MATRIA HEALTHCARE INC, 10-K, 1998-03-31

MATRIA HEALTHCARE INC
10-K, 1998-03-31
HOME HEALTH CARE SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- ----- Act of 1934 for the fiscal year ended December 31, 1997 or

Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 for the transition period from ________ to _________

COMMISSION FILE NO. 0-20619
MATRIA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered

None

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

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

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

As of March 11, 1998, there were 36,833,627 shares of Common Stock outstanding.
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $224,301,206 based upon the closing sale price
on March 11, 1998.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III.

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.
<PAGE> 2

MATRIA HEALTHCARE, INC.

1997 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

<TABLE>
<S> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 19

PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 23
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 . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

</TABLE>

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PART I.

ITEM 1. BUSINESS.

Certain of the statements made in this Item 1 and in other portions of
this Report and in documents incorporated by reference herein constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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, those
discussed in "Business - Factors Affecting Future Performance" herein. See
"Business - Factors Affecting Future Performance - Risks Associated with
Forward-Looking Statements."

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

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

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

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Effective December 13, 1997, the Company entered into an Agreement
with Control Diabetes Services, Inc. ("CDS"), a subsidiary of Eli Lily & Co.
in the business of providing diabetes patient self-management training and
education services to the general diabetes population. Under the terms of the
Agreement, which covers nine metropolitan areas, Matria is the preferred
provider of diabetes education services to CDS's managed care customers and has
rights to market on its own behalf CDS's ADA-certified diabetes education
program and to use CDS's unique Dia-TracTM outcome tracking and reporting
software.

On January 15, 1998, the Company acquired ten percent (10%) of the
outstanding stock of Diabetes Management Services, Inc. ("DMS"), a South
Carolina-based company engaged in the sale of insulin pumps and supplies as
well as providing diabetes education and management services. The Company also
acquired an option to purchase the balance of the outstanding stock of DMS at a
formula price and agreed to provide working capital for DMS's growth and
expansion. The Company has subcontracted its obligations under its agreement
with CDS to DMS.

The Company's newest business unit is a clinical software subsidiary,
Clinical-Management Systems, Inc. ("CMS"), which provides clinical practice
management systems and services.

SERVICES. The Company offers a comprehensive range of specialized
home healthcare and risk assessment and clinical services designed to assist
physicians in managing high risk pregnancies and numerous other obstetrical and
gynecological conditions more cost effectively. Substantially all of the
Company's revenues are derived from these services. In 1997, the Company
expanded its services to include the provision of diabetes education services
to the general diabetes population.

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

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

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of preterm labor, to provide emotional support and counseling and to encourage
compliance with the physician's treatment plan. Through the daily contact with
the patient and the frequent assessment of symptoms associated with preterm
labor, the Matria nurse obtains information that assists the prescribing
physician in the early detection and treatment of preterm labor.

In order to assist physicians in determining the most appropriate
treatment level for patients, the Company also markets a laboratory test,
developed with the assistance of the Company by Adeza Biomedical Corporation
("Adeza"), that can be utilized by physicians as an aid in determining the
likelihood of preterm labor commencing within a given time period from the date
of the test. The test, which is FDA approved, measures the existence of fetal
fibronectin, a protein present at various times in all pregnancies ("fFN"), in
the vagina of the patient and based thereon predicts the likelihood of delivery
within a 14 day time period. See Item 3 "Legal Proceedings" for a description
of litigation commenced against the Company by Adeza in connection with this
product. The litigation was settled in 1998. Under the terms of the
settlement agreement, the Company will cease to market fFN tests as of August
31, 1998.

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

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

Maternal Risk Assessment and Prenatal Education Services. Through its
comprehensive MaternaLink TM Program, the
Company offers a comprehensive risk assessment and patient education program
designed to reduce maternity related costs by providing expectant mothers with
focused education and psychological support and identifying pregnancies that
may be high risk. The Company sells the program to employers, managed care
organizations, health plans and other third-party payors or administrators who
make it available to their respective employees, insureds or members who are
pregnant. Through interviews with the expectant mother, the Company collects
data about the woman, her family/medical history and other circumstances that
might affect her pregnancy. Based on this information, the nurse provides the
woman with education regarding her specific risks, if any, and recommends
appropriate behavior modifications that may facilitate a healthy outcome.
Relevant information collected by the Company is summarized in reports and
provided to the participant's healthcare provider and case manager. Results of
program utilization and effect are summarized for the client in periodic
reports. The Company, working in conjunction with HMO's and other managed care
organizations, demonstrated reported improved patient outcomes and documented
cost savings from its MaternaLinkTM program.

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

General Diabetes Services. With its strategic alliance with CDS, the
Company began to provide diabetes education services to the general diabetes
population. Since the date of its Agreement with CDS, the Company has provided
such services to CDS's managed care customers. The Company intends to expand
its provision of services to the general diabetes population in the Third
Quarter of 1998.

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

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

CLINICAL PRACTICE MANAGEMENT SYSTEMS. Through its wholly owned
subsidiary, CMS, the Company has developed and markets an automated patient
record for obstetricians and gynecologists. The system helps physicians ensure
complete accurate patient records by replacing the manual process of gathering
and transcribing patient data with a fully automated PC-based system. CMS
began marketing to physician practices in July 1997 and installed its first
office system in the Third Quarter of 1997.

SERVICE LOCATIONS. Matria has approximately 36 service centers
throughout the United States and a number of additional sites of service. All
of the patient service centers operate in accordance with policies, procedures
and objectives established by Matria.

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

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

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clinical experience of its personnel, the quality of its clinical services, and
the cost and clinically effective nature of its therapies when compared to
hospitalization.

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

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

Private insurance companies, including HMO's, are the primary source
of reimbursement for Matria, which assumed a substantial number of formal and
informal contractual relationships previously held by Tokos and Healthdyne with
these entities. During 1997, government payors accounted for approximately 7%
of Matria's revenues. Reimbursement for uterine activity monitoring is
currently available from approximately one-half of the 50 state Medicaid
programs.

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

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

REGULATION. Participants in the healthcare industry, including
providers of services such as those offered by Matria, are subject to extensive
federal, state and local regulation

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

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

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

In 1995, the so-called "Stark II Law" went into effect. Stark II
imposes civil penalties and exclusions for certain specified referrals by
physicians to entities with which they have a financial relationship (subject
to specified exceptions). In January 1998 the Healthcare Finance
Administration issued proposed regulations relating to referrals for services
other than clinical laboratory services subject to the self-referral
prohibitions.

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

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

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

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

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

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

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

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

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the prediction of the onset of preterm labor in women with a history of a
previous preterm delivery. Although Matria does not believe that either home
uterine activity monitoring or any other diagnostic device can, in and of
itself, improve therapeutic outcomes (e.g., a mammogram cannot prevent breast
cancer), it does believe that monitoring can assist the physician in the early
detection of preterm labor. See Item 3 "Legal Proceedings" for a discussion of
a Petition filed by the NWHN.

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

EMPLOYEES. The Company currently employs a total of approximately 749
full-time employees and over 95 regular part-time employees. In addition, the
Company employs an additional 825 part-time clinical employees to provide,
among other things, patient training and backup support on an "as needed"
basis. None of the Company's employees are represented by a union. The
Company considers its relationship with its employees to be satisfactory.

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

FACTORS AFFECTING FUTURE PERFORMANCE.
REIMBURSEMENT. A significant portion of the Company's revenues are
affected directly by the reimbursement policies of third-party payors, such as
private insurance programs and state Medicaid programs. During 1997,
approximately 93% of the Company's revenue was derived from private insurance
programs and approximately 7% from government payors. Any change by
third-party or government payors in reimbursement amounts or practices could
have a material adverse effect on the Company's business, operating results and
financial condition.

Reimbursement for uterine activity monitoring is currently available
from approximately one-half of the 50 state Medicaid programs. Although the
Company seeks to comply with applicable Medicaid reimbursement regulations,
there can be no assurance that the Company would be found in compliance in all
respects with such regulations. In addition, reimbursement from Medicaid for
certain services is subject to audit and retroactive adjustment. Retroactive
adjustments made to prior years could have a material adverse effect on the
Company's business, financial condition and results of operations.

11
<PAGE> 12

The Company has focused its marketing efforts on developing private
pay accounts, which generally pay at higher rates than government payment
programs. Private insurance companies, including HMO's, are the primary source
of reimbursement for Matria, which assumed a substantial number of formal and
informal contractual relationships previously held by Tokos and Healthdyne with
these entities. The trend within the healthcare industry to deliver quality
healthcare services in a more cost-effective manner had an impact on the
Company's predecessors and is expected to continue to have an impact on the
Company. Driven by employers and third-party payors, as well as by legislation
and regulation, prices for services provided to patients, in general, are being
reduced, cost-effective preventative health care is being stressed and
vertically integrated networks of care providers (some of whom are accepting
the insurance risk of providing care through capitation contracts with
third-party payors) are being established. The Company anticipates that this
trend will continue and is attempting to focus its efforts on services, some of
which are offered in conjunction with third-party payors, that it believes can
benefit from this new environment. There can be no assurance, however, that
either additional changes or presently unforeseen consequences from this trend
may not develop.

COLLECTION OF ACCOUNTS RECEIVABLE. The home healthcare industry is
generally characterized by long collection cycles for accounts receivable due
to the complex and time consuming requirements for obtaining reimbursement from
private and governmental third-party payors. The Company is experiencing an
increase in the length of time required to collect receivables owed by managed
care organizations and other payors. The Company has implemented stronger
controls in the distribution of products and services and has devoted increased
resources to collection activities in an effort to obtain timely payment for
the Company's products and services. There can be no assurance that these
efforts will be successful. A continuation of the lengthening of the amount of
time required to collect accounts receivable from managed care organizations and
other payors could have a material effect on the Company's business, financial
condition or results of operations.

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

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

12
<PAGE> 13
In recent years, the federal government has significantly increased the
resources allocated to enforce the fraud and abuse laws. For example, the
Office of Inspector General, in cooperation with other federal agencies,
announced a program, Operation Restore Trust, under which it initially
scrutinized the activities of home health agencies, durable medical equipment
suppliers, skilled nursing facilities, and hospices in California, Florida,
Illinois, New York and Texas, states in which Matria has significant
operations. Since the start of the program, the Administration has added 12
more states and has announced plans to expand Operation Restore Trust to all 50
states. Private insurers and various state enforcement agencies also have
increased their scrutiny of healthcare claims in an effort to identify and
prosecute fraudulent and abusive practices. Matria maintains an internal
regulatory compliance review program and from time to time retains special
counsel to provide advice on compliance with applicable laws and regulations.
However, no assurance can be given that the practices of Matria, if reviewed,
would be found to be in compliance with such laws, as such laws ultimately may
be interpreted.

In 1995, the so-called "Stark II Law" went into effect. Stark II
imposes civil penalties and exclusions for certain specified referrals by
physicians to entities with which they have a financial relationship (subject
to specified exceptions). In January 1998, the Healthcare Financing
Administration issued proposed regulations relating to referrals for services
(other than clinical laboratory services) which are subject to the self-referral
prohibitions.

In addition, several states in which Matria operates have laws that
prohibit certain direct or indirect payments or fee-splitting arrangements
between healthcare providers if such arrangements are designed to induce or
encourage the referral of patients to a particular provider. Other states have
enacted or are considering legislation that either prohibits "physician
self-referral" arrangements or requires physicians to disclose any financial
interest they may have with a healthcare provider that such physicians
recommend to their patients. Possible sanctions for violations of these
restrictions include loss of licensure and civil and criminal penalties. Such
statutes and proposed legislation vary from state to state, and existing laws
have seldom been interpreted by the courts or regulatory agencies. Strict
enforcement of these restrictions is likely. In part as a result of these
changes, Matria's predecessor companies and Matria have terminated various
partnerships, and other arrangements with physicians in an attempt to ensure
that referrals by such physicians would not be precluded by these statutory
prohibitions. Although substantially reduced from prior periods, Matria
retains certain select financial relationships with physicians who may refer,
or be in a position to refer, patients for services. Matria believes that these
financial relationships meet applicable exceptions permitting referrals by such
physicians. Matria may be required to further modify these arrangements, or
forced to discontinue accepting referrals from such physicians, if the laws are
subsequently interpreted to prohibit these relationships.

13
<PAGE> 14

"Legal Proceedings" for a discussion of a Petition filed with the FDA by the
National Women's Health Network ("NWHN") concerning the use of subcutaneous
terbutaline for the treatment of preterm labor in the home. In response to the
petition, the FDA issued a letter to physicians reiterating that the use of
terbutaline sulfate has not been approved by the FDA for the management of
preterm labor. The Company has received and responded to a request from the
FDA for information regarding the Company' promotion of terbutaline sulfate for
off-label uses. The Company believes that its activities comply with all
applicable laws and guidelines. Any action by the FDA that limits the ability
of Matria to offer a high risk pregnancy management service involving medical
devices or the administration of drugs or tests for indications for which they
have not been labeled could have a material adverse effect on the results of
operations or financial condition of Matria.

HEALTHCARE REFORM. Legislative efforts continue at the federal and
state levels to control rising healthcare costs. Recently, federal initiatives
have been considered in the

14
<PAGE> 15

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

RISKS RELATIVE TO THE CORPORATE PRACTICE OF MEDICINE. Business
corporations are legally prohibited in many states from providing or holding
themselves out as providers of medical care. Although the Company has
structured its operations to comply with the corporate practice of medicine
laws of states in which it operates and will seek to structure its operations
in the future to comply with the laws of any state in which it seeks to
operate, there can be no assurance that, given varying and uncertain
interpretations of such laws, the Company would be found to be in compliance
with restrictions on the corporate practice of medicine in such states. A
determination that the Company is in violation of applicable restrictions on
the practice of medicine in any state in which it operates could have a
material adverse effect on the Company's business if the Company were unable to
restructure its operations to comply with the requirements of such state. Such
regulations may limit the states in which the Company can operate, thereby
inhibiting future expansion of the Company into potential markets in other
states.

CORPORATE EXPOSURE TO PROFESSIONAL LIABILITIES. Due to the nature of
its business, the Company may be the subject of medical malpractice claims,
with the attendant risk of substantial damage awards. The most significant
source of potential liability in this regard is the alleged negligence of
nurses placed by the Company in home healthcare settings. There can be no
assurance that a future claim or claims will be within the scope of the
Company's insurance coverage or not exceed the limits of available insurance
coverage, or that such coverage will continue to be available at acceptable
costs.

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

COMPETITION. The home obstetrical care services market in which
Matria competes is a relatively new market. As a result of the Merger, Matria
believes that it is both the leading

15
<PAGE> 16

provider (based on annual level of sales) of home obstetrical care and the
largest entity in this market whose services are devoted almost exclusively to
home obstetrical care. In substantially all of the metropolitan areas in which
Matria maintains centers competition exists from a number of local, regional or
national companies. Matria actually provides the patient services for several
regional and national companies on a subcontract basis, which offers Matria the
opportunity to participate with these more diversified service providers in
contracting with certain third-party payors who prefer to contract with a
single source for all home care services.

DEPENDENCE ON RELATIONSHIPS WITH REFERRAL SOURCES. The growth and
profitability of the Company depends on its ability to establish and maintain
close working relationships with referral sources, including payors, physicians
and other healthcare professionals. There can be no assurance that the Company
will be able to maintain existing referral sources or develop and maintain new
referral sources. The loss of any significant existing referral sources or the
failure to develop any new referral sources could have a material adverse
effect on the Company's business, operating results and financial condition.

RISKS ASSOCIATED WITH ACQUISITIONS. The Company may grow through
acquisitions of additional healthcare and complementary businesses. If the
Company does pursue the acquisition of a business, the Company expects to face
competition for acquisition candidates, which may limit the number of
acquisition opportunities and may lead to higher acquisition prices. There can
be no assurance that the Company will be able to identify, acquire or manage
profitably additional businesses or to integrate any acquired businesses into
the Company without substantial costs, delays or other operational or financial
problems. Further, acquisitions involve a number of risks, including possible
adverse effects on the Company's operating results, diversion of management's
attention, failure to retain key personnel of the acquired business and risks
associated with unanticipated events or liabilities, some or all of which could
have a material adverse effect on the Company's business. In addition, future
acquisitions may result in dilutive issuances of equity securities, incurring
additional debt, large one-time write-offs and the creation of goodwill or
other intangible assets that could result in amortization expense. These
factors could have a material adverse effect on the Company's business,
operating results and financial condition.

RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS. This 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 forward-looking
statements and information in this Form 10-K are forward-looking statements
within the meaning of Section 27A of the Securities Act and

16
<PAGE> 17

Section 21E of the Securities Exchange Act 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, those discussed above. 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
Report or in any statement referencing the risk factors and other cautionary
statements set forth in this Report, whether as a result of new information,
future events or otherwise.

ITEM 2. PROPERTIES.

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

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

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

17
<PAGE> 18

ITEM 3. LEGAL PROCEEDINGS

A complaint, filed by Adeza in the Superior Court of Santa Clara
County, California, was served on Matria on March 7, 1997. The complaint
alleges that Matria breached an Exclusive Marketing Agreement, dated December
31, 1991, as amended (the "Agreement"), between Adeza and Tokos and was filed
in an attempt to terminate the Agreement. Under the Agreement, Tokos invested
$10 million to assist Adeza in the development of a test to predict the
likelihood of the onset of preterm labor utilizing a fetal fibronectin
immunoassay ("fFN Test"). On March 3, 1998, Matria and Adeza settled this
litigation. Under the terms of the settlement, Matria will relinquish its fFN
distribution rights and equity stake in Adeza for the ability to recoup its
investment (from payments based upon future sales of fFN). Matria will
continue to distribute the test for a six-month transition period. The
settlement enables Matria to focus its energies on its core business, without
the expense and distraction of ongoing litigation.

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

On July 17, 1996, the NWHN filed a Petition with the FDA and issued a
press release alleging that terbutaline, although widely prescribed by
physicians for the off-label use as a tocolytic, was unsafe when administered
subcutaneously in the home. The Company strongly disputed the assertions of
the NWHN and filed a response to the Petition with the FDA and commenced
litigation against the NWHN. Matria voluntarily dismissed the litigation
against NWHN on November 26, 1997 so that Matria's intentions on the issues of
women's health care would not be misinterpreted and to avoid further expenses
related to the matter. The NWHN filed a motion seeking sanctions against
Matria on December 2, 1997. The Court dismissed the motion for lack of
jurisdiction on February 3, 1998. The NWHN did not appeal the dismissal of its
motion.

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

18
<PAGE> 19

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

The directors of the Company are divided into three classes. The
class comprised of Messrs. Parker H. Petit, Frank D. Powers, and Morris S.
Weeden will continue to serve until the 1998 annual meeting of stockholders and
until their successors are elected and qualified. The class comprised of
Messrs. Donald R. Millard and Carl E. Sanders will continue to serve until the
1999 annual meeting and until their successors are elected and qualified.

At the Annual Meeting of Stockholders of the Company held on December
15, 1997 (the "Meeting"), the following directors were elected, each of whom
will serve until the 2000 annual meeting of stockholders and until his or her
successor is elected and qualified:

<TABLE>
<CAPTION>
Affirmative Withheld
Nominee Votes Votes
- ---------------------------------------------------------------------
<S> <C> <C>
Jackie M. Ward 29,619,062 1,708,058
Frederick P. Zuspan, M.D. 29,597,491 1,729,629
</TABLE>

In addition, the following proposal was approved at the Meeting:

Approval of the Company's 1997 Stock Incentive Plan authorizing the
Company to grant options, stock bonuses and rights to purchase up to 1,800,000
shares of the Company's Common Stock to such employees, officers, independent
contractors and consultants of the Company as the Board of Directors or Stock
Option Committee shall, from time to time, designate.

