    |         |       | 14,000  |   |        |       | 22,794  | 
|Income tax benefit (expense) (note 5)                                      |          |                                                                | 4,500   |                          |         |      | (6,075  | )     |         |   | (9,100 | )    
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Earnings (loss) from continuing operations                     |         |                          | (15,644 | )    |         |       | 7,925   |   |        |       | 13,694  | 
|Loss from discontinued operations, net of income taxes (note 14)           |          |                                                                | (124    | )                        |         |      | (455    | )     |         |   |       |      
|Loss on disposal of discontinued operations, net of income taxes (note 14) |          |                                                                | (558    | )                        |         |      | (785    | )     |         |   |       |      
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Net earnings (loss)                                            |         |                          | (16,326 | )    |         |       | 6,685   |   |        |       | 13,694  | 
|Redeemable preferred stock dividends                                       |          |                                                                |        |                          |         |      | (1,638  | )     |         |   | (3,200 | )    
|Accretion of Series B redeemable preferred stock                           |          |                                                                |        |                          |         |      | (225    | )     |         |   | (441   | )    
|Net gain on repurchases of preferred stock (note 6)                        |          |                                                                |        |                          |         |      | 739     |       |         |   |       |      
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | Net earnings (loss) available to common shareholders           |         | $                        | (16,326 | )    |         | $     | 5,561   |   |        | $     | 10,053  | 
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|Net earnings (loss) per common share (note 1.p):                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           | Basic:   |                                                                |         |                          |         |      |         |       |         |   |        |       |        
|                                                                           |          | Continuing operations                                          |         | $                        | (1.68   | )    |         | $     | 0.78    |   |        | $     | 1.10    | 
|                                                                           |          | Discontinued operations                                        |         |                          | (0.07   | )    |         |       | (0.14   | ) |        |       |        | 
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | $                                                              | (1.75   | )                        |         | $    | 0.64    |       |         | $ | 1.10   |      
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           | Diluted: |                                                                |         |                          |         |      |         |       |         |   |        |       |        
|                                                                           |          | Continuing operations                                          |         | $                        | (1.68   | )    |         | $     | 0.76    |   |        | $     | 1.05    | 
|                                                                           |          | Discontinued operations                                        |         |                          | (0.07   | )    |         |       | (0.14   | ) |        |       |        | 
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           |          | $                                                              | (1.75   | )                        |         | $    | 0.62    |       |         | $ | 1.05   |      
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|Weighted average shares outstanding:                                       |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           | Basic    |                                                                |         | 9,309                    |         |      |         | 8,748 |         |   |        | 9,139 |        
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      
|                                                                           | Diluted  |                                                                |         | 9,309                    |         |      |         | 8,992 |         |   |        | 9,946 |        
|                                                                           |          |                                                                |         |                          |         |      |         |       |         |   |        |      

See accompanying notes to consolidated financial statements.

F-3



---



##### Table of Contents



MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Common Shareholders Equity and Comprehensive Earnings (Loss)
(Amounts and shares in thousands)

|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |   | 
|------------------------------------------------------------------------------ | ------------------------------------- |  | ------------ | ----- | ---------- | - | ----------- | -- | ----------- | - | ---------- | ------ | ------------- | - | ------------- | - | ------------- | - | ----------------------------- | - | ---------- | - | ------ | - |  | - | ------ | - |  | - | ------- | ------ |  | - | ------- | - | 
|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   | Accumulated Other             |   | Notes      |   |        |   |  |   |        |   | 
|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   | Comprehensive Earnings (Loss) |   | Receivable |   | Total  |   |  |   |       
|                                                                               |                                       |  | Common stock |       | Additional |   |             |    |             |   |            |        | and Accrued   |   | Common        |   |               |   |                              
|                                                                               |                                       |  |              |       | Paid-in    |   | Accumulated |    | Translation |   | Unrealized |        | Interest from |   | Shareholders' |   | Comprehensive
|                                                                               |                                       |  | Shares       |       | Amount     |   | Capital     |    | Deficit     |   | Adjustment |        | Appreciation  |   | Shareholder   |   | Equity        |   | Earnings (Loss)              
|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                              
|Balance, December 31, 1999                                                     |                                       |  | 9,193        |       |            | $ | 92          |    |             | $ | 293,486    |        |               | $ | (196,576      | ) |               | $ | (537                          | ) |            | $ | 6,314  |   |  | $ | (3,535 | ) |  | $ | 99,244  |        |  |   |         |  
|Issuance of common stock:                                                      |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |  
|                                                                               | Exercise of employee stock options    |  |              | 5     |            |   |             |   |             |   |            | 65     |               |   |               |  |               |   |                               |  |            |   |        |  |  |   |        |  |  |   |         | 65     |  |   |         |   | 
|                                                                               | Employee stock purchase plan          |  |              | 40    |            |   |             | 1  |             |   |            | 558    |               |   |               |  |               |   |                               |  |            |   |        |  |  |   |        |  |  |   |         | 559    |  |   |         |   | 
|                                                                               | Conversion of subordinated debentures |  |              |      |            |   |             |   |             |   |            | 5      |               |   |               |  |               |   |                               |  |            |   |        |  |  |   |        |  |  |   |         | 5      |  |   |         |   | 
|Repurchase of common stock                                                     |                                       |  | (460         | )     |            |   | (5          | )  |             |   | (4,728     | )      |               |   |              |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | (4,733  | )      |  |   |         |  
|Fractional shares retired after reverse stock split                            |                                       |  | (1           | )     |            |   |            |    |             |   | (45        | )      |               |   |              |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | (45     | )      |  |   |         |  
|Accretion on Series B redeemable preferred stock                               |                                       |  |             |       |            |   |            |    |             |   | (441       | )      |               |   |              |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | (441    | )      |  |   |         |  
|Dividends on redeemable preferred stock                                        |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   | (3,200        | ) |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | (3,200  | )      |  |   |         |  
|Net earnings                                                                   |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   | 13,694        |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | 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 tax |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   |              |   |               |   |                              |   |            |   | (6,273 | ) |  |   |       |   |  |   | (6,273  | )      |  |   | (6,273  | )
|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |  
|Balance, December 31, 2000                                                     |                                       |  | 8,777        |       |            |   | 88          |    |             |   | 288,900    |        |               |   | (186,082      | ) |               |   | (562                          | ) |            |   | 41     |   |  |   | (3,535 | ) |  |   | 98,850  |        |  | $ | 7,396   |  
|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |  
|Issuance of common stock:                                                      |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |  
|                                                                               | Exercise of employee stock options    |  |              | 171   |            |   |             | 2  |             |   |            | 3,510  |               |   |               |  |               |   |                               |  |            |   |        |  |  |   |        |  |  |   |         | 3,512  |  |   |         |   | 
|                                                                               | Employee stock purchase plan          |  |              | 40    |            |   |             |   |             |   |            | 380    |               |   |               |  |               |   |                               |  |            |   |        |  |  |   |        |  |  |   |         | 380    |  |   |         |   | 
|                                                                               | Conversion of subordinated debentures |  |              | 21    |            |   |             |   |             |   |            | 411    |               |   |               |  |               |   |                               |  |            |   |        |  |  |   |        |  |  |   |         | 411    |  |   |         |   | 
|Tax benefit from exercise of employee stock options                            |                                       |  |             |       |            |   |            |    |             |   | 700        |        |               |   |              |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | 700     |        |  |   |         |  
|Repurchase of common stock                                                     |                                       |  | (82          | )     |            |   | (1          | )  |             |   | (975       | )      |               |   |              |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | (976    | )      |  |   |         |  
|Repurchase of warrants                                                         |                                       |  |             |       |            |   |            |    |             |   | (3,370     | )      |               |   |              |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | (3,370  | )      |  |   |         |  
|Accretion on Series B redeemable preferred stock                               |                                       |  |             |       |            |   |            |    |             |   | (225       | )      |               |   |              |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | (225    | )      |  |   |         |  
|Dividends on redeemable preferred stock                                        |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   | (1,638        | ) |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | (1,638  | )      |  |   |         |  
|Net gain on repurchase of preferred stock                                      |                                       |  |             |       |            |   |            |    |             |   | 739        |        |               |   |              |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | 739     |        |  |   |         |  
|Net earnings                                                                   |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   | 6,685         |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | 6,685   |        |  | $ | 6,685   |  
|Change in foreign currency translation adjustment, net of income taxes         |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   |              |   |               |   | (164                          | ) |            |   |       |   |  |   |       |   |  |   | (164    | )      |  |   | (164    | )
|Change in unrealized appreciation on available-for-sale securities,
net of tax |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   |              |   |               |   |                              |   |            |   | (7     | ) |  |   |       |   |  |   | (7      | )      |  |   | (7      | )
|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |  
|Balance, December 31, 2001                                                     |                                       |  | 8,927        |       |            |   | 89          |    |             |   | 290,070    |        |               |   | (181,035      | ) |               |   | (726                          | ) |            |   | 34     |   |  |   | (3,535 | ) |  |   | 104,897 |        |  | $ | 6,514   |  
|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |  
|Issuance of common stock:                                                      |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |  
|                                                                               | Exercise of employee stock options    |  |              | 81    |            |   |             | 1  |             |   |            | 1,715  |               |   |               |  |               |   |                               |  |            |   |        |  |  |   |        |  |  |   |         | 1,716  |  |   |         |   | 
|                                                                               | Employee stock purchase plan          |  |              | 10    |            |   |             |   |             |   |            | 215    |               |   |               |  |               |   |                               |  |            |   |        |  |  |   |        |  |  |   |         | 215    |  |   |         |   | 
|                                                                               | Acquisition of businesses             |  |              | 1,158 |            |   |             | 12 |             |   |            | 19,828 |               |   |               |  |               |   |                               |  |            |   |        |  |  |   |        |  |  |   |         | 19,840 |  |   |         |   | 
|Tax benefit from exercise of employee stock options                            |                                       |  |             |       |            |   |            |    |             |   | 250        |        |               |   |              |   |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | 250     |        |  |   |         |  
|Retirement of note receivable from shareholder                                 |                                       |  | (125         | )     |            |   | (1          | )  |             |   | (1,026     | )      |               |   |              |   |               |   |                              |   |            |   |       |   |  |   | 3,535  |   |  |   | 2,508   |        |  |   |         |  
|Net loss                                                                       |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   | (16,326       | ) |               |   |                              |   |            |   |       |   |  |   |       |   |  |   | (16,326 | )      |  | $ | (16,326 | )
|Change in foreign currency translation adjustment, net of income taxes         |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   |              |   |               |   | 688                           |   |            |   |       |   |  |   |       |   |  |   | 688     |        |  |   | 688     |  
|Change in unrealized appreciation on available-for-sale securities,
net of tax |                                       |  |             |       |            |   |            |    |             |   |           |        |               |   |              |   |               |   |                              |   |            |   | (8     | ) |  |   |       |   |  |   | (8      | )      |  |   | (8      | )
|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |  
|Balance, December 31, 2002                                                     |                                       |  | 10,051       |       |            | $ | 101         |    |             | $ | 311,052    |        |               | $ | (197,361      | ) |               | $ | (38                           | ) |            | $ | 26     |   |  | $ |       |   |  | $ | 113,780 |        |  | $ | (15,646 | )
|                                                                               |                                       |  |              |       |            |   |             |    |             |   |            |        |               |   |               |   |               |   |                               |   |            |   |        |   |  |   |        |   |  |   |         |        |  |   |         |  

See accompanying notes to consolidated financial statements.

