SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File No. 0-20619

MATRIA HEALTHCARE, INC.

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

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

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

     Yes þ No o

As of June 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, there were 15,478,294 shares of common stock outstanding. The aggregate market value of common stock held by nonaffiliates was approximately $243,985,315 based upon the closing sale price on June 30, 2004. As of March 1, 2005, there were 15,954,473 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by reference into Part III.

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MATRIA HEALTHCARE, INC.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

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PART I

Item 1. Business

     General. Matria Healthcare, Inc. (“Matria” or the “Company”) provides comprehensive, integrated disease management services and related products that offer cost-saving solutions for many of the most costly medical conditions and chronic diseases, including diabetes, cardiovascular diseases, respiratory disorders, obstetrical conditions, cancer, obesity, depression, chronic pain and hepatitis C. We seek to improve patient outcomes and lower healthcare costs through a broad range of disease management programs and direct clinical services. We emphasize a multidisciplinary approach to care that involves our clinicians working with physicians to oversee the adherence to treatment plans. We focus on the management of patients between visits to their physician, the improvement of the patient’s compliance with the physician’s care plan and the avoidance of controllable and costly events, such as emergency room visits and hospital admissions. To serve this critical aspect of patient care, we have invested heavily in disease management information technology, care center infrastructure and a national network of skilled multidisciplinary clinicians.

     We provide services to self-insured employers, private and government sponsored health plans, pharmaceutical companies and patients. Our employer clients are primarily Fortune 1000 companies that self-insure the medical benefits provided to their employees, dependents and retirees. Our health plan customers are regional and national health plans, as well as government-sponsored health plans, such as state Medicaid programs.

     Our business strategy is described under “Management’s Discussion & Analysis of Financial Condition and Results of Operations” in Item 7 of this Report.

     Holding Company Reorganization. On December 31, 2004, our predecessor, Matria Healthcare, Inc. (the “Predecessor Registrant”) adopted a holding company form of organizational structure. In order to implement the reorganization, the Predecessor Registrant incorporated a new holding company as a wholly owned subsidiary of the Predecessor Registrant and merged with an indirect, wholly owned subsidiary of the new holding company. Pursuant to Section 251(g) of the Delaware General Corporation Law, the merger was effected without a vote of the Predecessor Registrant’s stockholders. In connection with the merger, all of the issued common stock of the Predecessor Registrant was converted into a like number of shares of our common stock. Our capital structure is the same as that of the Predecessor Registrant prior to the merger.

     We were incorporated under the laws of the state of Delaware on December 28, 2004 in connection with the Predecessor Registrant’s adoption of the holding company structure. The Predecessor Registrant was incorporated under the laws of the state of Delaware on March 8, 1996 in connection with the merger of Tokos Medical Corporation and Healthdyne Maternity Management. Our headquarters are located at 1850 Parkway Place, Marietta, GA 30067, and our telephone number is (770) 767-4500. Our website address is www.matria.com.

     Business Segments and Geographic Areas. In 2004, our operations consisted of two reportable business segments: Health Enhancement and Women’s and Children’s Health. Information regarding revenues, operating earnings, and identifiable assets (including intangibles) for each of the business segments in which we operated in fiscal years 2002 through 2004, as well as information regarding our revenues attributable to the geographic areas in which we operated during those years, is in Note 11 of Notes to Consolidated Financial Statements on pages F-25 through F-26 of this Report.

     Health Enhancement. At December 31, 2004, our Health Enhancement segment was comprised of our disease management business, our foreign diabetes business and Facet Technologies, LLC (“Facet”), our diabetes product design, development, assembly and distribution operation.

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     The disease management component of our Health Enhancement segment currently offers disease management services to employers and health plans for diabetes, cardiovascular disease, respiratory disorders, cancer, obesity, depression, and chronic pain. We began our disease management business in 1998, focusing solely on respiratory disease management. In 1999, we added diabetes disease management through an acquisition in which we acquired our former pharmacy and supplies business, as well as Facet. In 2002, we developed programs for cardiac, depression and chronic pain disease management and expanded into cancer disease management with the acquisition of Quality Oncology, Inc. In 2003, we launched an initiative to offer disease management services through pharmaceutical corporations in support of complex drug therapies and began to offer disease management services for hepatitis C. In 2004, we added obesity to our disease management programs.

