SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





Form
10-Q








x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE QUARTERLY PERIOD ENDED   March
      31, 2008


OR


 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE TRANSITION PERIOD FROM ______ TO
  _____











Commission
file number 0-20619








MATRIA
HEALTHCARE, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            20-2091331(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)1850
      Parkway Place
              Marietta,
      Georgia  30067
            (770)
      767-4500(Address
      of principal executive offices) (Zip Code)
            (Registrant’s
      telephone number, including area
code)














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.YesxNo ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined by Rule 12b-2 of the
Exchange Act).


Large accelerated filer  ̈                                                   Accelerated filerx Non-accelerated filer ̈Smaller
reporting company    ̈





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).Yes ̈Nox





The
number of shares outstanding of the issuer’s only class of common stock, $.01
par value, as of May 1, 2008, was 21,526,924.





MATRIA
HEALTHCARE, INC.


QUARTERLY
REPORT ON FORM 10-Q


MARCH
31, 2008





TABLE
OF CONTENTS








PART
      I - FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements
            3Item
      2.
            Management’s
      Discussion and Analysis of FinancialCondition
      and Results of Operations
            12Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            22Item
      4.
            Controls
      and Procedures
            22PART
      II - OTHER INFORMATIONItem
      1A.
            Risk
      Factors
            23Item
      6.
            Exhibits
            23SIGNATURES
            24


2


PART
I - FINANCIAL INFORMATION





Item
1.  Financial Statements





Matria
Healthcare, Inc. and Subsidiaries


Consolidated
Condensed Balance Sheets


(Amounts
in thousands, except per share amounts)


(Unaudited)





March
      31,
              
              
              December
      31,ASSETS
              
              2008
              
              
              2007Current
      assets:Cash
      and cash equivalents
              
              $
              23,070
              
              
              $
              19,501Trade
      accounts receivable, less allowances of $3,603 and$4,559 at March 31, 2008 and December 31, 2007,
    respectively
              
              
              46,591
              
              
              
              45,968Prepaid
      expenses and other current assets
              
              
              10,803
              
              
              
              11,479Deferred
      income taxes
              
              
              15,308
              
              
              
              15,308Total
      current assets
              
              
              95,772
              
              
              
              92,256Property
      and equipment, net
              
              
              40,027
              
              
              
              40,013Goodwill,
      net
              
              
              494,895
              
              
              
              494,718Other
      intangibles, net
              
              
              46,960
              
              
              
              48,746Other
      assets
              
              
              9,791
              
              
              
              10,505$
              687,445
              
              
              $
              686,238LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable, principally trade
              
              $
              8,882
              
              
              $
              8,365Current
      installments of long-term debt
              
              
              43,475
              
              
              
              43,988Unearned
      revenues
              
              
              11,331
              
              
              
              10,097Accrued
      liabilities
              
              
              17,499
              
              
              
              19,584Total
      current liabilities
              
              
              81,187
              
              
              
              82,034Long-term
      debt, excluding current installments
              
              
              242,828
              
              
              
              238,688Deferred
      income taxes
              
              
              5,115
              
              
              
              7,257Other
      long-term liabilities
              
              
              6,682
              
              
              
              7,019Total
      liabilities
              
              
              335,812
              
              
              
              334,998Shareholders'
      equity:Preferred
      stock, $.01 par value.  Authorized 50,000
shares;none outstanding at March 31, 2008 and December 31, 2007
              
              
              -
              
              
              
              -Common
      stock, $.01 par value.   Authorized 50,000
      shares;issued and outstanding 21,498 and 21,420 at March 31, 2008and
      December 31, 2007, respectively
              
              
              215
              
              
              
              214Additional
      paid-in capital
              
              
              433,390
              
              
              
              430,531Accumulated
      deficit
              
              
              (76,133
              )
              
              
              (76,389
              )Accumulated
      other comprehensive earnings
              
              
              (5,839
              )
              
              
              (3,116
              )Total
      shareholders' equity
              
              
              351,633
              
              
              
              351,240$
              687,445
              
              
              $
              686,238







See
accompanying notes to consolidated condensed financial
statements.


3





Matria
Healthcare, Inc. and Subsidiaries


Consolidated
Condensed Statements of Operations


(Amounts
in thousands, except per share amounts)


(Unaudited)





Three
      Months EndedMarch
      31,2008
              
              
              2007Revenues
              
              $
              79,512
              
              
              $
              86,024Cost
      of revenues
              
              
              25,593
              
              
              
              26,493Selling
      and administrative expenses
              
              
              45,516
              
              
              
              43,164Provision
      for doubtful accounts
              
              
              941
              
              
              
              1,219Amortization
      of intangible assets
              
              
              1,786
              
              
              
              1,786Total
      costs and operating expenses
              
              
              73,836
              
              
              
              72,662Operating
      earnings from continuing operations
              
              
              5,676
              
              
              
              13,362Interest
      income
              
              
              260
              
              
              
              378Interest
      expense
              
              
              (5,615
              )
              
              
              (5,648
              )Other
      income, net
              
              
              65
              
              
              
              323Earnings
      from continuing operations before income taxes
              
              
              386
              
              
              
              8,415Income
      tax expense
              
              
              (162
              )
              
              
              (3,454
              )Earnings
      from continuing operations
              
              
              224
              
              
              
              4,961Earnings
      (loss) from discontinued operations
              
              
              32
              
              
              
              (154
              )Net
      earnings
              
              $
              256
              
              
              $
              4,807Net
      earnings per common share:Basic:Continuing
      operations
              
              $
              0.01
              
              
              $
              0.23Discontinued
      operations
              
              
              -
              
              
              
              -$
              0.01
              
              
              $
              0.23Diluted:Continuing
      operations
              
              $
              0.01
              
              
              $
              0.23Discontinued
      operations
              
              
              -
              
              
              
              (0.01
              )$
              0.01
              
              
              $
              0.22Weighted
      average shares outstanding:Basic
              
              
              21,466
              
              
              
              21,307Diluted
              
              
              21,968
              
              
              
              21,828


See accompanying notes to consolidated
condensed financial statements.


4


Matria
Healthcare, Inc. and Subsidiaries


Consolidated
Condensed Statements of Cash Flows


(Amounts
in thousands)


(Unaudited)


Three
      Months EndedMarch
      31,2008
              
              
              2007Cash
      Flows from Operating Activities:Net
      earnings
              
              $
              256
              
              
              $
              4,807Less
      earnings (loss) from discontinued operations, net of income
      taxes
              
              
              32
              
              
              
              (154
              )Earnings
      from continuing operations
              
              
              224
              
              
              
              4,961Adjustments
      to reconcile earnings from continuing operations tonet cash provided by operating activities:Depreciation
      and amortization (including debt discount and expenses)
              
              
              5,387
              
              
              
              5,191Provision
      for doubtful accounts
              
              
              941
              
              
              
              1,219Deferred
      income taxes
              
              
              79
              
              
              
              1,547Share-based
      compensation
              
              
              1,839
              
              
              
              2,709Excess
      tax benefit - share-based compensation
              
              
              -
              
              
              
              (118
              )Other
              
              
              12
              
              
              
              -Changes
      in assets and liabilities:Trade
      accounts receivable
              
              
              (1,564
              )
              