<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Abstentions
- -----------------------------------------------------------------------------------------
<S> <C> <C>
25,169,485 4,809,546 1,348,089
</TABLE>

SPECIAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY.

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

<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Donald R. Millard 50 President, Chief Executive Officer and
Chief Financial Officer

Frank D. Powers 49 Executive Vice President and
Chief Operating Officer

Thornton A. Kuntz, Jr. 44 Vice President-Administration

</TABLE>

19
<PAGE> 20

<TABLE>
<S> <C> <C>
Roberta L. McCaw 42 Assistant General Counsel and
Assistant Secretary

Yvonne V. Scoggins 48 Vice President, Chief Accounting Officer
and Treasurer
</TABLE>

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

Mr. Millard has served as President, Chief Executive Officer and Chief
Financial Officer since October 20, 1997 and previously was Senior Vice
President-Finance, Chief Financial Officer and Treasurer of the Company from
March 8, 1996 to October 20, 1997. Prior thereto, he served as Vice
President-Finance and Chief Financial Officer of Healthdyne from July 1987 to
March 1996 and, in addition, was Treasurer of Healthdyne from March 1990 to
March 1996.

Mr. Powers has been Executive Vice President and Chief Operating
Officer since October 20, 1997 and previously was Executive Vice President of
the Company from March 8, 1996 to October 20, 1997. Prior thereto, he served
as President of Healthdyne Maternity Management, a subsidiary of Healthdyne,
from October 1989 until March 1996, and as President of Healthdyne's Home Care
Group from November 1986 to October 1989. In addition, he was President of
Healthdyne's Home Care Products Division from September 1984 to November 1986
and Corporate Controller of Healthdyne from January 1983 to September 1984.

Mr. 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.

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

Ms. Scoggins has been Vice President, Chief Accounting Officer and
Treasurer of the Company since December 15, 1997 and previously was Vice
President and Controller from March 8, 1996 to December 15, 1997. Prior
thereto, Ms. Scoggins 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, Chief Financial Officer of Home
Nutritional Services, Inc., a former majority owned subsidiary of Healthdyne,
from February 1990 to April 1993.

20
<PAGE> 21

PART II

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

Matria's Common Stock is traded in the over the counter market and is
quoted on the Nasdaq National Market ("NASDAQ") under the symbol "MATR". The
approximate number of record holders as of March 11, 1998, was 3,286.

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

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

The high and low sales price of Matria Common Stock from March 11,
1996 (the first day that trading occurred), through March 31, 1996, was $9.75
and $7.50, respectively. In addition, the following table sets forth, for the
remaining calendar quarters indicated in 1996 and 1997, the high and low sales
prices of Matria Common Stock.

<TABLE>
<CAPTION>
CALENDAR QUARTER LOW HIGH
---------------- --- ----
<S> <C> <C>
1996
Second $7.375 $9.25
Third 6.50 8.75
Fourth 4.625 8.375

1997
First $3.50 $7.50
Second 3.50 5.125
Third 3.5625 6.25
Fourth 4.875 7.125
</TABLE>

21
<PAGE> 22

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information represents the financial
performance of Matria from March 1, 1996 through December 31, 1997 and, for all
prior periods, of Tokos (deemed for accounting purposes to be the acquiror of
Healthdyne in the Merger) and is derived from, and should be read in
conjunction with, the historical consolidated financial statements of Matria
and Tokos and the related notes thereto. For all practical purposes, Matria
did not engage in business prior to the effective date of the Merger, and the
results of Tokos are not necessarily indicative of Matria's future performance.

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------ -------
(In thousands, except per share data)
Consolidated statements of operations:
--------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $144,533 130,806 85,209 98,565 120,837

Operating expenses 122,630 122,686 83,990 96,640 117,460
Provision for doubtful accounts 6,599 7,591 5,251 7,042 13,656
Amortization of goodwill and other
intangibles 36,604 30,083 1,235 350 187
Restructuring, severance and other charges -- 22,525 6,756 -- 14,000
-------- ------- ------- ------- -------
165,833 182,885 97,232 104,032 145,303
-------- ------- ------- ------- -------
Loss from operations (21,300) (52,079) (12,023) (5,467) (24,466)

Interest income, net 483 824 333 50 39
Other income (expense), net (85) 134 46 108 --
-------- ------- ------- ------ -------
Loss before income tax expense (20,902) (51,121) (11,644) (5,309) (24,427)
Income tax expense -- -- 150 550 1,956
-------- ------- ------- ------ -------

Net loss $(20,902) (51,121) (11,794) (5,859) (26,383)
======== ======= ======= ====== =======

Basic and diluted loss per share $ (0.57) (1.58) (0.68) (0.34) (1.53)
======== ======= ======= ====== =======

Weighted average shares outstanding 36,527 32,328 17,396 17,169 17,240
======== ======= ======= ====== =======
</TABLE>

<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Consolidated balance sheet data:
--------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $191,132 223,188 44,468 58,183 69,959
Long-term debt obligations, excluding
current maturities 1,712 2,499 2,078 2,593 3,348
Shareholders' equity 153,169 173,178 29,489 40,160 46,875

</TABLE>

22
<PAGE> 23

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

Certain of the statements made in this Item 7 and in other portions of
the Report and in documents incorporated by reference herein constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. 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, those discussed in "Business - Risk
Factors" herein. See "Business - Factors Affecting Future Performance - Risks
Associated with Forward-Looking Statements."

GENERAL.

On March 8, 1996, Tokos and Healthdyne merged with and into the
Company, which was created solely for the purpose of the Merger. The Merger was
accounted for using the purchase method of accounting, and Tokos was deemed to
be the acquiror since its shareholders received approximately 51% of the newly
issued shares of Matria Common Stock.

In March 1995, Healthdyne acquired a 15% ownership interest in NRMC,
and effective June 1, 1996, the Company acquired the remaining 85%. The
acquisition was accounted for using the purchase method of accounting.

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

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

23
<PAGE> 24

The Company's revenues from its preterm labor management business tend
to be seasonal. Revenues typically begin to decline with the onset of the
holiday season starting with Thanksgiving causing the first quarter revenues of
each year to be less than those of the fourth quarter of the previous year.
Over the previous four-year period the decline in revenues from the fourth to
first quarters has averaged 7%. Management believes that the Company's
quarterly revenues will continue to be impacted by this seasonality. In
addition, a letter from the Food and Drug Administration to physicians,
reiterating that the use of terbutaline sulfate for the management of preterm
labor is an "off-label" use, caused the Company to refocus the efforts of its
sales force to educating physicians and payors on clinical and regulatory
issues, which has had a negative impact on the Company's revenues in the first
quarter of 1998.

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

The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the consolidated
financial statements and related notes of the Company included in this Annual
Report on Form 10-K for the year ended December 31, 1997 as filed with the
Securities and Exchange Commission (the "Commission"). The results of the
Company include the results of Healthdyne only since March 1, 1996 and NRMC
only since June 1, 1996 and also include certain costs and expenses associated
with the Merger. The historical results of operations are not necessarily
indicative of the results that will be achieved by the Company during future
periods.

RESULTS OF OPERATIONS.

Revenues increased $13.727 million or 10.5% in 1997 and $45.597
million or 53.5% in 1996. The decline in revenues experienced by Tokos
throughout 1995, which was primarily a result of decreases in preterm labor
management patient service days, continued throughout 1996 and early 1997;
however, it was offset by the additional Healthdyne revenues included in the
Company's revenues from March 1, 1996 and by the additional NRMC revenues
included in the Company's revenues from June 1, 1996.

Additional revenues were also realized in 1997 and 1996 ($3.636
million and $738,000, respectively) from the marketing of the fetal fibronectin
immunoassay (fFN), a new in vitro diagnostic test used as an aid in assessing
the risk of preterm delivery in women. Through a marketing agreement entered
into by Tokos in 1991, the Company had exclusive rights to market this test in
the United States, Canada and Puerto Rico. The Company began marketing the
test in 1996 as a means of predicting whether preterm delivery was likely in
women with symptoms associated with preterm labor. In March 1998, the Company

24
<PAGE> 25

entered into a settlement agreement with the manufacturer of the tests in the
litigation over the exclusive rights to distribute the test (See Item 3 -
"Legal Proceedings" herein). Under the terms of the settlement, the Company
has agreed to relinquish its distribution rights and equity interest in Adeza
in exchange for the opportunity to recoup its investment over time, from
payments based upon future sales of the product. As a result, following a six
month transition period, revenues on sales of fFN are expected to be
substantially reduced.

Cost of revenues as a percent of revenues for 1997 decreased to 39.9%
from 42.7% and 41.1% in 1996 and 1995, respectively. The reductions of costs
of revenues as a percentage of the preterm labor management business to 36.5%
in 1997 from 40.9% in 1996 and 41.1% in 1995 were primarily achieved through
consolidation of service sites and operating efficiencies related to the
Merger. These reductions were partially offset by the inclusion of the results
of operations of NRMC in 1996 and 1997, whose costs of revenues as a percentage
of revenues were 66.3% in 1997 and 67.5% in 1996.

Selling and administrative expenses declined as a percentage of
revenues in 1997 to 44.9% from 50.8% and 56.9% in 1996 and 1995, respectively,
primarily due to synergies achieved as a result of the Merger.

Excluding the amortization of the additional goodwill and other
intangibles associated with the Merger ($32.613 million per year for the first
three years and $29.946 million per year for two additional years), the Company
achieved annualized cost savings on a quarterly run rate basis compared to the
historical combined costs of Tokos and Healthdyne of approximately $28.000
million in 1996, primarily as a result of reductions of patient services center
expenses in overlapping geographic locations, elimination of duplicate
facilities including corporate headquarters, and synergies in staff and
functional areas. Additional annualized cost savings in excess of $12.000
million were achieved in 1997.

As a result of the Merger and the acquisition of NRMC, a large
percentage of the assets reflected on the Company's balance sheet are
intangible assets or goodwill (as opposed to tangible assets such as cash,
accounts receivable, inventory and equipment). At December 31, 1997, the
Company's total assets were $191.132 million, of which $112.149 million, or
58.7% of total assets, were goodwill and intangibles. The amortization or any
future write-down of such goodwill and intangibles by the Company, if required,
could have a material adverse effect on the results of operations of the
Company.

The Company provides for estimated uncollectable accounts as revenues
are recognized. The provision for doubtful accounts as a percentage of
revenues for the preterm labor management business was approximately 5% in 1997
and 6% in 1996 and 1995. The provision is adjusted periodically based upon the
Company's quarterly evaluation of historical collection experience, recoveries
of amounts previously provided, industry reimbursement trends and other
relevant factors. Therefore, the provision rate could vary on a quarterly
basis. NRMC collects substantially all charges for patient services at the
time services are provided. Therefore, the provision for doubtful accounts for
NRMC is not significant.

During 1995, as Tokos' revenues continued to decline, specific
decisions were made and communicated by management related to cost reduction
efforts. The cost reduction plan consisted of reductions in the workforce
(comprised of personnel within information systems, reimbursement,
administrative support and to a lesser extent clinical services) and

25
<PAGE> 26

termination of several facility leases. In connection with these cost
reduction activities, Tokos incurred $2.456 million of restructuring costs in
1995. In connection with the Merger, the Company incurred approximately
$22.525 million of restructuring costs which were charged to operations in
1996. Of these costs, approximately $12.000 million related to involuntary
severance and relocation of employees, $2.500 million related to the
consolidation of facilities, $5.400 million related to the write-down of
software and equipment that will be obsolete as a result of the adoption of new
systems, and $2.625 million related to other miscellaneous Merger related
costs.

Tokos recorded income tax expense of $150,000 related to state
franchise taxes in 1995. No state franchise tax has been recorded in 1996 or
1997. Neither Tokos in 1995 nor the Company in 1996 and 1997 recorded federal
or state income tax benefits. The net tax operating loss of approximately
$87.000 million will be available to offset future taxable income, if any.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1997 the Company had cash and short-term
investments of $20.942 million.

Net cash provided by operating activities was $6.521 million for 1997,
compared with $4.833 million provided in 1996 and $3.314 million provided in
1995. In 1997, net cash flow from operating activities was reduced by $9.759
million for Merger related costs. In 1996, net cash flow was reduced by
payments of $14.720 million for Merger related costs, $5.345 million for the
settlement of a former Tokos shareholders lawsuit and $5.947 million related to
the purchase of NRMC. Net cash used in investing activities was $2.764
million, $3.588 million and $2.222 million in 1997, 1996 and 1995,
respectively. The decrease in 1997 is primarily due to less acquisition
activity. The increase in 1996 is primarily due to the increase in capital
expenditures relating to the upgrade of clinical computer systems at the
Company's sites of service and cash paid related to the acquisition of NRMC.
It is anticipated that the Company's capital expenditures in 1998 will exceed
those in 1997 by approximately $1.000 million primarily for continued
development of computer systems, including clinical and reimbursement systems.
During 1995, Tokos purchased certain physician-owned companies for which it
originally provided services and during 1995 and the first quarter of 1996,
Healthdyne purchased the minority interest in certain affiliated partnerships.
Notes issued in connection with these acquisitions have a balance outstanding
of $456,000 at December 31, 1997. The remaining balances are to be paid
through June 1999.

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

The Company incurred substantial costs in connection with the Merger.
These costs include: (i) restructuring costs incurred by the Company of
approximately $22.525 million, consisting of $12.000 million relating to
severance costs and relocations of employees, $2.500 million of lease
termination costs for duplicate facilities, $5.400 million for the write-

26
<PAGE> 27

off of computer equipment and $2.625 million for other Merger-related expenses;
(ii) additional liabilities incurred by Healthdyne as a result of the Merger of
approximately $9.350 million, consisting of $9.150 million relating to
severance costs of terminated employees and $200,000 for patient service
centers specifically identified to be closed; and (iii) transaction costs of
approximately $3.700 million, consisting of $2.275 million for investment
banking fees, $1.000 million for legal and accounting fees and $425,000 for
other costs such as document printing and mailing and filing fees. As of
December 31, 1997 the remaining liability for these estimated costs was
approximately $5.000 million of which approximately $3.000 will be paid in the
first half of 1998. Additionally, the Company may be required to make
additional severance payments of approximately $2.549 million in accordance
with employment agreements with certain officers of Healthdyne.

During 1997, the Company terminated a nonqualified defined benefit
plan and allowed existing participants to either receive a lump-sum payment or
to rollover their future benefit into a split-dollar life insurance contract
whereby the participants or their beneficiaries are entitled to the greater of
the contract's cash surrender value or the contract's death benefit, less
insurance premiums paid by the Company. The net present value of the future
cash payments by the Company for the participants' split-dollar contract is
approximately $4.000 million. The participants who chose the lump-sum payout
were paid approximately $1.328 million on January 2, 1998.

In 1997, the Company entered into a credit agreement with a leading
national banking organization for a $25.000 million secured line of credit that
is available for general corporate purposes. There were no amounts outstanding
at December 31, 1997.

The Company believes that its current cash balances, expected cash
flows from operations and investing activities and amounts available under the
credit agreement will be sufficient to finance its current operations and fund
any expansion of the business for the foreseeable future.

NEW ACCOUNTING STANDARDS

In June 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS No. 130"). SFAS No 130 requires companies to display, with the
same prominence as other financial statements, the components of comprehensive
income. SFAS No. 130 requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company's financial
statements will include the disclosure of comprehensive income in accordance
with the provisions of SFAS No. 130 beginning the first quarter of 1998.

In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131"). SFAS No. 131 requires that an enterprise
disclose certain information about operating segments. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company will evaluate the need for such disclosures at that time.

27
<PAGE> 28

YEAR 2000 ISSUE

Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000.

The Company is currently in the process of assessing its computer
software programs to determine their ability to function properly in the year
2000 and thereafter, and is in the process of modifying or replacing certain
time- sensitive software programs to avoid a potential temporary inability to
process transactions or engage in other normal business activities. The
project is estimated to be completed well in advance of December 31, 1999,
which is prior to any anticipated significant impact on the Company's operating
systems from the Year 2000 issues. The costs of the project to date and the
estimated costs to complete are not expected to be significant to the Company's
consolidated financial position or results of operations. The Company believes
that, upon completion of its ongoing project, the Year 2000 issues will not
pose significant operational problems for its computer systems.

Forward - Looking Information

This Management's Discussion and Analysis contains forward-looking
statements including statements concerning expected increases in revenues
arising from the Merger, expected increased revenues arising from the marketing
of fetal fibronectin immunoassay, expected synergies arising from the Merger,
the effect of goodwill on the Company's results of operations, capital
expenditures to be made in the future and the adequacy of the Company's sources
of cash to finance its current and future operations. These forward-looking
statements involve a number of risks and uncertainties. In addition to the
factors discussed above, among other factors that could cause actual results to
differ materially are the following: business conditions and growth in the home
healthcare industry and the general economy; competitive factors, such as the
possible entry of large diversified healthcare companies into the obstetrical
home healthcare business; new technologies and pricing pressures; changes in
third-party reimbursement policies and practices and regulatory requirements
applicable to the Company's business; the continued availability for sale of
existing products and services; management decisions to pursue new product
lines or lines of business which involve additional costs, risks or capital
expenditures; and the risk factors listed from time to time in the Company's
SEC reports, including but not limited to, its Annual Report on Form 10-K for
the year ended December 31, 1997.