F-4



---



##### Table of Contents



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

|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |         |        |        |         |  
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ----------------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------ | ------ | ------------------------ | ------- | -------- | ------ | ------- | ------- | ------- | ------ | ------ | ------- | -
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        | Years ended December 31,
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                         
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        | 2002                     |         | 2001     |        | 2000   
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |        
|Cash Flows from Operating Activities:                                  |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       | Net earnings (loss)                                                                        |                                                                   | $                                      | (16,326                                                | )      |                          | $       | 6,685    |        |         | $       | 13,694  |       
|                                                                       | Less, loss from discontinued operations, net of income taxes                               |                                                                   |                                        | (682                                                   | )      |                          |         | (1,240   | )      |         |         |        |       
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       | Earnings (loss) from continuing operations                                                 |                                                                   |                                        | (15,644                                                | )      |                          |         | 7,925    |        |         |         | 13,694  |       
|                                                                       | Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities: |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |         |       
|                                                                       |                                                                                            | Depreciation and amortization                                     |                                        |                                                        | 7,513  |                          |         |          | 15,198 |         |         |         | 13,984 |       
|                                                                       |                                                                                            | Amortization of debt discount and expenses                        |                                        |                                                        | 1,903  |                          |         |          | 853    |         |         |         |       |       
|                                                                       |                                                                                            | Provision for doubtful accounts                                   |                                        |                                                        | 9,955  |                          |         |          | 7,575  |         |         |         | 7,043  |       
|                                                                       |                                                                                            | Deferred tax expense (benefit)                                    |                                        |                                                        | (5,806 | )                        |         |          | 4,508  |         |         |         | 7,733  |       
|                                                                       |                                                                                            | Non-cash charges from termination of retirement plan              |                                        |                                                        | 9,409  |                          |         |          |       |         |         |         |       |       
|                                                                       |                                                                                            | Proceeds from termination of interest rate swap agreements        |                                        |                                                        | 3,053  |                          |         |          |       |         |         |         |       |       
|                                                                       |                                                                                            | Non-cash loss on settlement of note receivable                    |                                        |                                                        | 2,508  |                          |         |          |       |         |         |         |       |       
|                                                                       |                                                                                            | Non-cash write-off of computer software                           |                                        |                                                        | 2,494  |                          |         |          |       |         |         |         |       |       
|                                                                       |                                                                                            | Gains on sales of investments                                     |                                        |                                                        |       |                          |         |          |       |         |         |         | (6,077 | )     
|                                                                       |                                                                                            | Changes in assets and liabilities, net of effect of acquisitions: |                                        |                                                        |        |                          |         |          |        |         |         |         |        |       
|                                                                       |                                                                                            |                                                                   | Trade accounts receivable              |                                                        |        | (6,342                   | )       |          |        | (19,509 | )       |         |        | (5,583 | )      
|                                                                       |                                                                                            |                                                                   | Inventories                            |                                                        |        | (5,307                   | )       |          |        | (4,271  | )       |         |        | (6,735 | )      
|                                                                       |                                                                                            |                                                                   | Prepaid expenses                       |                                                        |        | (2,244                   | )       |          |        | (3,388  | )       |         |        | (347   | )      
|                                                                       |                                                                                            |                                                                   | Other current assets                   |                                                        |        | 1,201                    |         |          |        | (1,552  | )       |         |        | 694    |        
|                                                                       |                                                                                            |                                                                   | Intangible and other noncurrent assets |                                                        |        | (2,140                   | )       |          |        | (1,311  | )       |         |        | (3,451 | )      
|                                                                       |                                                                                            |                                                                   | Accounts payable                       |                                                        |        | 12,249                   |         |          |        | 1,369   |         |         |        | 3,713  |        
|                                                                       |                                                                                            |                                                                   | Accrued and other liabilities          |                                                        |        | 7,078                    |         |          |        | 550     |         |         |        | (4,550 | )      
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       |                                                                                            |                                                                   |                                        | Net cash provided by continuing operations             |        |                          | 19,880  |          |        |         | 7,947   |         |        |        | 20,118  |  
|                                                                       |                                                                                            |                                                                   |                                        | Net cash provided by (used in) discontinued operations |        |                          | 642     |          |        |         | 3,056   |         |        |        | (623    | )
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       |                                                                                            |                                                                   |                                        | Net cash provided by operating activities              |        |                          | 20,522  |          |        |         | 11,003  |         |        |        | 19,495  |  
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|Cash Flows from Investing Activities:                                  |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       | Purchases of property and equipment                                                        |                                                                   |                                        | (16,100                                                | )      |                          |         | (8,386   | )      |         |         | (7,395  | )     
|                                                                       | Purchases of property and equipment related to discontinued operations                     |                                                                   |                                        |                                                       |        |                          |         | (17      | )      |         |         | (3,492  | )     
|                                                                       | Acquisition of businesses, net of cash acquired                                            |                                                                   |                                        | (3,526                                                 | )      |                          |         |         |        |         |         |        |       
|                                                                       | Proceeds from disposition of business                                                      |                                                                   |                                        |                                                       |        |                          |         | 18,076   |        |         |         |        |       
|                                                                       | Proceeds from sales of short-term investments                                              |                                                                   |                                        |                                                       |        |                          |         |         |        |         |         | 7,298   |       
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       |                                                                                            |                                                                   |                                        | Net cash provided by (used in) investing activities    |        |                          | (19,626 | )        |        |         | 9,673   |         |        |        | (3,589  | )
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|Cash Flows from Financing Activities:                                  |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       | Borrowings under credit agreement                                                          |                                                                   |                                        | 12,116                                                 |        |                          |         | 36,000   |        |         |         | 23,000  |       
|                                                                       | Proceeds from issuance of debt                                                             |                                                                   |                                        | 1,462                                                  |        |                          |         | 1,013    |        |         |         | 891     |       
|                                                                       | Principal repayments under credit agreement and long-term debt                             |                                                                   |                                        | (14,133                                                | )      |                          |         | (127,738 | )      |         |         | (37,650 | )     
|                                                                       | Proceeds from issuance of common stock                                                     |                                                                   |                                        | 1,858                                                  |        |                          |         | 3,892    |        |         |         | 579     |       
|                                                                       | Proceeds from issuance of senior notes                                                     |                                                                   |                                        |                                                       |        |                          |         | 111,940  |        |         |         |        |       
|                                                                       | Repurchase of redeemable preferred stock                                                   |                                                                   |                                        |                                                       |        |                          |         | (40,931  | )      |         |         |        |       
|                                                                       | Repurchases of common stock and warrants                                                   |                                                                   |                                        |                                                       |        |                          |         | (4,346   | )      |         |         | (4,733  | )     
|                                                                       | Preferred stock dividend payments                                                          |                                                                   |                                        |                                                       |        |                          |         | (2,438   | )      |         |         | (3,200  | )     
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       |                                                                                            |                                                                   |                                        | Net cash provided by (used in) financing activities    |        |                          | 1,303   |          |        |         | (22,608 | )       |        |        | (21,113 | )
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|Effect of exchange rate changes on cash and cash equivalents           |                                                                                            |                                                                   | 1,318                                  |                                                        |        |                          |        |          |        |         | (426    | )      
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       |                                                                                            |                                                                   |                                        | Net increase (decrease) in cash and cash equivalents   |        |                          | 3,517   |          |        |         | (1,932  | )       |        |        | (5,633  | )
|Cash and cash equivalents at beginning of year                         |                                                                                            |                                                                   | 1,983                                  |                                                        |        |                          | 3,915   |          |        |         | 9,548   |        
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|Cash and cash equivalents at end of year                               |                                                                                            | $                                                                 | 5,500                                  |                                                        |        | $                        | 1,983   |          |        | $       | 3,915   |        
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|Supplemental disclosures of cash paid for:                             |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       | Interest                                                                                   |                                                                   | $                                      | 12,445                                                 |        |                          | $       | 9,428    |        |         | $       | 8,596   |       
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       | Income taxes                                                                               |                                                                   | $                                      | 247                                                    |        |                          | $       | 1,164    |        |         | $       | 2,167   |       
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|Supplemental disclosure of noncash investing and financing activities: |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        
|                                                                       | Equipment acquired under capital lease obligations                                         |                                                                   | $                                      | 255                                                    |        |                          | $       | 63       |        |         | $       | 526     |       
|                                                                       |                                                                                            |                                                                   |                                        |                                                        |        |                          |         |          |        |         |         |        

See accompanying notes to consolidated financial statements.

F-5



---



##### Table of Contents



MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000

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



|(1) |  | Summary of Significant Accounting Policies
|--- |  | ------------------------------------------



| | (a) |  | Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Matria Healthcare, Inc. (the Company) is a comprehensive, integrated
disease management company, offering its services to patients, health
plans and employers. Disease management encompasses a broad range of
services aimed at controlling healthcare costs through proactive
management of care. The Companys strategy is to provide cost-saving
solutions for the five most costly chronic diseases and episodic
conditions in the nation: diabetes, obstetrical conditions, cancer,
respiratory disorders and cardiovascular disease. In addition, the
Company has added programs for depression and chronic pain to its
service offerings. The Companys disease management programs seek to
lower healthcare costs and improve patient outcomes through a broad
range of disease management, mail-order supply and clinical services.
The Company is also a leading designer, developer, assembler and
distributor of products for the diabetes market. See note 2
for a summary of acquisitions and note 13 for a description of the
revenues, operating earnings, identifiable assets, depreciation and
amortization and capital expenditures of the Companys reportable
business segments.
|
| | (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 the
Company and all of its majority owned subsidiaries and partnerships.
All significant intercompany balances and transactions have been
eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (c) |  | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | Cash and cash equivalents consist of cash and interest-bearing
deposits. The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (d) |  | Short-Term Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |     |  | At December 31, 2002, short-term investments consist of the Companys
holdings in marketable equity securities. 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 loss in common
shareholders equity. Unrealized gains (net of income taxes) of $26
and $34 were included in common shareholders equity in the
consolidated balance sheets at December 31, 2002 and 2001, respectively
(see note 15).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-6



---



##### Table of Contents





| | (e) |  | Revenue Recognition and Allowances for Uncollectible Accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Revenues for the Womens Health segment are generated by providing
services through patient service centers. Revenues from this segment
are recognized as the related services are rendered and are net of
contractual allowances and related discounts. The Health Enhancement
segment provides services through its patient service centers, provides
supplies to patients, and assembles, packages and distributes lancing
products to original equipment manufacturers and distributors. Revenues for services
are recognized when services are provided and revenues from product
sales are recognized when products are 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, recoveries of amounts previously provided,
industry reimbursement trends, audit activity and other relevant
factors which, in the opinion of management, deserve recognition in
estimating the allowance for uncollectible accounts.
|
| | (f) |  | 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.                                                                                                                                                                                                                                                                                   
|
| | (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) |  | Prepaid Advertising                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | In accordance with American Institute of Certified Public Accountants
Statement of Position 93-7 (SOP 93-7), direct-response advertising
and related costs for the Companys Health Enhancement segment are
capitalized and amortized to selling and administrative expense in
proportion to expected future revenues. Management assesses the
realizability of the amounts of direct-response advertising costs
reported as assets at each balance sheet date by comparing the carrying
amounts of such assets to the estimated remaining future net benefits
estimated to result directly from such advertising.                                                                                                                      
|
| |     |  | Capitalized direct-response advertising costs, net of accumulated
amortization, of $4,469 and $3,377 were included in prepaid expenses in
the accompanying consolidated balance sheets at December 31, 2002 and
2001, respectively. The Company expenses in the period incurred all
other advertising and promotion costs that do not meet the requirements
for capitalization under SOP 93-7. Total advertising expense was
$2,906, $1,109 and $880 for the years ended December 31, 2002, 2001 and
2000, respectively.                                                                                                                                                                                                                  

F-7



---



##### Table of Contents





| | (i) |  | 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.
|
| |     |  | Property and equipment are summarized as follows:                                                                                                                                                                                                                                                                                                                                       

|                                               |  |              |        |      |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |        | 2001
|                                               |  |              |        |     
|Machinery, equipment and fixtures              |  | $            | 37,463 |      |  | $ | 26,829 | 
|Medical equipment                              |  |              | 11,318 |      |  |   | 15,759 | 
|Leasehold improvements                         |  |              | 3,039  |      |  |   | 2,652  | 
|                                               |  |              |        |      |  |   |        | 
|                                               |  |              | 51,820 |      |  |   | 45,240 | 
|Less accumulated depreciation and amortization |  |              | 25,104 |      |  |   | 26,518 | 
|                                               |  |              |        |      |  |   |        | 
|                                               |  | $            | 26,716 |      |  | $ | 18,722 | 
|                                               |  |              |        |      |  |   |        | 



| | (j) |  | Intangible Assets                      
| | --- |  | ---------------------------------------
|
| |     |  | A summary of intangible assets follows:

|                              |  |              |         |      |  |   |         | 
|----------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                              |  | December 31,
|                              |  |             
|                              |  | 2002         |         | 2001
|                              |  |              |         |     
|Goodwill                      |  | $            | 157,174 |      |  | $ | 135,045 | 
|Other intangible assets       |  |              | 3,800   |      |  |   | 3,800   | 
|                              |  |              |         |      |  |   |         | 
|                              |  |              | 160,974 |      |  |   | 138,845 | 
|Less accumulated amortization |  |              | 30,403  |      |  |   | 29,211  | 
|                              |  |              |         |      |  |   |         | 
|                              |  | $            | 130,571 |      |  | $ | 109,634 | 
|                              |  |              |         |      |  |   |         | 



| |  |  | Intangible assets consist of goodwill and other intangible assets,
primarily resulting from the Companys acquisitions (see note 2). The
net unamortized balance of goodwill as of December 31, 2002 was
$129,011. In 2001 and 2000, goodwill was amortized using the
straight-line method over periods ranging from eight to 15 years.
Amortization expense related to goodwill in each of these years totaled
$9,267 and $9,243, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Other intangible assets consist of customer lists and executive
noncompete agreements. The net unamortized balance of these
identifiable intangible assets as of December 31, 2002 was $1,560. In
2002, 2001 and 2000, these costs were amortized on a straight-line
basis over periods ranging from five to ten years. Amortization
expense in each of these three years was $560.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business
Combinations(SFAS 141) and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets(SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated or completed after June 30, 2001
and specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested
for impairment at least annually in accordance with the provisions of
SFAS 142. SFAS 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
144).

F-8



---



##### Table of Contents





| |  |  | The Company adopted the provisions of SFAS 141 in 2001 and SFAS 142
effective January 1, 2002. SFAS 141 required, upon adoption of SFAS
142, that the Company evaluate its existing goodwill and intangible
assets that were acquired in prior purchase business combinations and
make any necessary reclassifications in order to conform with the new
criteria in SFAS 141 for recognition apart from goodwill. Upon
adoption of SFAS 142, the Company also was required to reassess the
useful lives and residual values of all intangible assets acquired, and
to make any necessary amortization period adjustments.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the first quarter of 2002, the Company evaluated the fair values
of the business segments identified under the provisions of SFAS 141
and SFAS 142 and concluded that no impairment of recorded goodwill
exists. Likewise, such an evaluation was performed as of December 31,
2002, again resulting in a conclusion that no impairment existed. As a
result, no amortization of goodwill was recorded in 2002. The changes
in the carrying values of goodwill for the year ended December 31, 2002
were as follows:                                                                                              

|                                               |  |             |         |         |  |       |       |  |  |   |         |  
|---------------------------------------------- |  | ----------- | ------- | ------- |  | ----- | ----- |  |  | - | ------- | -
|                                               |  | Health      |         | Women's |  |       |       | 
|                                               |  | Enhancement |         | Health  |  | Total
|                                               |  |             |         |         |  |      
|Carrying value at December 31, 2001            |  | $           | 104,832 |         |  | $     | 2,682 |  |  | $ | 107,514 |  
|Additional goodwill from acquisitions (note 2) |  |             | 22,129  |         |  |       |      |  |  |   | 22,129  |  
|Tax benefit of additional deductible goodwill  |  |             | (632    | )       |  |       |      |  |  |   | (632    | )
|                                               |  |             |         |         |  |       |       |  |  |   |         |  
|Carrying value at December 31, 2002            |  | $           | 126,329 |         |  | $     | 2,682 |  |  | $ | 129,011 |  
|                                               |  |             |         |         |  |       |       |  |  |   |         |  



| |  |  | In connection with the adoption of SFAS 142, the Company also
reassessed the useful lives, residual values and classification of its
identifiable intangible assets and determined that they continue to be
appropriate. The components of identifiable intangible assets were as
follows:
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         |                       |   |              |       |      |   |        |       | 
|------------------------ | --------------------- | - | ------------ | ----- | ---- | - | ------ | ----- | 
|                         |                       |   | December 31,
|                         |                       |   |             
|                         |                       |   | 2002         |       | 2001
|                         |                       |   |              |       |     
|Gross carrying amounts:  |                       |   |              |       |      |   |        |      
|                         | Patient lists         |   | $            | 3,300 |      |   | $      | 3,300 | 
|                         | Non-compete agreement |   |              | 500   |      |   |        | 500   | 
|                         |                       |   |              |       |      |   |        |      
|                         |                       |   | 3,800        |       |      |   | 3,800  |      
|Accumulated amortization |                       |   | (2,240       | )     |      |   | (1,680 | )    
|                         |                       |   |              |       |      |   |        |      
|                         |                       | $ | 1,560        |       |      | $ | 2,120  |      
|                         |                       |   |              |       |      |   |        |      



| |  |  | Amortization expense for the years ended December 31, 2002, 2001 and
2000 was $560 in each year. Estimated amortization expense for the
five succeeding years is as follows:
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  |   |     | 
|---- |  | - | --- | 
|2003 |  | $ | 560 | 
|2004 |  |   | 200 | 
|2005 |  |   | 200 | 
|2006 |  |   | 200 | 
|2007 |  |   | 200 | 