              
              (3,234
              )Prepaid
      expenses and other current assets
              
              
              676
              
              
              
              (690
              )Noncurrent
      assets
              
              
              (91
              )
              
              
              (136
              )Accounts
      payable
              
              
              517
              
              
              
              (4,863
              )Accrued
      and other liabilities
              
              
              (744
              )
              
              
              (362
              )Net
      cash provided by continuing operations
              
              
              7,276
              
              
              
              6,224Net
      cash provided by (used in) discontinued operations
              
              
              55
              
              
              
              (519
              )Net
      cash provided by operating activities
              
              
              7,331
              
              
              
              5,705Cash
      Flows from Investing Activities:Purchases
      of property and equipment
              
              
              (3,443
              )
              
              
              (3,105
              )Increase
      in restricted cash
              
              
              -
              
              
              
              (16
              )Net
      cash used in investing activities
              
              
              (3,443
              )
              
              
              (3,121
              )Cash
      Flows from Financing Activities:Principal
      repayments of debt
              
              
              (1,339
              )
              
              
              (1,383
              )Proceeds
      from issuance of common stock
              
              
              1,020
              
              
              
              960Excess
      tax benefit - share-based compensation
              
              
              -
              
              
              
              118Net
      cash used in financing activities
              
              
              (319
              )
              
              
              (305
              )Net
      increase in cash and cash equivalents
              
              
              3,569
              
              
              
              2,279Cash
      and cash equivalents at beginning of year
              
              
              19,501
              
              
              
              19,839Cash
      and cash equivalents at end of period
              
              $
              23,070
              
              
              $
              22,118Supplemental
      disclosure of cash paid for:Interest
              
              $
              5,225
              
              
              $
              5,127Income taxes
              
              $
              206
              
              
              $
              70







See
accompanying notes to consolidated condensed financial
statements.


5


Notes
to Consolidated Condensed Financial Statements


(Unaudited)





1.  General




The
consolidated condensed financial statements as of March 31, 2008, and for the
three-month periods ended March 31, 2008 and 2007, respectively, are
unaudited.  The consolidated condensed balance sheet as of December
31, 2007, was derived from audited financial statements, but does not include
all disclosures required by accounting principles generally accepted in the
United States.  In preparing financial statements, it is necessary for
management to make assumptions and estimates affecting the amounts reported in
the consolidated financial statements and related notes.  These
estimates and assumptions are developed based upon all information
available.  Actual results could differ from estimated
amounts.  In the opinion of management, all adjustments, consisting of
normal recurring accruals, necessary for fair presentation of the consolidated
condensed financial position and results of operations for the periods presented
have been included.  The results for the three months ended March 31,
2008, are not necessarily indicative of the results that may be expected for the
full year ending December 31, 2008.





The
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and related notes included in our Annual
Report on Form 10-K for the year ended December 31, 2007. References herein to
“we,” “us,” “our,” the “Company,” and “Matria” refer to Matria Healthcare, Inc.
and its consolidated subsidiaries.





2.  Recently Issued and Recently
Adopted Accounting Standards





Fair Value
Measurements.  We adopted
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements
(“SFAS 157”), as of January 1, 2008.   SFAS 157 defines fair
value, establishes a methodology for measuring fair value, and expands the
required disclosure for fair value measurements.  On February 12,
2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.
157, which amends SFAS 157 by delaying its effective date by one year for
non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis.  Therefore, the adoption of SFAS 157 on January 1, 2008, is
limited to financial assets and liabilities.  The initial adoption did
not have a material impact on our financial position or results of operations.
However, we are still in the process of evaluating this standard with respect to
its effect on non-financial assets and liabilities, and we have not yet
determined the impact that it will have on our financial statements upon full
adoption on January 1, 2009.  See Note 11 for additional
information.





Fair Value
Option.  In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115 (“SFAS 159”).  This standard permits entities to choose to
measure many financial instruments and certain other items at fair
value.  Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting
date.  The fair value option may be elected on an
instrument-by-instrument basis with a few exceptions.  SFAS 159 also
establishes presentation and disclosure requirements to facilitate comparisons
between companies that choose different measurement attributes for similar
assets and liabilities.  We adopted SFAS 159 on January 1, 2008, and
did not elect the fair value measurement for any of our financial assets or
liabilities.





Disclosures about
Derivative Instruments.  In March 2008,
the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (“SFAS 161”).  SFAS 161 requires enhanced disclosure
related to derivatives and hedging activities and thereby seeks to improve the
transparency of financial reporting.  Under SFAS 161, entities are
required to provide enhanced disclosures relating to: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedge
items are accounted for under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), and its related
interpretations; and (c) how derivative






6
 
  instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS 161 must be applied prospectively to all
derivative instruments and non-derivative instruments that are designated and
qualify as hedging instruments and related hedged items accounted for under SFAS
133 and will be effective for all financial statements January 1, 2009. We are
currently evaluating the impact on the disclosures for our derivative
instruments and hedging activities.





3.         Plan of
Merger




On
January 27, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Inverness Medical Innovations, Inc. (“Inverness”), pursuant to
which Inverness will acquire Matria.  Inverness is a global leader in
rapid point-of-care diagnostics and the development of near-patient diagnosis,
monitoring and health management, including disease management and wellness
programs that enables individuals to take charge of improving their health and
quality of life.





At the
effective time of the merger, by virtue of the merger and without any action on
the part of the holders of any capital stock of Matria, each share of common
stock of Matria issued and outstanding immediately prior to the effective time
will be converted into the right to receive: (i) a portion of a share of
Inverness convertible preferred stock having a stated value of $32.50 (the $400
liquidation value of a share of Inverness convertible preferred stock multiplied
by 0.08125, which is the exchange ratio of the issuance of Inverness convertible
preferred stock in the merger), and (ii) $6.50 in cash. The merger has been
approved by the Boards of Directors of both companies.  The completion
of the merger is subject to obtaining the approval of Matria shareholders at a
meeting scheduled on May 8, 2008.  Matria and Inverness will continue
to operate separately until the transaction closes. Inverness has filed a
registration statement on Form S-4 with the SEC in connection with the
proposed merger, which includes additional information related to the proposed
merger and Matria’s proxy statement and Inverness’s prospectus for the proposed
transaction.





4.           Acquisition Contingent
Consideration




In
connection with our acquisition of Miavita LLC (“Miavita”) on April 1, 2005, we
were required to pay additional consideration in future periods, based upon a
percentage of specified revenues pertaining to certain customer
agreements.  For the third earn-out period ended March 31, 2008, we
accrued $177,000, payable on May 15, 2008, for additional acquisition
consideration and recorded the amount as a decrease to
goodwill.  Additional consideration payments will be payable in future
periods through 2010, which we estimate to be less than $250,000.





5.           Comprehensive Earnings
(Loss)




Comprehensive
earnings generally include all changes in equity during a period except those
resulting from investments by owners and distributions to
owners.  Comprehensive earnings consist of net earnings and net
unrealized gains and losses on derivative instruments.  Comprehensive
earnings (loss) for the three-months ended March 31, 2008 and 2007, were $(2.5)
million and $4.7 million, respectively.