     Our disease management programs seek to reduce medical costs and improve patient care for the chronically ill as well as those who are at the highest risk for significant and costly episodes of illness. We use our proprietary technology platform, which we refer to as TRAX^TM, to identify patients with the potential for high-cost events and to proactively manage the care of the patients identified. We help these individuals take more responsibility for their disease and avoid expensive medical events. Cost savings generally are realized through a reduction in emergency room visits and admissions to the hospital and shorter hospital stays. Our programs, which were developed in accordance with national clinical standards, are designed to increase patient compliance with the physician’s plan of care. Our disease management process includes the following steps:

	•	Medical claims, laboratory and prescription data from multiple providers are analyzed to identify and preliminarily stratify individuals at risk for chronic diseases and high cost conditions.
	•	Health specialists contact participants by phone to conduct a multi-condition risk assessment. The responses build a detailed medical profile in our TRAXTM information system.
	•	Predictive modeling determines the probability that a given individual has a chronic condition or is at risk of a significant health event that will result in substantial healthcare costs in the near and longer-term future.
	•	TRAXTM develops a risk-specific plan of care based on national clinical standards that includes ongoing support, regular interventions and patient education.
	•	Our clinicians make proactive contact depending on the patient’s stratification level and take calls from patients to counsel and educate them, as necessary. Care plans are provided to the patient and their physician as clinical counseling begins.
	•	Compliance management is enhanced through the monitoring of the patient’s utilization of medication and supplies and the frequency of periodic laboratory testing.
	•	Clinical and financial outcomes are reported to the customer on a routine basis.

     Our disease management programs are built on a sophisticated and advanced technology platform and infrastructure, TRAX^TM. Often, the most expensive patients in terms of past claims history are not necessarily those who will cost the most in the future. TRAX’s predictive modeling capabilities allow us to identify the potential of high-cost events and help us proactively manage the care of these identified participants.

     Effective October 1, 2003, we purchased certain assets of Options Unlimited Comprehensive Rehabilitative Services, Inc., now Matria Case Management, a company specializing in case management for health plans, third-party administrators and employers. We have integrated this company’s case management services with our existing disease management services and are offering these services to employers and health plans.

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     The disease management programs serve patients in the United States through our facilities in Atlanta, Georgia, McLean, Virginia, Sunrise, Florida, El Sequndo, California, Houston, Texas, and Huntington, New York.

     Our foreign diabetes division provides diabetes products and supplies and certain value-added services directly to patients in Germany through its main facilities in Neumünster and Dresden, Germany and depots maintained in physician offices and clinics. Most revenues are received directly from the German national healthcare system.

     Our Health Enhancement segment also includes Facet, a leading designer, developer, assembler and distributor of products for the diabetes market, which we acquired in 1999. Facet has 30% to 50% of the world market share in each of the three major product lines used by patients with diabetes to obtain blood samples for testing blood glucose levels: standard lancets, lancing devices and safety lancets. Facet operates from facilities in Marietta, Georgia, McDonough, Georgia, and Northhampton, England. Its products are shipped primarily to North and South America, Europe and Asia.

     On June 30, 2004, the Company completed the sale of substantially all of the assets, excluding trade and certain other receivables, of our domestic direct to consumer pharmacy and supplies business to DEGC Enterprises (U.S.), Inc. The Company operated the divested business through our wholly-owned subsidiaries, Diabetes Management Solutions, Inc. and Diabetes Self Care, Inc. As part of the transaction, the Company and DEGC Enterprises entered into a strategic relationship whereby DEGC Enterprises will provide diabetes and respiratory supplies to our disease management customers. As part of the sale, DEGC had the option to buy Matria Labs, Inc., a direct-to-consumer laboratory business, for $1. The purchase option expired, unexercised, in November 2004. The Company had previously made the decision to exit the lab business in the event DEGC did not exercise the purchase option. As a result of the sale of the domestic pharmacy and supplies business and the discontinuance of the lab business, the accompanying consolidated financial statements reflect the operations of these divisions as discontinued operations for all periods presented.

     Approximately 41%, 41% and 44% of the Health Enhancement segment’s revenues were derived from customers outside of the United States in 2004, 2003 and 2002, respectively. Approximately 33%, 35% and 37% of the segment’s revenues in 2004, 2003 and 2002, respectively, were from customers in Germany.