28
<PAGE> 29

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Not applicable

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-23 of this Annual Report on Form 10-K:

<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Reports F-1
F-1A

Consolidated Balance Sheets - December 31, 1997 and 1996 F-2

Consolidated Statements of Operations - Years Ended
December 31, 1997, 1996 and 1995 F-4

Consolidated Statements of Shareholders' Equity - Years
Ended December 31, 1997, 1996 and 1995 F-5

Consolidated Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995 F-7

Notes to Consolidated Financial Statements F-9
</TABLE>

<PAGE> 30

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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The accompanying consolidated
financial statements of Matria Healthcare, Inc. for the year ended December 31,
1995 were audited by other auditors whose report thereon dated February 22, 1996
expressed an unqualified opinion on those statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 1997 and 1996 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Matria
Healthcare, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

Atlanta, Georgia
March 6, 1998

F-1
<PAGE> 31

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:

Cash and cash equivalents (note 9) $ 9,086 6,930
Short-term investments (note 9) 11,856 17,710
Trade accounts receivable, less allowances of $22,651 and
$26,198 at December 31, 1997 and 1996, respectively 39,601 29,456
Inventories 1,088 867
Prepaid expenses and other current assets 2,264 1,628
-------- -------
Total current assets 63,895 56,591

Property and equipment, net (note 3) 12,364 15,220
Excess of cost over net assets of businesses acquired,
less accumulated amortization of $63,741 and $29,804 at

December 31, 1997 and 1996, respectively (note 2) 108,498 142,126
Intangible assets, less accumulated amortization of $4,889 and
$2,222 at December 31, 1997 and 1996, respectively (note 2) 3,651 5,973
Other assets (note 8) 2,724 3,278

-------- -------
$191,132 223,188
======== =======
</TABLE>

See accompanying notes to consolidated financial statements

F-2
<PAGE> 32

<TABLE>
<CAPTION>
December 31,
--------------------
Liabilities and Shareholders' Equity 1997 1996
------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Current installments of long-term debt and obligations
under capital leases (notes 4, 9, and 11) $ 884 2,521
Accounts payable, principally trade 5,712 6,486
Accrued liabilities (note 5) 16,147 25,559
--------- --------
Total current liabilities 22,743 34,566

Long-term debt and obligations under capital leases, excluding
current installments (notes 4, 9, and 11) 1,712 2,499
Accrued benefit costs (note 8) 5,328 4,096
Other long-term liabilities 8,180 8,849
--------- --------
Total liabilities 37,963 50,010
--------- --------

Shareholders' equity (note 7):
Preferred stock, $.01 par value. Authorized 50,000
shares; none issued -- --
Common stock, $.01 par value. Authorized 100,000
shares; issued and outstanding 36,791 and 36,333 shares
at December 31, 1997 and 1996, respectively 368 363
Additional paid-in capital 282,327 281,318
Accumulated deficit (125,991) (105,089)
Notes receivable and accrued interest from officers (3,535) (3,414)
--------- --------
Total shareholders' equity 153,169 173,178

Commitments and contingencies (notes 8, 11, and 12)
--------- --------
$ 191,132 223,188
========= ========
</TABLE>

F-3
<PAGE> 33

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 144,533 130,806 85,209
Cost of revenues 57,610 55,911 35,017
Selling and administrative expenses 64,864 66,493 48,460
Provision for doubtful accounts 6,599 7,591 5,251
Research and development expenses 156 282 513
Amortization of goodwill and intangibles 36,604 30,083 1,235
Restructuring expenses (note 10) -- 22,525 2,456
Settlement of litigation (note 12) -- -- 4,300
--------- -------- -------
Operating loss (21,300) (52,079) (12,023)

Interest income 794 1,177 848
Interest expense (311) (353) (515)
Other income (expense), net (85) 134 46
--------- -------- -------
Loss before income tax expense (20,902) (51,121) (11,644)

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

Net loss $ (20,902) (51,121) (11,794)
========= ======== =======

Basic and diluted net loss per common share $ (.57) (1.58) (.68)
========= ======== =======

Weighted average shares outstanding 36,527 32,328 17,396
========= ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 34

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

(Amounts and shares in thousands)

Notes
receivable
Common stock Additional and accrued Treasury stock Total
----------------- paid-in Accumulated interest from ---------------- shareholders'
Shares Amount capital deficit officers Shares Amount equity
------ ------ ------- ------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 17,411 $ 17 86,519 (42,126) (3,492) (156) $(758) 40,160
Issuance of common stock -
exercise of options 250 1 1,089 -- -- -- -- 1,090
Issuance of treasury stock to
employee stock purchase plan
and other stock awards -- -- -- (48) -- 44 219 171
Acceptance of note receivable
from officer -- -- -- -- (80) -- -- (80)
Payment on note receivable
from officers -- -- -- -- 122 -- -- 122
Accrued interest on officer notes -- -- -- -- (180) -- -- (180)
Net loss -- -- -- (11,794) -- -- -- (11,794)
------ ---- ------- ------- ------ ---- ----- --------
Balance, December 31, 1995 17,661 18 87,608 (53,968) (3,630) (112) (539) 29,489

Issuance of common stock:
Acquisition of Healthdyne, Inc. 17,007 170 182,826 -- -- -- -- 182,996
Exercise of options 839 7 4,298 -- -- -- -- 4,305
Employee Stock Purchase Plan 33 -- 214 -- -- -- -- 214
Conversion of subordinated
debentures 9 -- 43 -- -- -- -- 43
Acquisition of National Reproductive
Medical Center, Inc. 899 9 7,112 -- -- -- -- 7,121
Payment on debt resulting from
acquisition of minority interest
in partnerships 40 -- 335 -- -- -- -- 335
</TABLE>

(Continued)

F-5
<PAGE> 35

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

(Amounts and shares in thousands)

Notes
receivable
Common stock Additional and accrued Treasury stock Total
----------------- paid-in Accumulated interest from ---------------- shareholders'
Shares Amount capital deficit officers Shares Amount equity
------ ------ ------- ------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change in par value of common stock -- $ 159 (159) -- -- -- $ -- --
Purchase of treasury stock -- -- -- -- -- (43) (420) (420)
Cancellation of treasury stock (155) -- (959) -- -- 155 959 --
Payment on note receivable from officers -- -- -- -- 350 -- -- 350
Accrued interest on officer notes -- -- -- -- (134) -- -- (134)
Net loss -- -- -- (51,121) -- -- -- (51,121)
------- ----- -------- -------- ------ ---- ----- --------
Balance, December 31, 1996 36,333 363 281,318 (105,089) (3,414) -- -- 173,178

Issuance of common stock:

Exercise of options 500 5 1,471 -- -- -- -- 1,476
Employee Stock Purchase Plan 111 1 454 -- -- -- -- 455
Conversion of subordinated debenture 3 -- 15 -- -- -- -- 15
Purchase and cancellation of treasury
stock (156) (1) (931) -- -- -- -- (932)
Accrued interest on officer notes -- -- -- -- (121) -- -- (121)
Net loss -- -- -- (20,902) -- -- -- (20,902)
------- ----- -------- -------- ------ ---- ----- --------

Balance, December 31, 1997 36,791 $ 368 282,327 (125,991) (3,535) -- $ -- 153,169
======= ===== ======== ======== ====== ==== ===== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 36

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(20,902) (51,121) (11,794)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 41,944 34,263 6,019
Provision for doubtful accounts 6,599 7,591 5,251
Settlement of shareholder litigation -- -- 4,300
Reserve for patient service equipment, patient
monitoring devices, and investments in other
healthcare entities -- -- 625
Accrued interest on officer notes (121) (134) (180)
Write-off of intangible assets 196 990 --
Loss on sale of fixed assets 30 493 --
Minority interest in net earnings of partnerships 113 151 --
Other -- -- 145
(Increase) decrease in:
Short-term investments 5,854 15,656 235
Trade accounts receivable (16,770) (8,598) 795
Inventories (221) 1,230 (96)
Prepaid expenses and other current assets (547) 3,582 1,022
Other assets 14 1,469 (615)
Increase (decrease):
Accounts payable (774) 2,388 (693)
Accrued and other liabilities (8,894) (3,127) (1,700)
-------- ------- -------
Net cash provided by operating activities 6,521 4,833 3,314
-------- ------- -------

Cash flows from investing activities:
Acquisition of businesses and physician-owned
companies, net of cash acquired (249) (3,981) (865)
Purchases of property and equipment (2,529) (3,868) (1,357)
Proceeds from disposal of property and equipment 14 4,261 --
-------- ------- -------
Net cash used in investing activities (2,764) (3,588) (2,222)
-------- ------- -------
</TABLE>

(Continued)

F-7
<PAGE> 37

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:

Proceeds from issuance of long-term debt $ -- 1,542 --
Principal repayments of long-term debt and obligations
under capital leases (2,369) (4,501) (7,122)
Proceeds from issuance of common stock 1,931 4,519 1,210
Purchase of treasury stock (932) (420) --
Treasury stock issued -- -- 219
Treasury stock contributions to employee stock purchase plan -- -- (168)
Acceptance of note receivable from officers -- -- (80)
Proceeds from payments on notes receivable from officers -- 350 122
Distributions to minority interest in partnerships (231) (227) --
------- ------ ------
Net cash provided by (used in) financing activities (1,601) 1,263 (5,819)
------- ------ ------

Net increase (decrease) in cash and cash
equivalents 2,156 2,508 (4,727)

Cash and cash equivalents at beginning of year 6,930 4,422 9,149
------- ------ ------

Cash and cash equivalents at end of year $ 9,086 6,930 4,422
======= ====== ======

Supplemental disclosures of cash paid for:
Interest $ 311 382 341
======= ====== ======

Income taxes $ -- -- 96
======= ====== ======

Supplemental disclosures of noncash investing and financing activities:

Common stock issued for payment on debt
resulting from acquisition of minority

interest of partnerships $ -- 335 --
======= ====== ======

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

See accompanying notes to consolidated financial statements.

F-8
<PAGE> 38

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

December 31, 1997, 1996, and 1995

(1) Summary of Significant Accounting Policies

(a) Business

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

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

(b) Basis of Financial Statement Presentation

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

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

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

(Continued)

F-9
<PAGE> 39

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

(d) Concentration of Credit Risk

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

(e) Cash and Cash Equivalents

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

(f) Short-Term Investments

Short-term investments consist of United States Government and
municipal bonds. Under the provisions of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, the Company classifies its short-term
investments as trading securities which are carried at fair value
with any unrealized gains and losses included in earnings. Unrealized
gains (losses) of $67, $(131), and $101 are included in the
consolidated statements of operations for the years ended December
31, 1997, 1996, and 1995, respectively.

(g) Inventories

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

(h) Property and Equipment

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

(Continued)

F-10
<PAGE> 40

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

(j) Intangible Assets

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

(k) Stock Option Plans

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

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

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

(Continued)

F-11
<PAGE> 41

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(m) 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. Additionally, the effect on deferred taxes of
a change in tax rates is recognized in earnings in the period that
includes the enactment date.

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

(n) Net Loss Per Share of Common Stock

On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which
prescribes the calculation methodology and financial reporting
requirements for basic and diluted earnings per share. Basic earnings
(loss) per common share available to common shareholders are based on
the weighted-average number of common shares outstanding. Diluted
earnings (loss) per common share available to common shareholders are
based on the weighted-average number of common shares outstanding and
dilutive potential common shares, such as dilutive stock options. The
computation of diluted net loss per share of common stock was
antidilutive in each of the periods presented; therefore, the amounts
reported for basic and diluted are the same.

(o) Reclassifications

Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to presentations adopted
in 1997. Included in these reclassifications are the assets and
liabilities of a subsidiary to be sold in 1998 which have been
reclassified to prepaid expenses and other current assets in the
accompanying consolidated balance sheets.

(2) Acquisitions

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

(Continued)

F-12
<PAGE> 42

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The purchased fair value of the net tangible assets of Healthdyne
included $9,150 of estimated severance payments for Healthdyne employees
resulting from the Merger, and $200 of facilities costs for patient
service centers specifically identified to be closed. Accrued severance
costs of $2,073 remained at December 31, 1997, of which $1,036 is
current.

In February 1995, Healthdyne converted a $250 note receivable from
National Reproductive Medical Center, Inc. ("NRMC"), a California
fertility clinic, into 14,280 shares of NRMC's Series C convertible
preferred stock and acquired an additional 57,120 shares of NRMC's Series
C convertible preferred stock for $1,000. Using a conversion ratio of
preferred to common stock of 1:1, the 71,400 shares acquired constituted
approximately 11.11% of the fully diluted common shares of NRMC. In June
1996, the Company exercised an option to acquire the remaining
outstanding stock of NRMC for $5,697 in cash and 899,000 shares of Matria
common stock with a value of $7,121 on the date of acquisition. This
acquisition was accounted for using the purchase method of accounting
with the results of operations of the business acquired included from the
effective date of the acquisition. The acquisition resulted in excess of
cost over net assets acquired of approximately $15,053. In 1997, the
Company incurred additional acquisition costs of $189 related to NRMC
which were recorded as an increase in excess of cost over net assets
acquired.

Unaudited pro forma results of operations for the year ended December 31,
1996 as if Healthdyne and NRMC had been acquired January 1, 1996 are as
follows:
<TABLE>
<S> <C>
Revenues $ 147,732
Net loss (58,011)
Net loss per share (1.63)
</TABLE>

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

<TABLE>
<CAPTION>
Healthdyne NRMC
---------- -------
<S> <C> <C>
Fair value of assets acquired, including goodwill $ 221,435 17,970
Cash paid for the assets acquired, net of cash acquired -- (5,447)
Common stock issued for the assets acquired (182,996) (7,121)
Acquisition costs paid (3,700) (250)
--------- -------

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

The Company had previously entered into agreements with certain
physician-owned companies to provide its basic core high-risk pregnancy
and related healthcare services to the patients of the companies for a
fee. During 1997, 1996, and 1995, the Company purchased certain of these
physician-owned companies for $60, $611, and $1,094 in cash and $60,
$179, and $1,475 in notes payable, respectively. These acquisitions were
accounted for using the purchase method of accounting with the results of
operations of the businesses acquired included from the effective date of
the acquisitions. The acquisitions resulted in excess of cost over net
assets acquired of approximately $120 and $746 in 1997 and 1996,
respectively.

(Continued)

F-13
<PAGE> 43

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(3) Property and Equipment

Property and equipment are summarized as follows:

<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
------- ------
<S> <C> <C>
Rental assets $17,556 17,493
Machinery, equipment, and fixtures 15,720 13,926
Leasehold improvements 2,416 1,794
------- ------
35,692 33,213
Less accumulated depreciation and amortization 23,328 17,993
------- ------

$12,364 15,220
======= ======
</TABLE>

(4) Long-Term Debt

Long-term debt is summarized as follows:

<TABLE>
<CAPTION>
December 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Convertible subordinated debentures and note (net of discount of $88 and
$128 at December 31, 1997 and 1996, respectively); interest at 8%
payable annually; maturing on December 31, 2001; convertible into the
Company's common stock at $4.90 per share; redeemable
by the Company at face value $1,234 1,294
Unsecured, noninterest-bearing obligations incurred in
connection with buyout of physician-owned companies;
payable at various dates through June 1999 456 1,631
Capital lease obligations; interest ranging from 3% to 20%
with various monthly payments and maturing at various
dates through October 2001 718 1,303
Note payable to equipment financing company; interest
at 10% per annum, payable in monthly installments
through July 1998 99 376
Unsecured promissory note issued in connection with buyout
of minority partnership interest; paid in 1997 -- 200
Other debt; interest at rates ranging from approximately 6% to
10%; payable in monthly installments through January 1998 89 216
------ -----
Total long-term debt 2,596 5,020

Less current installments 884 2,521
------ -----

Long-term debt, excluding current installments $1,712 2,499
====== =====
</TABLE>

(Continued)

F-14
<PAGE> 44

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

In September 1997, the Company entered into a secured revolving line of
credit with a commercial lender. Under the terms of this credit facility,
the Company can borrow up to $25,000 based upon the value of eligible
collateral as defined in the credit agreement. Borrowings under this
agreement bear interest at the Company's option, of (i) the reference
rate of the Bank plus 0.5% or (ii) the LIBOR rate plus 2.75%. At December
31, 1997, there were no outstanding borrowings under this agreement.

Approximate aggregate minimum annual payments due on long-term debt for
the five years subsequent to December 31, 1997 are as follows:

<TABLE>
<S> <C>
1998 $ 884
1999 410
2000 50
2001 1,252
2002 --
------

$2,596
======
</TABLE>

(5) Accrued Liabilities

Accrued liabilities are summarized as follows:

<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
------- ------
<S> <C> <C>
Accrued salaries, wages, and incentives $ 6,806 4,220
Accrued severance 1,036 4,597
Accrued restructuring costs 2,125 9,359
Deferred revenue 3,561 3,402
Other 2,619 3,981
------- ------

$16,147 25,559
======= ======
</TABLE>

(6) Income Taxes

The components of income tax expense are as follows:
<TABLE>
<CAPTION>

Years ended December 31,
--------------------------------
1997 1996 1995
------- ----- ----
<S> <C> <C> <C>
Current expense:
Federal $ -- -- --
State -- -- 150
------- ----- ---

Total income tax expense $ -- -- 150
======= ===== ===

</TABLE>

(Continued)

F-15
<PAGE> 45

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Computed expected income tax benefit $(7,316) (17,892) (4,076)
Increase (decrease) resulting from:
Losses in excess of allowable carrybacks 132 7,529 4,022
Nontaxable municipal interest income (244) (385) --
Nondeductible expenses 7,428 10,748 --
State income taxes, net of Federal benefit -- -- 98
Other, net -- -- 106
------- ------- ------

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

At December 31, 1997, the Company had the following estimated credit and
operating loss carryforwards available for Federal income tax reporting
purposes to be applied against future taxable income and tax liabilities:

<TABLE>
<CAPTION>
General Net
Year of business operating
expiration credit loss
- ---------- --------- ---------
<S> <C> <C>
1998 $ 283 94
1999 100 523
2000 79 990
2001 97 1,537
2002 43 3,252
2003 61 2,922
2004 151 6,198
2005 -- 7,137
2007 -- 4,475
2008 -- 7,266
2009 -- 15,241
2010 -- 7,182
2011 -- 29,015
2012 -- 1,649
------- ------

$ 814 87,481
======= ======
</TABLE>

(Continued)

F-16
<PAGE> 46

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The net operating loss carryforward of $87,481 includes deductions of
approximately $16,484 related to the exercise of stock options which will
be credited to additional paid-in capital when recognized. A portion of
the net operating loss ($15,600) is limited, by the Internal Revenue Code
Section 382, to an annual utilization of $2,300. The total net operating
loss is limited to an annual utilization of approximately $17,000. The
Company also has available alternative minimum tax (AMT) credit
carryforwards of approximately $1,383 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 $79,348.

At December 31, 1997 and 1996, the Company had deferred tax assets of
approximately $49,963 and $52,843, respectively, before valuation
allowances. The valuation allowance is based on the likelihood that a
substantial portion of the deferred tax asset will not be realized. The
decrease in the valuation allowance of $2,880 during 1997 was equal to
the decrease in the deferred asset.

At December 31, 1997 and 1996, deferred income taxes consist of future
tax benefits attributable to:

Deferred income tax assets:

Allowance for doubtful accounts $ 1,894 4,564
Accruals and reserves not deducted for tax purposes 6,490 8,629
Depreciation and amortization 8,246 7,524
Net operating loss carryforwards 30,618 29,057
Credit carryforwards 2,197 2,631
Contribution carryforward 518 438
-------- -------
Total 49,963 52,843

Less valuation allowance (49,963) (52,843)
-------- -------

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

(7) Shareholders' Equity

Stock Option Plans

Prior to the Merger, the Company maintained a stock option plan for the
benefit of key employees and directors under which options granted
expired ten years from the date of grant. In connection with the
Merger, the Company assumed options outstanding under the Healthdyne
option plans. Both the Company's options and Healthdyne's options
outstanding on the date of the Merger became fully vested. All other
terms and conditions of the options remained the same as they were
prior to the Merger. As of the date of the Merger, the Company adopted
two stock option plans for the benefit of key employees and nonemployee
directors. A total of 1,250,000 shares of the Company's common stock
have been authorized for issuance under these plans. Stock options
granted under these plans are exercisable in equal amounts over three
years and expire in ten years.

(Continued)

F-17
<PAGE> 47

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

During 1997, the Board of Directors of the Company adopted the 1997
Stock Option Plan for key employees, officers, independent contractors,
and consultants of the Company. The 1997 Stock Option Plan has three
components: a stock option component, a stock bonus/stock purchase
component, and a Stock Appreciation Right component. A total of
1,800,000 shares of the Company's common stock have been authorized for
issuance under this Plan. The Stock Option Committee shall determine
the term of each option granted under the Plan, provided, however, that
the term does not exceed ten years. These options are exercisable based
upon established performance goals, provided, however, that they are
not exercisable in less than two years or more than four years. In
addition, during 1997, the Board of Directors of the Company granted
nonplan options to purchase 479,150 shares of common stock to certain
nonexecutive employees.