6.           Income
Taxes
  We
adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”) on January 1, 2007. As a result of implementing FIN 48,
we derecognized $524,000 in income tax benefits for certain tax positions for
which there is uncertainty and recognized $145,000 of related interest and
penalties. These adjustments resulted in increases of $669,000 to beginning
Accumulated deficit and to Other long-term liabilities. As of March 31, 2008 and
December 31, 2007, we had a liability of $971,000 for tax benefits recognized
which may not be sustained. We recognize interest and penalties related to
unrecognized tax benefits in Interest expense and Selling and administrative
expenses, respectively on the consolidated condensed statement of
operations.  At March 31, 2008 and December 31, 2007, we accrued
$288,000 and $213,000, respectively, for the payment of interest and
  7
   penalties.  These
amounts are included in Other long-term liabilities on the consolidated
condensed balance sheets.





7.           Earnings Per
Share




The
computations for basic and diluted net earnings per common share are as follows
(in thousands, except per share amounts):




Three
      Months EndedMarch
      31,2008
              
              
              2007Net
      earnings (loss) - basic and diluted:Continuing
      operations
              
              $
              224
              
              
              $
              4,961Discontinued
      operations
              
              
              32
              
              
              
              (154
              )Net
      earnings available to common shareholders
              
              $
              256
              
              
              $
              4,807Shares:Weighted
      average common shares outstanding - basic
              
              
              21,466
              
              
              
              21,307Dilutive
      effect of:Stock options and employee stock purchase plan
              
              
              455
              
              
              
              444Unvested restricted stock awards
              
              
              47
              
              
              
              77Weighted
      average common shares outstanding - diluted
              
              
              21,968
              
              
              
              21,828Basic:Continuing
      operations
              
              $
              0.01
              
              
              $
              0.23Discontinued
      operations
              
              
              -
              
              
              
              -$
              0.01
              
              
              $
              0.23Diluted:Continuing
      operations
              
              $
              0.01
              
              
              $
              0.23Discontinued
      operations
              
              
              -
              
              
              
              (0.01
              )$
              0.01
              
              
              $
              0.22
  The
calculation of diluted earnings per share excludes the antidilutive effect of
1.6 million shares of stock options and unvested restricted stock awards in both
three-month periods ended March 31, 2008 and 2007.







8.   Share -Based
Compensation




Share-based
compensation expense includes compensation expense, recognized over the
applicable vesting periods, for the share-based awards granted after December
31, 2005, and for share-based awards granted prior to but not vested as of our
adoption of FASB SFAS No. 123(revised 2004), Share-Based
Payment.





At March
31, 2008, total compensation cost related to unvested share-based awards granted
to employees under stock option plans but not yet recognized, totaled $14.5
million after estimating forfeitures and before income taxes.  Of this
amount, approximately $6.3 million relates to shares of unvested restricted
stock. The expense of all unvested share-based awards is expected to be
recognized over an estimated weighted average period of 2.4 years. Our
restricted stock awards are performance-based and service-based, and
compensation expense for restricted stock awards is recognized using the tranche
method (performance-based awards) or the straight line method (service-based
awards) over the vesting period. The remaining unrecognized compensation expense
for the performance-based restricted stock awards may vary each reporting period
based on changes in the expected achievement of performance
measures.





The
impact on our results of operations of recording share-based compensation for
the three months






8
 
  ended
March 31, 2008 and 2007, was as follows:




Three
      Months EndedMarch
      31,2008
              
              
              2007Share-based
      compensation expense
              
              $
              1,839
              
              
              $
              2,709Income
      tax benefit
              
              
              (585
              )
              
              
              (884
              )Share-based
      compensation expense, net of income taxes
              
              $
              1,254
              
              
              $
              1,825Effect
      on diluted earnings per share
              
              $
              (0.06
              )
              
              $
              (0.08
              )





9.           Long-Term
Debt




We have a
$485.0 million Credit Facility, as amended, with Bank of America, N.A., which
matures in January 2012.  Under the terms of the agreement, the
amounts borrowed accrue interest at a variable spread over LIBOR, with the
applicable spread determined by the Company’s consolidated leverage ratio, as
described in the credit agreement.  Interest rates for the Credit
Facility are reset quarterly. Amounts borrowed are fully and unconditionally
guaranteed on a joint and several basis by substantially all of our
subsidiaries. As of March 31, 2008, the outstanding balance under the Credit
Facility was $266.1 million, excluding the Revolving Credit Facility noted
below.





Our
Revolving Credit Facility provided that the amounts borrowed accrue interest at
a variable spread over LIBOR or the prime rate, at our option, with the
applicable spread determined by reference to our consolidated leverage
ratio.  On February 23, 2007, we entered into a third amendment to the
Credit Facility, the terms of which increased our borrowing capacity under the
Revolving Credit Facility from $30.0 million to $50.0 million.  All
other terms of the Credit Facility, as amended, remain unchanged.  At
March 31, 2008, there was $10.0 million outstanding under the Revolving Credit
Facility, and the available balance was $38.9 million.





The
Credit Facility contains, among other things, various representations,
warranties and affirmative, negative and financial covenants customary for
financings of this type. The negative covenants include, without limitation,
certain limitations on transactions with affiliates, liens, making investments,
the incurrence of debt, sales of assets, and changes in business. The financial
covenants contained in the Credit Facility include a consolidated leverage ratio
and a consolidated fixed charges coverage ratio. At March 31, 2008, we were in
compliance with all covenants of the Credit Facility.





The
weighted average interest rates, including amortization of debt discount and
expense, on all outstanding indebtedness were 7.99% and 8.07% for the
three-month periods ended March 31, 2008 and 2007, respectively.





10.  Derivative Financial
Instruments




In
February and May 2006, we entered into two interest rate swap agreements, each
with a notional amount of $100.0 million, to hedge exposure to fluctuations in
interest rates related to our Credit Facility.  The agreements, which
have two-year terms, have the economic effect of converting $200.0 million of
floating-rate debt under the Credit Facility to fixed-rate debt.  In
February 2008, we terminated the February 2006 swap according to the terms of
the agreement.  The provisions of the May 2006 agreement provide that
we pay the bank a fixed base rate of 5.350%, and the bank will pay us a floating
rate based on three-month LIBOR (2.703% at March 31, 2008). The variable rate is
reset quarterly.





In August
2007, we entered into two additional interest rate swap agreements, each with a
notional amount of $100.0 million.  The terms of these agreements are
scheduled to become effective after the termination of the swaps noted above, in
February and May 2008. The term of the February 2008 swap began




9
 
  as
scheduled.  These agreements also have two-year terms and have the
economic effect of converting $200.0 million of floating-rate debt to fixed-rate
debt.  We will pay the bank fixed base rates of 4.890% and 4.910%,
respectively, under these swap arrangements, and the bank will pay us floating
rates based on three-month LIBOR.





On the
dates the interest rate swap derivative contracts were entered into, we
designated the derivatives as hedges of the variability of cash flow to be paid
(“cash flow” hedge).  Under cash flow hedge accounting, changes in the
fair value of a derivative that is qualified, designated and highly effective as
a cash flow hedge are recorded in other comprehensive income until earnings are
affected by the variability of cash flows.  We reflected the interest
rate swap agreements on the consolidated condensed balance sheets at fair value
(liabilities of $10.1 million and $5.1 million at March 31, 2008, and December
31, 2007, respectively), which was based upon the estimated amount we would pay
upon settlement of the agreements taking into account interest rates on those
dates.  For the three-month periods ended March 31, 2008 and 2007, we
recognized net gains (losses) of $(328,000) and $79,000, respectively, from the
cash flow hedges.  These amounts are included in Interest expense in
the consolidated condensed statements of operations.