     Women’s and Children’s Health. Our Women’s and Children’s Health segment offers a wide range of clinical and disease management services designed to assist physicians and payors in the cost-effective management of maternity patients. The segment manages patients with gestational diabetes, hypertension, hyperemesis, and anticoagulation disorders, as well as patients experiencing or at risk for preterm labor. In addition, this segment recently launched a strategic initiative to provide services for children through neonatal intensive care case management. In connection with this initiative, in 2004, we changed the name of our Women’s Health segment to Women’s and Children’s Health. Our Women’s and Children’s Health segment is headquartered in Marietta, Georgia and has 39 sites of service throughout the United States, seven of which are monitoring centers. All 39 sites are fully accredited as home care organizations by the Joint Commission on Accreditation of Health Care Organizations. In addition, the segment has two after-hours centers. Most revenues are received directly from the patient’s health plan.

     Customers, Suppliers and Third-Party Payors. In 2004, revenues from continuing operations were derived from the following types of customers and third-party payors: 48% from direct payors (including corporations and health plans), 25% from third-party private payors, 22% from foreign healthcare systems and 5% from domestic government payors.

     We market our disease management services to self-insured employers, health plans (both commercial and governmental) and pharmaceutical companies. We market our clinical services to self-insured employers, health plans (both commercial and governmental) and physicians. Both business units market their services

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primarily through our employee sales force. Our foreign diabetes division also markets it products through an employee sales force, primarily to physicians who, in turn, make the products available for sale to patients.

     Our clinical services and foreign diabetes businesses are reimbursed on a fee-for-service or per item basis. Our disease management services, however, are paid for primarily on the basis of (i) monthly fees for each employee or member enrolled in a health plan, (ii) each member identified with a particular chronic disease or condition under contract, (iii) each member enrolled in our program or (iv) a fixed rate per case. In some cases, a portion of our disease management fees are “at risk” based on our performance. Similarly, in some cases, we are entitled to bonuses for exceeding our performance goals.

     Facet markets its products to large medical device manufacturers and distributors through its employee sales force. Its customers include original equipment manufacturers and distributors of blood glucose and other point-of-care test kits. Five major original equipment manufacturer customers represented approximately 92% of Facet’s total sales in 2004.

     Risk Factors. Our business is subject to certain risks, including the risks described under the headings “Seasonality,” “Trademarks, Licenses and Patents,” “Competition” and “Regulation and Healthcare Industry Changes” in this Item 1, Item 3 “Litigation” and those described below. Readers of this Annual Report on Form 10-K should take such risks into account in evaluating any investment decision involving our common stock. This Item 1 does not describe all risks applicable to our business and is intended only as a summary of certain material factors that affect our operations in the industries in which we operate. More detailed information concerning these and other risks is contained in other sections of this Annual Report on Form 10-K.

The disease management business is an evolving component of the overall healthcare industry.

     Disease management services are a relatively new component of the overall healthcare industry. Accordingly, some of our potential customers have not had significant experience in purchasing, evaluating or monitoring such services, which can result in a lengthy sales cycle. The success of our business plan relative to our disease management operations depends on a number of factors. These factors include:

	•	Our ability to differentiate our products and service offerings from those of our competitors;
	•	The extent and timing of the acceptance of our services as a replacement for, or supplement to, traditional managed care offerings;
	•	Our ability to implement new and additional services beneficial to health plans and employers;
	•	Our ability to effect cost savings for health plans and employers through the use of our programs; and
	•	Our ability to improve patient compliance with the complex drug therapies offered by our pharmaceutical customers.

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

We are highly dependent on payments from third-party healthcare payors, which may implement cost reduction measures that adversely affect our business and operations.

     Third-party private and governmental payors exercise significant control over patient access and use their enhanced bargaining power to secure discounted rates and other concessions from providers. Changes in reimbursement rates, policies or payment practices by third-party and governmental payors (whether initiated by the payor or legislatively mandated) could have an adverse impact on our business.

Government regulations may adversely affect our business.

     We are subject to extensive and frequently changing federal, state, local and foreign regulation. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on operating methods, costs and reimbursement amounts provided by government and third-party payors. There

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can be no assurance that we are or have been in compliance with all applicable existing laws and regulations or that we will be able to comply with new laws or regulations. Changes in applicable laws or any failure to comply with existing or future laws, regulations or standards could have a material adverse effect on our results of operations, financial condition, business and prospects .