F-9



---



##### Table of Contents





| |  |  | The reconciliation of reported net earnings (loss) adjusted for the
adoption of SFAS 142 is as follows:
| |  |  | -------------------------------------------------------------------------------------------------------

|                                                              |          |   |                          |   |      |   |        |  |  |   |        |  | 
|------------------------------------------------------------- | -------- | - | ------------------------ | - | ---- | - | ------ |  |  | - | ------ |  | 
|                                                              |          |   | Years ended December 31,
|                                                              |          |   |                         
|                                                              |          |   | 2002                     |   | 2001 |   | 2000  
|                                                              |          |   |                          |   |      |   |       
|Net earnings (loss) available to common shareholders          |          |   |                          |   |      |   |        |  |  |   |        | 
|As reported                                                   |          | $ | (16,326                  | ) |      | $ | 5,561  |  |  | $ | 10,053 | 
|Add back: Goodwill amortization, net of tax                   |          |   |                         |   |      |   | 5,246  |  |  |   | 5,555  | 
|                                                              |          |   |                          |   |      |   |        |  |  |   |        | 
|Adjusted net earnings (loss) available to common shareholders |          | $ | (16,326                  | ) |      | $ | 10,807 |  |  | $ | 15,608 | 
|                                                              |          |   |                          |   |      |   |        |  |  |   |        | 
|Net earnings (loss) per common share                          |          |   |                          |   |      |   |        |  |  |   |        | 
|                                                              | Basic:   |   |                          |   |      |   |        |  |  |   |        |  | 
|As reported                                                   |          | $ | (1.75                    | ) |      | $ | 0.64   |  |  | $ | 1.10   | 
|Add back: Goodwill amortization, net of tax                   |          |   |                         |   |      |   | 0.60   |  |  |   | 0.61   | 
|                                                              |          |   |                          |   |      |   |        |  |  |   |        | 
|Adjusted net earnings (loss) per common share                 |          | $ | (1.75                    | ) |      | $ | 1.24   |  |  | $ | 1.71   | 
|                                                              |          |   |                          |   |      |   |        |  |  |   |        | 
|                                                              | Diluted: |   |                          |   |      |   |        |  |  |   |        |  | 
|As reported                                                   |          | $ | (1.75                    | ) |      | $ | 0.62   |  |  | $ | 1.05   | 
|Add back: Goodwill amortization, net of tax                   |          |   |                         |   |      |   | 0.58   |  |  |   | 0.56   | 
|                                                              |          |   |                          |   |      |   |        |  |  |   |        | 
|Adjusted net earnings (loss) per common share                 |          | $ | (1.75                    | ) |      | $ | 1.20   |  |  | $ | 1.61   | 
|                                                              |          |   |                          |   |      |   |        |  |  |   |        | 



| | (k) |  | Long-Lived Assets and Long-Lived Assets to Be Disposed Of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In August 2001, the FASB issued SFAS 144, which supersedes both
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of(SFAS 121) and the accounting and reporting provisions of
Accounting Principles Board (APB) Opinion No. 30, Reporting the
Results of OperationsReporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions(Opinion 30) for the disposal of a segment of
a business (as previously defined in that Opinion). SFAS 144 retains
the fundamental provisions in SFAS 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS 121. For example, SFAS 144
provides guidance on how a long-lived asset that is used as part of a
group should be evaluated for impairment, establishes criteria for when
a long-lived asset is held for sale, and prescribes the accounting for
a long-lived asset that will be disposed of other than by sale. SFAS
144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment
of a business). The Company adopted SFAS 144 on January 1, 2002. SFAS
144 had no impact on the Companys financial statements.
|
| | (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-10



---



##### Table of Contents





| | (m) |  | Fair Value of Financial Instruments                                                                  
| | --- |  | -----------------------------------------------------------------------------------------------------
|
| |     |  | The carrying amounts and estimated fair values of the Companys
financial instruments are as follows:

|                                            |  |                   |         |  |                   |   |         |          |  |   |         |   |  |   |         |  
|------------------------------------------- |  | ----------------- | ------- |  | ----------------- | - | ------- | -------- |  | - | ------- | - |  | - | ------- | -
|                                            |  |                   |         | 
|                                            |  | December 31, 2002 |         |  | December 31, 2001 |  
|                                            |  |                   |         |  |                   |  
|                                            |  | Carrying          |         |  | Fair              |   |         | Carrying |  |   | Fair    |  
|                                            |  | Amount            |         |  | Value             |   |         | Amount   |  |   | Value   |  
|                                            |  |                   |         |  |                   |   |         |          |  |   |         |  
|Senior notes (see notes 3 and 4)            |  | $                 | 115,288 |  |                   | $ | 109,190 |          |  | $ | 115,090 |   |  | $ | 126,270 |  
|Interest rate swap arrangement (see note 4) |  | $                 |        |  |                   | $ |        |          |  | $ | (639    | ) |  | $ | (639    | )



| |     |  | The carrying amount of the senior notes is net of the unamortized
discount. The carrying amount of the senior notes at
December 31, 2001 included a $639 adjustment to reflect the fair
value of the portion of the senior notes included in the interest
rate swap arrangement. The estimated fair value of the senior notes is based upon
the quoted market price of the senior notes. The estimated fair value
of the interest rate swap arrangement represented the amount that the
Company would receive to terminate the agreement, taking into account
current interest rates at December 31, 2001. The Companys other
financial instruments approximate fair value due to the short-term
nature of those assets and liabilities.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (n) |  | Accrued Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | Accrued liabilities are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                       |  |              |        |      |  |   |        | 
|-------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2002         |        | 2001
|                                       |  |              |        |     
|Accrued salaries, wages and incentives |  | $            | 3,408  |      |  | $ | 3,003  | 
|Accrued interest                       |  |              | 2,309  |      |  |   | 1,932  | 
|Income tax liability                   |  |              | 2,464  |      |  |   | 1,787  | 
|Other                                  |  |              | 10,580 |      |  |   | 4,897  | 
|                                       |  |              |        |      |  |   |        | 
|                                       |  | $            | 18,761 |      |  | $ | 11,619 | 
|                                       |  |              |        |      |  |   |        | 



| | (o) |  | Stock Option Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | As described in note 7, the Company offers various stock option plans
for its employees, officers, independent contractors and consultants.
The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees,and related Interpretations. No stock-based
employee compensation cost is reflected in net earnings, as all options
granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.
|
| |     |  | The
following table illustrates the effect on earnings (loss) from
continuing operations and earnings (loss) per share from continuing
operations if the Company had applied the fair value recognition
provisions of FASB Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation(SFAS 123), to stock-based
employee compensation.                                                                                                                                                                          

|                                                                                                                                      |  |                          |         |      |  |      |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                      |  | Years Ended December 31,
|                                                                                                                                      |  |                         
|                                                                                                                                      |  | 2002                     |         | 2001 |  | 2000
|                                                                                                                                      |  |                          |         |      |  |     
|Earnings (loss) from
continuing operations available
to common shareholders                                                           |  | $                        | (15,644 | )    |  | $    | 6,801  |   |  | $ | 10,053 |  
|Deduct: Stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects |  |                          | (1,290  | )    |  |      | (1,014 | ) |  |   | (1,101 | )
|                                                                                                                                      |  |                          |         |      |  |      |        |   |  |   |        |  
|Pro forma earnings (loss)
from continuing operations
available to common shareholders                                                 |  | $                        | (16,934 | )    |  | $    | 5,787  |   |  | $ | 8,952  |  
|                                                                                                                                      |  |                          |         |      |  |      |        |   |  |   |        |  

F-11



---



##### Table of Contents



|                                                             |                        |  |                          |       |      |  |      |      |  |  |   |      | 
|------------------------------------------------------------ | ---------------------- |  | ------------------------ | ----- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                             |                        |  | Years Ended December 31,
|                                                             |                        |  |                         
|                                                             |                        |  | 2002                     |       | 2001 |  | 2000
|                                                             |                        |  |                          |       |      |  |     
|Earnings (loss) per common
share from continuing operations: |                        |  |                          |       |      |  |      |      |  |  |   |     
|                                                             | Basic   as reported   |  | $                        | (1.68 | )    |  | $    | 0.78 |  |  | $ | 1.10 | 
|                                                             | Basic   pro forma     |  | $                        | (1.82 | )    |  | $    | 0.66 |  |  | $ | 0.98 | 
|                                                             | Diluted   as reported |  | $                        | (1.68 | )    |  | $    | 0.76 |  |  | $ | 1.05 | 
|                                                             | Diluted   pro forma   |  | $                        | (1.82 | )    |  | $    | 0.65 |  |  | $ | 0.94 | 



| | (p) |  | 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. All outstanding warrants and
convertible preferred stock were repurchased in July 2001 (see note 6).
|
| |     |  | The computations for basic and diluted net earnings (loss) per common
share are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                     |                                                                  |   |                          |       |      |   |        |       |   |   |        |      | 
|---------------------------------------------------- | ---------------------------------------------------------------- | - | ------------------------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ---- | 
|                                                     |                                                                  |   | Years ended December 31,
|                                                     |                                                                  |   |                         
|                                                     |                                                                  |   | 2002                     |       | 2001 |   | 2000  
|                                                     |                                                                  |   |                          |       |      |   |       
|Basic                                                |                                                                  |   |                          |       |      |   |        |       |   |   |        |     
|Earnings (loss) from continuing operations           |                                                                  | $ | (15,644                  | )     |      | $ | 7,925  |       |   | $ | 13,694 |     
|Discontinued operations:                             |                                                                  |   |                          |       |      |   |        |       |   |   |        |     
|                                                     | Loss from discontinued operations, net of income taxes           |   |                          | (124  | )    |   |        | (455  | ) |   |        |     | 
|                                                     | Loss on disposal of discontinued operations, net of income taxes |   |                          | (558  | )    |   |        | (785  | ) |   |        |     | 
|                                                     |                                                                  |   |                          |       |      |   |        |       |   |   |        |     
|Net earnings (loss)                                  |                                                                  |   | (16,326                  | )     |      |   | 6,685  |       |   |   | 13,694 |     
|Redeemable preferred stock dividends                 |                                                                  |   |                         |       |      |   | (1,638 | )     |   |   | (3,200 | )   
|Accretion on Series B redeemable preferred stock     |                                                                  |   |                         |       |      |   | (225   | )     |   |   | (441   | )   
|Net gain on repurchases of preferred stock           |                                                                  |   |                         |       |      |   | 739    |       |   |   |       |     
|                                                     |                                                                  |   |                          |       |      |   |        |       |   |   |        |     
|Net earnings (loss) available to common shareholders |                                                                  | $ | (16,326                  | )     |      | $ | 5,561  |       |   | $ | 10,053 |     
|                                                     |                                                                  |   |                          |       |      |   |        |       |   |   |        |     
|Weighted average number of common shares outstanding |                                                                  |   | 9,309                    |       |      |   | 8,748  |       |   |   | 9,139  |     
|                                                     |                                                                  |   |                          |       |      |   |        |       |   |   |        |     
|Net earnings (loss) per common share:                |                                                                  |   |                          |       |      |   |        |       |   |   |        |     
|                                                     | Continuing operations                                            |   | $                        | (1.68 | )    |   | $      | 0.78  |   |   | $      | 1.10 | 
|                                                     | Discontinued operations                                          |   |                          | (0.07 | )    |   |        | (0.14 | ) |   |        |     | 
|                                                     |                                                                  |   |                          |       |      |   |        |       |   |   |        |     
|                                                     |                                                                  | $ | (1.75                    | )     |      | $ | 0.64   |       |   | $ | 1.10   |     
|                                                     |                                                                  |   |                          |       |      |   |        |       |   |   |        |     

F-12



---



##### Table of Contents



|                                                     |                                                               |   |                          |       |   |   |       |       |   |   |        |       | 
|---------------------------------------------------- | ------------------------------------------------------------- | - | ------------------------ | ----- | - | - | ----- | ----- | - | - | ------ | ----- | 
|                                                     |                                                               |   | Years ended December 31,
|                                                     |                                                               |   |                         
|Diluted                                              |                                                               |   |                          |       |   |   |       |       |   |   |        |      
|Net earnings (loss) available to common shareholders |                                                               | $ | (16,326                  | )     |   | $ | 5,561 |       |   | $ | 10,053 |      
|Dividends on convertible preferred shares            |                                                               |   |                         |       |   |   | 25    |       |   |   | 400    |      
|                                                     |                                                               |   |                          |       |   |   |       |       |   |   |        |      
|Net earnings (loss) for diluted calculation          |                                                               | $ | (16,326                  | )     |   | $ | 5,586 |       |   | $ | 10,453 |      
|                                                     |                                                               |   |                          |       |   |   |       |       |   |   |        |      
|Shares:                                              |                                                               |   |                          |       |   |   |       |       |   |   |        |      
|                                                     | Weighted average number of common shares outstanding          |   |                          | 9,309 |   |   |       | 8,748 |   |   |        | 9,139 | 
|                                                     | Shares issuable from assumed exercise of options and warrants |   |                          |      |   |   |       | 209   |   |   |        | 251   | 
|                                                     | Convertible preferred stock                                   |   |                          |      |   |   |       | 35    |   |   |        | 556   | 
|                                                     |                                                               |   |                          |       |   |   |       |       |   |   |        |      
|                                                     |                                                               |   | 9,309                    |       |   |   | 8,992 |       |   |   | 9,946  |      
|                                                     |                                                               |   |                          |       |   |   |       |       |   |   |        |      
|Net earnings (loss) per common share:                |                                                               |   |                          |       |   |   |       |       |   |   |        |      
|                                                     | Continuing operations                                         |   | $                        | (1.68 | ) |   | $     | 0.76  |   |   | $      | 1.05  | 
|                                                     | Discontinued operations                                       |   |                          | (0.07 | ) |   |       | (0.14 | ) |   |        |      | 
|                                                     |                                                               |   |                          |       |   |   |       |       |   |   |        |      
|                                                     |                                                               | $ | (1.75                    | )     |   | $ | 0.62  |       |   | $ | 1.05   |      
|                                                     |                                                               |   |                          |       |   |   |       |       |   |   |        |      



| | (q) |  | Comprehensive Earnings (Loss)                                                                                                                                                                                                                                                                                                                                                                                            
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Comprehensive earnings (loss) generally include all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. For 2002, 2001 and 2000, comprehensive
earnings (loss) consist of net earnings (loss), foreign currency
translation adjustments (net of income taxes) and changes in unrealized
appreciation on available-for-sale securities (net of income taxes).
|
| | (r) |  | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |     |  | Certain amounts in the 2001 and 2000 consolidated financial statements
have been reclassified to conform to presentations adopted in 2002.                                                                                                                                                                                                                                                                               