11.  Fair Value
Measurement




In September 2006, the FASB issued SFAS
157.  SFAS 157 does not require any new fair value measurements,
rather, it defines fair value, establishes a framework for measuring fair value
in accordance with existing GAAP, and expands disclosures about fair value
measurements. Beginning January 1, 2008, assets and liabilities recorded at fair
value in the consolidated condensed balance sheets are categorized based upon
the level of judgment associated with the inputs used to measure their fair
value.  Level inputs, as defined by SFAS 157, are as
follows:





Level
Input                Input
Definition




Level
      1
            Inputs
      are unadjusted, quoted prices for identical assets or liabilities in
      active markets at the measurement
date.




Level
      2
            Inputs
      other than quoted prices included in Level I that are observable for the
      asset or liability through corroboration with market data at the
      measurement date.




Level
      3
            Unobservable
      inputs that reflect management’s best estimate of what market participants
      would use in pricing the asset or liability at the measurement
      date.





As of March 31, 2008, our financial
liabilities that are measured at fair value on a recurring basis are our
derivative financial instruments, which consist of interest rate
swaps.  See Note 10 for further information about our derivative
instruments and hedging activities. The fair values of the swap contracts are
determined based on inputs that are readily available in public markets or can
be derived from information available in publicly quoted markets.  We
have, therefore, categorized these swap contracts as Level 2.




The following table summarizes our fair
value measurements at March 31, 2008, for financial liabilities measured at fair
value on a recurring basis (in thousands):




Level 1
              
              
              Level 2
              
              
              Level 3
              
              
              TotalFair
      value of interest rate swap agreements
              
              $
              -
              
              
              $
              10,065
              
              
              $
              -
              
              
              $
              10,065


12.  Contingencies




In
connection with our acquisition of CorSolutions, we are pursuing a claim for
fraudulent misrepresentation, concealment and breach of contract before the
American Arbitration Association in Chicago, Illinois, seeking damages in an
unspecified amount.  There is no assurance that we will prevail in
this proceeding.





10




In
addition, we are subject to various legal claims and actions incidental to our
business and the businesses of our predecessors, including product liability
claims and professional liability claims. We maintain 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 against us in the future, (ii) our prior
experience with respect to the disposition of 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 other pending legal or
governmental proceedings to which we are a party that we believe would, if
adversely resolved, have a material adverse effect on us.





13.  Supplemental Disclosures
Regarding Revenue




Our
revenues are generated from the following sources:  our disease and
condition management services, our wellness programs and our maternity
management services. The following table summarizes our revenues for these
services and programs (amounts in thousands):





Three
      Months EndedMarch
      31,2008
              
              
              2007Disease
      and Condition Management
              
              $
              46,158
              
              
              $
              52,758Wellness
              
              
              6,149
              
              
              
              6,829Maternity
      Management
              
              
              27,205
              
              
              
              26,437Total
      Revenues
              
              $
              79,512
              
              
              $
              86,024
  11


Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





The following discussion and analysis
should be read in conjunction with the other financial information in this
Report and the consolidated financial statements and related notes and other
financial information in our Annual Report on Form 10-K for the year ended
December 31, 2007, as filed with the Securities and Exchange Commission (the
“Commission” or “SEC”).  The discussion contains forward-looking
statements that involve risks and uncertainties.  Actual results could
differ materially from those anticipated in the forward-looking statements as a
result of a variety of factors, including those discussed in “Risk Factors” in
the Annual Report.  The historical results of operations are not
necessarily indicative of future results.





Executive
Overview





We are a leading provider of
comprehensive, integrated programs and services focused on wellness, disease and
condition management, productivity enhancement and informatics. This suite of
services, which we call “Health Enhancement,” is designed to reduce
health-related costs and enhance the health and quality of life of the
individuals we serve. We provide services to self-insured employers, private and
government-sponsored health plans, pharmaceutical companies and patients. Our
employer clients are primarily Fortune 1000 companies that self-insure the
medical benefits provided to their employees, dependents and
retirees.  Our health plan customers are regional and national health
plans, as well as government-sponsored health plans, such as state Medicaid
programs.





Our
online, interactive wellness programs address issues such as: smoking cessation,
weight loss, exercise, healthier diet, stress relief, healthy aging, and
productivity enhancement. These programs are designed to help employees and
health plan members live healthier and longer lives while reducing their
healthcare costs and increasing their productivity.





Our
disease and condition management programs focus on the most costly medical
conditions including, without limitation, diabetes, cardiovascular diseases,
respiratory disorders, depression, chronic pain, hepatitis C, cancer and
high-risk pregnancies.  We assist individuals to better manage their
conditions by increasing their knowledge about their illnesses or conditions,
potential complications and the importance of medication and treatment plan
compliance. Depending on acuity, our specialized nurses proactively contact
patients to monitor their progress and ensure they are following the plan of
care set by their physician.





Plan
of Merger


On
January 27, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Inverness Medical Innovations, Inc. (“Inverness”), pursuant to
which Inverness will acquire Matria.  Inverness is a global leader in
rapid point-of-care diagnostics and the development of near-patient diagnosis,
monitoring and health management, including disease management and wellness
programs that enables individuals to take charge of improving their health and
quality of life.





At the
effective time of the merger, by virtue of the merger and without any action on
the part of the holders of any capital stock of Matria, each share of common
stock of Matria issued and outstanding immediately prior to the effective time
will be converted into the right to receive: (i) a portion of a share of
Inverness convertible preferred stock having a stated value of $32.50 (the $400
liquidation value of a share of Inverness convertible preferred stock multiplied
by 0.08125, which is the exchange ratio of the issuance of Inverness convertible
preferred stock in the merger), and (ii) $6.50 in cash. The merger has been
approved by the Boards of Directors of both companies.  The completion
of the merger is subject to obtaining the approval of Matria shareholders at a
meeting scheduled on May 8, 2008.  Matria and Inverness will continue
to operate separately until the transaction closes. Inverness has filed a
registration statement on Form S-4 with the SEC in connection with




12
 
  the
proposed merger, which includes additional information related to the proposed
merger and Matria’s proxy statement and Inverness’s prospectus for the proposed
transaction.








Results
of Operations




Three
Months Ended March 31, 2008, Compared to Three Months Ended March 31,
2007




The
following table summarizes key components in our financial statements for
continuing operations for the three-month periods ended March 31, 2008 and 2007,
respectively, expressed as a percentage of revenues. An explanation of the
results follows the table.





Three
      Months EndedMarch
      31,2008
              
              
              2007Revenues
              
              
              100.0
              %
              
              
              100.0
              %Cost
      of revenues
              
              
              32.2
              %
              
              
              30.8
              %Gross margin
              
              
              67.8
              %
              
              
              69.2
              %Selling
      and administrative expenses
              
              
              57.2
              %
              
              
              50.2
              %Provision
      for doubtful accounts
              
              
              1.2
              %
              
              
              1.4
              %Amortization
      of intangible assets
              
              
              2.2
              %
              
              
              2.1
              %Operating earnings
              
              
              7.1
              %
              
              
              15.5
              %Interest
      expense, net
              
              
              6.7
              %
              
              
              6.1
              %Other
      income, net
              
              
              0.1
              %
              
              
              0.4
              %Earnings from continuing operation before income taxes
              
              
              0.5
              %
              
              
              9.8
              %Income
      tax expense
              
              
              0.2
              %
              
              
              4.0
              %Earnings from continuing operations
              
              
              0.3
              %
              
              
              5.8
              %
  Note:
Totals may not foot due to rounding.