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

Net loss $ (22,530) (52,279) (12,218)
============= ======= =========

Loss per share $ (.62) (1.62) (.70)
============= ======= =========
</TABLE>

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

The weighted-average fair value of the individual options granted
during 1997, 1996, and 1995 is estimated at $3.22, $3.03, and $2.52,
respectively, on the date of grant. The fair values for those years
were determined using a Black-Scholes option-pricing model with the
following assumptions.

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield None None None
Volatility 46% 40% 51%
Risk-free interest rate 6.25% 6.25% 6.00%
Expected life 5 Years 5 Years 3 Years
</TABLE>

(Continued)

F-18
<PAGE> 48

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

<TABLE>
<CAPTION>
1997 1996 1995
---------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,088,501 $ 6.00 2,032,429 $ 5.97 2,152,844 $ 5.68
Assumed from Healthdyne option plans - - 1,108,888 3.34 - -
Granted 974,150 6.51 919,920 8.14 670,500 6.37
Exercised (500,261) 2.95 (838,881) 4.47 (250,273) 3.43
Canceled (657,007) 8.03 (133,855) 7.57 (540,642) 6.62
--------- ---- --------- ---- --------- ----

Outstanding at end of year 2,905,383 $ 6.23 3,088,501 $ 6.00 2,032,429 $ 5.97
========= ==== ========= ==== ========= ====

Exercisable at year-end 1,638,263 $ 5.61 2,262,627 $ 5.18 202,913 $ 3.41
========= ==== ========= ==== ========= ====
</TABLE>

The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:

<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------- ------------------------
Weighted-average Weighted- Weighted-
Range of remaining average average
exercise Shares contractual exercise Shares exercise
price outstanding life (years) price exercisable price
------------- ----------- ------------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .67-$5.00 550,572 2.84 $ 2.94 544,909 $ 2.96
$5.00-$10.00 2,340,999 8.13 6.96 1,079,542 6.83
$10.00-$20.00 10,512 2.17 11.33 10,512 11.33
$20.00-$30.00 3,300 4.66 27.95 3,300 27.95
</TABLE>

Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan (the "Purchase
Plan") to encourage ownership of its common stock by employees. The
Purchase Plan provides for the purchase of up to 500,000 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 1997, 1996, and 1995, respectively, 110,967, 33,357, and
33,680 shares of common stock were issued under the Purchase Plan.
Compensation cost related to this plan determined under SFAS 123 had an
insignificant effect on the pro forma net loss and pro forma loss per
share disclosed above.

(Continued)

F-19
<PAGE> 49

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Shareholder Rights Plan

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

(8) Employee Benefit Plans

The Company maintains a 401(k) defined contribution plan for the benefit
of its employees. The Company's obligation for contributions under the
401(k) plan is limited to the lesser of (i) one-half of each
participant's contributions but not more than 2.5% of the participant's
compensation or (ii) 20% of the Company's pretax earnings before
consideration of this contribution. Discretionary Company contributions
are allowed under the plan. Contributions to the plan for the years ended
December 31, 1997, 1996, and 1995 were approximately $607, $652, and
$-0-, respectively.

During 1996, the Company established a nonqualified defined benefit
pension plan for the benefit of a certain select group of senior
management. The benefits are based on the employee's compensation during
the three calendar years in which the individual's base salary is the
highest and actual years of service.

During 1997, the Company terminated the nonqualified defined benefit
pension plan and allowed existing participants to either receive a
lump-sum payment or roll over their investment into a split-dollar life
insurance contract whereby the participants or their beneficiaries are
entitled to the greater of the contract's cash surrender value or the
contract's death benefit, less insurance premiums paid by the Company.
The net present value of the future cash payments by the Company for the
participants' split-dollar contracts is approximately $4,000. The
participants who chose the lump-sum payout were paid approximately $1,328
on January 2, 1998.

(Continued)

F-20
<PAGE> 50

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

During 1997, the Company paid $1,928 in insurance premiums, of which the
Company recorded an asset of $1,800 for the cash surrender value of the
life insurance contracts and $128 as insurance premium expense.

(9) Fair Value of Financial Instruments

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

(a) Cash and Short-Term Investments

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

(b) Long-Term Debt

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

(10) Restructuring

During 1996, in connection with the Merger, the Company incurred
restructuring charges of $22,525 related to severance costs for 278
involuntarily terminated employees in the executive, sales, clinical
service, and administrative support functions. Also, lease terminations
and other facilities-related exit costs arising from closing duplicate
patient service centers and consolidation of two corporate headquarters
were incurred. In addition, computer and patient service equipment was
determined to be incompatible with nursing station software to be used by
Matria and computer hardware and software was determined to be obsolete
by adoption of new systems. Accrued restructuring charges are $2,797 at
December 31, 1997, of which $2,125 is current.

A summary of the components of the 1996 restructuring charges follows:
<TABLE>
<S> <C>
Employee severance $10,750
Relocation 1,250
Duplicate/excess facility costs 2,500
Write-off of excess/obsolete equipment 5,400
Other 2,625
-------

$22,525
=======
</TABLE>

(Continued)

F-21
<PAGE> 51

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

A summary of the components of the 1995 restructuring charges follows:
<TABLE>
<S> <C>
Employee severance $1,834
Facility closing 332
Other 290
------

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

(11) 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, 1997 are as follows:

<TABLE>
<CAPTION>
Operating Capital
Years ending December 31, leases leases
------------------------ ------------ -------
<S> <C> <C>
1998 $ 5,376 421
1999 4,645 321
2000 3,774 54
2001 3,208 19
2002 2,901 -
2003 and thereafter 1,701 -
--------- -----

$ 21,605 815
=========

Less interest 97
-----
Present value of future minimum
capital lease payments $ 718
=====
</TABLE>

Amortization of leased assets is included in depreciation expense.

Rental expense for cancelable and noncancelable leases was approximately
$6,100, $5,200, and $3,600 for the years ended December 31, 1997, 1996,
and 1995, respectively.

(Continued)

F-22
<PAGE> 52

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(12) Contingencies

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

In March 1997, Adeza Biomedical Corporation ("Adeza") initiated
litigation against the Company alleging that the Company breached the
Exclusive Marketing Agreement, dated as of December 31, 1991, as amended
(the "Agreement") between the Company and Adeza under which the Company
was granted the exclusive marketing rights to Adeza's fetal fibronectin
immunoassay test ("fFN"). On March 3, 1998, the Company settled its
dispute with Adeza. Under the terms of the settlement, the Company agreed
to relinquish its rights under the Agreement and its equity interest in
Adeza in exchange for a right to recoup a portion of its investment in
Adeza and the product, based on future sales of fFN. The Company will
continue to distribute fFN during a transition period ending on August
31, 1998.

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

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

(13) Quarterly Financial Information - Unaudited

Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 1997 and 1996.

<TABLE>
<CAPTION>
Quarter
---------------------------------------------------------------
Fourth Third Second First
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
1997:
Revenues $ 37,101 36,540 36,362 34,530
Net loss (4,141) (4,898) (5,516) (6,347)
Net loss per common share (.11) (.13) (.15) (.17)

1996:
Revenues $ 36,205 35,799 34,716 24,086
Net loss (14,120) (7,344) (8,566) (21,091)
Net loss per common share (.39) (.20) (.25) (.96)
</TABLE>

F-23
<PAGE> 53

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

None.

PART III

ITEMS 10-13.

The information contained under the heading "Management of the
Company" in the Company's definitive proxy materials for its 1998 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange
Commission, is incorporated by reference herein. Additional information
relating to the executive officers of the Company is included as a Special Item
in Part I of this Annual Report on Form 10-K

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

Section 16(a) of the Securities Exchange Act of 1934 as amended (the
"Act"), requires the Company's directors and executive officers and persons who
own more than ten percent of a registered class of the Company's equity
securities to file reports with the SEC regarding beneficial ownership of
Common Stock and other equity securities of the Company. To the Company's
knowledge, based solely on a review of copies of such reports furnished to the
Company and written representations that no other reports were required, during
the fiscal year ended December 31, 1997, all officers, directors and greater
than ten percent beneficial owners complied with the Section 16(a) filing
requirements of the Act in all instances with the exception of late filings
with respect to two transactions relating to (i) the purchase of Common Stock
by Frank D. Powers and (ii) the disposition of Common Stock by transfer to an
Exchange Fund by Parker H. Petit.

29
<PAGE> 54

PART IV

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

(a)(1)The following consolidated financial statements of the Company
and its subsidiaries and report of independent auditors thereon are included as
pages F-1 through F-23 of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Reports F-1
F-1A

Consolidated Balance Sheets - December 31, 1997 and 1996 F-2

Consolidated Statements of Operations - Years Ended
December 31, 1997, 1996 and 1995 F-4

Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995 F-5

Consolidated Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995 F-7

Notes to Consolidated Financial Statements F-9
</TABLE>

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

Independent Auditors' Report.

Schedule II - Valuation and Qualifying Accounts.

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

(a)(3) Exhibits:

30
<PAGE> 55

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

EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2 Agreement and Plan of Merger, dated October 2, 1995, as amended, between Healthdyne, Tokos and
Registrant (included as Appendix A to the Joint Proxy Statement/Prospectus filed as part of the
Company's Registration Statement No. 333-00781 on Form S-4 (Registration No. 333-00781) filed
February 7, 1996 (the "Form S-4") and incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation (included as Appendix D to the Joint Proxy
Statement/Prospectus filed as a part of the Company's Form S-4 and incorporated herein by
reference).
3.2 Bylaws (included as Appendix E to the Joint Proxy Statement/Prospectus filed as part of the
Company's Form S-4 and incorporated herein by reference).
4.1 Indenture dated as of December 1, 1986, between Healthdyne and National Bank of Georgia, trustee,
for 8% Convertible Subordinated Indentures due December 31, 2001 (filed as Exhibit (4)(b) to the
Healthdyne Annual Report on Form 10-K for the year ended December 31, 1986 and incorporated herein
by reference).
10.1 Form of Rights Agreement between Registrant and SunTrust Bank, Atlanta (filed as Exhibit 10.1 to
the Company's Form S-4 and incorporated herein by reference).
10.2 1996 Stock Incentive Plan (included as Appendix F-I to the Joint Proxy Statement/Prospectus filed
as a part of the Company's Form S-4 and incorporated herein by reference).
10.3 1996 Directors' Non-Qualified Stock Option Plan (included as Appendix F-II to the Joint Proxy
Statement/Prospectus filed as a part of the Company's Form S-4 and incorporated herein by
reference).
10.4 1996 Employee Stock Purchase Plan (included as Appendix F-III to the Joint Proxy
Statement/Prospectus filed as a part of the Company's Form S-4 and incorporated herein by
reference).
10.5 Corporate Services Agreement, dated as of April 21, 1995, between Healthdyne and Healthdyne
Technologies (filed as Exhibit 10.21 to the Technologies Form 8-K and incorporated herein by
reference).
10.6 Tax Indemnification Agreement, dated as of April 21, 1995, between Healthdyne and Healthdyne
Technologies (filed as Exhibit 10.20 to the Technologies Form 8-K and incorporated herein by
reference).
10.7 Tax Sharing Agreement, dated as of March 31, 1993, between Healthdyne and Healthdyne Technologies
(filed as an Exhibit to the Registration Statement on Form S-1 of Healthdyne Technologies
(Registration No. 33-60708), dated April 6, 1993, and incorporated herein by reference).
10.8 Agreement Concerning Taxes, dated as of April 21, 1995, between Healthdyne, Healthdyne
Technologies and Health Scan Products, Inc. (filed as an exhibit to the Technologies Form 8-K, and
incorporated herein by reference).
</TABLE>

31
<PAGE> 56

<TABLE>
<S> <C>
10.9 OEM Design and Manufacturing Agreement, dated as of April 21, 1995, between Healthdyne and
Healthdyne Technologies (filed as Exhibit 10.22 to the Technologies Form 8-K and incorporated
herein by reference).
10.10 Distribution Agreement, dated as of October 20, 1995, between Healthdyne and Healthdyne
Information Enterprises, Inc. ("HIE") (filed as Exhibit 2.1 to Amendment No. 1 to the Registration
Statement on Form S-1 of HIE (Registration No. 33-96478) dated October 24, 1995 (the "HIE Form S-
1"), and incorporated herein by reference).
10.11 Tax Indemnity Agreement, dated as of October 20, 1995, between Healthdyne and HIE (filed as
Exhibit 10.2 to Amendment No. 1 to the HIE Form S-1 and incorporated herein by reference).
10.12 Tax Disaffiliation Agreement, dated as of October 20, 1995, between Healthdyne and HIE (filed as
Exhibit 10.3 to Amendment No. 1 to the HIE Form S-1 and incorporated herein by reference).
10.13 Severance Compensation and Restrictive Covenant Agreement, dated October 2, 1995, between
Healthdyne and Frank D. Powers (filed as Exhibit 10.22 to the Company's Form S-4 and incorporated
herein by reference).
10.14 Form of Healthdyne Executive Non-qualified Retirement Plan and Trust (filed as Exhibit (10) (qq)
to the Healthdyne Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated
herein by reference).
10.15 Exclusive Marketing Agreement, dated December 31, 1991, between Tokos and Adeza Biomedical
Corporation (filed as an Exhibit to the Tokos Annual Report on Form 10-K dated March 27, 1992 with
those portions omitted for confidentiality reasons filed separately with the Commission and
incorporated herein by reference).
10.16 Form of Tokos Executive Non-qualified Retirement Plan and Trust (filed as Exhibit 10.29 to the
Company's Form S-4 and incorporated herein by reference).
10.17 Amended and Restated Severance Compensation and Restrictive Covenant Agreement, dated October 2,
1995, between Healthdyne and Donald R. Millard (filed as Exhibit (10)(fff) to the Healthdyne
Quarterly Report on Form 10-Q for the period ended September 30, 1995 and incorporated herein by
reference).
10.18 Form of Promissory Note with Tokos officers and related Security Agreement (filed as an Exhibit to
the Tokos Registration Statement on Form S-1 (Registration No. 33-33340) and incorporated herein
by reference).
10.19 Agreement and Plan of Merger, dated June 24, 1996, between National Reproductive Medical Centers,
Inc. ("NRMC"), Matria, NRMC Acquisition Corporation and certain NRMC shareholders (filed as
Exhibit 2.1 to the Matria Current Report on Form 8-K dated July 10, 1996).
10.20 Shareholders Agreement, dated February 28, 1995, among Healthdyne, Inc. (a predecessor of Matria),
certain shareholders of National Reproductive Medical Centers, Inc. ("NRMC") and NRMC (filed as
Exhibit 99.3 to the Matria Current Report on Form 8-K dated July 10, 1996).
10.21 Amendment No. 1 dated May 8, 1996 to Exclusive Marketing Agreement, dated December 31, 1991,
between Tokos and Adeza Biomedical Corporation (filed as
</TABLE>

32
<PAGE> 57
Exhibit 10.31 to the Matria Annual Report on Form 10-K
for the year ended December 31, 1996).
4.4 Loan and Security Agreement, dated September 15, 1997
between BankAmerica Business Credit, Inc. and Matria
Healthcare, Inc. (filed as Exhibit 4.4 to the Matria
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).

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

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

The following exhibits are filed as part of this Report:

10.32 Letters, dated November 10 and November 17, 1997, between
Matria Healthcare, Inc., Healthdyne Technologies, Inc. and
Respironics, Inc. amending the Corporate Services
Agreement and Tradename License Agreement, both dated
April 25, 1995 between Healthdyne, Inc. and Healthdyne
Technologies, Inc.
10.33 Settlement Agreement, dated March 3, 1998 between the
Company and Adeza Biomedical Corporation (Confidential
Treatment Requested).
21.0 List of Subsidiaries.
23.0 Accountants' Consents.
27.0 Financial Data Schedule (for SEC use only).
(b.) Reports on Form 8-K.
None.

33
<PAGE> 58

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 26, 1998 By: /s/ Donald R. Millard
---------------------------------------
Donald R. Millard, Director, President,
Chief Executive Officer and Chief
Financial Officer (Principal Financial
Officer)

/s/ Yvonne V. Scoggins
--------------------------------------
Yvonne V. Scoggins, Vice President,
Chief Accounting Officer and Treasurer

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

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

Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Parker H. Petit Chairman of the Board March 26, 1998
- ------------------- Director
Parker H. Petit

/s/ Donald R. Millard Director, President March 26, 1998
- --------------------- Chief Executive Officer
Donald R. Millard and Chief Financial
Officer (Principal
Executive, Financial
and Accounting Officer)

/s/ Frank D. Powers Director, Executive March 26, 1998
- ------------------- Vice President and
Frank D. Powers Chief Operating Officer
</TABLE>

34
<PAGE> 59

<TABLE>
<S> <C> <C>
/s/ Carl E. Sanders Director March 26, 1998
- ------------------------------------------
Carl E. Sanders

/s/ Jackie M. Ward Director March 26, 1998
- -----------------------------------------
Jackie M. Ward

/s/ Morris S. Weeden Director March 26, 1998
- --------------------------------------
Morris S. Weeden

/s/ Frederick P. Zuspan Director March 26, 1998
- ---------------------------------------
Frederick P. Zuspan, M.D.
</TABLE>

35
<PAGE> 60

MATRIA HEALTHCARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
Additions
---------
Balance at Charges to
beginning Charges to costs and Net Balance at
Description of period other accounts expenses Deductions end of period
----------- --------- -------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1995
Allowance for contractual adjustments
and doubtful accounts $12,900 12,6961 5,251 10,551 20,296

December 31, 1996
Allowance for contractual adjustments
and doubtful accounts 20,296 8,3002 7,591 9,989 26,198

December 31, 1997
Allowance for contractual adjustments
and doubtful accounts 26,198 -- 6,599 10,146 22,651

December 31, 1995
Reserves for patient service
equipment and supplies 2,030 -- -- -- 2,030

December 31, 1996
Reserves for patient service
equipment and supplies 2,030 -- -- 2,030 --

December 31, 1995
Reserves for patient monitoring devices 2,200 -- -- -- 2,200

December 31, 1996
Reserves for patient monitoring devices 2,200 -- -- 2,200 --
</TABLE>

_________________________________
1 Represents restatement of December 31, 1995 allowance balance resulting
from reclass of contra accounts receivable balance from gross accounts
receivable to the allowance for doubtful accounts.

2 Represents beginning balances in allowance for doubtful accounts of acquired
companies.

<PAGE> 1
EXHIBIT 10.32

November 17, 1997

Mr. Craig B. Reynolds
President and CEO
Healthdyne Technologies, Inc.
1255 Kennestone Circle
Marietta, GA 30066

Mr. Dennis S. Meteny
President and CEO
Respironics, Inc.
1501 Ardmore Blvd.
Pittsburgh, PA 15221-4401

Re: Corporate Services Agreement and Trademark License Agreement

Gentlemen:

Please refer to our letter dated November 10, 1997 concerning this
subject. Capitalized terms herein shall have the meanings prescribed in the
November 10th letter.

Section 4 of the November 10th letter states that the term of the
Matria Services Agreement is extended until 12 months after the effective time
of the merger, after which it may be terminated upon 6 months prior written
notice. However, Section 6 states that Matria may not terminate either of the
Matria Agreements other than in the case of a breach by Healthdyne which has not
been cured within 30 days of notice adequately describing such breach. This
letter will clarify that a termination by Matria in accordance with the Matria
Services Agreement and in accordance with Section 4 of the November 10th letter
would not be prohibited by Section 6 of such letter, whether or not the
termination was in connection with a breach of the Matria Services Agreement by
Healthdyne.