F-13



---



##### Table of Contents





|(2) |  | Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On September 30, 2002, the Company acquired all of the issued and
outstanding stock of Quality Oncology, Inc. (QO), a national provider of
cancer disease management services, for consideration valued for financial
statement purposes at $19,751. Under the terms of the agreement, the
Company paid $3,255 in cash and issued approximately 890,000 shares of
common stock. An additional 42,000 shares were issued in February 2003
pursuant to a purchase price adjustment. Additional financial
consideration will be paid in 2004 based upon 2003 operating results.
Management currently estimates that the additional consideration could be
between $20,000 and $25,000, although the amount could be more or less
depending on 2003 performance. The additional consideration will be
payable, at the Companys option, in cash, shares of common stock or a
combination thereof, provided that the lesser of 20% of the payment or
$10,000 must be paid in cash. The Companys December 31, 2002 balance
sheet reflects the assets acquired and liabilities assumed in this
transaction, including goodwill of $19,342. Of this amount, $18,596 is
deductible for income tax purposes. Results of operations of QO have been
included in the consolidated statement of operations of the Company
effective October 1, 2002.
|   
|    |  | The following is a summary of the estimated fair value of assets acquired
and liabilities assumed (including transaction costs) at the date of
acquisition, September 30, 2002:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                            |                       |   |        |        | 
|--------------------------- | --------------------- | - | ------ | ------ | 
|Current assets              |                       | $ | 2,953  |       
|Property and equipment, net |                       |   | 820    |       
|Goodwill                    |                       |   | 19,342 |       
|Deferred income taxes       |                       |   | 450    |       
|Other assets                |                       |   | 52     |       
|                            |                       |   |        |       
|                            | Total assets acquired |   |        | 23,617 | 
|Current liabilities         |                       |   | (3,866 | )     
|                            |                       |   |        |       
|                            |                       | $ | 19,751 |       
|                            |                       |   |        |       



| |  | The following unaudited pro forma combined condensed statement of
operations is presented to give effect to the acquisition as if it had been
completed on January 1, 2001. The pro forma information presents the
combined results of operations for the years ended December 31, 2002 and
2001 and were prepared based on the historical financial statements of the
Company and QO and include pro forma adjustments to reflect the income tax
effect of QOs net loss, the interest cost of the cash portion of the
purchase price and other purchase accounting adjustments. Incremental
shares of the Companys common stock resulting from the acquisition are
reflected in the pro forma earnings (loss) per share.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                             |         |   |                          |       |      |   |         |       | 
|------------------------------------------------------------ | ------- | - | ------------------------ | ----- | ---- | - | ------- | ----- | 
|                                                             |         |   | Years ended December 31,
|                                                             |         |   |                         
|                                                             |         |   | 2002                     |       | 2001
|                                                             |         |   |                          |       |     
|Revenues                                                     |         | $ | 284,406                  |       |      | $ | 269,734 |      
|Earnings (loss) from continuing operations                   |         | $ | (16,624                  | )     |      | $ | 6,114   |      
|Earnings (loss) per common share from
continuing operations: |         |   |                          |       |      |   |         |      
|                                                             | Basic   |   | $                        | (1.66 | )    |   | $       | 0.52  | 
|                                                             | Diluted |   | $                        | (1.66 | )    |   | $       | 0.51  | 
|Weighted average shares outstanding:                         |         |   |                          |       |      |   |         |      
|                                                             | Basic   |   |                          | 9,991 |      |   |         | 9,638 | 
|                                                             | Diluted |   |                          | 9,991 |      |   |         | 9,882 | 



| |  | Effective June 14, 2002, the Company acquired MarketRing.com, Inc.
(MarketRing), a healthcare information technology company. For financial
statement purposes, the acquisition was recorded at fair value of $4,087 and was paid by the issuance of approximately 267,000
shares of common stock.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14



---



##### Table of Contents





|    |  | The Company is holding an additional 28,500
shares, issuable in connection with the acquisition, in escrow through June
2003 as security for certain indemnification obligations of MarketRing
under the related merger agreement. In addition, the Company may issue up
to 21,500 shares of common stock upon the exercise of MarketRing stock
options assumed and a warrant issued by the Company in connection with the
acquisition. The Company has recorded goodwill of $2,787 related to this
acquisition. The Companys financial statements include the operations of
MarketRing commencing on June 14, 2002. The acquisition of MarketRing is
not individually material to the consolidated financial statements of the
Company and therefore pro forma results are not presented.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Total cash paid related to all acquisitions in 2002, net of cash acquired,
was $3,526.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) |  | Long-Term Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | Long-term debt is summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                                                                                                                                                                                                                                                      |                      |   |              |         |      |   |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | - | ------------ | ------- | ---- | - | ------- | ------- | 
|                                                                                                                                                                                                                                                                      |                      |   | December 31,
|                                                                                                                                                                                                                                                                      |                      |   |             
|                                                                                                                                                                                                                                                                      |                      |   | 2002         |         | 2001
|                                                                                                                                                                                                                                                                      |                      |   |              |         |     
|Unsecured 11% senior notes, net of
unamortized discount of $6,712 and $7,549 at
December 31, 2002 and 2001, respectively,
plus unamortized deferred gains on interest
rate swaps of $2,747 at December 31, 2002;
interest payable semi-annually and maturing
May 2008 |                      | $ | 118,035      |         |      | $ | 114,451 |        
|Capital lease obligations; interest ranging
from approximately 1% to 18% with various
monthly payments and maturing at various
dates through November 2006 (note 10)                                                                                                  |                      |   | 391          |         |      |   | 263     |        
|Other debt; interest at rates ranging from
approximately 4% to 9%; payable in monthly
installments through April 2003                                                                                                                                                 |                      |   | 532          |         |      |   | 476     |        
|                                                                                                                                                                                                                                                                      |                      |   |              |         |      |   |         |        
|                                                                                                                                                                                                                                                                      | Total long-term debt |   |              | 118,958 |      |   |         | 115,190 | 
|Less current installments                                                                                                                                                                                                                                             |                      |   | 743          |         |      |   | 615     |        
|                                                                                                                                                                                                                                                                      |                      |   |              |         |      |   |         |        
|Long-term debt, excluding current installments                                                                                                                                                                                                                        |                      | $ | 118,215      |         |      | $ | 114,575 |        
|                                                                                                                                                                                                                                                                      |                      |   |              |         |      |   |         |        



| |  | On July 9, 2001, the Company issued $125,000 of 11% senior notes at a
discount of 6.5% from the principal amount. Interest is payable
semi-annually in arrears on May 1 and November 1. Among the covenants
under the bond indenture is a requirement to repurchase notes from the
Companys annual excess cash flow, as defined, or from the proceeds
received from asset sales. See note 16 for supplemental guarantor and
non-guarantor financial information provided in connection with these
senior notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In September 2002, the Company terminated its existing revolving bank
credit facility. In October 2002, the Company entered into a new revolving
credit facility with a borrowing capacity of $35,000. The facility
provides for a borrowing base of 80% of eligible accounts receivable. The
facility is collateralized by cash, accounts receivable, inventories,
intellectual property and certain other assets of the Company. Borrowings
under this agreement bear interest at the LIBOR rate plus 2.9% and the
facility requires a non-utilization fee of 0.5% of the unused borrowing
capacity. Interest and the commitment fee are payable monthly. The
facility has an initial two-year term. Thereafter, the term will be
automatically extended for annual successive periods unless either party
provides notice not less than 60 days prior to the end of the period.
There was no balance outstanding under this agreement as of December 31,
2002.
|
| |  | The senior notes indenture and the new credit facility set forth a number
of covenants binding on the Company. Negative covenants in such
instruments limit the ability of the Company to, among other things, incur
indebtedness and liens, pay dividends, repurchase shares, enter into merger
agreements, make                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-15



---



##### Table of Contents





| |  | investments, engage in new business activities unrelated to the Companys
current business or sell assets. In addition, under the new credit
facility, the Company is required to maintain certain financial ratios. As
of December 31, 2002, the Company is in compliance with the financial
covenants in its credit instruments.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Approximate aggregate minimum annual payments due on long-term debt for the
five years subsequent to December 31, 2002 are as follows:                                                                                                                                                                                            

|                                              |  |   |         |  
|--------------------------------------------- |  | - | ------- | -
|2003                                          |  | $ | 743     |  
|2004                                          |  |   | 98      |  
|2005                                          |  |   | 47      |  
|2006                                          |  |   | 35      |  
|2007                                          |  |   |        |  
|Thereafter                                    |  |   | 122,000 |  
|                                              |  |   |         |  
|Minimum annual payments                       |  |   | 122,923 |  
|Plus unamortized gains on interest rate swaps |  |   | 2,747   |  
|Less unamortized discount                     |  |   | (6,712  | )
|                                              |  |   |         |  
|                                              |  | $ | 118,958 |  
|                                              |  |   |         |  



|(4) |  | Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133). SFAS 133 requires all derivatives to be recorded on the
balance sheet at fair value and establishes accounting treatment for
certain hedge transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | Effective August 2001, the Company entered into an interest rate swap
transaction with a bank involving a notional amount of $60,000. In June
2002, the Company terminated this agreement and received proceeds from the
counter party bank of $2,380. At the same time, the Company entered into a
new interest rate swap arrangement with this bank in the notional amount of
$60,000. In August 2002, the Company terminated the June 2002 interest
rate swap arrangement and received proceeds from the counter party bank of
$673. The cash proceeds of $3,053 from the terminations of the two
interest rate swap agreements will be amortized into income as a reduction
of interest expense over the remaining term of the senior notes (through
May 2008).
|   
|(5) |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | The provision (benefit) for income taxes consisted of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                   |                 |                                        |        |                          |        |      |       |       |       |   |       |       |       | 
|---------------------------------- | --------------- | -------------------------------------- | ------ | ------------------------ | ------ | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                   |                 |                                        |        | Years ended December 31,
|                                   |                 |                                        |        |                         
|                                   |                 |                                        |        | 2002                     |        | 2001 |       | 2000 
|                                   |                 |                                        |        |                          |        |      |       |      
|Current tax provision:             |                 |                                        |        |                          |        |      |       |       |       |   |       |      
|                                   | U.S. federal    |                                        | $      |                         |        |      | $     |      |       |   | $     |      |      
|                                   | State and local |                                        |        | 21                       |        |      |       | 535   |       |   |       | 692   |      
|                                   | Non-U.S         |                                        |        | 1,285                    |        |      |       | 1,032 |       |   |       | 675   |      
|                                   |                 |                                        |        |                          |        |      |       |       |       |   |       |      
|                                   |                 | Total current tax provision            |        |                          | 1,306  |      |       |       | 1,567 |   |       |       | 1,367 | 
|                                   |                 |                                        |        |                          |        |      |       |       |       |   |       |      
|Deferred tax provision (benefit):  |                 |                                        |        |                          |        |      |       |       |       |   |       |      
|                                   | U.S. federal    |                                        |        | (4,874                   | )      |      |       | 4,241 |       |   |       | 7,224 |      
|                                   | State and local |                                        |        | (932                     | )      |      |       | 267   |       |   |       | 509   |      
|                                   | Non-U.S         |                                        |        |                         |        |      |       |      |       |   |       |      |      
|                                   |                 |                                        |        |                          |        |      |       |       |       |   |       |      
|                                   |                 | Total deferred tax provision (benefit) |        |                          | (5,806 | )    |       |       | 4,508 |   |       |       | 7,733 | 
|                                   |                 |                                        |        |                          |        |      |       |       |       |   |       |      
|Total income tax expense (benefit) |                 | $                                      | (4,500 | )                        |        | $    | 6,075 |       |       | $ | 9,100 |      
|                                   |                 |                                        |        |                          |        |      |       |       |       |   |       |      

F-16



---



##### Table of Contents





| |  | Below is a reconciliation of the expected income tax expense (benefit) 
(based on the U.S. federal statutory income tax rate of 34% in 2002 and
2001 and 35% in 2000) to the actual income taxes:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               |                                                     |   |                          |       |      |   |       |     |   |   |       |     | 
|---------------------------------------------- | --------------------------------------------------- | - | ------------------------ | ----- | ---- | - | ----- | --- | - | - | ----- | --- | 
|                                               |                                                     |   | Years ended December 31,
|                                               |                                                     |   |                         
|                                               |                                                     |   | 2002                     |       | 2001 |   | 2000 
|                                               |                                                     |   |                          |       |      |   |      
|Computed expected income tax expense (benefit) |                                                     | $ | (6,849                   | )     |      | $ | 4,760 |     |   | $ | 7,978 |    
|Increase (decrease) resulting from:            |                                                     |   |                          |       |      |   |       |     |   |   |       |    
|                                               | State and local income taxes, net of federal effect |   |                          | (601  | )    |   |       | 529 |   |   |       | 781 | 
|                                               | Non-U.S. municipal taxes and tax rate differences   |   |                          | 150   |      |   |       | 140 |   |   |       | 159 | 
|                                               | Nondeductible expenses Nondeductible expenses       |   |                          | 3,077 |      |   |       | 669 |   |   |       | 182 | 
|                                               | Nontaxable income of captive insurance subsidiary   |   |                          | (266  | )    |   |       |    |   |   |       |    | 
|                                               | Other, net                                          |   |                          | (11   | )    |   |       | (23 | ) |   |       |    | 
|                                               |                                                     |   |                          |       |      |   |       |     |   |   |       |    
|Income tax expense (benefit)                   |                                                     | $ | (4,500                   | )     |      | $ | 6,075 |     |   | $ | 9,100 |    
|                                               |                                                     |   |                          |       |      |   |       |     |   |   |       |    



| |  | At December 31, 2002 and 2001, the deferred income tax assets consist of
future tax benefits attributable to:
| |  | -------------------------------------------------------------------------------------------------------------

|                            |              |                                                        |                                  |   |              |        |        |   |        |        | 
|--------------------------- | ------------ | ------------------------------------------------------ | -------------------------------- | - | ------------ | ------ | ------ | - | ------ | ------ | 
|                            |              |                                                        |                                  |   | December 31,
|                            |              |                                                        |                                  |   |             
|                            |              |                                                        |                                  |   | 2002         |        | 2001  
|                            |              |                                                        |                                  |   |              |        |       
|Deferred income tax assets: |              |                                                        |                                  |   |              |        |        |  
|                            | Current:     |                                                        |                                  |   |              |        |        |   |       
|                            |              | Allowance for doubtful accounts                        |                                  | $ | 2,943        |        |        | $ | 3,289  |       
|                            |              | Accruals and reserves not deducted for tax purposes    |                                  |   | 1,879        |        |        |   | 579    |       
|                            |              | Deferred gain from terminations of interest rate swaps |                                  |   | 196          |        |        |   |       |       
|                            |              |                                                        |                                  |   |              |        |        |  
|                            |              |                                                        | 5,018                            |   |              |        | 3,868  |  
|                            |              |                                                        |                                  |   |              |        |        |  
|                            | Non-current: |                                                        |                                  |   |              |        |        |   |       
|                            |              | Accruals and reserves not deducted for tax purposes    |                                  |   | 4,739        |        |        |   | 957    |       
|                            |              | Depreciation and amortization                          |                                  |   | (1,376       | )      |        |   | 1,712  |       
|                            |              | Split-dollar retirement plan termination               |                                  |   | 1,454        |        |        |   |       |       
|                            |              | Deferred gain from terminations of interest rate swaps |                                  |   | 873          |        |        |   |       |       
|                            |              | Net operating loss carryforwards                       |                                  |   | 22,401       |        |        |   | 18,597 |       
|                            |              | Credit carryforwards                                   |                                  |   | 2,460        |        |        |   | 2,843  |       
|                            |              | Other                                                  |                                  |   | 297          |        |        |   | 606    |       
|                            |              |                                                        |                                  |   |              |        |        |  
|                            |              |                                                        | 30,848                           |   |              |        | 24,715 |  
|                            |              |                                                        |                                  |   |              |        |        |  
|                            |              |                                                        | Total deferred income tax assets |   | $            | 35,866 |        |   | $      | 28,583 | 
|                            |              |                                                        |                                  |   |              |        |        |  



| |  | Based on projections of taxable income in 2003 and future years,
management believes that, more likely than not, the Company will fully
realize the value of the recorded deferred income tax assets.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17



---



##### Table of Contents





| |  | At December 31, 2002, 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:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           |         |          |     |           |  |   |        | 
|---------- | ------- | -------- | --- | --------- |  | - | ------ | 
|           |         | General  |     | Net      
|Year of    |         | Business |     | Operating
|Expiration | Credits | Losses  
|           |         |         
|2003       |         | $        | 89  |           |  | $ |       | 
|2004       |         |          | 43  |           |  |   |       | 
|2005       |         |          | 61  |           |  |   |       | 
|2006       |         |          | 151 |           |  |   |       | 
|2010       |         |          |    |           |  |   | 8,370  | 
|2011       |         |          |    |           |  |   | 36,617 | 
|2012       |         |          |    |           |  |   | 1,824  | 
|2018       |         |          |    |           |  |   | 414    | 
|2019       |         |          |    |           |  |   | 355    | 
|2020       |         |          |    |           |  |   | 436    | 
|2021       |         |          |    |           |  |   | 462    | 
|2022       |         |          |    |           |  |   | 10,299 | 
|           |         |          |     |           |  |   |        | 
|           |         | $        | 344 |           |  | $ | 58,777 | 
|           |         |          |     |           |  |   |        | 



|    |  | The Company also has available alternative minimum tax (AMT) credit
carryforwards of approximately $2,116 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 $39,775.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(6) |  | Redeemable Preferred Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | In 1999, the Company issued 10,000 shares of 4% Series A convertible
redeemable preferred stock and issued 35,000 shares of 8% Series B
redeemable preferred stock with attached warrants to purchase 1,000,000
shares of the Companys common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | In July 2001, from the proceeds of the senior notes (see note 3), the
Company completed the repurchase of all outstanding shares of its
redeemable preferred stock and retired all common stock warrants. The
resulting net gain of $739,000 was included in net earnings available to
common shareholders in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(7) |  | Common Shareholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | Stock Option Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | During 2002, the Board of Directors of the Company adopted the 2002 Stock
Incentive Plan for employees, officers, independent contractors and
consultants of the Company. The 2002 Stock Incentive Plan has three
components: a stock option component, a stock bonus/stock purchase
component and a stock appreciation rights component. Options, stock
bonuses and rights to purchase the Companys common stock may be granted to
exercise or purchase an aggregate of not more than 250,000 shares of the
Companys common stock (subject to adjustment to reflect certain
acquisitions). The 2002 Stock Incentive Plan contains a $100 limitation on
the aggregate fair market values of incentive stock options which first
become exercisable by an optionee in any calendar year. Also, the maximum
number of shares of stock with respect to which stock appreciation rights or
options to acquire stock may be granted, or sales or bonus grants of stock
may be made, to any individual per calendar year shall not exceed 100,000
shares (subject to adjustment to reflect certain corporate acquisitions).
The term of each option is 10 years from the date of grant. The options
are exercisable based on established performance goals and are fully vested
at four years.