Our first
quarter 2008 revenues were $79.5 million, a decrease of $6.5 million, or 7.6%,
from $86.0 million in the comparable period in 2007.  Disease and
condition management revenues decreased $6.6 million, or 12.5%, and wellness
program revenues decreased $681,000, or 10.0%, in the first three months of 2008
compared to 2007. These decreases were largely due to (i) the loss of one of our
large health plan accounts and (ii) the loss of several smaller accounts
resulting from increased competition for our Administrative Services Only, or
ASO, customers.  These decreases were partially offset by increases
from the implementation of new and expanded disease management and wellness
contracts.  Additionally, our maternity management program revenues
increased $768,000, or 2.9%, to $27.2 million for the quarter ended March 31,
2008, primarily due to an increase in census and patient days for certain
preterm labor management services, as well as higher revenues from our
MaternaLink®services.





Cost of
revenues consists primarily of clinical labor and supplies related to the
provision of services. Cost of revenues as a percentage of revenues increased to
32.2% for the three-month period ended March 31, 2008, from 30.8% in
2007.  This increase was primarily due to the decrease in our
high-margin disease management and wellness revenues.  Cost as a
percentage of revenues for our maternity management services decreased due to
the availability of a lower cost generic drug for Zofran, which is used for
nausea and vomiting in our maternity management services, and due to a reduction
in costs as a result of the implementation of cost reduction
initiatives.





Selling
and administrative expenses increased $2.4 million, or 5.5%, to $45.5 million
for the quarter ended March 31, 2008, from $43.2 million in 2007. We incurred
approximately $1.8 million of legal, accounting and financial advisor expenses
related to our pending acquisition by Inverness. Additionally, our costs for
salaries and other personnel-related expenses increased $1.8 million due
primarily to severance payable to certain senior-level management. These
increases were partially offset by a reduction of $870,000 for share-based
compensation expense due the exclusion of expense for certain performance-based
restricted stock awards. Because expense for restricted stock awards is
recognized using the tranche method






13
 
  (performance-based
awards) or the straight line method (service-based awards) over the vesting
period, our recognition of compensation expense for the performance-based
restricted stock awards may vary each reporting period based on changes in the
expected achievement of performance measures. Selling and administrative
expenses as a percentage of revenues increased to 57.2% in the first quarter of
2008 from 50.2% in the same period of 2007.





The
provision for doubtful accounts as a percentage of revenues was 1.2% for the
three-month period ended March 31, 2008, compared to 1.4% in
2007.  The provision, which is recorded primarily for our maternity
management program revenues, is adjusted periodically based upon our quarterly
evaluation of historical collection experience, recoveries of amounts previously
provided, industry reimbursement trends and other relevant factors.





We
recorded $1.8 million expense in both three-month periods of 2008 and 2007 from
the amortization of intangible assets.  The amortization expense
results from our acquisitions of CorSolutions in 2006, and WinningHabits and
Miavita in 2005.





Interest
expense remained stable at $5.6 million for both quarters ended March 31, 2008
and 2007. The weighted average interest rates, including amortization of debt
discount and expense, on all outstanding indebtedness were 7.99% and 8.07% for
the quarters ended March 31, 2008 and 2007, respectively.





Income
tax expense was $162,000 and $3.5 million for the three months ended March 31,
2008 and 2007, respectively.  Our effective income tax rates were
42.0% in 2008 and 41.0% in 2007. The effective income tax rate is higher than
the statutory federal tax rate due to state income taxes and certain
non-deductible expenses for tax purposes.  Cash outflows for income
taxes for continuing and discontinued operations in 2008 and 2007 were $206,000
and $70,000, respectively, comprised of federal alternative minimum taxes and
state income taxes.  As of December 31, 2007, our remaining net
operating loss carryforwards were $49.4 million, which we expect will be
available to offset future taxable income, subject to certain limitations. We
expect to use approximately $21.6 million of our net operating loss
carryforwards in 2008.





Discontinued
operations include the operations of Facet Technologies LLC (“Facet”) and our
foreign diabetes service operations in Germany (“Dia Real”), which we sold in
the third and forth quarters of 2006, respectively.








Liquidity
and Capital Resources




Operating
Activities


As of
March 31, 2008, we had cash and cash equivalents of $23.1 million.  In
the first three months of 2008, operating activities from continuing operations
provided $7.3 million of cash, compared with $6.2 million provided in the
comparable period of 2007.  This increase was due primarily to
decreases in accounts payable in the first three months of 2007, as well as the
change in accounts receivable, which used $1.6 million of cash in the first
quarter of 2008 compared to a use of $3.2 million in the same period of
2007.  Our days’ sales outstanding, or DSO, decreased to 53 days at
March 31, 2008, from 58 days at March 31, 2007.  Our DSO at December
31, 2007, was 47 days.





Net cash
provided by (used in) discontinued operations was $55,000 and $(519,000) for the
three-month periods ended March 31, 2008 and 2007, respectively, driven
primarily by the payment of certain expenses related to the sale of Facet and
Dia Real in 2007.





14




Investing
Activities


Net cash
used in investing activities totaled $3.4 million and $3.1 million for the three
months ended March 31, 2008 and 2007, respectively, which is attributable to
capital expenditures for the replacement and enhancement of computer information
systems.  We expect to expend a total of approximately $12.0 million
for capital items in 2008, including capital expenditures made in the first
three months.





Financing
Activities


Net cash
used in financing activities was $319,000 and $305,000 for the three months
ended March 31, 2008 and 2007, respectively.  We repaid $1.3 million
and $1.4 million of short-term indebtedness and capital lease obligations during
the three-month periods ended March 31, 2008 and 2007,
respectively.  We received $1.0 million and $960,000 from participants
under our stock purchase and stock option plans in the 2008 and 2007 periods,
respectively.





We have a
Credit Facility, as amended, with Bank of America, N.A., which matures in
January 2012.  Under the terms of the agreement, the amounts borrowed
accrue interest at a variable spread over LIBOR, with the applicable spread
determined by the Company’s consolidated leverage ratio, as described in the
agreement.  Interest rates for the Credit Facility are reset
quarterly. Amounts borrowed are fully and unconditionally guaranteed on a joint
and several basis by substantially all of our subsidiaries. As of March 31,
2008, the outstanding balance under the Credit Facility was $266.1 million,
excluding the Revolving Credit Facility noted below.





Our
Revolving Credit Facility provide that amounts borrowed accrue interest at a
variable spread over LIBOR or the prime rate, at our option, with the applicable
spread determined by reference to our consolidated leverage ratio.  On
February 23, 2007, we entered into a third amendment to the Credit Facility, the
terms of which increased our borrowing capacity under the Revolving Credit
Facility from $30.0 million to $50.0 million.  All other terms of the
Credit Facility, as amended, remain unchanged.  At March 31, 2008,
there was $10.0 million outstanding under the Revolving Credit Facility, and the
available balance was $38.9 million.