Many of our disease management fees are contingent upon performance.

     Many of our existing disease management agreements contain savings or other guarantees, which typically provide that we will repay all or some of our fees if the payor’s cost savings as a result of our disease management programs do not meet expectations or if other quality performance measures are not met. Some contracts also provide that we will receive bonus compensation by meeting certain performance criteria. There is no guarantee that we will accurately forecast cost savings and clinical outcome improvements under our disease management agreements or meet the performance criteria necessary to receive the designated bonus compensation or to avoid repayment of fees under the agreements.

Facet is substantially dependent on a few customers.

     Facet’s revenues are substantially dependent on sales to five customers. In 2004, these five customers represented approximately 92% of Facet’s revenues, which in turn represented approximately 26% of our total revenues. We have multiple contracts covering various products with these customers that have expirations ranging from October 2005 to March 2009. Certain contracts may be terminated prior to expiration without cause and there is no guarantee that these contracts will be renewed on favorable terms, if at all, or that these customers will continue to purchase products and services at prior levels. If we do not generate as much revenue from our major customers as we expect, or if we lose certain of them as customers, our total revenue could be significantly reduced.

     Facet and our Women’s and Children’s Health segment are both highly dependent on supplies from limited sources.

     Facet’s business is highly dependent on its exclusive supply relationship with Nipro Corporation, from which it purchases virtually all of the components for its products on terms we view as favorable. Under the agreement, some terms, such as pricing, are negotiated annually while others, such as the exclusivity arrangement, are renewable after longer periods. The exclusivity provisions of our agreement with Nipro will expire in December 2005. Although Nipro has been a supplier to Facet’s business for more than 15 years, there can be no assurance that we will be able to negotiate a renewal of the exclusivity arrangement on favorable terms, if at all. In addition, there are an extremely limited number of suppliers of terbutaline sulfate, a prescription drug used in large supply by our Women’s and Children’s Health segment, and price increases in this drug during the second and third quarter of 2002 adversely affected the segment’s cost of revenues. In September 2002, we entered into a three-year arrangement for the supply of this drug which has reduced its cost to us. We purchase substantially all of our requirements for this drug under this arrangement. We currently are negotiating an extension of this agreement through 2005 on favorable pricing terms. Termination of any of these supply arrangements or failure to continue any of them on favorable terms could have a material adverse effect on the business of Facet or the Women’s and Children’s Health segment, as applicable, as would any interruption in the supply or significant increase in the price of these products, whatever the cause.

Our operating results have fluctuated in the past and could fluctuate in the future.

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

	•	impact of substantial divestitures and acquisitions;
	•	loss or addition of customers and referral sources;
	•	investments required to support growth and expansion;
	•	changes in the mix of our products and customers;
	•	changes in healthcare reimbursement policies and amounts;

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	•	length of sales cycle and implementation process for new disease management customers;
	•	increases in costs of revenues and operating expenses;
	•	increases in selling, general and administrative expenses;
	•	increased or more effective competition; and
	•	regulatory changes.

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

Our profit margin may be adversely affected by the product mix and pricing pressure in the Women’s and Children’s Health segment.

     Although our Women’s and Children’s Health segment is a leading provider in its market, its revenues have been reduced and its cost of revenues as a percentage of revenues has increased over the past several years. These trends, which have reduced our profit margins, are largely a function of price pressure and physician prescription patterns towards the use of higher cost, lower margin therapies. If these trends continue, the profit margins for this business will continue to decline.

Facet operates in an industry that is becoming increasingly dominated by price competition.

     In all of our product and service lines, we face strong competition from companies, both large and small, located in the United States and abroad, on factors including quality of care and service, reputation within the medical community, scope of products and services, geographical scope and price. Facet operates in an industry where price competition is becoming increasingly dominant over other factors, which has created downward pressure on pricing on this portion of our business. If this trend toward price dominated competition continues, the resulting downward pricing pressure may have a material adverse effect on Facet’s business.

If our costs of providing products or services increase, we may not be able to pass these cost increases on to our customers.