F-18



---



##### Table of Contents





| |  | During 2001, the Board of Directors of the Company adopted the 2001 Stock
Incentive Plan for employees, officers, independent contractors and
consultants of the Company. The 2001 Stock Incentive Plan also 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 250,000 shares of common stock were reserved for
issuance. The 2001 Stock Incentive Plan contains a $100 limitation on the
aggregate fair market value of incentive stock options that become
exercisable by an individual in any calendar year. Additionally, the
maximum number of shares of stock with respect to which stock appreciation
rights or options to acquire stock may be granted, or sales or bonus grants
of stock may be made, to any individual per calendar year shall not exceed
100,000 shares. The term of each option is 10 years from the date of
grant. The options are exercisable based on established performance goals
and are fully vested at four years.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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, as amended in 2002, a total of 112,500 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 of grant and vest monthly over 12 months from the date of
grant. The term of each option is ten years from the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Also 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.                                                                                                                                                                                                                                                                                           
|
| |  | The weighted average fair value of the individual options granted during
2002, 2001 and 2000 is estimated at $9.15, $9.12 and $10.67, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                        |  |         |      |         |  |         |      |   |  |  |      |  
|----------------------- |  | ------- | ---- | ------- |  | ------- | ---- | - |  |  | ---- | -
|                        |  | 2002    |      | 2001    |  | 2000   
|                        |  |         |      |         |  |        
|Dividend yield          |  | None    |      | None    |  | None   
|Volatility              |  |         | 74   | %       |  |         | 60   | % |  |  | 57   | %
|Risk-free interest rate |  |         | 3.82 | %       |  |         | 4.55 | % |  |  | 6.15 | %
|Expected life           |  | 5 Years |      | 5 Years |  | 5 Years



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

|                                 |  |        |           |       |  |          |       |       |  |        |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|-------------------------------- |  | ------ | --------- | ----- |  | -------- | ----- | ----- |  | ------ | --------- | -------- |  | - | ----- |  |  | -------- | --------- | - |  | - | ----- | 
|                                 |  | 2002   |           | 2001  |  | 2000    
|                                 |  |        |           |       |  |         
|                                 |  |        |           |       |  | Weighted |       |       |  |        |           | Weighted |  |   |       |  |  | Weighted
|                                 |  |        |           |       |  | Average  |       |       |  |        |           | Average  |  |   |       |  |  | Average 
|                                 |  |        |           |       |  | Exercise |       |       |  |        |           | Exercise |  |   |       |  |  | Exercise
|                                 |  | Shares |           | Price |  | Shares   |       | Price |  | Shares |           | Price   
|                                 |  |        |           |       |  |          |       |       |  |        |           |         
|Outstanding at beginning
of year |  |        | 1,438,471 |       |  | $        | 20.04 |       |  |        | 1,048,344 |          |  | $ | 22.41 |  |  |          | 884,729   |   |  | $ | 23.16 | 
|Granted                          |  |        | 477,434   |       |  |          | 14.51 |       |  |        | 651,831   |          |  |   | 16.54 |  |  |          | 234,105   |   |  |   | 19.16 | 
|Exercised                        |  |        | (81,217   | )     |  |          | 21.13 |       |  |        | (171,476  | )        |  |   | 20.70 |  |  |          | (16,875   | ) |  |   | 14.62 | 
|Canceled                         |  |        | (459,796  | )     |  |          | 19.96 |       |  |        | (90,228   | )        |  |   | 20.95 |  |  |          | (53,615   | ) |  |   | 22.73 | 
|                                 |  |        |           |       |  |          |       |       |  |        |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|Outstanding at end of year       |  |        | 1,374,892 |       |  | $        | 18.02 |       |  |        | 1,438,471 |          |  | $ | 20.04 |  |  |          | 1,048,344 |   |  | $ | 22.41 | 
|                                 |  |        |           |       |  |          |       |       |  |        |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|Exercisable at end of year       |  |        | 538,870   |       |  | $        | 22.40 |       |  |        | 643,601   |          |  | $ | 22.95 |  |  |          | 634,478   |   |  | $ | 24.67 | 
|                                 |  |        |           |       |  |          |       |       |  |        |           |          |  |   |       |  |  |          |           |   |  |   |       | 

F-19



---



##### Table of Contents





| |  | The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002:
| |  | ---------------------------------------------------------------------------------------------------------------

|                |  |                     |           |                     |  |                  |     |             |  |          |       |  |  |          |         |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | --- | ----------- |  | -------- | ----- |  |  | -------- | ------- |  |  | - | ----- | 
|                |  | Options outstanding |           | Options exercisable
|                |  |                     |           |                    
|                |  |                     |           |                     |  | Weighted Average |     | Weighted    |  |          |       |  |  | Weighted
|                |  |                     |           |                     |  | Remaining        |     | Average     |  |          |       |  |  | Average 
|Range of        |  | Shares              |           | Contractual         |  | Exercise         |     | Shares      |  | Exercise
|Exercise Price  |  | Outstanding         |           | Life (years)        |  | Price            |     | Exercisable |  | Price   
|                |  |                     |           |                     |  |                  |     |             |  |         
|$7.50 - $10.00  |  |                     | 229,355   |                     |  |                  | 9.8 |             |  | $        | 8.88  |  |  |          | 6,775   |  |  | $ | 8.69  | 
|$10.00 - $20.00 |  |                     | 691,064   |                     |  |                  | 8.0 |             |  |          | 16.37 |  |  |          | 172,259 |  |  |   | 16.27 | 
|$20.00 - $30.00 |  |                     | 400,420   |                     |  |                  | 4.7 |             |  |          | 23.89 |  |  |          | 312,147 |  |  |   | 24.29 | 
|$30.00 - $40.00 |  |                     | 54,053    |                     |  |                  | 4.2 |             |  |          | 34.49 |  |  |          | 47,689  |  |  |   | 34.14 | 
|                |  |                     |           |                     |  |                  |     |             |  |          |       |  |  |          |         |  |  |   |       | 
|                |  |                     | 1,374,892 |                     |  |                  |     |             |  |          |       |  |  |          | 538,870 |  |  |   |       | 
|                |  |                     |           |                     |  |                  |     |             |  |          |       |  |  |          |         |  |  |   |       | 



| |  | 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 250,000 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 2002, 2001 and 2000, respectively,
10,270, 39,539 and 39,755 shares of common stock were issued under the
Purchase Plan. Compensation costs related to this plan as determined under
SFAS 123 were insignificant to the Companys consolidated statements of
operations for the three years ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Shareholders Rights Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | In connection with the 1996 merger of Tokos Medical Corporation (Delaware)
and Healthdyne, Inc., the Company 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.
|
| |  | Retirement of Note Receivable from Shareholder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Selling and administrative expenses for 2002 included a one-time, non-cash
charge of $2,508 related to the retirement of a $3,500 note receivable from
a former executive acquired from a predecessor organization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-20



---



##### Table of Contents





|    |  | The note, which matured on June 30, 2002, stipulated that the balance could
be settled in full by surrender of collateral consisting of 125,000 shares
of the Companys common stock. The settlement generated a charge equal to
the difference between the book value of the note and the closing market
value on June 30, 2002 of the 125,000 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(8) |  | Employee Benefit Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | The Company maintains a 401(k) defined contribution plan for the benefit of
its employees. The Companys obligation for contributions under the 401(k)
plan is limited to 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, 2002, 2001 and 2000 were approximately $887, $830 and $784,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | During 1997, the Company established a split-dollar life insurance contract
for the benefit of a certain select group of senior management. Under the
terms of the contract, the participants or their beneficiaries were
entitled to the greater of the contracts cash surrender value or the
contracts targeted benefit, less insurance premiums paid by the Company.
On December 31, 2002, the Company terminated the contracts for certain
former employees and the Companys Chairman, President and Chief Executive Officer
and restructured the contracts for other current employees by replacing the
split-dollar life insurance contracts with a Supplemental Executive
Retirement Plan (SERP). Under the SERP plan, individual trust accounts
have been opened and funded equal to the December 31, 2002 net present
value of the targeted benefit under the prior split-dollar plan. Benefits
vest under the SERP based on age and years of service with 100% vesting
obtained at age 55 and 15 years of service. Earlier vesting may occur upon
a change in control or other events as defined in the agreement. The
Company recorded a charge of $14,247 in connection with the termination and
restructuring of the split-dollar plan. The amount represents the net
present value of the targeted benefits under the plan (including tax
mitigation amounts) of approximately $13,668, and $579 related to
transaction costs and the net shortfall in the refund of cumulative
premiums paid by the Company. The Company satisfied its obligations
to participants by relinquishing its collateral interests in the
split-dollar policies and through net incremental payments of
approximately $3,086 (the effect of which is mitigated by the
elimination of future premium obligations of $3,694). An additional
$1,016 is expected to be expensed over the next nine years of
expected service by the respective current employees. During 2002,
2001 and 2000, the Company paid $2,754 in each year in insurance
premiums related to these split-dollar life insurance contracts. At
December 31, 2002, the cash surrender values of the insurance
contracts of the current employees of $2,019 was recorded in
other assets, the amounts to be paid in 2003 to the
former employees of $1,804 was recorded in accrued
liabilities, and the ongoing liability under the new SERP plan
of $3,737 was recorded in other long-term liabilities on
the consolidated balance sheet.
|   
|(9) |  | Restructuring                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | In 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 related to customer
contract fulfillment costs, $518 related to remaining software development
costs, $312 related to payroll costs and related involuntary severance of
employees and $201 related to other costs and expenses for the shutdown of
the business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-21



---



##### Table of Contents





|(10) |  | 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, 2002 are as follows:

|                                                       |  |           |        |         |  |   |     | 
|------------------------------------------------------ |  | --------- | ------ | ------- |  | - | --- | 
|                                                       |  | Operating |        | Capital
|Years ending December 31,                              |  | Leases    |        | Leases 
|                                                       |  |           |        |        
|2003                                                   |  | $         | 4,507  |         |  | $ | 229 | 
|2004                                                   |  |           | 3,855  |         |  |   | 108 | 
|2005                                                   |  |           | 3,387  |         |  |   | 52  | 
|2006                                                   |  |           | 2,906  |         |  |   | 37  | 
|2007                                                   |  |           | 2,690  |         |  |   |    | 
|Thereafter                                             |  |           | 4,635  |         |  |   |    | 
|                                                       |  |           |        |         |  |   |     | 
|                                                       |  | $         | 21,980 |         |  |   | 426 | 
|                                                       |  |           |        |         |  |   |     | 
|Less interest                                          |  |           |        |         |  |   | 35  | 
|                                                       |  |           |        |         |  |   |     | 
|Present value of future minimum
capital lease payments |  |           |        |         |  | $ | 391 | 
|                                                       |  |           |        |         |  |   |     | 



|     |  | Amortization of leased assets is included in depreciation expense. Rental
expense for cancelable and noncancelable leases was approximately $6,290,
$5,747 and $6,673 for the years ended December 31, 2002, 2001 and 2000,
respectively.                                                                                                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(11) |  | 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.