The
Credit Facility contains, among other things, various representations,
warranties and affirmative, negative and financial covenants customary for
financings of this type. The negative covenants include, without limitation,
certain limitations on transactions with affiliates, liens, making investments,
the incurrence of debt, sales of assets, and changes in business. The financial
covenants contained in the Credit Facility include a consolidated leverage ratio
and a consolidated fixed charges coverage ratio. At March 31, 2008, we were in
compliance with all covenants of the Credit Facility.





In
February and May 2006, we entered into two interest rate swap agreements, each
with a notional amount of $100.0 million, to hedge exposure to fluctuations in
interest rates related to our Credit Facility.  The agreements, which
have two-year terms, have the economic effect of converting $200.0 million of
floating-rate debt under the Credit Facility to fixed-rate debt.  In
February 2008, we terminated the February 2006 swap according to the terms of
the agreement.  The provisions of the May 2006 agreement provide that
we pay the bank fixed base rate of 5.350%, and the bank will pay us a floating
rate based on three-month LIBOR (2.703% at March 31, 2008). The variable rate is
reset quarterly.





In August
2007, we entered into two additional interest rate swap agreements, each with a
notional amount of $100.0 million.  The terms of these agreements are
scheduled to become effective after the termination of the swaps noted above, in
February and May 2008.  The term of the February 2008 swap began as
scheduled.  These agreements also have two-year terms and have the
economic effect of converting $200.0 million of floating-rate debt to
fixed-rate debt.  We will pay the bank fixed base rates of 4.890% and
4.910%,




15
 
  respectively,
under these swap arrangements, and the bank will pay us floating rates based on
three-month LIBOR.





On the
dates the interest rate swap derivative contracts were entered into, we
designated the derivatives as hedges of the variability of cash flow to be paid
(“cash flow” hedge).  Under cash flow hedge accounting, changes in the
fair value of a derivative that is qualified, designated and highly effective as
a cash flow hedge are recorded in other comprehensive income until earnings are
affected by the variability of cash flows.  We reflected the interest
rate swap agreements on the consolidated condensed balance sheets at fair value
(liabilities of $10.1 million and $5.1 million at March 31, 2008, and December
31, 2007, respectively), which was based upon the estimated amount we would pay
upon settlement of the agreements taking into account interest rates on those
dates.  For the three-month periods ended March 31, 2008 and 2007, we
recognized net gains (losses) of $(328,000) and $79,000, respectively, from the
cash flow hedges.  These amounts are included in Interest expense in
the consolidated condensed statements of operations.





We
believe that our cash, other liquid assets, operating cash flows, Credit
Facility and alternative financing, taken together, will provide adequate
resources to fund ongoing operating requirements, planned capital expenditures
and contractual obligations through at least the next twelve months. However, we
may not be able to remain in compliance with the financial covenants as defined
by the terms of the Credit Facility due to costs incurred related to the pending
acquisition by Inverness or due to other business risks as discussed in the
“Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007.  If the pending acquisition does not
close within the timeframe expected, we may be required to seek a waiver from
the bank, restructure the financial covenants in the Credit Facility, obtain
alternative financing or raise additional equity.  Although we believe
we would be able to resolve any noncompliance, we cannot assure you that we
would be successful in our efforts to do so.





Contractual
Obligations, Commitments and Off-Balance Sheet Arrangements


We have
various contractual obligations that are recorded as liabilities in our
consolidated condensed financial statements. Certain other items, such as
operating lease obligations, are not recognized as liabilities in our
consolidated condensed financial statements but are required to be disclosed.
The following sets forth our future minimum payments required under our
contractual obligations as of March 31, 2008 (in thousands):





Payments
      Due by YearTotal
              
              
              Less
      than 1 Year
              
              
              1
      - 3 Years
              
              
              3
      - 5 Years
              
              
              More
      than 5 YearsLong-term
      debt obligations
              
              
              
              (1)
              
              $
              319,743
              
              
              $
              26,961
              
              
              $
              110,406
              
              
              $
              182,376
              
              
              $
              -Capital
      lease obligations
              
              
              
              
              
              
              7
              
              
              
              7
              
              
              
              -
              
              
              
              -
              
              
              
              -Operating
      lease obligations
              
              
              
              
              
              
              21,248
              
              
              
              7,806
              
              
              
              8,804
              
              
              
              2,439
              
              
              
              2,199Other
      long-term obligations
              
              
              
              
              
              
              5,013
              
              
              
              2,768
              
              
              
              2,245
              
              
              
              -
              
              
              
              -$
              346,011
              
              
              $
              37,542
              
              
              $
              121,455
              
              
              $
              184,815
              
              
              $
              2,199


(1)
            Includes projected interest
      payments.





Scheduled
principal and interest payments of $12.5 million and $10.2 million,
respectively, under the Credit Facility and Revolving Credit Facility are
payable in the remaining nine months of 2008. We intend to make voluntary,
unscheduled payments of $30.0 million in 2008. Capital expenditures of
approximately $12.0 million, including capital expenditures made in the first
three months, are estimated in 2008 as we continue to enhance our computer
information systems.





As of
March 31, 2008, we did not have any significant off-balance sheet arrangements,
as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, except for our
indemnification obligations related to potential






16
 
  breaches
of the representations and warranties contained in the definitive agreement to
sell Facet and Dia Real, which obligations are capped at $12.5 million and $9.9
million, respectively.








Other
Factors Affecting Liquidity


In
connection with our acquisition of Miavita LLC, we will be required to pay
additional earn-out consideration in future periods through 2010, based upon
specified revenues pertaining to certain customer agreements.  In
accordance with SFAS No. 141, Business Combinations, we
accrue contingent consideration obligations upon attainment of the objectives.
Additionally, any such payments would result in increases in
goodwill.





At March
31, 2008, we computed the additional consideration payable pursuant to the 2007
earn-out period to be $177,000, which is payable on May 15, 2008. This amount
was recorded as an increase to Goodwill and to Accrued liabilities on the
consolidated condensed balance sheet.  We estimate the additional
consideration payable for the remaining periods to be less than
$250,000.





Uncertainties


We are subject to various legal
claims and actions incidental to our business and the businesses of our
predecessors, including product liability claims and professional liability
claims.  We maintain insurance, including insurance covering
professional and product liability claims, with customary deductible
amounts.  There can be no assurance, however, that (i) lawsuits will
not be filed against us in the future, (ii) our prior experience with respect to
the disposition of 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, if at all, for incidents arising or claims made
in the future.  There are no pending legal or governmental proceedings
to which we are a party that we believe would, if adversely resolved, have a
material adverse effect on our financial position or results of operations. For
a discussion of other risks and uncertainties that may affect our business, see
“Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2007.







Critical
Accounting Policies and Estimates




Critical accounting policies are those
policies that require management to make the most challenging, subjective or
complex judgments, often because they must estimate the effect of matters that
are inherently uncertain and may change in subsequent
periods.  Critical accounting policies involve judgments and
uncertainties that are sufficiently sensitive to result in materially different
results under different assumptions and conditions. We believe our most critical
accounting policies are described below:





Revenue
Recognition and Allowances for Uncollectible Accounts.  Our
services are provided telephonically and through home-based nursing services
through care centers located throughout the United States. In addition, our
services are provided through access to our online health and wellness based
tools. Revenues are recognized as the related services are rendered and are net
of contractual allowances and related discounts.