     In many of our markets, due to competitive pressures or the fact that reimbursement rates are set by law, we have very little control over the price at which we sell our products and services. If our costs increase, we may not be able to increase our prices, which would adversely affect results of operations. Accordingly, any increase in the cost of such products and services could reduce our overall profit margin.

Future acquisitions may cause integration problems, disrupt our business and strain our resources.

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

We may face costly litigation that could force us to pay damages and harm our reputation.

     Like other participants in the healthcare market, we are subject to lawsuits alleging negligence, product liability or other similar legal theories, many of which involve large claims and significant defense costs. Any of these claims, whether with or without merit, could result in costly litigation, and divert the time, attention,

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and resources of our management. Although we currently maintain liability insurance intended to cover such claims, there can be no assurance that the coverage limits of such insurance policies will be adequate or that all such claims will be covered by the insurance. In addition, these insurance policies must be renewed annually. Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim in excess of the insurance coverage could have a material adverse effect on our results of operations or financial condition.

The outcome of the pending qui tam claim filed against us could result in the imposition of material liabilities or penalties and could result in our exclusion from participation in federal healthcare programs.

     The Federal False Claims Act allows actions to be brought on the government’s behalf by individuals under the Federal False Claims Act’s qui tam provision. A qui tam claim has been filed against the Company and our former subsidiary, Diabetes Self-Care, Inc., alleging improper claims for Medicare payments in the pharmacy, laboratory and supplies division of our Health Enhancement segment. Although, we recently sold that business, the purchaser did not assume liability for the qui tam claim. As is required by law, the federal government is conducting an investigation into the complaint to determine if it will intervene or join in this suit. We are cooperating fully with the investigation. The matter is still in its preliminary stages, and we are unable to predict the ultimate disposition of the action or the investigation. An unfavorable outcome in the action could subject us to repayment obligations, loss of reimbursement, exclusion from participation in Medicare and Medicaid, substantial fines or penalties and other sanctions, which could have a material adverse effect on our business, financial position and results of operations. Defending a qui tam claim, even when there is little or no merit to the allegation, can be expensive and time consuming.

If we do not manage our growth successfully, our growth and profitability may slow, decline or stop.

     If we do not manage our growth successfully, our growth and profitability may slow or stop. We have expanded our operations rapidly and plan to continue to expand. This expansion has created significant demands on our administrative, operational and financial personnel and other resources. Additional expansion in existing or new markets could strain our resources and increase our need for capital. Our personnel, systems, procedures, controls and existing space may not be adequate to support further expansion. In addition, because our business strategy emphasizes growth, the failure to achieve our stated growth objectives or the growth expectations of investors could cause our stock price to decline.

Our data management and information technology systems are critical to maintaining and growing our business.

     Our disease management services are dependent on the effective use of information technology. We use our proprietary TRAX™ and Integrated Care Management systems in the provision of our disease management services. Although we believe that our systems provide us with a competitive advantage, we are exposed to technology failure or obsolescence. In addition, data acquisition, data quality control and data analysis, which are a cornerstone of our disease management programs, are intense and complex processes subject to error. Untimely, incomplete or inaccurate data, flawed analysis of such data or our inability to properly identify, implement and update systems could have a material adverse impact on our business and results of operations.

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

     All of Facet’s revenues are from the sale of consumable testing supplies used to draw and test small quantities of blood for the purpose of measuring and monitoring blood glucose levels. Numerous research and development efforts are underway to develop more convenient and less intrusive glucose measurement

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techniques. The commercialization and widespread acceptance of new technologies that eliminate or reduce the need for consumable testing supplies could negatively affect Facet’s business.

Our foreign operations are subject to additional risks.

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

     Our diabetes supply business in Germany distributes its products to customers primarily from physician offices, and substantially all of its revenues are received from the German national healthcare system. Doctors participating in this method of distribution, both for us and other providers, have been the subject of lawsuits brought by pharmacies alleging that this practice constitutes a violation by such doctors of German law. There is a split of authority among German courts on this issue. Although we have not been a party to any of these lawsuits or claims, such lawsuits could indirectly affect our operations, and unfavorable resolution of this issue could require us to seek alternative channels of distribution and could have a material adverse effect on our German operations.

We have recorded a significant amount of intangible assets, the value of which could become impaired.