Please acknowledge your agreement with the foregoing by signing this
letter in the space provided below and returning it to the undersigned. This
letter may be signed

<PAGE> 2

in counterparts and upon facsimiles, but all such counterparts and facsimiles
shall constitute one and the same agreement.

MATRIA HEALTHCARE, INC.

By: /s/ J. Brent Burkey
---------------------------------
J. Brent Burkey
Senior Vice President and
General Counsel

Acknowledge and agreed to this ___ day of November, 1997.

HEALTHDYNE TECHNOLOGIES, INC.

By: /s/ Craig B. Reynolds
-------------------------------
Title: President and CEO
----------------------------

RESPIRONICS, INC.

By: /s/ Dennis S. Meteny
-------------------------------
Title: President and CEO
----------------------------

<PAGE> 3

November 10, 1997

Craig B. Reynolds
President and CEO
Healthdyne Technologies, Inc.
1225 Kennestone Circle
Marietta, GA 30066

Dennis S. Meteny
President and CEO
Respironics, Inc.
1501 Ardmore Blvd.
Pittsburgh, PA 15221-4401

Re: Corporate Services Agreement and Trademark License
Agreement

Gentlemen:

Reference is made to that certain Corporate Services Agreement dated
April 21, 1995 (the "Matria Services Agreement") between Matria Healthcare, Inc.
("Matria") and Healthdyne Technologies, Inc. ("Healthdyne") and that certain
Tradename License Agreement dated April 21, 1995 (the "Matria License Agreement"
and, together with the Matria Services Agreement, the "Matria Agreements")
between Matria and Healthdyne.

1. Purpose of Letter. The purpose of this letter is to confirm our
agreement to amend the terms of the Matria Agreements in the manner described
herein, effective at the Effective Time of the Merger (each as defined in the
Agreement and Plan of Reorganization dated as of November 10, 1997 (the
"Reorganization Agreement") by and among Respironics, Inc. ("Respironics"),
RIGA, Inc. and Healthdyne). Matria understands that execution of this letter
agreement is a material inducement for Respironics to enter into the
Reorganization Agreement.

2. Effective Date of Agreements in this Letter. The amendments to the
Matria Agreements set forth in this letter shall become effective at the
Effective Time. This letter will terminate and be of no further force and effect
upon termination of the Reorganization Agreement in accordance with its terms.
Prior to the earlier of (i) the Effective Time and (ii) termination of the
Reorganization Agreement in accordance with its terms, Matria shall not amend or
terminate either of the Matria Agreements without the prior written consent of
Respironics or take any actions under or with respect to the Matria Agreements
inconsistent with the terms and purposes of this letter.

<PAGE> 4

Respironics, Inc. November 10, 1997

3. Waiver of Rights in Connection with the Merger and Upon a Change of
Control. Matria waives any rights it may have to terminate the Matria Agreements
in connection with or as a result of the Merger, including without limitation
the right to terminate the Matria License Agreement as a result of a Change of
Control (as defined in the Matria License Agreement).

4. Amendments to Matria Services Agreement. The term of the Matria
Services Agreement shall be extended until 12 months after the Effective Time of
the Merger, after which it may be terminated upon 6 months prior written notice.
The fees and charges payable to Matria under the Matria Services Agreement for
any services provided on or after the Effective Time of the Merger shall be as
provided in the Matria Services Agreement. The type of services to be provided
by Matria under the Matria Services Agreement shall be limited to the types of
services provided as of the date hereof.

5. Amendments to Matria License Agreement. The license granted to
Healthdyne under the Matria License Agreement shall be exclusive with respect to
respiratory and cardiopulmonary medical devices, except for existing uses by
Matria of the Mark, as defined in the Matria License Agreement, as of the date
of this letter. The duration of the license granted under the Matria License
Agreement shall be perpetual. Matria shall grant to Healthdyne a right of first
refusal to purchase the Mark in the event that Matria shall determine to sell or
terminate use of the Mark or permit the Mark to lapse. Nothing contained herein
shall limit use of the Mark by Healthdyne Information Enterprises, Inc. ("HIE")
in accordance with the terms of HIE's existing license agreement with Matria.

6. Amendments Regarding Termination Rights. Matria shall not terminate
either of the Matria Agreements other than in the case of a breach by Healthdyne
that has not been cured within 30 days of notice adequately describing such
breach.

2
<PAGE> 5

Please acknowledge your agreement with the foregoing by signing this
letter in the space provided below and returning it to the undersigned. This
letter may be signed in counterparts and upon facsimiles, but all such
counterparts and facsimiles shall constitute one and the same agreement.

MATRIA HEALTHCARE, INC.

By: /s/ Parker H. Petit
----------------------------
Title: Chairman
-------------------------

Acknowledge and agreed to this
10th day of November, 1997.

HEALTHDYNE TECHNOLOGIES, INC.

By: /s/ Craig B. Reynolds
-------------------------------
Title: President and CEO
----------------------------

RESPIRONICS, INC.

By: /s/ Dennis Meteny
-------------------------------
Title: President and CEO
----------------------------

<PAGE> 1

EXHIBIT 10.33

AGREEMENT AND RELEASE

THIS AGREEMENT AND RELEASE ("Agreement and Release") is made and
entered into as of March 3, 1998 (the "Effective Date"), by and between Adeza
Biomedical Corporation, a Delaware corporation ("Adeza"), and Matria Healthcare,
Inc., a Delaware corporation ("Matria").

RECITALS

WHEREAS, Adeza has developed and manufactures certain fetal fibronectin
pre-term delivery tests (the "fFN Tests"), which are useful in the diagnosis of
pre-term delivery risks for pregnant women;

WHEREAS, Adeza and Matria's predecessor, Tokos Medical Corporation
("Tokos"), entered into an Exclusive Marketing Agreement with respect to the fFN
Tests effective as of December 31, 1991 (the "Exclusive Marketing Agreement");

WHEREAS, under the Exclusive Marketing Agreement, Tokos was granted the
exclusive right to market, sell, use and otherwise dispose of the fFN Tests in
the United States, Puerto Rico and Canada (the "Territory");

WHEREAS, Adeza and Tokos entered into amendments of the Exclusive
Marketing Agreement dated December 20, 1994 and January 13, 1995;

WHEREAS, on March 8, 1996, Tokos and Healthdyne, Inc. ("Healthdyne")
merged with and into Matria, a newly-formed Delaware corporation. Pursuant to
the merger agreement between Tokos and Healthdyne, Matria assumed all of Tokos'
rights and obligations under the Exclusive Marketing Agreement;

WHEREAS, on May 8, 1996, Adeza and Matria entered into an amendment to
the Exclusive Marketing Agreement (hereafter, the term "Exclusive Marketing
Agreement" shall mean the Exclusive Marketing Agreement, as amended to date);

WHEREAS, disputes have arisen under the Exclusive Marketing Agreement
between Adeza and Matria;

WHEREAS, on February 20, 1997, Adeza served notice of termination of
the Exclusive Marketing Agreement to Matria;

WHEREAS, on March 7, 1997, Adeza served Matria with a complaint for
damages, declaratory relief and injunctive relief naming Matria and various
unnamed defendants, Docs 1-100, which complaint has been amended subsequent to
March 7, 1997 (as amended to date, the "Complaint") in the Superior Court of the
State of California in the County of Santa Clara in Adeza Biomedical Corporation
v. Matria Healthcare, Inc., Case No. CV 764258 (the "Litigation") in which Adeza
pled, inter alia, that it was entitled to terminate the Exclusive Marketing
Agreement as a result of Matria's breach of the terms thereof;

<PAGE> 2

WHEREAS, Matria has brought counterclaims against Adeza with respect to
the claims asserted by Adeza in the Litigation (the "Counterclaims");

WHEREAS, the parties in entering into this Agreement and Release do not
admit any liability or obligation to the other party arising out of, in
connection with, or in any way related to the facts, actions, failures to act,
transactions or occurrences alleged or which could have been alleged in the
Complaint or the Counterclaims, as the case may be; and

WHEREAS, without admitting any issue of fact, law or equity, Matria and
Adeza agree that the settlement of this matter and entry of this Agreement and
Release are in good faith, in an effort to avoid expensive and protracted
litigation, and in the public interest.

AGREEMENT

NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

ARTICLE 1

MARKETING AGREEMENT

1.1 Termination. As of the Effective Date, the Exclusive Marketing
Agreement, together with all rights and obligations contained therein or related
thereto, is terminated and is of no further force or effect and, except as
otherwise set forth in Section 1.2 below, as between the parties, all rights to
promote, market and sell the fFN Tests and related services will have reverted
to Adeza, and Matria shall retain no such rights under the Exclusive Marketing
Agreement or otherwise.

1.2 Transition.

(a) The parties agree to perform in good faith the duties and
responsibilities set forth in the attached Exhibit A (the "Transition
Responsibilities") during the period of time commencing upon the Effective Date
and concluding on the earlier of August 31, 1998 or the Acceleration Date (as
defined below) (the "Transition Period").

(b) Matria shall, at least thirty (30) days (but no more than
ninety (90) days) prior to the conclusion of the Transition Period, send written
notification to all third parties with which it has an agreement related to the
fFN Tests at the address maintained by Matria that Matria will, effective upon
the conclusion of the Transition Period, cease to be a distributor of fFN Tests.
Adeza may, in its sole discretion, elect to conclude the Transition Period prior
to August 31, 1998, in which case Adeza will give Matria notice at least
forty-five (45) days prior to the desired date of conclusion (which desired date
of conclusion shall be referred to herein as the "Accelerated Date"), whereupon
Matria shall, within fifteen (15) days following receipt of such notice from
Adeza, notify in the manner described above in this subsection 1.2(b) all third
parties with which it has an agreement related to the fFN Tests that Matria
will, effective upon the Accelerated Date, cease to be a distributor of fFN
Tests. If Adeza determines that Matria's

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<PAGE> 3

obligation to perform any specific Transition Responsibility should be
terminated at least thirty (30) days prior to the conclusion of the Transition
Period as a result of a good faith determination that such termination is
necessary or appropriate to effect the orderly transition of the fFN business to
Adeza, Adeza may terminate Matria's obligation to perform such Transition
Responsibility upon forty-five (45) days written notice to Matria. Matria shall,
within fifteen (15) days following receipt of such notice, notify all third
parties with which Matria has an agreement that are affected by such change that
Matria will, effective upon the expiration of such forty-five (45) day period,
cease to be responsible for the performance of such Transition Responsibility.
Under no circumstances shall Matria be required to provide more than two (2)
such notices of partial termination (unless required to be given to less than
fifty (50) entities or individuals) unless Adeza reimburses Matria for the cost
and expense of such additional notices. Notwithstanding the foregoing, in the
event that Adeza elects to terminate, pursuant to this Section 1.2(b), all or
any portion of the Transition Responsibilities prior to August 31, 1998, Matria
shall continue to perform its Transition Responsibilities with respect to any of
Matria's contractual relationships that require ninety (90) days notice for
termination until the earlier of (i) one hundred (100) days following Matria's
receipt of written notice from Adeza regarding the intended termination of the
applicable Transition Responsibilities, (ii) the actual termination of such
relationship or (iii) August 31, 1998.

(c) In the event that either party believes, in good faith, that
the other party is in material default with respect to the performance of its
Transition Responsibilities, such party may provide written notice of default to
the other party describing in sufficient detail the alleged deficiencies in
performance, whereupon the allegedly defaulting party shall have a period of
fifteen (15) days in which to cure such default. If the alleged breach is not
cured within such fifteen (15) day period, the party providing notice thereof
may request, upon further written notice by electronic mail or facsimile (with
original to follow via U.S. mail) to the allegedly defaulting party, the
initiation of arbitration proceedings, which arbitration proceedings shall be
conducted in accordance with the rules of the American Arbitration Association.
In the event that the parties cannot agree on an appropriate arbitrator within
five (5) business days following the date of the written request, then an
arbitrator shall be appointed pursuant to the rules of the American Arbitration
Association. All such arbitration proceedings shall take place at a mutually
convenient time and place in Chicago, Illinois and a decision shall be rendered
within thirty (30) days of the commencement of such proceeding. Any decision by
such arbitrator shall be final and binding upon the parties. If the arbitrator
determines that Matria has materially defaulted in its performance of the
Transition Responsibilities, the parties acknowledge that the arbitrator may, as
one of its available remedies, reduce all further percentage royalty payment
obligations of Adeza to Matria as set forth in subsections 3.2(a) and (b) below;
provided, however, that the arbitrator shall not reduce the royalty payment
obligations under Section 3.2(a) to an amount less than 0.75% of Net Sales and
shall not reduce the royalty payment obligation under Section 3.2(a) to an
amount less than 0.375% of Net Sales. If the arbitrator determines that Adeza
has materially defaulted in its performance of the Transition Responsibilities,
the parties acknowledge that the arbitrator may, as one of its available
remedies, terminate Adeza's right to receive payment of any revenues from Matria
that have accrued, but have not yet been paid, as of the date of such
determination, along with any revenues that accrue thereafter during the
Transition Period.

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<PAGE> 4

(d) The party asserting any claim pursuant to (c) above shall bear
(i) its own attorney's fees arising out of the proceedings described in
subsection 1.2(c) and (ii) the costs of arbitration; provided, however, that in
the event that a party is determined by the arbitrator to be the prevailing
party in such proceedings, the arbitrator, at its discretion, may recommend that
the prevailing party be reimbursed by the non-prevailing party for all
reasonable expenses and costs incurred by the prevailing party in protecting or
enforcing its rights hereunder, including, without limitation, its reasonable
attorneys' fees. The parties shall direct the arbitrator to have the time and
expense of the arbitration minimized to the maximum extent practicable under the
circumstances.

(e) The remedies set forth in this Section 1.2 shall be the
exclusive remedy of the parties with respect to any alleged failure on the part
of any such party to fulfill its Transition Responsibilities. Unless a party
shall have notified the other party of any alleged default by such other party
in the performance of its Transition Responsibilities (other than a payment
default with respect to payments due after the end of the Transition Period)
during the Transition Period or during the fifty (50) day period immediately
following the conclusion of the Transition Period, that party shall be deemed to
have waived all rights with respect to any such default by such other party.
Notwithstanding the foregoing, nothing in this Section 1.2(e) shall limit either
party's rights and obligations under Article 13 of this Agreement and Release.

ARTICLE 2

SURRENDER OF ADEZA SECURITIES

2.1 Surrender and Cancellation of Securities. Upon the Effective Date,
Matria shall surrender to Adeza for cancellation (a) certificates representing
(i) 1,142,858 shares of Adeza's Series E Preferred Stock, no par value, and (ii)
11,657 shares of Adeza's Series 2 Preferred Stock, par value $0.001 per share,
and (b) a Warrant to purchase 1,702 shares of Adeza's Series 2 Preferred Stock
(collectively, the "Surrendered Securities"), which securities represent all of
the Adeza capital stock, or rights to acquire Adeza capital stock, held
beneficially or of record by Matria or its affiliates. Matria acknowledges and
agrees that following the Effective Date it will have no right to receive any
shares of the Adeza Series 1 Preferred Stock for which the Adeza Series E
Preferred Stock was to be exchanged. To properly effect the surrender of the
Preferred Stock, Matria shall, on or prior to the Effective Date, complete,
execute and deliver to Adeza the assignments separate from certificate attached
as Exhibit B hereto.

2.2 Representations Regarding Ownership. Matria hereby represents and
warrants that, as of the Effective Date:

(a) It is the sole record and beneficial owner of the Surrendered
Securities and has good and valid title to such Surrendered Securities free and
clear of all restrictions, claims, liens, charges, pledges and encumbrances
whatsoever, except for such restrictions, claims, liens, charges, pledges or
encumbrances as may have been created by Adeza;

(b) It has full right, power and authority to transfer and deliver
such Surrendered Securities to Adeza, and, upon delivery of the securities or
any certificates therefor along with the executed assignments separate from
certificate attached hereto as Exhibit B, and

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<PAGE> 5

following Adeza's acceptance thereof, will transfer to Adeza good and valid
title thereto free and clear of any restriction, claim, lien, charge or
encumbrance whatsoever;

(c) It is not a party to any voting trust, voting proxy, agreement
or arrangement affecting the exercise of the voting rights of the Surrendered
Securities;

(d) Other than the Litigation, there is no action, proceeding,
claim or, to its knowledge, investigation or threatened investigation against it
or its assets or properties, at law or in equity, or before any court,
arbitrator or other tribunal, or before any administrative law judge, hearing
officer or administrative agency relating to or in any other manner impacting
upon the Surrendered Securities and the cancellation of the Surrendered
Securities contemplated hereby; and

(e) With the exception of the Surrendered Securities, it, together
with its affiliates, does not hold any interest in any capital stock of Adeza or
any securities convertible into or exercisable for the capital stock of Adeza.

ARTICLE 3

ROYALTIES

3.1 Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:

(a) "fFN ELISA Test" shall mean Adeza's fFN qualitative,
enzyme-linked immunosorbant assay diagnostic test, in such form as it shall
exist during the period that royalties are due hereunder, as used to measure the
presence of fetal fibronectin in the vaginal fluid of pregnant women in order to
assess the likelihood of birth.

(b) "fFN Rapid Assay Test" shall mean the disposable, dry chemistry
derivative of the fFN ELISA Test, in such form as it shall exist during the
period that royalties are due hereunder. For the purposes of this Article 3, the
term "fFN Rapid Assay Test" shall include any biochemical diagnostic test
incorporating any material portion of Adeza's fFN technology as contained in the
fFN ELISA Test or fFN Rapid Assay Test as of the Effective Date.

The terms fFN ELISA Test or fFN Rapid Assay Test shall include: fFN
specimen collection kits, fFN control kits and fFN analyzers distributed for fFN
ELISA Test and fFN Rapid Assay Test-specific uses; products that are directly
and integrally related to the obtaining of a fFN ELISA Test result or a fFN
Rapid Assay Test result; and the processing and analyzing of a specimen, but
shall exclude printers and other peripherals attached to the analyzers.

(c) "Net Sales" for a fFN ELISA Test or a fFN Rapid Assay Test
shall mean all amounts actually received by Adeza, any Adeza Affiliate (as
defined below) or any successor-in-interest to all or substantially all of
Adeza's fFN ELISA Test business and/or fFN Rapid Assay Test business (a
"Successor"), from the sale, processing or analyzing of such test by Adeza and
such Adeza Affiliate (or such Successor and its affiliates) in the Territory to
any unaffiliated third party, whether or not for resale to others, less the
following deductions actually

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<PAGE> 6

paid or allowed by Adeza or such Adeza Affiliate (or such Successor): quantity
and cash discounts normal and customary in the trade; sales, use and other
similar taxes; amounts repaid or credited by reason of rejection or return; and
any transportation, delivery and insurance charges related thereto paid by Adeza
or such Adeza Affiliate (or such Successor); provided, however, that to the
extent that the fFN ELISA Tests or the fFN Rapid Assay Tests are sold in the
form of bundling with other products or services which are also sold by Adeza or
an Adeza Affiliate (or such Successor) in material quantities on a stand alone
basis for use other than with an fFN Test (other than the service performed in
processing such fFN ELISA Tests or fFN Rapid Assay Tests), the Net Sales for the
fFN ELISA Test or fFN Rapid Assay Test included therein shall be the sum
obtained by multiplying the Net Sales for the sale of the bundled package as a
whole by a fraction, the numerator of which shall be the list price of such fFN
ELISA Test or fFN Rapid Assay Test (calculated as set forth above in this
subsection 3.1(c)) and the denominator of which shall be the sum of the list
prices of each component included within such bundled package. Amounts received
upon sales of fFN ELISA Tests and fFN Rapid Assay Tests (including the
processing and analyzing of tests) to an Adeza Affiliate shall not be included
within the definition of Net Sales and shall be disregarded for purposes of
determining the amounts due Matria under this Article 3.