F-22



---



##### Table of Contents





|(12) |  | Quarterly Financial Information  Unaudited                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 2002 and 2001.

|      |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |        |      |       | 
|----- | ------------------------------------------------------------------ | ----------------------- | ----- | ------- | ------- | ------- | ----- | ------ | ------ | ------ | ----- | ------ | ----- | ----- | - | ------ | ---- | ----- | 
|      |                                                                    |                         |       |         | Quarter
|      |                                                                    |                         |       |         |        
|      |                                                                    |                         |       |         | Fourth  |         | Third |        | Second |        | First
|      |                                                                    |                         |       |         |         |         |       |        |        |        |      
|2002: |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       
|      | Revenues                                                           |                         | $     | 71,688  |         |         | $     | 71,352 |        |        | $     | 69,403 |       |       | $ | 65,188 |     
|      | Net
earnings (loss)
Continuing operations                          |                         | $     | (15,976 | )       |         | $     | (565   | )      |        | $     | (721   | )     |       | $ | 1,618  |     
|      |                                                                    | Discontinued operations |       |         |        |         |       |        | (682   | )      |       |        |      |       |   |        |     |      
|      |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       
|      |                                                                    |                         | Total |         | $       | (15,976 | )     |        | $      | (1,247 | )     |        | $     | (721  | ) |        | $    | 1,618 | 
|      |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       
|      | Net earnings (loss) per diluted
common share                       |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |        |     
|      |                                                                    | Continuing operations   |       | $       | (1.59   | )       |       | $      | (0.06  | )      |       | $      | (0.08 | )     |   | $      | 0.17 |      
|      |                                                                    | Discontinued operations |       |         |        |         |       |        | (0.08  | )      |       |        |      |       |   |        |     |      
|      |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       
|      |                                                                    |                         | Total |         | $       | (1.59   | )     |        | $      | (0.14  | )     |        | $     | (0.08 | ) |        | $    | 0.17  | 
|      |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       
|2001: |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       
|      | Revenues                                                           |                         | $     | 69,680  |         |         | $     | 68,097 |        |        | $     | 64,838 |       |       | $ | 61,368 |     
|      | Net
earnings (loss)
Continuing operations                          |                         | $     | 400     |         |         | $     | 2,449  |        |        | $     | 3,045  |       |       | $ | 2,031  |     
|      |                                                                    | Discontinued operations |       |         | (1,030  | )       |       |        | (210   | )      |       |        |      |       |   |        |     |      
|      |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       
|      |                                                                    |                         | Total |         | $       | (630    | )     |        | $      | 2,239  |       |        | $     | 3,045 |   |        | $    | 2,031 | 
|      |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       
|      | Net
earnings (loss) per diluted common share
Continuing operations |                         | $     | 0.04    |         |         | $     | 0.11   |        |        | $     | 0.48   |       |       | $ | 0.13   |     
|      |                                                                    | Discontinued operations |       |         | (0.11   | )       |       |        | (0.02  | )      |       |        |      |       |   |        |     |      
|      |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       
|      |                                                                    |                         | Total |         | $       | (0.07   | )     |        | $      | 0.09   |       |        | $     | 0.48  |   |        | $    | 0.13  | 
|      |                                                                    |                         |       |         |         |         |       |        |        |        |       |        |       |       |   |       



|     |  | 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 the timing of quarterly net earnings
(loss) relative to the timing of the issuance of shares resulting
from acquisitions and due to rounding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(13) |  | Business Segment Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|     |  | The Companys operations are classified into two reportable business
segments: Health Enhancement and Womens Health. The Health Enhancement
segment includes disease management and diabetes product design,
development and assembly operations. Disease management programs
improve health outcomes through identification, stratification, risk
assessment, patient education, support and compliance management for
specified conditions and associated co-morbidities. The Company currently
offers disease management services for diabetes cancer, respiratory
disorders,
cardiac disease, depression and chronic pain. The Womens Health
segment offers a wide range of services
designed to assist physicians and payors in the cost-effective management
of maternity patients, including: risk
assessment, patient education, hypertension management, infusion
therapy for the management of hyperemesis, anticoagulation disorders
and pre-term labor, gestational diabetes management, fetal
surveillance, home uterine activity monitoring and other clinical
services.
|    
|     |  | The accounting policies of the segments are the same as those described in
the summary of significant accounting policies for the consolidated entity.
Operating earnings of the Health Enhancement segment were reduced by the
amortization of goodwill of $8,703 and $8,679 for the years ended December
31, 2001 and 2000, respectively. Operating earnings of the Womens Health
segment were reduced by the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-23



---



##### Table of Contents





| |  | amortization of goodwill of $564 in each year ended December 31, 2001 and
2000. As discussed in Note 1(j), no amortization of goodwill was recorded
for the year ended December 31, 2002. Severance and related costs of
$1,740 and $503 were incurred in the Health Enhancement and Womens Health
segments, respectively, during the year ended December 31, 2002. Operating
earnings (loss) by business segment exclude interest income and interest
expense. An allocation of corporate expenses for shared services has been
charged to the segments.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Summarized financial information as of and for the years ended December 31,
2002, 2001 and 2000 by business segment follows:                                                                                                                                                                                                                                                                                                                                                                                                                              

|                            |                |   |          |         |                     |   |         |         |      |   |         |         |      |   |                 |        |  |   |         |        |  |   |        |        | 
|--------------------------- | -------------- | - | -------- | ------- | ------------------- | - | ------- | ------- | ---- | - | ------- | ------- | ---- | - | --------------- | ------ |  | - | ------- | ------ |  | - | ------ | ------ | 
|                            |                |   |          |         |                     |   |         |         |      |   |         |         |      |   | Earnings (loss)
|                            |                |   | Revenues |         | before income taxes
|                            |                |   |          |         |                    
|                            |                |   | 2002     |         | 2001                |   | 2000    |         | 2002 |   | 2001    |         | 2000
|                            |                |   |          |         |                     |   |         |         |      |   |         |         |     
|Health Enhancement          |                | $ | 179,535  |         |                     | $ | 159,872 |         |      | $ | 116,051 |         |      | $ | 10,363          |        |  | $ | 15,608  |        |  | $ | 6,128  |       
|Womens Health              |                |   | 98,158   |         |                     |   | 104,234 |         |      |   | 109,716 |         |      |   | 12,330          |        |  |   | 16,887  |        |  |   | 24,292 |       
|Intersegment sales          |                |   | (62      | )       |                     |   | (123    | )       |      |   |        |         |      |   |                |        |  |   |        |        |  |   |       |       
|                            |                |   |          |         |                     |   |         |         |      |   |         |         |      |   |                 |        |  |   |         |        |  |   |        |       
|                            | Total segments |   |          | 277,631 |                     |   |         | 263,983 |      |   |         | 225,767 |      |   |                 | 22,693 |  |   |         | 32,495 |  |   |        | 30,420 | 
|General corporate           |                |   |         |         |                     |   |        |         |      |   |        |         |      |   | (26,092         | )      |  |   | (7,848  | )      |  |   | (7,745 | )     
|Interest expense, net       |                |   |         |         |                     |   |        |         |      |   |        |         |      |   | (13,626         | )      |  |   | (10,008 | )      |  |   | (8,156 | )     
|Other income (expense), net |                |   |         |         |                     |   |        |         |      |   |        |         |      |   | (3,119          | )      |  |   | (639    | )      |  |   | 8,275  |       
|                            |                |   |          |         |                     |   |         |         |      |   |         |         |      |   |                 |        |  |   |         |        |  |   |        |       
|                            |                | $ | 277,631  |         |                     | $ | 263,983 |         |      | $ | 225,767 |         |      | $ | (20,144         | )      |  | $ | 14,000  |        |  | $ | 22,794 |       
|                            |                |   |          |         |                     |   |         |         |      |   |         |         |      |   |                 |        |  |   |         |        |  |   |        |       

|                   |  |                     |         |                               |  |      |         |      |  |      |         |      |  |   |       |  |  |   |        |  |  |   |        | 
|------------------ |  | ------------------- | ------- | ----------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | - | ----- |  |  | - | ------ |  |  | - | ------ | 
|                   |  | Identifiable assets |         | Depreciation and amortization
|                   |  |                     |         |                              
|                   |  | 2002                |         | 2001                          |  | 2000 |         | 2002 |  | 2001 |         | 2000
|                   |  |                     |         |                               |  |      |         |      |  |      |         |     
|Health Enhancement |  | $                   | 210,880 |                               |  | $    | 169,827 |      |  | $    | 154,384 |      |  | $ | 3,002 |  |  | $ | 10,635 |  |  | $ | 10,073 | 
|Womens Health     |  |                     | 30,336  |                               |  |      | 36,081  |      |  |      | 38,343  |      |  |   | 2,370 |  |  |   | 2,885  |  |  |   | 2,381  | 
|General corporate  |  |                     | 50,191  |                               |  |      | 54,715  |      |  |      | 76,123  |      |  |   | 2,141 |  |  |   | 1,678  |  |  |   | 1,530  | 
|                   |  |                     |         |                               |  |      |         |      |  |      |         |      |  |   |       |  |  |   |        |  |  |   |        | 
|                   |  | $                   | 291,407 |                               |  | $    | 260,623 |      |  | $    | 268,850 |      |  | $ | 7,513 |  |  | $ | 15,198 |  |  | $ | 13,984 | 
|                   |  |                     |         |                               |  |      |         |      |  |      |         |      |  |   |       |  |  |   |        |  |  |   |        | 

|                   |  |                      |        |      |  |      |       |  |  |   |       | 
|------------------ |  | -------------------- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                   |  | Capital expenditures
|                   |  |                     
|                   |  | 2002                 |        | 2001 |  | 2000
|                   |  |                      |        |      |  |     
|Health Enhancement |  | $                    | 12,755 |      |  | $    | 4,221 |  |  | $ | 3,583 | 
|Womens Health     |  |                      | 2,131  |      |  |      | 3,739 |  |  |   | 2,212 | 
|General corporate  |  |                      | 1,214  |      |  |      | 426   |  |  |   | 1,600 | 
|                   |  |                      |        |      |  |      |       |  |  |   |       | 
|                   |  | $                    | 16,100 |      |  | $    | 8,386 |  |  | $ | 7,395 | 
|                   |  |                      |        |      |  |      |       |  |  |   |       | 



|     |  | The Companys revenues from operations outside the U.S. were approximately
17%, 15% and 16% of total revenues in 2002, 2001 and 2000, respectively.
No single customer accounted for 10% of consolidated net revenues in 2002,
2001 or 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(14) |  | Disposition of Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|     |  | In February 2001, the Company completed the sale of 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. In 2001 and 2002, cash
flows from collections of QDS accounts receivable, less costs of
collection were $3,056 and $642, respectively. As of December 31, 2002,
approximately $125 of accounts receivable remained to be collected. In
2001, the Company reflected an estimated loss from discontinued operations
and a loss on disposal of discontinued operations totaling approximately
$1,240, net of income taxes. An additional loss, net of income taxes, of
approximately $682 was recorded in 2002 as a result of greater than
expected costs of collection and lower than expected cash receipts from
the retained receivables. The accompanying consolidated financial
statements reflect QDS as a discontinued operation for all periods
presented.

F-24



---



##### Table of Contents





| |  | The operating results of discontinued operations are as follows:
| |  | ----------------------------------------------------------------

|                                                                                                                       |  |                          |      |      |  |      |        |   |  |   |        | 
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                                                                                                       |  | Years Ended December 31,
|                                                                                                                       |  |                         
|                                                                                                                       |  | 2002                     |      | 2001 |  | 2000
|                                                                                                                       |  |                          |      |      |  |     
|Revenues                                                                                                               |  | $                        |     |      |  | $    |       |   |  | $ | 15,336 | 
|                                                                                                                      
|Loss from operations, net of income tax benefit
of $76 and $275 in 2002 and 2001, respectively                         |  | $                        | (124 | )    |  | $    | (455   | ) |  | $ |       | 
|Loss on disposal of discontinued operations, net of income tax
benefit of $342 and $485 in 2002 and 2001, respectively |  |                          | (558 | )    |  |      | (785   | ) |  |   |       | 
|                                                                                                                       |  |                          |      |      |  |      |        |   |  |   |        | 
|Loss from discontinued operations                                                                                      |  | $                        | (682 | )    |  | $    | (1,240 | ) |  | $ |       | 
|                                                                                                                       |  |                          |      |      |  |      |        |   |  |   |        | 



|(15) |  | Sales of Short-Term Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | In connection with the 1998 acquisition of assets of QDS from Endeavor
Technologies, Inc. (subsequently named WebMD Corporation) (WebMD), 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 2000, shares were sold generating
proceeds of $7,298 and a gain of $6,077, which was reflected in other
income in the consolidated statements of operations. No shares were sold
in 2001 or 2002. At December 31, 2002, the Company had a remaining
investment in WebMD of 16,423 shares.
|    
|(16) |  | Supplemental Guarantor/Non-Guarantor Financial Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|     |  | Supplemental financial information is being provided in connection with
the Companys private offering of 11% senior notes (see note 3). The senior notes are unconditionally guaranteed by the Company and its
domestic subsidiaries. All guarantees are joint and several. Each of the
domestic and foreign subsidiaries is 100% owned by the Company.                                                                                                                                                                                                                                                                     
|    
|     |  | The following financial information presents the consolidating condensed
balance sheets, statements of operations and cash flows of the Company,
the guarantor domestic subsidiaries on a combined basis and the
non-guarantor foreign subsidiaries on a combined basis.                                                                                                                                                                                                                                                                                                                                                     

F-25



---



##### Table of Contents



Consolidating Condensed Balance Sheets
December 31, 2002
(Unaudited)

|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |          |         | 
|---------------------------------------------- | ------------------------------ | --------------------------------- | ------- | ----------- | ------ | ------------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------ | - | -------- | -------- | -------- | - | ------- | -------- | ------- | 
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         | Non-         |        |   |          |          |          |   |         |         
|                                               |                                |                                   |         | Matria      |        | Guarantor    |         | Guarantor    |         |              |         |              |        |   |          |         
|                                               |                                |                                   |         | Healthcare, |        | Domestic     |         | Foreign      |         |              |         |              |        |  
|                                               |                                |                                   |         | Inc.        |        | Subsidiaries |         | Subsidiaries |         | Eliminations |         | Consolidated
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |             
|ASSETS                                         |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|Cash and cash equivalents                      |                                | $                                 | 1,919   |             |        | $            | 2,080   |              |         | $            | 1,501   |              |        | $ |         |          |          | $ | 5,500   |         
|Short-term investments                         |                                |                                   | 140     |             |        |              |        |              |         |              |        |              |        |   |         |          |          |   | 140     |         
|Trade accounts receivable, net                 |                                |                                   | 18,002  |             |        |              | 26,514  |              |         |              | 5,177   |              |        |   |         |          |          |   | 49,693  |         
|Inventories                                    |                                |                                   | 2,194   |             |        |              | 15,737  |              |         |              | 8,826   |              |        |   |         |          |          |   | 26,757  |         
|Other current assets                           |                                |                                   | 7,098   |             |        |              | 7,147   |              |         |              | 902     |              |        |   |         |          |          |   | 15,147  |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               | Total current assets           |                                   |         | 29,353      |        |              |         | 51,478       |         |              |         | 16,406       |        |   |          |         |          |   |         | 97,237   |        
|Property and equipment, net                    |                                |                                   | 9,100   |             |        |              | 17,021  |              |         |              | 595     |              |        |   |         |          |          |   | 26,716  |         
|Intangible assets, net                         |                                |                                   | 2,682   |             |        |              | 123,111 |              |         |              | 4,778   |              |        |   |         |          |          |   | 130,571 |         
|Investment in subsidiaries                     |                                |                                   | 127,889 |             |        |              |        |              |         |              |        |              |        |   | (127,889 | )        |          |   |        |         
|Deferred income taxes                          |                                |                                   | 30,848  |             |        |              |        |              |         |              |        |              |        |   |         |          |          |   | 30,848  |         
|Other long-term assets                         |                                |                                   | 5,629   |             |        |              | 406     |              |         |              |        |              |        |   |         |          |          |   | 6,035   |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               |                                | $                                 | 205,501 |             |        | $            | 192,016 |              |         | $            | 21,779  |              |        | $ | (127,889 | )        |          | $ | 291,407 |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|LIABILITIES AND SHAREHOLDERS EQUITY           |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|Current installments of long-term debt         |                                | $                                 | 680     |             |        | $            | 63      |              |         | $            |        |              |        | $ |         |          |          | $ | 743     |         
|Other current liabilities                      |                                |                                   | 17,746  |             |        |              | 26,058  |              |         |              | 10,134  |              |        |   |         |          |          |   | 53,938  |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               | Total current liabilities      |                                   |         | 18,426      |        |              |         | 26,121       |         |              |         | 10,134       |        |   |          |         |          |   |         | 54,681   |        
|Long-term debt, excluding current installments |                                |                                   | 114,152 |             |        |              | 97      |              |         |              | 3,966   |              |        |   |         |          |          |   | 118,215 |         
|Intercompany                                   |                                |                                   | 2,861   |             |        |              | 16,059  |              |         |              | (18,920 | )            |        |   |         |          |          |   |        |         
|Other long-term liabilities                    |                                |                                   | 4,547   |             |        |              | 184     |              |         |              |        |              |        |   |         |          |          |   | 4,731   |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               | Total liabilities              |                                   |         | 139,986     |        |              |         | 42,461       |         |              |         | (4,820       | )      |   |          |         |          |   |         | 177,627  |        
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|Common shareholders equity                    |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               | Common stock                   |                                   |         | 101         |        |              |         |             |         |              |         |             |        |   |          |         |          |   |         | 101      |        
|                                               | Additional paid-in capital     |                                   |         | 311,052     |        |              |         | 123,111      |         |              |         | 4,778        |        |   |          | (127,889 | )        |   |         | 311,052  |        
|                                               | Accumulated earnings (deficit) |                                   |         | (249,229    | )      |              |         | 34,608       |         |              |         | 17,260       |        |   |          |         |          |   |         | (197,361 | )      
|                                               | Other                          |                                   |         | 3,591       |        |              |         | (8,164       | )       |              |         | 4,561        |        |   |          |         |          |   |         | (12      | )      
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               |                                | Total common shareholders equity |         |             | 65,515 |              |         |              | 149,555 |              |         |              | 26,599 |   |          |          | (127,889 | ) |         |          | 113,780 | 
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               |                                | $                                 | 205,501 |             |        | $            | 192,016 |              |         | $            | 21,779  |              |        | $ | (127,889 | )        |          | $ | 291,407 |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         