     Our acquisitions have resulted in the recognition of intangible assets, primarily goodwill. Goodwill, which represents the excess of cost over the fair value of net assets of businesses acquired, and other intangible assets was approximately $135.3 million, net of amortization, at December 31, 2004, representing approximately 44% of our total assets. On an ongoing basis, we will make an evaluation to determine whether events and circumstances indicate that all or a portion of the carrying value of intangible assets may no longer be recoverable, in which case an additional charge to earnings may be necessary. Any future determinations requiring an asset impairment of a significant portion of intangible assets could materially affect our results of operations for the period in which the adjustment occurs.

Our inventory management is complex, and excess inventory may harm our results of operations.

     Our management makes estimates regarding our inventory requirements based on assumptions about future demand. Furthermore, a substantial portion of products supplied by Facet are tailored to the specifications of particular customers. If future demand changes or actual market conditions are less favorable than as projected by management, we may become subject to inventory obsolescence and may have to sell excess inventory at reduced prices, or, in the case of products tailored to specific customers, excess inventory may not be marketable at all. Any excess inventory held by us may, therefore, adversely affect our results of operations.

The competition for staff may cause us to restrict growth in certain areas or to realize increased labor costs in existing areas.

     Our operations are dependent on the services provided by qualified management and staff, including nurses and other healthcare professionals, for which we compete with other health care providers. In addition, our opportunities for growth are limited by our ability to attract and retain such personnel. In certain markets, there is a shortage of nurses and other medical providers, thereby increasing competition and requiring us to improve working conditions, including wages and benefits, for such personnel. Our potential inability to maintain and grow an appropriate workforce may inhibit our expansion and even have a material adverse effect on our financial results.

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Impairment of our intellectual property rights could negatively affect our business or allow competitors to minimize any advantage that our proprietary technology may give us.

     We own a number of trademarks and service marks which, in the aggregate, are important to the marketing and promotion of our products and services. Patents owned by Facet or its suppliers are material to the continued marketing of those products. Also, we consider our disease management programs to be proprietary and material to the portion of our business to which they relate. In addition, our future success depends in part upon our proprietary technology and product development, and our ability to obtain patent and other intellectual property rights with respect to such technology and development.

     We hold patents or have an exclusive, perpetual right to use the only uterine activity monitors that have received pre-market approval from the Food and Drug Administration (“FDA”) for home use on patients with a history of previous preterm birth. Our rights to the monitors had been a material competitive advantage in marketing our uterine activity monitoring services. In 2001, the FDA reclassified the monitors from Class III into Class II devices, which makes substantially equivalent devices available to our competitors, without their having to receive pre-market approval. As part of the reclassification, the FDA may impose special controls on the use of such devices. Although these developments have not had a negative impact on our home uterine activity monitoring business, we cannot predict what future impact these changes may have.

     Patent positions are uncertain and involve complex legal, scientific and factual questions. Our patent positions might not protect us against competitors with similar products or technologies because competing products or technologies may not infringe our patents. For certain of our products in development, there may be third parties who have patents or pending patents that they may claim effectively prevent us from commercializing these products in certain territories. If our patent or other intellectual property rights or positions are infringed, challenged, invalidated, prevented or otherwise impaired, or we fail to prevail in any future intellectual property litigation, our business could be adversely affected.

     Effective trademark and other intellectual property protection may not be available in every country in which our products are made available. This could have a material adverse effect on our business, results of operations and financial condition. To date, we have not been notified that our products infringe the proprietary rights of third parties, but we cannot assure you that third parties will not claim infringement by us with respect to past, current and future products. We expect that participants in our markets increasingly will be subject to infringement claims as the number of competitors in our industry segment grows. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.

Our actual financial results might vary from our publicly disclosed forecasts.

     Our actual financial results might vary from those anticipated by us, and these variations could be material. Our forecasts reflect numerous assumptions concerning our expected performance, as well as other factors, which are beyond our control, and which might not turn out to have been correct. Although we believe that the assumptions underlying the projections are reasonable, actual results could be materially different. Our financial results are subject to numerous risks and uncertainties, including those identified throughout these “Risk Factors” and elsewhere in this prospectus and the documents incorporated by reference.