(d) "Marketing Fee" shall mean the portion of any up-front or lump
sum payment (either in the form of cash or property) from a third party received
by Adeza or an Adeza Affiliate (or any Successor) that would appropriately be
characterized as a payment made by such third party in consideration for the
granting of rights to such third party by Adeza or an Adeza Affiliate (or such
Successor) to market, sell, distribute or provide to patients the fFN ELISA
Tests or fFN Rapid Assay Tests, less sales or use taxes actually paid by Adeza
or such Adeza Affiliate (or such Successor) on such portion and any amount of
such portion subsequently forfeited by Adeza or such Adeza Affiliate (or such
Successor). In the event that a Marketing Fee is paid in the form of property,
that Marketing Fee shall be deemed to be the fair market value of such property
on the date of transfer for purposes of Section 3.2. All payments received upon
the granting to an Adeza Affiliate (after becoming an Adeza Affiliate) of rights
to market, sell, distribute or provide to patients the fFN ELISA Tests or fFN
Rapid Assay Tests shall not be deemed a Marketing Fee and shall be disregarded
for purposes of determining the amounts due Matria under this Article 3.

(e) "Adeza Affiliate" shall mean any corporation, company or other
entity controlling, controlled by, or under common control with Adeza, where
control means the ownership of thirty percent (30%) or more of an entity's
outstanding voting securities; provided, however, that such corporation, company
or other entity shall be considered an Adeza Affiliate only for the time during
which such control exists.

3.2 Royalty Obligations. Adeza shall pay to Matria a royalty equal to:

(a) One Percent (1%) of (i) the Net Sales from all fFN ELISA Tests
sold to an unaffiliated third party following the Effective Date and (ii) the
Marketing Fees with respect to the grant of rights to the fFN ELISA Tests (which
grant is independent from a grant of rights to the fFN Rapid Assay Tests)
following the Effective Date;

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<PAGE> 7

(b) One-Half of One Percent (0.5%) of (i) the Net Sales from all
fFN Rapid Assay Tests sold to an unaffiliated third party following the
Effective Date and (ii) the Marketing Fees with respect to the grant of rights
to the fFN Rapid Assay Tests (which grant is independent from a grant of rights
to the fFN ELISA Tests) following the Effective Date; and

(c) Three-Quarters of One Percent (0.75%) of the Marketing Fees
with respect to the grant, in a single transaction, of rights to both the fFN
ELISA Tests and the fFN Rapid Assay Tests;

provided, however, that in the event that Adeza's or an Adeza
Affiliate's (or any Successor's) aggregate royalty obligations hereunder for
sales of any fFN ELISA Test or fFN Rapid Assay Test, when combined with [...]*
and [...]* exceed Five Percent (5%) of the Net Sales from such test, the royalty
payment obligations set forth in subsections 3.2(a) and (b) above shall be
reduced pro rata with the royalty obligations due all other royalty payees
(presuming reduction of the royalty payment obligations due all other royalty
payees regardless of whether Adeza or such Adeza Affiliate (or such Successor)
is legally entitled to actually reduce or pro rate such other royalties) such
that the total royalties payable by Adeza (or such Successor) to Matria for the
sale of such fFN ELISA Test or fFN Rapid Assay Test shall presume that all
royalties payable by Adeza or such Adeza Affiliate (or such Successor) for the
sale of such test shall not exceed Five Percent (5%) of the Net Sales for such
test sale [...]* and, provided, further, that in no event shall the aggregate
royalties payable to Matria under this Section 3.2 exceed Twelve Million Dollars
($12,000,000). The foregoing example is presented for illustration purposes only
and is not intended to imply that any royalties are actually owing to third
parties or that the amount of any such royalty, if deemed to be owing, is or
should be equal to the percentages set forth above.

3.3 Payment; Reports. Until such time as Matria has been paid aggregate
royalties in the amount of Twelve Million Dollars ($12,000,000) pursuant to
Section 3.2 above (the "Royalty Period"), Adeza shall submit to Matria, and
shall require each Successor to submit to Matria, within thirty (30) days
following each March 31, June 30, September 30 and December 31 hereafter, (a)
the royalties payable under Section 3.2 above on all fFN ELISA Tests and fFN
Rapid Assay Tests sold by Adeza, Adeza Affiliates and Successors during the
three (3) month period preceding such date and (b) a report identifying (i) the
aggregate Net Sales on such tests and (ii) the royalties payable to Matria as a
result of the fFN ELISA Test and fFN Rapid Assay Test sales during such period
determined in accordance with Section 3.2 above. In the event that the royalties
payable to Matria are prorated in accordance with Section 3.2 above, Adeza
shall, upon Matria's request, certify that such proration was appropriate under
Section 3.2 as a result of royalties paid, or to be paid, on the fFN Test sales
by Adeza to third parties holding rights in the patents set forth on Schedule
3.2. [...]* If no royalties are due Matria for any reporting period, the
report shall so indicate. Adeza shall cause the Successors, if any, to assume
their obligations under this Article 3 expressly in writing and shall deliver
the same to Matria.

3.4 Audit Rights. During the Royalty Period and for a period of one (1)
year thereafter, Adeza (and any Successor) shall maintain complete and accurate
records in accordance with generally accepted methods of accounting for all
transactions which would

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*"Confidential treatment is requested for the language which has been redacted."

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<PAGE> 8

require a royalty payment to Matria pursuant to Section 3.2. An independent
accounting firm retained by Matria and reasonably acceptable to Adeza shall have
access to such records (including agreements setting forth any third party
royalty payment obligations that necessitate proration in accordance with
Section 3.2 above) no more than once per year, upon reasonable notice and during
Adeza's, or such Successor's (as the case may be), normal business hours, for
the purposes of auditing such records for so long as such records are required
to be maintained hereunder. As a condition to such audit, the independent
accountant selected by Matria shall execute a written agreement, reasonable
satisfactory to Adeza, to maintain in confidence all information obtained during
the course of any such audit except for disclosure to Matria regarding the
existence or non-existence and amount, if applicable, of any discrepancy between
Adeza's or its Successor's records and their payment of royalties to Matria
under this Agreement and Release. Adeza (or such Successor) shall pay to Matria
the amount of any underpayment so discovered and Matria shall refund the amount
of any overpayment so discovered. Matria shall pay the expenses of the audit,
unless the audit reveals an underpayment of royalties in excess of ten percent
(10%) during the audited period, in which case Adeza (or such Successor) shall
pay Matria the reasonable fees and expenses of such audit, and shall pay the
amount of any underpayment so revealed.

ARTICLE 4

NON-COMPETITION

During the period of time from the Effective Date up to and including
December 31, 1998, Matria shall not, directly or indirectly, develop, market,
sell or otherwise distribute any biochemical markers or biochemical tests that
are competitive with fFN Tests (e.g., salivary estriol).

ARTICLE 5

FULL CONSIDERATION AND SETTLEMENT

5.1 Settlement of Adeza Claims. Adeza, for itself and its successors,
subsidiaries, directors, officers, stockholders, employees, representatives,
distributors, agents, legal representatives and assigns (the "Adeza Affiliated
Entities"), does hereby agree that the obligations and restrictions imposed upon
Matria pursuant to the terms of this Agreement and Release represent settlement
in full of any and all Adeza and Adeza Affiliated Entity claims, assertions of
claims, demands, actions, causes of action, suits, debts, losses, executions,
judgments, settlements, liabilities, damages, costs and expenses (including
attorney's fees) of any nature, direct or indirect, known or unknown, suspected
or unsuspected, matured or unmatured, past, present and future, or any other
form of legal or equitable relief, arising from or relating to the Exclusive
Marketing Agreement and/or the matters set forth in the Complaint (collectively,
the "Adeza Claims"); provided, however, that nothing contained in this Section
5.1 shall relieve Matria of its obligations under this Agreement and Release
including, without limitation, Section 13.2 below.

5.2 Settlement of Matria Claims. Matria, for itself and its successors,
subsidiaries, predecessors, directors, officers, stockholders, employees,
representatives, distributors, agents,

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<PAGE> 9

legal representatives and assigns (the "Matria Affiliated Entities"), does
hereby agree that the obligations and restrictions imposed upon Adeza pursuant
to the terms of this Agreement and Release represent settlement in full of any
and all Matria and Matria Affiliated Entity claims, assertions of claims,
demands, actions, causes of action, suits, debts, losses, executions, judgments,
settlements, liabilities, damages, costs and expenses (including attorney's
fees) of any nature, direct or indirect, known or unknown, suspected or
unsuspected, matured or unmatured, past, present and future, or any other form
of legal or equitable relief, arising from or relating to the Exclusive
Marketing Agreement and/or the matters set forth in the Counterclaims
(collectively, the "Matria Claims"); provided, however, that nothing contained
in this Section 5.2 shall relieve Adeza of its obligations under this Agreement
and Release including, without limitation, Section 13.1 below.

ARTICLE 6

RELEASE AND COVENANT NOT TO SUE

6.1. Release and Covenant Not to Sue by Adeza. With the exception of
the obligations of Matria set forth in this Agreement and Release, Adeza, on
behalf of itself, the Adeza Affiliated Entities, and any other persons or
entities which may or could assert claims by or through it, hereby agrees to
release, covenant not to sue, acquit and forever discharge, both individually
and collectively, Matria as well as any Matria Affiliated Entity of and from any
and all Adeza Claims.

6.2. Release and Covenant Not to Sue by Matria. With the exception of
the obligations of Adeza set forth in this Agreement and Release, Matria, on
behalf of itself, the Matria Affiliated Entities and any other persons or
entities which may or could assert claims by or through it, hereby agree to
release, covenant not to sue, acquit and forever discharge, both individually
and collectively, Adeza as well as any Adeza Affiliated Entity of and from any
and all Matria Claims.

6.3 California Civil Code Section 1542 and Related Statutes. Adeza and
Matria each understand, and for valuable consideration do hereby waive, all of
the rights and benefits they may have under Section 1542 of the California Civil
Code, which section reads as follows:

"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THIS SETTLEMENT WITH THE
DEBTOR;"

along with all rights and benefits they may have under analogous provisions of
the laws of the State of Georgia.

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<PAGE> 10

ARTICLE 7

DISMISSAL

The Parties agree to take any and all steps necessary to accomplish the
immediate dismissal of the various claims and crossclaims by each of them
against the other in the Litigation within five (5) business days following the
Effective Date. The dismissals shall be with prejudice and with each party to
assume responsibility for its own costs.

ARTICLE 8

NO ADMISSION

8.1 No Admission by Matria. Adeza acknowledges that Matria's agreement
to be bound by the obligations and restrictions set forth in this Agreement and
Release does not constitute an admission of liability, express or implied, on
the part of Matria with respect to any fact or matter alleged in the Complaint
and that such agreement is being provided solely for the purpose of amicably
resolving the claims by Adeza against Matria.

8.2 No Admission by Adeza. Matria acknowledges that Adeza's agreement
to be bound by the obligations and restrictions set forth in this Agreement and
Release does not constitute an admission of liability, express or implied, on
the part of Adeza with respect to any fact or matter alleged in the
Counterclaims and that such agreement is being provided solely for the purpose
of amicably resolving the claims by Matria against Adeza.

ARTICLE 9

NO PRIOR ASSIGNMENT

9.1 No Prior Assignment by Adeza. Adeza represents and warrants that no
portion of any Adeza Claim to which Adeza might be entitled has been assigned,
subrogated or transferred to any other person, firm, corporation or other
entity, by operation of law or otherwise. In the event that any Adeza Claim
should be made or instituted against Matria or a Matria Affiliated Entity
because of any such purported assignment or subrogation or transfer, Adeza
agrees to indemnify and hold harmless Matria and the Matria Affiliated Entities,
as the case may be, against any such Adeza Claim, and to pay and satisfy any
such Adeza Claim, including necessary expenses of investigation, attorneys' fees
and costs.

9.2 No Prior Assignment by Matria. Except for any assignment or
transfer that may be deemed to have occurred from Tokos to Matria in connection
with the merger of Tokos and Healthdyne into Matria, Matria represents and
warrants that no portion of any Matria Claim to which Matria might be entitled
has been assigned, subrogated or transferred to any other person, firm,
corporation or other entity, by operation of law or otherwise. In the event that
any Matria Claim should be made or instituted against Adeza or an Adeza
Affiliated Entity because of any such purported assignment or subrogation or
transfer, Matria agrees to indemnify and hold harmless Adeza and the Adeza
Affiliated Entities, as the case may be, against any such Matria Claim, and to
pay and satisfy any such Matria Claim, including necessary expenses of
investigation, attorneys' fees and costs.

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ARTICLE 10

NON-DISPARAGEMENT; PRESS RELEASES

10.1 Non-Disparagement. Each party agrees not to disparage the other
party, its directors, officers, employees, contractors, agents, products or
services. Each party shall institute appropriate policies and guidelines
(collectively "Policies") for its directors, officers, employees, contractors,
agents and other representatives that prohibit the disparagement of the other
party, its directors, officers, employees, contractors, agents, products or
services, and shall use reasonable efforts to disseminate copies of all such
Policies to such persons and to instruct such persons in good faith on the
importance of adhering to such Policies. Each party agrees that, in the event an
alleged violation of such party's Policies is brought to the attention of such
party's management, such management will again instruct in good faith the person
alleged to have violated such Policies as to the existence of the Policies and
the importance of his or her adherence thereto. So long as a party has complied
with its obligations as specifically set forth in this Section 10.2, such party
shall not be obligated to take any other measures by way of enforcing such
Policies, nor be liable in any respect for any violation of the Policies. The
parties acknowledge and agree, however, that, on and after January 1, 1999,
either party may, as otherwise permitted by this Agreement and Release, make
accurate, non-misleading factual statements regarding the other party's products
or services that may have a disparaging effect.

10.2 Press Releases. On the Effective Date or shortly thereafter, the
parties shall issue a joint press release in the form attached as Exhibit C
hereto; provided, however, that in the event that a third party publishes or
broadcasts information that, in the good faith judgment of a party, necessitates
the disclosure of more specific information concerning the financial terms of
this Agreement and Release than was set forth in such press release, such party
shall notify the other party of its intent to respond to such publication or
broadcast, the timing of its response and the specific manner in which it
intends to respond, and may thereafter disclose the additional information
regarding the financial terms of this Agreement and Release as limited by
Article 12 hereof. Except as permitted by the preceding sentence, neither party
shall distribute or publish any press release during the initial thirty (30) day
period following the Effective Date regarding the Litigation, this Agreement and
Release or any dispute between the parties with respect to the matters set forth
in the Complaint or the Counterclaims, as the case may be. After the initial
thirty (30) day period following the Effective Date up until the one (1) year
anniversary of the Effective Date, neither party shall distribute or publish any
press release (a) regarding the Litigation or any dispute between the parties
with respect to the matters set forth in the Complaint or the Counterclaims, as
the case may be, or (b) that references the other party or its products and
services in a manner that could reasonably be deemed to be derogatory or
disparaging, without first obtaining such other party's consent to the contents
of such press release, which consent shall not be unreasonably withheld or
delayed; provided, however, that either party shall be entitled to issue a press
release regarding, the matters set forth in (a) or (b) above without the other
party's consent so long as the description of such matters conforms in general
terms to the description set forth in the joint press release attached as
Exhibit C hereto. Notwithstanding the foregoing, either party shall have the
right to file reports with the Securities and Exchange Commission ("SEC") and
the National Association of Securities Dealers, Inc. ("NASD") regarding the
execution and effect of this Agreement and Release as such party deems necessary
to comply with the rules and regulations of the SEC and the NASD, as the case
may

-11-
<PAGE> 12

be, without the other party's consent; provided, however, that under no
circumstances shall Matria disclose the information contained in the following
portions of the Agreement and Release: (1) clauses (i) and (ii) in the fourth
paragraph of Section 3.2 (in lieu thereof the parties may simply refer to
"certain royalties"); (2) the example set forth in parentheses in the
penultimate sentence of Section 3.2; (3) the representation set forth in the
third sentence of Section 3.3; (4) Schedule 3.2; and (5) clauses (i), (ii) and
(iii) in the second paragraph of Exhibit A and the numerical reference in the
subsequent sentence of such second paragraph (the "Adeza-Specific Information").
In the event that Matria intends to file this Agreement and Release as an
exhibit to any SEC or other government agency filing, Matria shall so notify
Adeza and shall work with Adeza to file a Confidential Treatment Request with
respect to the Adeza-Specific Information, seeking to preserve the
confidentiality of such Adeza-Specific Information.

ARTICLE 11

REPRESENTATIONS AND WARRANTIES

11.1 Mutual Representations. Adeza and Matria each hereby represent and
warrant that:

(a) it has the authority to execute, deliver and perform this
Agreement and Release and bind the entity on whose behalf it purports to execute
this Agreement and Release;

(b) this Agreement and Release is the result of arms' length
negotiations among the parties, who were each represented by counsel;

(c) it intends this Agreement and Release to be final and binding
between the parties hereto, including their respective predecessors, successors
and assigns; and

(d) it will not take, intentionally, any action that would
interfere with or impair the performance of this Agreement and Release, or the
transactions contemplated hereby by any other party hereto.

11.2 Matria Representations. Matria further represents and warrants
that, as of the date hereof, to the knowledge of its management staff:

(a) except for the Litigation, there are no claims, actions,
suits, inquiries, proceedings, or investigations pending or threatened, at law
or in equity, or by any federal, state, local or foreign government agency
(including, without limitation, the Food and Drug Administration ("FDA"), the
Centers for Disease Control and Prevention, and the Health Care Finance
Administration) or professional organization (including, without limitation, the
American Medical Association and the College of American Pathologists) against
Matria or any of the Matria Affiliated Entities resulting from or arising out of
(i) the use, sale, distribution or marketing of, or reimbursement, regulatory
matters or clinical trials with respect to, Adeza's products or services or (ii)
Matria's or a Matria Affiliated Entity's performance under the Exclusive
Marketing Agreement; and

(b) neither Matria nor any Matria Affiliated Entity has violated
any material provision of an applicable federal, state, local or foreign law,
statute, rule, regulation or guideline

-12-
<PAGE> 13

(including, without limitation, the United States Food and Drug Act, good
manufacturing practices as outlined by the FDA, and the United States Clinical
Laboratory Improvement Act of 1988, as amended) (collectively "Violations") in
connection with its performance under the Exclusive Marketing Agreement,
performance of fFN Tests, or the use (internally by Matria or a Matria
Affiliated Entity for testing or demonstrational purposes), sale, distribution,
marketing or manufacture of, or reimbursement, regulatory matters or clinical
trials with respect to, Adeza's products or services; provided, however, that
notwithstanding the representations set forth in Sections 11.2(a) or (b), Matria
makes no representation hereunder with respect to any Violation resulting from
(i) actions taken at the specific request of Adeza or (ii) Adeza's failure to
package materials delivered by Adeza to Matria in accordance with FDA
regulations.