F-26



---



##### Table of Contents



Consolidating Condensed Balance Sheets
December 31, 2001
(Unaudited)

|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |          |         | 
|---------------------------------------------- | ------------------------------ | --------------------------------- | ------- | ----------- | ------ | ------------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------ | - | -------- | -------- | -------- | - | ------- | -------- | ------- | 
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         | Non-         |        |   |          |          |          |   |         |         
|                                               |                                |                                   |         | Matria      |        | Guarantor    |         | Guarantor    |         |              |         |              |        |   |          |         
|                                               |                                |                                   |         | Healthcare, |        | Domestic     |         | Foreign      |         |              |         |              |        |  
|                                               |                                |                                   |         | Inc.        |        | Subsidiaries |         | Subsidiaries |         | Eliminations |         | Consolidated
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |             
|ASSETS                                         |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|Cash and cash equivalents                      |                                | $                                 | 1,319   |             |        | $            | 535     |              |         | $            | 129     |              |        | $ |         |          |          | $ | 1,983   |         
|Short-term investments                         |                                |                                   | 116     |             |        |              |        |              |         |              |        |              |        |   |         |          |          |   | 116     |         
|Trade accounts receivable, net                 |                                |                                   | 22,939  |             |        |              | 23,740  |              |         |              | 5,375   |              |        |   |         |          |          |   | 52,054  |         
|Inventories                                    |                                |                                   | 2,151   |             |        |              | 13,155  |              |         |              | 6,000   |              |        |   |         |          |          |   | 21,306  |         
|Other current assets                           |                                |                                   | 5,885   |             |        |              | 7,119   |              |         |              | 1,036   |              |        |   |         |          |          |   | 14,040  |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               | Total current assets           |                                   |         | 32,410      |        |              |         | 44,549       |         |              |         | 12,540       |        |   |          |         |          |   |         | 89,499   |        
|Property and equipment, net                    |                                |                                   | 11,254  |             |        |              | 6,985   |              |         |              | 483     |              |        |   |         |          |          |   | 18,722  |         
|Intangible assets, net                         |                                |                                   | 2,682   |             |        |              | 101,974 |              |         |              | 4,978   |              |        |   |         |          |          |   | 109,634 |         
|Investment in subsidiaries                     |                                |                                   | 106,952 |             |        |              |        |              |         |              |        |              |        |   | (106,952 | )        |          |   |        |         
|Deferred income taxes                          |                                |                                   | 24,715  |             |        |              |        |              |         |              |        |              |        |   |         |          |          |   | 24,715  |         
|Other long-term assets                         |                                |                                   | 17,879  |             |        |              | 174     |              |         |              |        |              |        |   |         |          |          |   | 18,053  |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               |                                | $                                 | 195,892 |             |        | $            | 153,682 |              |         | $            | 18,001  |              |        | $ | (106,952 | )        |          | $ | 260,623 |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|LIABILITIES AND SHAREHOLDERS EQUITY           |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|Current installments of long-term debt         |                                | $                                 | 484     |             |        | $            | 131     |              |         | $            |        |              |        | $ |         |          |          | $ | 615     |         
|Other current liabilities                      |                                |                                   | 11,942  |             |        |              | 16,612  |              |         |              | 5,716   |              |        |   |         |          |          |   | 34,270  |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               | Total current liabilities      |                                   |         | 12,426      |        |              |         | 16,743       |         |              |         | 5,716        |        |   |          |         |          |   |         | 34,885   |        
|Long-term debt, excluding current installments |                                |                                   | 108,015 |             |        |              | 21      |              |         |              | 6,539   |              |        |   |         |          |          |   | 114,575 |         
|Intercompany                                   |                                |                                   | (2,053  | )           |        |              | 18,499  |              |         |              | (16,446 | )            |        |   |         |          |          |   |        |         
|Other long-term liabilities                    |                                |                                   | 5,757   |             |        |              | 467     |              |         |              | 42      |              |        |   |         |          |          |   | 6,266   |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               | Total liabilities              |                                   |         | 124,145     |        |              |         | 35,730       |         |              |         | (4,149       | )      |   |          |         |          |   |         | 155,726  |        
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|Common shareholders equity                    |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               | Common stock                   |                                   |         | 89          |        |              |         |             |         |              |         |             |        |   |          |         |          |   |         | 89       |        
|                                               | Additional paid-in capital     |                                   |         | 290,070     |        |              |         | 101,974      |         |              |         | 4,978        |        |   |          | (106,952 | )        |   |         | 290,070  |        
|                                               | Accumulated earnings (deficit) |                                   |         | (218,916    | )      |              |         | 24,150       |         |              |         | 13,731       |        |   |          |         |          |   |         | (181,035 | )      
|                                               | Other                          |                                   |         | 504         |        |              |         | (8,172       | )       |              |         | 3,441        |        |   |          |         |          |   |         | (4,227   | )      
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               |                                | Total common shareholders equity |         |             | 71,747 |              |         |              | 117,952 |              |         |              | 22,150 |   |          |          | (106,952 | ) |         |          | 104,897 | 
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         
|                                               |                                | $                                 | 195,892 |             |        | $            | 153,682 |              |         | $            | 18,001  |              |        | $ | (106,952 | )        |          | $ | 260,623 |         
|                                               |                                |                                   |         |             |        |              |         |              |         |              |         |              |        |   |          |          |          |   |         |         

F-27



---



##### Table of Contents



Consolidating Condensed Statements of Operations
For the Year Ended December 31, 2002
(Unaudited)

|                                            |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |     |   |  |   |         |         |  
|------------------------------------------- | -------------------------------------------------------------- | - | ----------- | ------- | ------------ | - | ------------ | ------ | ------------ | - | ------------ | ----- |  | - | --- | - |  | - | ------- | ------- | -
|                                            |                                                                |   |             |         |              |   |              |        |              |   | Non-         |       |  |   |     |   |  |   |        
|                                            |                                                                |   | Matria      |         | Guarantor    |   | Guarantor    |        |              |   |              |       |  |   |    
|                                            |                                                                |   | Healthcare, |         | Domestic     |   | Foreign      |        |              |   |              |       |  |   |    
|                                            |                                                                |   | Inc.        |         | Subsidiaries |   | Subsidiaries |        | Eliminations |   | Consolidated
|                                            |                                                                |   |             |         |              |   |              |        |              |   |             
|Revenues                                    |                                                                | $ | 98,161      |         |              | $ | 133,501      |        |              | $ | 46,031       |       |  | $ | (62 | ) |  | $ | 277,631 |        
|Cost of revenues                            |                                                                |   | 43,544      |         |              |   | 84,437       |        |              |   | 36,379       |       |  |   | (62 | ) |  |   | 164,298 |        
|Selling and administrative expenses         |                                                                |   | 55,502      |         |              |   | 30,998       |        |              |   | 5,470        |       |  |   |    |   |  |   | 91,970  |        
|Charges from termination of
retirement plan |                                                                |   | 14,247      |         |              |   |             |        |              |   |             |       |  |   |    |   |  |   | 14,247  |        
|Provision for doubtful accounts             |                                                                |   | 5,320       |         |              |   | 4,635        |        |              |   |             |       |  |   |    |   |  |   | 9,955   |        
|Amortization of intangible assets           |                                                                |   |            |         |              |   | 360          |        |              |   | 200          |       |  |   |    |   |  |   | 560     |        
|                                            |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |     |   |  |   |         |        
|                                            | Operating earnings (loss) from
continuing operations           |   |             | (20,452 | )            |   |              | 13,071 |              |   |              | 3,982 |  |   |     |  |  |   |         | (3,399  | )
|Interest income (expense), net              |                                                                |   | (13,248     | )       |              |   | (9           | )      |              |   | (369         | )     |  |   |    |   |  |   | (13,626 | )      
|Other income (expense), net                 |                                                                |   | (1,119      | )       |              |   | (1,926       | )      |              |   | (74          | )     |  |   |    |   |  |   | (3,119  | )      
|                                            |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |     |   |  |   |         |        
|                                            | Earnings (loss) from continuing
operations before income taxes |   |             | (34,819 | )            |   |              | 11,136 |              |   |              | 3,539 |  |   |     |  |  |   |         | (20,144 | )
|Income
tax benefit (expense)                |                                                                |   | 4,506       |         |              |   | 4            |        |              |   | (10          | )     |  |   |    |   |  |   | 4,500   |        
|                                            |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |     |   |  |   |         |        
|                                            | Earnings (loss) from continuing
operations                     |   |             | (30,313 | )            |   |              | 11,140 |              |   |              | 3,529 |  |   |     |  |  |   |         | (15,644 | )
|Discontinued operations, net of taxes       |                                                                |   |            |         |              |   | (682         | )      |              |   |             |       |  |   |    |   |  |   | (682    | )      
|                                            |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |     |   |  |   |         |        
|                                            | Net earnings (loss)                                            |   | $           | (30,313 | )            |   | $            | 10,458 |              |   | $            | 3,529 |  |   | $   |  |  |   | $       | (16,326 | )
|                                            |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |     |   |  |   |         |        

Consolidating Condensed Statements of Operations
For the Year Ended December 31, 2001
(Unaudited)

|                                      |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |      |   |  |   |         |        | 
|------------------------------------- | -------------------------------------------------------------- | - | ----------- | ------- | ------------ | - | ------------ | ------ | ------------ | - | ------------ | ----- |  | - | ---- | - |  | - | ------- | ------ | 
|                                      |                                                                |   |             |         |              |   |              |        |              |   | Non-         |       |  |   |      |   |  |   |        
|                                      |                                                                |   | Matria      |         | Guarantor    |   | Guarantor    |        |              |   |              |       |  |   |     
|                                      |                                                                |   | Healthcare, |         | Domestic     |   | Foreign      |        |              |   |              |       |  |   |     
|                                      |                                                                |   | Inc.        |         | Subsidiaries |   | Subsidiaries |        | Eliminations |   | Consolidated
|                                      |                                                                |   |             |         |              |   |              |        |              |   |             
|Revenues                              |                                                                | $ | 106,627     |         |              | $ | 117,148      |        |              | $ | 40,685       |       |  | $ | (477 | ) |  | $ | 263,983 |       
|Cost of revenues                      |                                                                |   | 43,601      |         |              |   | 69,453       |        |              |   | 33,108       |       |  |   | (477 | ) |  |   | 145,685 |       
|Selling and administrative expenses   |                                                                |   | 52,209      |         |              |   | 19,534       |        |              |   | 4,506        |       |  |   |     |   |  |   | 76,249  |       
|Provision for doubtful accounts       |                                                                |   | 5,451       |         |              |   | 2,090        |        |              |   | 34           |       |  |   |     |   |  |   | 7,575   |       
|Amortization of intangible assets     |                                                                |   | 564         |         |              |   | 8,766        |        |              |   | 497          |       |  |   |     |   |  |   | 9,827   |       
|                                      |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |      |   |  |   |         |       
|                                      | Operating earnings from
continuing operations                  |   |             | 4,802   |              |   |              | 17,305 |              |   |              | 2,540 |  |   |      |  |  |   |         | 24,647 | 
|Interest income (expense), net        |                                                                |   | (9,615      | )       |              |   | 9            |        |              |   | (402         | )     |  |   |     |   |  |   | (10,008 | )     
|Other income (expense), net           |                                                                |   | (736        | )       |              |   | 5            |        |              |   | 92           |       |  |   |     |   |  |   | (639    | )     
|                                      |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |      |   |  |   |         |       
|                                      | Earnings (loss) from continuing
operations before income taxes |   |             | (5,549  | )            |   |              | 17,319 |              |   |              | 2,230 |  |   |      |  |  |   |         | 14,000 | 
|Income tax expense                    |                                                                |   | 6,068       |         |              |   |             |        |              |   | 7            |       |  |   |     |   |  |   | 6,075   |       
|                                      |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |      |   |  |   |         |       
|                                      | Earnings (loss) from continuing
operations                     |   |             | (11,617 | )            |   |              | 17,319 |              |   |              | 2,223 |  |   |      |  |  |   |         | 7,925  | 
|Discontinued operations, net of taxes |                                                                |   |            |         |              |   | (1,240       | )      |              |   |             |       |  |   |     |   |  |   | (1,240  | )     
|                                      |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |      |   |  |   |         |       
|                                      | Net earnings (loss)                                            |   | $           | (11,617 | )            |   | $            | 16,079 |              |   | $            | 2,223 |  |   | $    |  |  |   | $       | 6,685  | 
|                                      |                                                                |   |             |         |              |   |              |        |              |   |              |       |  |   |      |   |  |   |         |       