Our
services are paid for primarily on the basis of (i) monthly fees for each
employee or member enrolled in a health plan, (ii) each member identified with a
particular chronic disease or condition under contract, (iii) each member
enrolled in our programs, (iv) fee-for-service, or (v) a fixed rate per
case.  Billings for certain services occur in advance of services
being performed.  Such amounts are recorded as Unearned revenues in
the consolidated condensed balance sheets. Such amounts are subsequently
recognized as revenue as services are performed.





17




Some
contracts provide that a portion of our fees are at-risk (i.e., refundable) if
our programs do not achieve certain financial cost savings and clinical
performance criteria. Revenues subject to refund are not recognized if (i)
sufficient information is not available to calculate performance measurements,
or (ii) interim performance measurements indicate that we are not meeting
performance targets.  If either of these two conditions exists, we
record the amounts as Unearned revenues in the consolidated condensed balance
sheets.  If we do not meet performance targets by the end of the
operations period under the contract, we are contractually obligated to refund
some or all of the at-risk fees. Historically, such adjustments have been
immaterial to our financial condition and results of operations.





A
significant portion of our revenues is billed to third-party reimbursement
sources.  Therefore, the collectibility of all of our accounts
receivable varies based on payor mix, general economic conditions and other
factors. A provision for doubtful accounts is made for revenues estimated to be
uncollectible and is adjusted periodically based upon our evaluation of current
industry conditions, historical collection experience, recoveries of amounts
previously provided, industry reimbursement trends and other relevant factors
which, in the opinion of management, deserve recognition in estimating the
allowance for uncollectible accounts.  The evaluation is performed at
each reporting period for each operating unit with an overall assessment at the
consolidated level.  The evaluation of the monthly estimates of
revenues estimated to be uncollectible has not resulted in material adjustments
in any recent period; however, special charges have resulted from certain
specific circumstances affecting collectibility.  While estimates and
judgments are involved and factors impacting collectibility may change,
management believes adequate provision has been made for any adjustments that
may result from final determination of amounts to be collected.





Goodwill and
Identifiable Intangible Assets.  Goodwill
represents the excess of cost over fair value of net assets
acquired.  Goodwill arising from business combinations is accounted
for under the provisions of SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and
Other Intangible Assets, and is not amortized. Our identifiable
intangible assets are amortized over their respective estimated useful lives. As
of March 31, 2008, we reported goodwill and identifiable intangible assets at
net carrying amounts of $494.9 million and $47.0 million, respectively. The
total of $541.9 million represents approximately 79% of our total assets as of
March 31, 2008.





We review
goodwill and identifiable intangibles for impairment annually as of December 31
and whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. In testing for impairment, we compare the book value of
net assets to the fair value of the related reporting units that have goodwill
and indefinite life intangibles assigned to them.  If the fair value
is determined to be less than book value, a second step is performed to compute
the amount of impairment.  We estimate the fair values of the
reporting units based upon earnings multiples for similar precedent transactions
as well as the present value of estimated future free cash flows. The approach
utilized is dependent on a number of factors, including estimates of future
revenues and operating costs, appropriate discount rates and other
variables.  We base our estimates on assumptions that we believe to be
reasonable, but which are unpredictable and inherently
uncertain.  Therefore, future impairments could result if actual
results differ from those estimates.  Based on our evaluation, we
concluded that no impairment of recorded goodwill and intangibles existed at
December 31, 2007.





Accounting for
Income Taxes.  We account 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.





18




We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”) on January
1, 2007. As a result of the implementation, we recognized a liability of
$524,000 for tax benefits recognized which may not be sustained and $144,000 of
related interest and penalties, which increased our Accumulated deficit at
January 1, 2007.  FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return.  FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.





As of December 31, 2007, our remaining
net operating loss carryforwards of $49.4 million, the tax effect of which is
reflected as an asset on the balance sheet in Deferred income taxes, will be
available to offset future taxable income liabilities, subject to certain
limitations.  Based on projections of taxable income in 2008 and
future years, we believe that it is more likely than not that we will fully
realize the value of the recorded deferred income tax assets.  The
amount of the deferred tax asset considered realizable, however, could be
reduced if estimates of future taxable income during the carryforward period are
reduced.





Share-Based
Compensation.   On January 1, 2006, we adopted Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS
123R”).  SFAS 123R establishes standards for the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for either equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R eliminates the ability to account for share-based compensation
transactions, as we formerly did, using the intrinsic value method as prescribed
by Accounting Principles Board, (“APB”), Opinion No. 25, Accounting for Stock
Issued to Employees, and generally requires that such transactions be accounted
for using a fair-value-based method. Changes in assumptions as to the employee
forfeitures assumptions, expected stock option exercise terms and volatility
could have a significant impact on the stock compensation fair value
determinations. Additionally, our restricted stock awards are performance-based
and service-based.  Expense for restricted stock awards is recognized
using the tranche method (performance-based awards) or the straight line method
(service-based awards) over the vesting period. The remaining unrecognized
compensation costs for the performance-based restricted stock awards may vary
each reporting period based on changes in the expected achievement of
performance measures.





The above
listing is not intended to be a comprehensive list of all of our accounting
policies.  In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States, 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 different
result.  See the Notes to Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended December 31, 2007, which contain
additional accounting policies and other disclosures required by accounting
principles generally accepted in the United States.





Our
senior management has discussed the development and selection of our critical
accounting estimates, and this disclosure, with the Audit Committee of our Board
of Directors.








Recently
Issued and Recently Adopted Accounting Standards




Fair Value
Measurements.  We adopted
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements
(“SFAS 157”), as of January 1, 2008.   SFAS 157 defines fair
value, establishes a methodology for measuring fair value, and expands the
required disclosure for fair value measurements.  On February 12,
2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.
157, which amends SFAS 157 by delaying its effective date by one year for
non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in




19
 
  the
financial statements on a recurring basis.  Therefore, the adoption of
SFAS 157 on January 1, 2008, is limited to financial assets and
liabilities.  The initial adoption did not have a material impact on
our financial position or results of operations. However, we are still in the
process of evaluating this standard with respect to its effect on non-financial
assets and liabilities, and we have not yet determined the impact that it will
have on our financial statements upon full adoption on January 1,
2009.  See Note 11 of the Notes to Consolidated Condensed Financial
Statements for additional information.





Fair Value
Option.  In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115 (“SFAS 159”).  This standard permits entities to choose to
measure many financial instruments and certain other items at fair
value.  Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting
date.  The fair value option may be elected on an
instrument-by-instrument basis with a few exceptions.  SFAS 159 also
establishes presentation and disclosure requirements to facilitate comparisons
between companies that choose different measurement attributes for similar
assets and liabilities.  We adopted SFAS 159 on January 1, 2008, and
did not elect the fair value measurement for any of our financial assets or
liabilities.





Disclosures about
Derivative Instruments.  In March 2008,
the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (“SFAS 161”).  SFAS 161 requires enhanced disclosure
related to derivatives and hedging activities and thereby seeks to improve the
transparency of financial reporting.  Under SFAS 161, entities are
required to provide enhanced disclosures relating to: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedge
items are accounted for under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS 161 must be applied prospectively to all derivative instruments and
non-derivative instruments that are designated and qualify as hedging
instruments and related hedged items accounted for under SFAS 133 and will be
effective for all financial statements January 1, 2009. We are currently
evaluating the impact on the disclosures for our derivative instruments and
hedging activities.