11.3 Adeza Representations. Adeza further represents and warrants that,
as of the date hereof, to the knowledge of its management staff:

(a) except for the Litigation, there are no claims, actions,
suits, inquiries, proceedings, or investigations pending or threatened, at law
or in equity, or by any federal, state, local or foreign government agency
(including, without limitation, the FDA, the Centers for Disease Control and
Prevention, and the Health Care Finance Administration) or professional
organization (including, without limitation, the American Medical Association
and the College of American Pathologists) against Adeza or any of the Adeza
Affiliated Entities resulting from or arising out of (i) the use, sale,
marketing, distribution, development, or manufacture of, or reimbursement,
regulatory matters or conduct of clinical trials with respect to, Adeza's
products or services or (ii) Adeza's or an Adeza Affiliated Entity's performance
under the Exclusive Marketing Agreement; and

(b) neither Adeza nor any Adeza Affiliated Entity has committed a
Violation in connection with its performance under the Exclusive Marketing
Agreement, performance of fFN Tests, or the use, sale, marketing, distribution,
development, or manufacture of, or reimbursement, regulatory matters or conduct
of clinical trials with respect to, Adeza's fFN products or services.

ARTICLE 12

CONFIDENTIALITY

The terms of this Agreement and Release shall be considered strictly
confidential and shall not be disclosed by the parties or their attorneys or
agents to any person or entity not named as a party herein, except: (a) as
necessary for compliance and implementation of the terms of this Agreement and
Release; (b) to the parties' accountants, attorneys or tax advisors who have a
need to know; (c) to the extent that the disclosing party deems it necessary to
comply with the information disclosure requirements under federal and state
securities laws or the rules and regulations of the NASD; (d) to its employees;
(e) as may be appropriately disclosed at that time in a press release permitted
by this Agreement and Release; (f) during the thirty (30) day period immediately
following the Effective Date to investors, securities analysts and others in the
securities business in direct response to specific questions and, following the
initial thirty (30) day period after the Effective Date, to investors,
securities analysts and others in the securities business and (g) as may be
required by applicable law or judicial or government order; provided,

-13-
<PAGE> 14

however, that upon receipt of any such legal request to disclose the terms of
this Agreement and Release, the party receiving such request shall promptly
notify the other party of the terms of such request and shall cooperate with the
other party to limit disclosure to the minimum extent necessary to comply with
such law or order. Notwithstanding the foregoing, under no circumstances shall
Matria, its attorneys or agents disclose any Adeza-Specific Information other
than pursuant to subsections (a), (b) or (g) of the immediately preceding
sentence. The parties further acknowledge that the parties shall be entitled to
disclose to parties with whom they have, or are negotiating for, contractual
relationships or customers or potential customers of fFN Tests that upon the
conclusion of the Transition Period Matria will no longer be marketing fFN
products or services.

ARTICLE 13

INDEMNIFICATION

13.1 Adeza Obligations. Adeza shall defend, indemnify and hold Matria
and the Matria Affiliated Entities harmless from and against any and all claims,
actions, damages, liabilities, judgments, costs and expenses (including, without
limitation, reasonable attorney's fees and expenses) in connection with,
relating to or arising from: (a) any third party claim alleging (i) that the
use, sale, distribution or marketing of the fFN ELISA Tests or fFN Rapid Assay
Tests infringes the patent, copyright, trademark, trade secret or other
intellectual property right of such third party, except to the extent that such
alleged infringement arises or results from (A) any unauthorized modification or
combination of the fFN ELISA Tests or fFN Rapid Assay Tests as delivered to
Matria by Adeza or (B) any failure by Matria or a Matria Affiliated Entity to
follow the use and distribution guidelines provided by Adeza relating to the fFN
ELISA Tests or fFN Rapid Assay Tests, or (ii) that the use of the fFN ELISA
Tests or fFN Rapid Assay Tests has resulted in property damage or bodily injury
to such third party, except to the extent that such damage or injury arises or
results from (A) Matria's, or a Matria Affiliated Entity's, unauthorized
modification or combination of the fFN ELISA Tests or fFN Rapid Assay Tests as
delivered to Matria by Adeza, (B) any failure by Matria or a Matria Affiliated
Entity to follow the use and distribution guidelines provided by Adeza relating
to the fFN ELISA Tests or fFN Rapid Assay Tests or (C) any reckless or negligent
act or failure to act on the part of Matria or a Matria Affiliated Entity; (b)
damages resulting from a defect in the design or manufacture of an Adeza product
supplied to Matria by Adeza or the failure of any such product, in the form
provided by Adeza, to perform in accordance with Adeza's published
specifications when used in accordance with Adeza's instructions and/or
guidelines; (c) the acts of any third party distributor other than a Matria
Affiliated Entity in selling or distributing Adeza's products and services; (d)
Adeza's breach of its representations, warranties or covenants under this
Agreement and Release; provided, however, that Matria's sole remedy with respect
to a breach by Adeza of its Transition Responsibilities (other than a payment
default with respect to payments due after the end of the Transition Period)
shall be as set forth in Section 1.2 hereof; or (e) a Violation resulting from
or arising out of Adeza's (i) development, manufacture, packaging or processing
of any Adeza fFN products or services or (ii) performance under the Exclusive
Marketing Agreement.

13.2 Matria Obligations. Matria shall defend, indemnify and hold Adeza
and the Adeza Affiliated Entities harmless from and against any and all claims,
actions, damages, liabilities, judgments, costs and expenses (including, without
limitation, reasonable attorney's

-14-
<PAGE> 15

fees and expenses) in connection with, relating to or arising from: (a) any
third party claim alleging (i) that, except as covered by Adeza's
indemnification obligations set forth in Section 13.1 above, the use (internally
by Matria or a Matria Affiliated Entity for testing or demonstrational
purposes), sale, distribution or marketing of the fFN ELISA Tests or fFN Rapid
Assay Tests infringes the patent, copyright, trademark, trade secret or other
intellectual property rights of such third party, or (ii) that modifications or
combinations made by Matria or a Matria Affiliated Entity to the fFN ELISA Tests
or fFN Rapid Assay Tests have resulted in, or that any reckless or negligent act
or failure to act on the part of Matria or a Matria Affiliated Entity in
connection with the use, sale, distribution or marketing of such tests has
resulted in, property damage or bodily injury to such third party or the failure
of the Adeza products to perform in accordance with Adeza's published
specifications; (b) any unauthorized representations or warranties made by
Matria or a Matria Affiliated Entity with respect to Adeza or its products and
services; (c) Matria's breach of its representations, warranties or covenants
under this Agreement and Release; provided, however, that Adeza's sole remedy
with respect to a breach by Matria of its Transition Responsibilities (other
than a payment default with respect to payments due after the end of the
Transition Period) shall be as set forth in Section 1.2 hereof; (d) Matria's, or
a Matria Affiliated Entity's, breach of any agreement with, or unfulfilled
commitment to, a third party, which agreement or commitment is related to the
fFN ELISA Tests or fFN Rapid Assay Tests; provided, however, that Matria shall
not be responsible to the extent that such breach or unfulfillment resulted from
an activity or circumstance for which Adeza would be obligated to indemnify
Matria pursuant to Section 13.1 above; or (e) a Violation resulting from or
arising out of Matria's or any Matria Affiliated Entity's (i) use (internally by
Matria or a Matria Affiliated Entity for testing or demonstrational purposes),
sale, distribution or marketing of, or laboratory analysis, reimbursement or
clinical trials with respect to, any Adeza products or services or (ii)
performance under the Exclusive Marketing Agreement; provided, however, that
Matria shall have no responsibility under this Section 13.2 for any Violation
resulting from (A) actions taken at the specific request of Adeza or (B) Adeza's
failure to package materials delivered by Adeza to Matria in accordance with FDA
regulations.

13.3 Procedural Requirements. In the event that a party seeks
indemnification pursuant to Sections 9.1, 9.2, 13.1 or 13.2 above (the
"Indemnified Party"), such Indemnified Party shall (a) provide prompt written
notice to the other party (the "Indemnifying Party") detailing the claim for
which indemnification is being sought hereunder, (b) allow the Indemnifying
Party to have sole control over the defense or settlement of such claim,
provided that the Indemnifying Party agrees in writing to accept a tender of
defense of such claim and assume full responsibility therefor at the time at
which it assumes such control and, provided further, that the Indemnifying Party
shall not settle any such claim without the prior written consent of the
Indemnified Party if such settlement could reasonably be construed as having an
adverse effect on the rights of the Indemnified Party, which consent, if
required, will not be unreasonably withheld or delayed and (c) upon the request
of the Indemnifying Party, and at the Indemnifying Party's request, provide all
reasonable and necessary assistance to the Indemnifying Party for the purpose of
defending or settling such claim.

-15-
<PAGE> 16

ARTICLE 14

GOVERNING LAW AND DISPUTE RESOLUTION

14.1 Governing Law. This Agreement and Release shall be governed by and
construed and enforced in accordance with the laws of the State of California,
without regard to its conflicts of law provisions.

14.2 Dispute Resolution In the event that either Adeza or Matria shall
have a dispute regarding the interpretation of any provision of, or the other
party's compliance with any term or condition of, this Agreement and Release
(other than with respect to the performance of the Transition Responsibilities,
which shall be governed by subsections 1.2(c) and (d) above), then the following
procedures shall be followed:

(a) such claim shall be in the form of a written notice by the
party with the claim ("Claiming Party") to the other party ("Responding Party")
setting forth the nature of the claim, including, without limitation, the
alleged legal basis therefor, the persons or entities against which such claim
is made, and the proposed remedy;

(b) within ten (10) business days after receipt of such notice,
the Responding Party shall respond in writing to the Claiming Party either
accepting, denying or proposing a different remedy;

(c) the parties may continue in such manner until there is a
mutually acceptable resolution of the matter; provided, however, that after (a)
and (b) have occurred at least once, then either party may request, upon written
notice to the other, for the commencement of mediation by a mutually acceptable
third party in no less than thirty (30) business days from the date of such
notice. In the event that the parties cannot agree on an appropriate third party
within ten (10) business days of the date of the notice, then a mediator shall
be appointed pursuant to the rules of JAMS-Endispute;

(d) the parties may continue in such mediation until there is a
mutually acceptable resolution of the matter; provided, however, that if such
mediation does not result in such resolution within ten (10) business days after
its commencement, then either party may request, upon written notice to the
other, for the commencement of arbitration by a mutually acceptable third party
in no less than sixty (60) business days from the date of such notice, which
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association. In the event that the parties cannot agree on an
appropriate arbitrator within ten (10) business days of the date of the notice,
then an arbitrator shall be appointed pursuant to the rules of the American
Arbitration Association. Any decision by such arbitrator shall be final and
binding upon the parties. The arbitrator shall be required to provide in writing
to the parties the basis for the arbitrator's decision and award, and a court
reporter shall record all hearings for the arbitration with such record
constituting the official transcript of the arbitration proceedings;

(e) All such mediation and arbitration proceedings shall take
place at a mutually convenient time and place in Chicago, Illinois; and

-16-
<PAGE> 17

(f) The party asserting any claim pursuant to (a) above shall bear
(i) its own attorney's fees arising out of the proceedings described in this
Section 14.2 and (ii) the costs of mediation and arbitration; provided, however,
that in the event that a party is determined by the arbitrator to be the
prevailing party in such proceedings (or, in the event the parties do not take
the claim to arbitration, and a party is determined by the mediator to be the
prevailing party in such proceedings) the mediator or arbitrator, at their
discretion, may recommend that the prevailing party be reimbursed by the
non-prevailing party for all reasonable expenses and costs incurred by the
prevailing party in protecting or enforcing its rights hereunder, including,
without limitation, its reasonable attorneys' fees. The parties seek to have the
time and expense of the mediation or arbitration minimized to the maximum extent
practicable under the circumstances.

ARTICLE 15

VOLUNTARY AND INFORMED DECISION

The advice of legal counsel has been obtained by each party prior to
signing this Agreement and Release. The parties each acknowledge and represent
that it is executing this Agreement and Release voluntarily with full knowledge
of its legal significance. The parties further acknowledge that each party, with
the assistance of counsel, has participated in the drafting of this Agreement
and Release and that any ambiguity should not be construed for or against any
party on account of such drafting. The parties agree that this Agreement and
Release has been negotiated at arms' length by parties of equal bargaining
power, each of whom was represented by competent counsel of its own choosing.
The parties further acknowledge that the obligations and releases herein
described are in good faith and are reasonable in the context of the matters
released.

ARTICLE 16

PROPRIETARY INFORMATION

Matria shall maintain confidential and shall not use for any purpose
other than that stipulated herein any part of the technical information,
proprietary information or trade secrets received from Adeza in connection with
the Exclusive Marketing Agreement and/or this Agreement and Release; provided,
however, that the obligations of this Article 16 shall not apply to information
which: (a) was in the possession of Matria prior to its receipt from Adeza as
evidenced by written documents; (b) is or hereafter becomes publicly known
through no fault of Matria; or (c) is disclosed to Matria by a third party
entitled to disclose it.

ARTICLE 17

NON-SOLICITATION

Each party agrees that, until December 31, 1998, neither it nor its
affiliates shall solicit any employee or consultant of the other party to
terminate his or her relationship with such other party; provided, however, that
in no event shall either party be prohibited from hiring any employee or
consultant of the other party who makes an unsolicited application or inquiry
for employment or engagement.

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<PAGE> 18

ARTICLE 18

GENERAL PROVISIONS

18.1 Further Assurances. The parties represent, warrant and agree to
execute all documents and to do all things necessary to fully effectuate the
terms of this Agreement and Release.

18.2 Binding Nature. This Agreement and Release shall be binding upon
the administrators, successors and assigns of the respective parties hereto.

18.3 Survival. The representations, warranties, agreements, and
promises made by each party to this Agreement and Release and contained herein
shall survive the execution of this Agreement and Release.

18.4 Entire Agreement. This Agreement and Release, along with all
exhibits hereto, contains the entire agreement between the parties hereto and
supersedes all prior and contemporaneous agreements, arrangements, negotiations
and understandings between the parties hereto relating to the subject matter
hereof. No representations, warranties, covenants or conditions, express or
implied, whether by statute or otherwise, other than as set forth herein, have
been made by any party hereto regarding the subject matter hereof.

18.5 Waiver. The failure to enforce at any time any of the provisions
of this Agreement and Release or to require at any time performance by the other
party of any of the provisions hereof shall in no way be construed to be a
waiver of such provisions or to affect either the validity of this Agreement and
Release, or any part hereof, or the right of any party thereafter to enforce
each and every provision in accordance with the terms of this Agreement and
Release.

18.6 Severability. If any provision of this Agreement and Release shall
be held to be invalid, illegal or unenforceable by any court of competent
jurisdiction, then such provision shall be limited or eliminated to the minimum
extent necessary so that this Agreement and Release shall otherwise remain in
full force and effect and enforceable.

18.7 Attorney's Fees. Each parties' attorneys' fees incurred with
respect to the matters resolved hereby, including preparation of this Agreement
and Release, shall be paid by the party incurring the same.

18.8 Modification. No supplement, modification, amendment, or waiver of
any term, provision or condition of this Agreement and Release shall be binding
or enforceable unless executed in writing by the parties hereto.

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<PAGE> 19

18.9 Headings. The subject headings of the paragraphs and subparagraphs
of this Agreement and Release are included solely for purposes of convenience
and reference only, and shall not be deemed to explain, modify, limit, amplify
or aid in the meaning, construction or interpretation of any of the provisions
of this Agreement and Release.

18.10 Counterparts. This Agreement and Release may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

18.11 Satisfaction of Accounts. Adeza shall, within five (5) business
days following the Effective Date, pay to Matria all amounts invoiced to Adeza
pursuant to the Exclusive Marketing Agreement (whether or not such payment is
actually due as of the Effective Date) as itemized on Schedule 18.11 hereto, and
Matria acknowledges and agrees that such payment represents payment-in-full for
all amounts invoiced to Adeza pursuant to the Exclusive Marketing Agreement up
to and including the Effective Date. Matria shall, within five (5) business days
following the Effective Date, pay to Adeza all amounts invoiced to Matria
pursuant to the Exclusive Marketing Agreement (whether or not such payment is
actually due as of the Effective Date) as itemized on Schedule 18.11 hereto, and
Adeza acknowledges and agrees that such payment represents payment-in-full for
all amounts invoiced to Matria pursuant the Exclusive Marketing Agreement up to
and including the Effective Date.

18.12 Notice. Any notice required or permitted by this Agreement and
Release shall be in writing and shall be deemed sufficient upon receipt, when
delivered personally or by courier, overnight delivery service or confirmed
facsimile, or three (3) days after being deposited in the regular mail as
certified or registered mail with postage prepaid, if such notice is addressed
to the party to be notified at such party's address or facsimile number as set
forth below, or as subsequently modified by written notice, and (a) if to Adeza,
to the attention of the Chief Executive Officer, with a copy to Venture Law
Group, 2775 Sand Hill Road, Menlo Park, CA 94025, Attn: Joshua L. Green, or (b)
if to Matria, to the attention of the President, with a copy to the General
Counsel.

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<PAGE> 20

THIS AGREEMENT AND RELEASE has been duly executed and authorized by the
parties hereto as of the date set forth below.

Dated: March ___, 1998 ADEZA BIOMEDICAL CORPORATION

By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------

Address: 1240 Elko Drive
Sunnyvale, CA 94089
fax: (408) 745-7074

Dated: March ___, 1998 MATRIA HEALTHCARE, INC.

By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------

Address: 1850 Parkway Place, 12th Floor
Marietta, Georgia 30067
fax: (770) 423-7769

SIGNATURE PAGE TO AGREEMENT AND RELEASE

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<PAGE> 21

SCHEDULE 3.2

[...]*

- -----------------------------------
*"Confidential treatment is requested for the language which has been redacted."

<PAGE> 22

Schedule 18.11

PAYMENTS INVOICED TO MATRIA

<TABLE>
<CAPTION>
DESCRIPTION INVOICE # $ AMOUNT
---------------------------------------------------------------------------
<S> <C> <C>
Lab Tests 22836 $ 19,065.00
fFN Complete Kit 22906 $ 14,850.00*
Lab Tests 22982 $ 17,763.00
-----------
Lab Tests 22942 $ 20,584.00
-----------
TOTAL OUTSTANDING $ 72,262.00
</TABLE>

*INVOICE 22906 = $29,850 LESS PAYMENT $15,000 RECEIVED

PAYMENTS INVOICED TO ADEZA

<TABLE>
<CAPTION>
DESCRIPTION INVOICE DATE $ AMOUNT
---------------------------------------------------------------------------
<S> <C> <C>
FedEx Charges December $ 15,446.52
FedEx Charges January $ 13,247.21
FedEx Charges February $ 16,844.73

TOTAL OUTSTANDING $ 45,538.46
</TABLE>

<PAGE> 23

EXHIBIT A

TRANSITION RESPONSIBILITIES

Matria Responsibilities

Matria shall, during the Transition Period, perform in good faith the
following responsibilities with respect to the fFN ELISA Tests and the fFN Rapid
Assay Tests, in substantially the same manner and with the same degree of care
that it performed such responsibilities during the ninety (90) day period
preceding the Effective Date.