F-28



---



##### Table of Contents



Consolidating Condensed Statements of Operations
For the Year Ended December 31, 2000
(Unaudited)

|                                      |                                                         |   |             |        |              |   |              |       |              |   |              |       |  |   |        |   |  |   |         |        | 
|------------------------------------- | ------------------------------------------------------- | - | ----------- | ------ | ------------ | - | ------------ | ----- | ------------ | - | ------------ | ----- |  | - | ------ | - |  | - | ------- | ------ | 
|                                      |                                                         |   |             |        |              |   |              |       |              |   | Non-         |       |  |   |        |   |  |   |        
|                                      |                                                         |   | Matria      |        | Guarantor    |   | Guarantor    |       |              |   |              |       |  |   |       
|                                      |                                                         |   | Healthcare, |        | Domestic     |   | Foreign      |       |              |   |              |       |  |   |       
|                                      |                                                         |   | Inc.        |        | Subsidiaries |   | Subsidiaries |       | Eliminations |   | Consolidated
|                                      |                                                         |   |             |        |              |   |              |       |              |   |             
|Revenues                              |                                                         | $ | 111,065     |        |              | $ | 79,590       |       |              | $ | 36,416       |       |  | $ | (1,304 | ) |  | $ | 225,767 |       
|Cost of revenues                      |                                                         |   | 40,716      |        |              |   | 47,002       |       |              |   | 29,765       |       |  |   | (1,304 | ) |  |   | 116,179 |       
|Selling and administrative expenses   |                                                         |   | 52,384      |        |              |   | 11,964       |       |              |   | 4,120        |       |  |   |       |   |  |   | 68,468  |       
|Provision for doubtful accounts       |                                                         |   | 5,641       |        |              |   | 1,370        |       |              |   | 32           |       |  |   |       |   |  |   | 7,043   |       
|Amortization of intangible assets     |                                                         |   | 564         |        |              |   | 8,788        |       |              |   | 451          |       |  |   |       |   |  |   | 9,803   |       
|Restructuring charges                 |                                                         |   | (128        | )      |              |   | 1,727        |       |              |   |             |       |  |   |       |   |  |   | 1,599   |       
|                                      |                                                         |   |             |        |              |   |              |       |              |   |              |       |  |   |        |   |  |   |         |       
|                                      | Operating earnings from
continuing operations           |   |             | 11,888 |              |   |              | 8,739 |              |   |              | 2,048 |  |   |        |  |  |   |         | 22,675 | 
|Interest income (expense), net        |                                                         |   | (7,840      | )      |              |   | 62           |       |              |   | (378         | )     |  |   |       |   |  |   | (8,156  | )     
|Other income (expense), net           |                                                         |   | 8,188       |        |              |   | 50           |       |              |   | 37           |       |  |   |       |   |  |   | 8,275   |       
|                                      |                                                         |   |             |        |              |   |              |       |              |   |              |       |  |   |        |   |  |   |         |       
|                                      | Earnings from continuing operations
before income taxes |   |             | 12,236 |              |   |              | 8,851 |              |   |              | 1,707 |  |   |        |  |  |   |         | 22,794 | 
|Income tax expense                    |                                                         |   | 9,100       |        |              |   |             |       |              |   |             |       |  |   |       |   |  |   | 9,100   |       
|                                      |                                                         |   |             |        |              |   |              |       |              |   |              |       |  |   |        |   |  |   |         |       
|                                      | Earnings from continuing operations                     |   |             | 3,136  |              |   |              | 8,851 |              |   |              | 1,707 |  |   |        |  |  |   |         | 13,694 | 
|Discontinued operations, net of taxes |                                                         |   |            |        |              |   |             |       |              |   |             |       |  |   |       |   |  |   |        |       
|                                      |                                                         |   |             |        |              |   |              |       |              |   |              |       |  |   |        |   |  |   |         |       
|                                      | Net earnings                                            |   | $           | 3,136  |              |   | $            | 8,851 |              |   | $            | 1,707 |  |   | $      |  |  |   | $       | 13,694 | 
|                                      |                                                         |   |             |        |              |   |              |       |              |   |              |       |  |   |        |   |  |   |         |       

Consolidating Condensed Statements of Cash Flows
For the Year Ended December 31, 2002
(Unaudited)

|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |         |         |  
|------------------------------------------------------------ | ---------------------------------------------------- | --------------------------------------------------- | ----- | ----------- | ------ | ------------ | ----- | ------------ | ------- | ------------ | ------ | ------ | ------ | - | ----- | ------- | ------- | -
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        | Non-   |        |   |       |        
|                                                             |                                                      |                                                     |       | Matria      |        | Guarantor    |       | Guarantor    |         |              |        |       
|                                                             |                                                      |                                                     |       | Healthcare, |        | Domestic     |       | Foreign      |         |              |        |       
|                                                             |                                                      |                                                     |       | Inc.        |        | Subsidiaries |       | Subsidiaries |         | Consolidated
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |             
|Cash Flows from Operating Activities:                        |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|                                                             | Net cash provided by (used in) continuing operations |                                                     | $     | (3,567      | )      |              | $     | 17,712       |         |              | $      | 5,735  |        |   | $     | 19,880  |        
|                                                             | Net cash provided by discontinued operations         |                                                     |       |            |        |              |       | 642          |         |              |        |       |        |   |       | 642     |        
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|                                                             |                                                      | Net cash provided by (used in) operating activities |       |             | (3,567 | )            |       |              | 18,354  |              |        |        | 5,735  |   |       |         | 20,522  |  
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|Cash Flows from Investing Activities:                        |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|                                                             | Purchases of property and equipment                  |                                                     |       | (3,345      | )      |              |       | (12,391      | )       |              |        | (364   | )      |   |       | (16,100 | )      
|                                                             | Acquisition of businesses, net of cash acquired      |                                                     |       |            |        |              |       | (3,526       | )       |              |        |       |        |   |       | (3,526  | )      
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|                                                             |                                                      | Net cash used in investing activities               |       |             | (3,345 | )            |       |              | (15,917 | )            |        |        | (364   | ) |       |         | (19,626 | )
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|Cash Flows from Financing Activities:                        |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|                                                             | Borrowings under credit agreement                    |                                                     |       | 12,116      |        |              |       |             |         |              |        |       |        |   |       | 12,116  |        
|                                                             | Proceeds from issuance of debt                       |                                                     |       | 1,462       |        |              |       |             |         |              |        |       |        |   |       | 1,462   |        
|                                                             | Principal repayments of long-term debt               |                                                     |       | (11,427     | )      |              |       | (133         | )       |              |        | (2,573 | )      |   |       | (14,133 | )      
|                                                             | Proceeds from issuance of common stock               |                                                     |       | 1,858       |        |              |       |             |         |              |        |       |        |   |       | 1,858   |        
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|                                                             |                                                      | Net cash provided by (used in) financing activities |       |             | 4,009  |              |       |              | (133    | )            |        |        | (2,573 | ) |       |         | 1,303   |  
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|Effect of exchange rate changes on cash and cash equivalents |                                                      |                                                     |      |             |        |              |      |              |         |              | 1,318  |        |        |   | 1,318 |        
|Net change in intercompany balances                          |                                                      |                                                     | 3,503 |             |        |              | (759  | )            |         |              | (2,744 | )      |        |   |      |        
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|                                                             |                                                      | Net increase in cash and cash equivalents           |       |             | 600    |              |       |              | 1,545   |              |        |        | 1,372  |   |       |         | 3,517   |  
|Cash and cash equivalents at beginning of year               |                                                      |                                                     | 1,319 |             |        |              | 535   |              |         |              | 129    |        |        |   | 1,983 |        
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        
|Cash and cash equivalents at end of year                     |                                                      | $                                                   | 1,919 |             |        | $            | 2,080 |              |         | $            | 1,501  |        |        | $ | 5,500 |        
|                                                             |                                                      |                                                     |       |             |        |              |       |              |         |              |        |        |        |   |       |        

F-29



---



##### Table of Contents



Consolidating Condensed Statements of Cash Flows
For the Year Ended December 31, 2001
(Unaudited)

|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |          |        |         |  
|------------------------------------------------------------ | ---------------------------------------------------- | --------------------------------------------------- | ----------------------------------------- | -------- | ----------- | ------- | ------------ | ------ | ------------ | ---- | ------------ | ------ | ------ | ------ | ----- | -------- | ------ | ------- | -
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        | Non-   |        |       |          |       
|                                                             |                                                      |                                                     |                                           |          | Matria      |         | Guarantor    |        | Guarantor    |      |              |        |       
|                                                             |                                                      |                                                     |                                           |          | Healthcare, |         | Domestic     |        | Foreign      |      |              |        |       
|                                                             |                                                      |                                                     |                                           |          | Inc.        |         | Subsidiaries |        | Subsidiaries |      | Consolidated
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |             
|Cash Flows from Operating Activities:                        |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|                                                             | Net cash provided by (used in) continuing operations |                                                     | $                                         | 164      |             |         | $            | 9,511  |              |      | $            | (1,728 | )      |        | $     | 7,947    |       
|                                                             | Net cash provided by discontinued operations         |                                                     |                                           |         |             |         |              | 3,056  |              |      |              |       |        |        |       | 3,056    |       
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|                                                             |                                                      | Net cash provided by (used in) operating activities |                                           |          | 164         |         |              |        | 12,567       |      |              |        | (1,728 | )      |       |          | 11,003 |        
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|Cash Flows from Investing Activities:                        |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|                                                             | Purchases of property and equipment                  |                                                     |                                           | (4,071   | )           |         |              | (4,208 | )            |      |              | (124   | )      |        |       | (8,403   | )     
|                                                             | Proceeds from disposition of business                |                                                     |                                           |         |             |         |              | 18,076 |              |      |              |       |        |        |       | 18,076   |       
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|                                                             |                                                      | Net cash provided by (used in) investing activities |                                           |          | (4,071      | )       |              |        | 13,868       |      |              |        | (124   | )      |       |          | 9,673  |        
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|Cash Flows from Financing Activities:                        |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|                                                             | Proceeds from issuance of senior notes               |                                                     |                                           | 111,940  |             |         |              |       |              |      |              |       |        |        |       | 111,940  |       
|                                                             | Borrowings under credit agreement                    |                                                     |                                           | 36,000   |             |         |              |       |              |      |              |       |        |        |       | 36,000   |       
|                                                             | Proceeds from issuance of debt                       |                                                     |                                           | 1,013    |             |         |              |       |              |      |              |       |        |        |       | 1,013    |       
|                                                             | Principal repayments of long-term debt               |                                                     |                                           | (127,564 | )           |         |              | (174   | )            |      |              |       |        |        |       | (127,738 | )     
|                                                             | Proceeds from issuance of common stock               |                                                     |                                           | 3,892    |             |         |              |       |              |      |              |       |        |        |       | 3,892    |       
|                                                             | Repurchases of common stock and warrants             |                                                     |                                           | (4,346   | )           |         |              |       |              |      |              |       |        |        |       | (4,346   | )     
|                                                             | Repurchases of redeemable preferred stock            |                                                     |                                           | (40,931  | )           |         |              |       |              |      |              |       |        |        |       | (40,931  | )     
|                                                             | Preferred stock dividend payments                    |                                                     |                                           | (2,438   | )           |         |              |       |              |      |              |       |        |        |       | (2,438   | )     
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|                                                             |                                                      |                                                     | Net cash used in financing activities     |          |             | (22,434 | )            |        |              | (174 | )            |        |        |       |       |          |        | (22,608 | )
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|Effect of exchange rate changes on cash and cash equivalents |                                                      |                                                     |                                          |          |             |         |             |        |              |      |             |        |        |        |      |         
|Net change in intercompany balances                          |                                                      |                                                     | 26,136                                    |          |             |         | (26,771      | )      |              |      | 635          |        |        |        |      |         
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|                                                             |                                                      |                                                     | Net decrease in cash and cash equivalents |          |             | (205    | )            |        |              | (510 | )            |        |        | (1,217 | )     |          |        | (1,932  | )
|Cash and cash equivalents at beginning of year               |                                                      |                                                     | 1,524                                     |          |             |         | 1,045        |        |              |      | 1,346        |        |        |        | 3,915 |         
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         
|Cash and cash equivalents at end of year                     |                                                      | $                                                   | 1,319                                     |          |             | $       | 535          |        |              | $    | 129          |        |        | $      | 1,983 |         
|                                                             |                                                      |                                                     |                                           |          |             |         |              |        |              |      |              |        |        |        |       |         

F-30



---



##### Table of Contents



Consolidating Condensed Statements of Cash Flows
For the Year Ended December 31, 2000
(Unaudited)

|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |         |         |  
|------------------------------------------------------------ | --------------------------------------------- | --------------------------------------------------- | ------ | ----------- | ------- | ------------ | ------ | ------------ | ------ | ------------ | ----- | ---- | ---- | - | ----- | ------- | ------- | -
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       | Non- |      |   |       |        
|                                                             |                                               |                                                     |        | Matria      |         | Guarantor    |        | Guarantor    |        |              |       |     
|                                                             |                                               |                                                     |        | Healthcare, |         | Domestic     |        | Foreign      |        |              |       |     
|                                                             |                                               |                                                     |        | Inc.        |         | Subsidiaries |        | Subsidiaries |        | Consolidated
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |             
|Cash Flows from Operating Activities:                        |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|                                                             | Net cash provided by continuing operations    |                                                     | $      | 2,965       |         |              | $      | 16,519       |        |              | $     | 634  |      |   | $     | 20,118  |        
|                                                             | Net cash used in discontinued operations      |                                                     |        |            |         |              |        | (623         | )      |              |       |     |      |   |       | (623    | )      
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|                                                             |                                               | Net cash provided by operating activities           |        |             | 2,965   |              |        |              | 15,896 |              |       |      | 634  |   |       |         | 19,495  |  
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|Cash Flows from Investing Activities:                        |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|                                                             | Purchases of property and equipment           |                                                     |        | (3,961      | )       |              |        | (6,795       | )      |              |       | (131 | )    |   |       | (10,887 | )      
|                                                             | Proceeds from sales of short-term investments |                                                     |        | 7,298       |         |              |        |             |        |              |       |     |      |   |       | 7,298   |        
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|                                                             |                                               | Net cash provided by (used in) investing activities |        |             | 3,337   |              |        |              | (6,795 | )            |       |      | (131 | ) |       |         | (3,589  | )
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|Cash Flows from Financing Activities:                        |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|                                                             | Borrowings under credit agreement             |                                                     |        | 23,000      |         |              |        |             |        |              |       |     |      |   |       | 23,000  |        
|                                                             | Proceeds from issuance of debt                |                                                     |        | 891         |         |              |        |             |        |              |       |     |      |   |       | 891     |        
|                                                             | Principal repayments of long-term debt        |                                                     |        | (37,492     | )       |              |        | (149         | )      |              |       | (9   | )    |   |       | (37,650 | )      
|                                                             | Proceeds from issuance of common stock        |                                                     |        | 579         |         |              |        |             |        |              |       |     |      |   |       | 579     |        
|                                                             | Repurchases of common stock                   |                                                     |        | (4,733      | )       |              |        |             |        |              |       |     |      |   |       | (4,733  | )      
|                                                             | Preferred stock dividend payments             |                                                     |        | (3,200      | )       |              |        |             |        |              |       |     |      |   |       | (3,200  | )      
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|                                                             |                                               | Net cash used in financing activities               |        |             | (20,955 | )            |        |              | (149   | )            |       |      | (9   | ) |       |         | (21,113 | )
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|Effect of exchange rate changes on cash and cash
equivalents |                                               |                                                     |       |             |         |              |       |              |        |              | (426  | )    |      |   | (426  | )      
|Net change in intercompany balances                          |                                               |                                                     | 10,475 |             |         |              | (9,529 | )            |        |              | (946  | )    |      |   |      |        
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|                                                             |                                               | Net decrease in cash and cash equivalents           |        |             | (4,178  | )            |        |              | (577   | )            |       |      | (878 | ) |       |         | (5,633  | )
|Cash and cash equivalents at beginning of year               |                                               |                                                     | 5,702  |             |         |              | 1,622  |              |        |              | 2,224 |      |      |   | 9,548 |        
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        
|Cash and cash equivalents at end of year                     |                                               | $                                                   | 1,524  |             |         | $            | 1,045  |              |        | $            | 1,346 |      |      | $ | 3,915 |        
|                                                             |                                               |                                                     |        |             |         |              |        |              |        |              |       |      |      |   |       |        

F-31