Our
Annual Report on Form 10-K for the year ended December 31, 2007, as filed with
the Commission, also contains a discussion of recently issued accounting
standards and the expected impact on our financial statements.





20




Forward-Looking
Information




This Form
10-Q, including the information incorporated by reference herein, contains
various forward-looking statements and information that are based on our beliefs
and assumptions, as well as information currently available to
us.  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-Q and in such other
statements, are intended to identify forward-looking statements, although some
statements may use other phrasing.  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
Quarterly Report are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of 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, or
      uncollectible accounts in excess of current
  estimates;


(ii)
            The
      loss of major payors or customers;


(iii)
            Impairment
      of the Company’s rights in intellectual
  property;


(iv)
            Increased
      or more effective competition;


(v)
            New
      technologies that render obsolete or non-competitive products and services
      offered by the Company;


(vi)
            Changes
      in or new interpretations of laws or regulations applicable to the
      Company, its customers or referral sources or failure to comply with
      existing laws and regulations;


(vii)
            Increased
      exposure to professional negligence
liability;


(viii)
            Difficulties
      in successfully integrating recently acquired businesses into the
      Company’s operations and uncertainties related to the future performance
      of such businesses;


(ix)
            Changes
      in company-wide or business unit
strategies;


(x)
            The
      effectiveness of the Company’s advertising, marketing and promotional
      programs;


(xi)
            Market
      acceptance of the Company’s wellness and disease and condition management
      programs and the Company’s ability to sign and implement new wellness and
      disease and condition management
contracts;


(xii)
            Inability
      to successfully manage the Company’s
growth;


(xiii)
            Acquisitions
      that strain the Company’s financial and operational
    resources;


(xiv)
            Inability
      to forecast accurately or effect cost savings and clinical outcomes
      improvements or penalties for failure to meet the clinical or cost savings
      performance criteria under the Company’s disease management contracts or
      inability to reach agreement with the Company’s disease management
      customers with respect to the same;


(xv)
            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;


(xvi)
            Increases
      in interest rates;


(xvii)
            Changes
      in the number of covered lives enrolled in the health plans with which the
      Company has agreements for payment;


(xviii)
            The
      availability of adequate financing and cash flows to fund the Company’s
      capital and other anticipated
expenditures;


(xix)
            Higher
      than anticipated costs of doing business that cannot be passed on to
      customers;





21


(xx)
            Pricing
      pressures;(xxi)
            Information
      technology failures or obsolescence or the inability to effectively
      integrate new technologies;


(xxii)
            The
      outcome of legal proceedings or investigations involving the Company, and
      the adequacy of insurance coverage in the event of an adverse
      judgment;


(xxiii)
            Competition
      for staff;


(xxiv)
            Changes
      in estimated payments of earn-out
consideration;


(xxv)
            Delay
      or failure to consummate the Company’s proposed merger with Inverness;
      and


(xxvi)
            The
      risk factors discussed from time to time in the Company’s SEC reports,
      including but not limited to, the Company’s Annual Report on Form 10-K for
      the year ended December 31, 2007.





These
factors are not intended to be an all-encompassing list of risks and
uncertainties that may affect the operations, performance, development and
results of our business.  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.  In providing
forward-looking statements, the Company expressly disclaims any obligation to
update these statements publicly or otherwise, whether as a result of new
information, future events or otherwise, except as may be required by
law.











Item
3.  Quantitative and Qualitative Disclosures About Market
Risk




We are
exposed to market risk from changes in interest rates on long-term
debt.





Our
primary interest rate risk relates to the Credit Facility and our interest rate
swap facilities.  In February and May 2006, we entered into two
interest rate swap agreements, each with a notional amount of $100.0 million, to
hedge exposure to fluctuations in interest rates related to our Credit
Facility.  The agreements, which have two-year terms, have the
economic effect of converting $200.0 million of floating-rate debt under the
Credit Facility to fixed-rate debt.  In February 2008, we terminated
the February 2006 swap according to the terms of the agreement.  The
provisions of the May 2006 agreement provide that we pay the bank fixed base
rate of 5.350%, and the bank will pay us a floating rate based on three-month
LIBOR (2.703% at March 31, 2008). In August 2007, we entered into two additional
interest rate swap agreements, each with a notional amount of $100.0 million.
These agreements also have two-year terms and have the economic effect of
converting $200.0 million of floating-rate debt to fixed-rate
debt.  We will pay the bank fixed base rates of 4.890% and 4.910%,
respectively, under these swap arrangements, and the bank will pay us floating
rates based on three-month LIBOR.  Based upon the total amount of debt
outstanding at March 31, 2008, not covered by interest rate swaps, a
hypothetical two percentage point increase in the interest rates for a duration
of one year would result in additional interest expense of approximately $1.5
million.










Item
4.  Controls and Procedures




(a)  Evaluation
of Disclosure Controls and Procedures




Our Chief Executive
Officer and our Chief Financial Officer have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)) as of March 31, 2008.  No
process, no matter how well designed and operated, can provide absolute
assurance that the objectives of the process are met in all
cases.  However, our disclosure controls and procedures are designed
to provide reasonable assurance that the certifying officers will be alerted on
a timely basis to material information relating to the Company, including the
Company’s consolidated subsidiaries, required to be included in our reports
filed or submitted under the Exchange Act.




22




Based on
such evaluation, such officers have concluded that our disclosure controls and
procedures were effective as of March 31, 2008, to provide reasonable assurance
that the objectives of the disclosure controls and procedures were
met.









(b)  Changes
in Internal Control Over Financial Reporting




During
the three months ended March 31, 2008, there were no significant changes in the
Company’s internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.








Item
1A.  Risk Factors





As of the date of the report, there
have been no material changes to the risk factors included in Item 1A to our
Annual Report on Form 10-K for the year ended December 31, 2007.








Item
      6.  ExhibitsExhibit
              Number    Description10.1
            Third
      Amendment to Lease Agreement dated November 24, 2004, between Atlanta
      Parkway Investment Group, Inc. and Matria Healthcare,
  Inc.10.2
            Fourth Amendment to
      Lease Agreement dated December 29, 2006, between NM Owner LLC and Matria
      Healthcare, Inc.*10.3
            Severance,
      Release and Restrictive Covenant Agreement dated February 26, 2008,
      between Matria Healthcare, Inc. and Richard M. Hassett,
  MD.31.1
            Rule
      13a-14(a)/15d-14(a) Certification by Parker H. Petit31.2
            Rule
      13a-14(a)/15d-14(a) Certification by Jeffrey L. Hinton32.1
            Section
      1350 Certification by Parker H. Petit32.2
            Section
      1350 Certification by Jeffrey L. Hinton


23


SIGNATURES








Pursuant
to the requirements 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.


May
      6, 2008
            By:  /s/  Parker H.
    PetitParker
      H. PetitChairman
      of the Board andChief
      Executive Officer








/s/  Jeffrey L.
      HintonJeffrey
      L. HintonSenior
      Vice President andChief
      Financial Officer








24