Matria shall process and fill orders for fFN ELISA Tests and provide
customer service and support. Matria shall pay for the fFN ELISA Tests
distributed by Matria during the Transition Period in accordance with the
payment practices in effect during the ninety (90) day period preceding the
Effective Date, except that (i) the price that Matria will pay for the ELISA
kits purchased during the Transition Period shall be [...]*, (ii) the price per
fFN ELISA Test shall be [...]* plus [...]* of all reimbursement amounts in
excess of [...]*, collected by Matria for such test and (iii) Adeza shall
provide to Matria, at Adeza's expense, [...]* individual specimen collection
kits for each fFN ELISA Test sold to Matria or [...]* individual specimen
collection kits, whichever is greater. In the event that Matria requires more
than [...]* individual specimen collection kits, it shall so notify Adeza,
whereupon the parties shall cooperate to ensure that Matria receives sufficient
quantities of specimen collection kits at no charge to Matria. Notwithstanding
the foregoing, Matria shall not be deemed to be in breach of its Transition
Responsibilities to the extent that such breach resulted from Adeza's failure to
provide sufficient quantities of specimen collection kits to Matria as set forth
in this paragraph.

Following the conclusion of the Transition Period, Matria shall
continue to pursue collections with respect to fFN ELISA Tests sold by Matria
during the Transition Period in accordance with its standard collection
practices and shall continue to remit to Adeza any share of such collections
owed to Adeza in accordance with the payment practices in effect during the
ninety (90) day period preceding the Effective Date. All payments by Matria to
Adeza as part of the Transition Responsibilities shall be made net thirty (30)
days following Matria's receipt of an invoice from Adeza.

Matria shall, at its expense, continue the two (2) clinical trials
currently in process in Arizona (the Elliot trials) until the conclusion of the
initial phase. As these trials involve Matria's other services in addition to
fFN, Matria will continue these trials at Matria's expense and, upon conclusion
of the initial phase, will provide Adeza a summary of the data and results
therefrom. Matria shall have no other obligations with respect to such clinical
trials and Matria shall own all right in the data and results of such clinical
trials.

As more fully set forth in Schedule A, Matria shall use commercially
reasonable efforts to facilitate the transfer of its regional laboratory
relationships to Adeza, provided that Matria

- ------------
*"Confidential treatment is requested for the language which has been redacted."

<PAGE> 24

makes no representation as to the willingness of any such laboratory to contract
with Adeza and shall not be liable in any respect by virtue of such laboratory's
refusal to enter into a contractual relationship with Adeza. The parties
acknowledge that, as of the date hereof, Penrose lab has announced its intention
to discontinue its role as a regional fFN testing laboratory effective March 9,
1998. Moreover, Matria will discontinue its efforts to establish its own
clinical laboratory in New York.

In addition, in the course of making physician sales calls with respect
to its other products, Matria may market fFN Tests to physicians.
Notwithstanding the foregoing, however, in no event shall Matria be required to
make managed care or physician sales calls (other than in conjunction with Adeza
as specifically outlined on Schedule A hereto), initiate new arrangements with
laboratories, seek Medicaid reimbursement for fFN Test, pursue the assignment of
CPT codes for fFN Tests, or undertake any other forward-looking market
development activities. Moreover, nothing herein shall be deemed to require
Matria to maintain any specific level of fFN Tests per week or month.

Matria shall not terminate without cause (including constructive
termination) any of its employees or contractors who are, as of the Effective
Date, involved in the marketing or distribution of fFN Tests, nor shall it
reassign any such employees or contractors to a non-fFN related position. In the
event that any such employee or contractor voluntarily terminates his or her
employment or is terminated with cause, Matria shall use commercially reasonable
efforts to temporarily reassign other of its employees or contractors (with
substantially similar skills if possible) as necessary to fulfill its Transition
Responsibilities.

Adeza Responsibilities

Adeza shall, during the Transition Period, perform in good faith the
following responsibilities with respect to the fFN ELISA Tests and the fFN Rapid
Assay Tests, in substantially the same manner and with the same degree of care
that it performed such responsibilities during the ninety (90) day period
preceding the Effective Date (including, without limitation, its obligations
with respect to product and service shipping charges): laboratory testing
services, reporting of laboratory testing service results, fulfillment of
product orders, regulatory and clinical support. Adeza will reimburse Matria for
actual freight charges related to fFN ELISA Test shipments not to exceed $12.00
per shipment. All payments by Adeza to Matria as part of the Transition
Responsibilities shall be made net thirty (30) days following Adeza's receipt of
an invoice from Matria.

EXCEPT FOR THE WARRANTIES SET FORTH IN THIS AGREEMENT AND RELEASE,
ADEZA MAKE NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE fFN ELISA
TESTS OR OTHER MATERIALS SUPPLIED TO MATRIA HEREUNDER AND EXPRESSLY DISCLAIMS
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

<PAGE> 25

Information Access and Copies

Within twenty (20) days following the Effective Date, Matria shall,
during Matria's normal business hours, provide Adeza with reasonable access to,
and copies (or, in Adeza's discretion, written summaries in sufficient detail as
to be useful) of, all information within Matria's control, in both electronic
and hard-copy form, that is included within the categories set forth in the
attached Schedule A dating back to September 1, 1995.

Similarly, within twenty (20) days following the conclusion of the
Transition Period, Matria shall, during Matria's normal business hours, provide
Adeza with reasonable access to, and copies (or, in Adeza's discretion, written
summaries in sufficient detail as to be useful) of, all information within
Matria's control, in both electronic and hard-copy form, that is included within
the categories set forth in the attached Schedule A dating back to the Effective
Date in substantially the same form as provided to Adeza within twenty (20) days
following the Effective Date as required by the preceding paragraph (as updated
to reflect all events occurring during the Transition Period).

Survival of Certain Obligations

All financial obligations arising from the sale of fFN Tests during the
Transition Period that remain unsatisfied upon the conclusion of the Transition
Period shall survive the conclusion of the Transition Period. Within 30 days
after the end of the Transition Period, Adeza shall repurchase at Matria's
original purchase price from Adeza any inventory in Matria's possession or
control (including inventory consigned to outside laboratories) which was
received by Matria from Adeza during the last ninety (90) days of the Transition
Period and paid for by Matria within thirty (30) days after the conclusion of
the Transition Period. Such repurchase shall be limited to the inventory that
was stored properly by Matria or the outside laboratory in accordance with
labeling requirements and not opened, and shall be repurchased by payment or
credit of the applicable amount, depending upon whether Matria has already paid
for such inventory. Such inventory in Matria's possession (not including
inventory consigned to outside laboratories) shall be shipped to Adeza as soon
as possible after the end of the Transition Period at Adeza's cost; provided,
however, that Adeza shall have the right to select the method of shipment and
carrier.

<PAGE> 26

Schedule A

Physician Sales/Orders

1. Reports of all physicians ordering the fFN ELISA Test by month including
quantity ordered, physician name, address, telephone and fax.

2. Reports or partial reports of all fFN Specimen Collection Kit shipments by
month to physicians including quantity shipped, physician name, address,
telephone, fax and current pricing.

3. A listing of physicians that have not ordered fFN Tests, but have expressed
an interest in fFN, but Matria is not under any obligation to conduct an
extensive survey.

4. Not more than 30 joint physician calls with Adeza or its agents to be
scheduled at mutually convenient times. Matria will not be required to make
a joint physician call with an agent of Adeza who is a competitor of Matria
(such as Coram).

5. All patient outcome data in the form maintained by Matria, with all patient
identifiers redacted.

Laboratory Sales/Orders

1. Copies of all fFN laboratory agreements/contracts (for existing, committed
to and contemplated agreements/contracts) including laboratory name,
laboratory contact, address, telephone, fax, current status of
agreements/contracts and pricing.

2. Reports of monthly revenue from all laboratories (other than NYU) ordering
the fFN ELISA Test by month including quantity ordered, laboratory name,
laboratory contact, address, telephone, fax and current pricing.

3. Reports of all fFN ELISA Kit and control kit shipments to laboratories by
product and month including quantity ordered, laboratory name, laboratory
contact, address, telephone, fax and current pricing.

4. A listing of all labs exhibiting interest in fFN, but Matria is not under
any obligation to conduct an extensive survey.

5. Not more than 15 joint laboratory calls with Adeza or its agents to be
scheduled at mutually convenient times. Matria will not be required to make
a joint physician call with an agent of Adeza who is a competitor of Matria
(such as Coram).

6. All patient outcome data in the form maintained by Matria, with all patient
identifiers redacted.

<PAGE> 27

Marketing and Trade Show Materials

1. Sample copies of all marketing materials relating to fFN in Matria's
possession including, but not limited to, the fFN ELISA Test, fFN ELISA Kit,
Specimen Collection Kits and Control Kits (e.g. physician brochures, grand
rounds presentations, slide presentations, sales lead fulfillment packages,
in-service education/training materials for physicians, nurses and
laboratories).

2. Copies of all trade show materials and posters relating to fFN products and
services.

3. Copies of all fFN market research, market strategy, new product or service
opportunities reports related to fFN (including beta site data and reports),
provided that the report of Cladek & Associates shall only be provided upon
Adeza's payment of one half of Matria's cost therefor.

4. All fFN marketing materials in inventory will be destroyed, and certified as
such in writing, provided that Matria may maintain and continue to use
materials that describe fFN as part of Matria's "continuum of care" or
similar service protocol.

Inventory Status

1. A report setting forth the inventory of fFN ELISA kits, fFN specimen
collection kits and fFN control kits maintained at Matria's distribution
center and, as of the conclusion of the Transition Period, at regional
laboratories.

Customer Service Inquiries

1. To the extent such exists, records and service protocols of all fFN patient,
physician, laboratory and payor call inquiry reports, customer complaint
logs, customer complaint handling processes and customer complaint
resolution logs.

2. To the extent such exists, records and service protocols of all fFN standard
patient, physician, laboratory and payor customer service questions and
answers including 800 call line reports.

Reimbursement Activities (Payor Means Commercial Payors and Medicaid)

1. Sample copies of all presentation materials relating to fFN (e.g. payor
brochures, slide presentations, education/training materials) for
presentations made to payors.

2. Records of all fFN technology assessment programs, to the extent available,
completed, in-process and contemplated including copies of reports,
information provided, payor name, payor contact, address, telephone and fax.

<PAGE> 28

3. A list of all payors with which Matria has a written contract or
reimbursement of fFN, including payor name, payor contact, address,
telephone and fax numbers and the reimbursement amount (to the extent
confidentiality provisions in the contracts permit such disclosure).

4. Medicaid fFN status for each state including contact name, address,
telephone and fax numbers.

5. Reports of all fFN payor reimbursement collection histories and cash
receipts by month, payor name, payor contact, claim number, date, address,
telephone and fax.

6. List of payors with whom Matria is negotiating for fFN reimbursement as of
the Effective Date and the conclusion of the Transition Period including the
current status of such negotiations, payor name, payor contact, address,
telephone and fax.

Clinical Trial Activities Except with respect to the clinical trials referenced
in Exhibit A.

1. Copies of all fFN clinical trial agreements/contracts (for completed,
in-process, committed to and contemplated clinical trials (including the
Lovelace and Kalchbrenner trials)) including protocols, investigator names,
address, telephone and fax.

2. Records of all fFN clinical trials (including the Lovelace and Kalchbrenner
trials) completed and in-process including site files, raw data, patient
outcome information, analyses, conclusions, final reports, investigator
names, addresses, telephone and fax.

Regulatory Communications

1. Records of all regulatory communications related to fFN, for all agencies
identified in Section 11.2 (a).

2. Records of all regulatory rulings and actions related to fFN for all
agencies identified in Section 11.2 (a).

Accounting

1. Reports of all fFN Test reserves by laboratory (including Adeza).

2. Reports of quantity of fFN Tests performed by region and state.

3. Records of all unshipped and open sales orders for fFN ELISA Kits, fFN
Specimen Collection Kits, and fFN Control Kits as of the Effective Date and
as of the conclusion of the Transition Period by account and required
shipping dates.

<PAGE> 29

4. Reports of all accounts receivable aging by account as of the Effective Date
and as of the conclusion of the Transition Period for fFN ELISA Tests, fFN
ELISA Kits, fFN Specimen Collection Kits, fFN Control Kits for laboratories,
payors and patients (with all patient identifiers redacted).

<PAGE> 30

EXHIBIT B

Assignments Separate from Certificate

<PAGE> 31

ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto Adeza Biomedical Corporation 1,142,858 shares of the Series E Preferred
Stock of Adeza Biomedical Corporation, standing in the undersigned's name on the
books of said corporation represented by Certificate No. _______- herewith, and
does hereby irrevocably constitute and appoint Venture Law Group as
attorney-in-fact to transfer the said stock on the books of the said corporation
with full power of substitution in the premises.

Dated:
------------------

---------------------------------------------
Signature

---------------------------------------------
Name

---------------------------------------------
Title

<PAGE> 32

ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto Adeza Biomedical Corporation 11,657 shares of the Series 2 Preferred Stock
of Adeza Biomedical Corporation, standing in the undersigned's name on the books
of said corporation represented by Certificate No. _______- herewith, and does
hereby irrevocably constitute and appoint Venture Law Group as attorney-in-fact
to transfer the said stock on the books of the said corporation with full power
of substitution in the premises.

Dated:
------------------

---------------------------------------------
Signature

---------------------------------------------
Name

---------------------------------------------
Title

<PAGE> 33

EXHIBIT C

Form of Joint Press Release

<PAGE> 34
MATRIA AND ADEZA ANNOUNCE SETTLEMENT OF LITIGATION

Adeza Biomedical Corporation Matria Healthcare, Inc.
Emory V. Anderson Donald R. Millard
(409)745-0975 (770)767-4529

Marietta, GA and Sunnyvale, CA, March 3, 1998, MATRIA HEALTHCARE, INC.
(Nasdaq:MATR) and ADEZA BIOMEDICAL CORPORATION announced today that a settlement
has been reached in the litigation over the Exclusive Marketing Agreement under
which Matria had exclusive distribution rights to Adeza's fetal fibronectin
immunoassay test ("fFN Test"). The fFN Test is an immunodiagnostic test that
assists in identifying women at risk to give birth prematurely.

Under the terms of the settlement, Matria has agreed to relinquish its
distribution rights and equity interest in Adeza in exchange for the opportunity
to recoup its investment over time, based on future sales of the product. Matria
will continue to distribute the fFN Test during a six-month transition period.
The parties have committed to working together during the transition period to
ensure that there is no disruption to their customers.

With reference to the settlement, Donald R. Millard, President and
Chief Executive Officer of Matria, stated that, "The settlement represents a
reasonable compromise of the parties' respective rights and gives Matria an
opportunity to recoup its investment in the product. Additionally, the
settlement enables Matria to focus its energies on its core business, without
the expense and distraction of ongoing litigation."

Emory V. Anderson, President of Adeza, said, "We believe that the
resolution of this litigation is an important step in our ability to serve the
patient and physician community. This settlement allows Adeza to both
manufacture and market the fFN Test, a valuable and cost-effective diagnostic
tool for physicians in their evaluation of expectant mothers."

Matria Healthcare, Inc. is the leading provider of comprehensive
obstetrical homecare and maternity management services to HMO's, indemnity
carriers and employers.

Adeza Biomedical Corporation is a Sunnyvale, California-based
biotechnology company that develops, manufactures and markets diagnostic
products and services specifically for women's pregnancy and reproductive health
care problems, including preterm and late birth, preeclampsia, endometriosis and
infertility.

This press release contains forward-looking statements that involve
risks and uncertainties, including developments in the healthcare industry,
third-party actions over which Matria and Adeza do not have control, and
regulatory requirements applicable to Matria's and Adeza's businesses, as well
as other risks detailed from time to time in reports filed with the Securities
and Exchange Commission.

####

<PAGE> 1
EXHIBIT 21.0

MATRIA HEALTHCARE, INC. SUBSIDIARIES
March 27, 1998

Jurisdiction of
Name Incorporation
---- ---------------
<S> <C>
*Carelink Corporation Delaware
Clinical-Management Systems, Inc. Georgia
*Creative Medical Concepts, Inc. Georgia
*East Med Services, Inc. Georgia
*EMS Supplies Incorporated Georgia
*Healthdyne Financial Services, Inc. Georgia
*Healthdyne Home Care Services, Inc. Georgia
*Healthdyne Home Care Products, Inc. Georgia
*Healthdyne Integrated Alternatives, Inc. Georgia
*Healthdyne Nursery Products, Inc. Delaware
*Healthdyne Maternity Management of Texas, Inc. Texas
High-Tech Nursing, Inc. Georgia
Maternal Fetal Diagnostic Services, Inc. Georgia
Matria Healthcare of Illinois, Inc. Georgia
Matria of New York, Inc. New York
Matria Healthcare Puerto Rico, Inc. Puerto Rico
*Monitered Care, Inc. Delaware
National Medical Reproductive Centers, Inc. California
Pacific Fertility Centers of California, Inc. California
Pacific Fertility Parenting Centers, Inc. California
*Perinatal Care Alternatives, Inc. Georgia
*Perinatal Services Nederland B.V. Nederlands
*Shared Care, Inc. Georgia
Specialized Clinical Services, Inc. California
Specialized Clinical Services, Inc. Delaware
*Tokos Acquisition Corporation Delaware
*Tokos Clinical Services Corporation (Portland) Delaware
*Tokos Clinical Services Corporation (New York) New York
*Tokos Clinical Services Corporation Delaware
*Tokos Medical Management Corporation Delaware
*Women's Homecare, Inc. Delaware
</TABLE>

*Inactive

Note: The above subsidiaries (except for Perinatal Services Nederland B.V. in
which Matria owns a 51% interest) are directly or indirectly 100% owned by
Matria Healthcare, Inc.

<PAGE> 1
EXHIBIT 23

ACCOUNTANTS' CONSENT

The Board of Directors
Matria Healthcare, Inc.

We consent to incorporation by reference in the registration statement (Nos.
333-781, 333-02283, and 333-11143) on Form S-8 of Matria Healthcare, Inc. of
our reports dated March 6, 1998, relating to the consolidated balance sheets of
Matria Healthcare, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the two-year period ended December 31,
1997, and the related financial statement schedule, which reports appear in the
1997 annual report on Form 10-K of Matria Healthcare, Inc.

/s/ KPMG Peat Marwick LLP

KPMG PEAT MARWICK LLP

Atlanta, Georgia
March 26, 1998
<PAGE> 2
EXHIBIT 23

REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
Tokos Medical Corporation (Delaware)

We have audited the consolidated balance sheet of Tokos Medical Corporation
(Delaware) and subsidiaries as of December 31, 1995 (not presented separately
herein), and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tokos
Medical Corporation (Delaware) at December 31, 1995, and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

/s/ Ernst & Young LLP

Ernst & Young LLP

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

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 20,942
<SECURITIES> 0
<RECEIVABLES> 62,162
<ALLOWANCES> (22,561)
<INVENTORY> 1,088
<CURRENT-ASSETS> 63,895
<PP&E> 35,692
<DEPRECIATION> (23,328)
<TOTAL-ASSETS> 191,132
<CURRENT-LIABILITIES> 22,743
<BONDS> 0
0
0
<COMMON> 368
<OTHER-SE> 152,801
<TOTAL-LIABILITY-AND-EQUITY> 191,132
<SALES> 0
<TOTAL-REVENUES> 144,533
<CGS> 0
<TOTAL-COSTS> 57,610
<OTHER-EXPENSES> 101,624
<LOSS-PROVISION> 6,599
<INTEREST-EXPENSE> (311)
<INCOME-PRETAX> (20,902)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,902)
<EPS-PRIMARY> (.57)
<EPS-DILUTED> (.57)

</TABLE>