     Forward-Looking Statements. This Annual Report on Form 10-K, including the information incorporated by reference herein, contains various forward-looking statements and information that are based on our beliefs and assumptions, as well as information currently available to us. From time to time, the Company and its officers, directors or employees may make other oral or written statements (including statements in press releases or other announcements) that contain forward-looking statements and information. Without limiting the generality of the foregoing, the words “believe”, “anticipate”, “estimate”, “expect”,

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“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, although some statements may use other phrasing. All statements that express expectations and projections with respect to future matters, including, without limitation, statements relating to growth, new lines of business and general optimism about future operating results, are forward-looking statements. All forward-looking statements and information in this Annual Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and are intended to be covered by the safe harbors created thereby. Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Such factors include, without limitation: (i) changes in reimbursement rates, policies or payment practices by third-party payors, whether initiated by the payor or legislatively mandated, or uncollectible accounts in excess of current estimates; (ii) the loss of major payors or customers; (iii) termination of Facet’s exclusive supply agreement with Nipro Corporation or failure to continue the agreement on the terms currently in effect; (iv) impairment of the Company’s rights in intellectual property; (v) increased or more effective competition; (vi) new technologies that render obsolete or non-competitive products and services offered by the Company; (vii) changes in or new interpretations of laws or regulations applicable to the Company, its customers or referral sources or failure to comply with existing laws and regulations; (viii) increased exposure to professional negligence liability; (ix) difficulties in successfully integrating recently acquired businesses into the Company’s operations and uncertainties related to the future performance of such businesses; (x) losses due to foreign currency exchange rate fluctuations or deterioration of economic conditions in foreign markets; (xi) changes in company-wide or business unit strategies and changes in patient therapy mix; (xii) the effectiveness of the Company’s advertising, marketing and promotional programs; (xiii) market acceptance of the Company’s disease management products and the Company’s ability to sign and implement new disease management contracts; (xiv) inability to successfully manage the Company’s growth; (xv) acquisitions that strain the Company’s financial and operational resources; (xvi) inability to forecast accurately or effect cost savings and clinical outcomes improvements or penalties for non-performance under the Company’s disease management contracts or to reach agreement with the Company’s disease management customers with respect to the same; (xvii) inability of the Company’s disease management customers to provide timely and accurate data that is essential to the operation and measurement of the Company’s performance under its disease management contracts; (xviii) increases in interest rates (xix) financial penalties for failure to achieve expected cost savings or clinical outcomes in the Company’s disease management business; (xx) changes in the number of covered lives enrolled in the health plans with which the Company has agreements for payment; (xxi) the availability of adequate financing and cash flows to fund the Company’s capital and other anticipated expenditures; (xxii) higher than anticipated costs of doing business that cannot be passed on to customers; (xxiii) pricing pressures; (xxiv) interruption in the supply or increase in the price of drugs used in the Company’s Women’s and Children’s Health business; (xxv) information technology failures or obsolescence or the inability to effectively integrate new technologies; (xxvi) inventory obsolescence; (xxvii) the outcome of legal proceedings or investigations involving the Company, and the adequacy of insurance coverage in the event of an adverse judgment; (xxviii) competition for staff, and (xxix) the risk factors discussed from time to time in the Company’s Securities and Exchange Commission (“SEC“or the “Commission”) reports, including but not limited to, this Annual Report on Form 10-K for the year ended December 31, 2004. Many of such factors are beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. The Company disclaims any obligation to update or review any forward-looking statements contained in this Annual Report or in any statement referencing the risk factors and other cautionary statements set forth in this Annual Report, whether as a result of new information, future events or otherwise, except as may be required by the Company’s disclosure obligations in filings it makes with the SEC under federal securities laws.

     Seasonality. Revenues of our Women’s and Children’s Health segment tend to be seasonal. Revenues typically begin to decrease with the onset of the holiday season starting with Thanksgiving, causing the fourth quarter and first quarter revenues of each year to be less than those of the second and third quarters. Our other businesses currently do not reflect any significant degree of seasonality.

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     Trademarks, Licenses and Patents. We own a number of trademarks and service marks which, in the aggregate, are important to the marketing and promotion of our products and services. Patents owned by Facet or its suppliers are material to the continued marketing of many of Facet’s products. Also, we consider our disease management programs to be proprietary and material to the portion of our business to which they relate. In addition, our future success depends in part upon our proprietary technology and product development, and our ability to obtain patent and other intellectual property rights with respect to such technology and development.

     We hold patents or have an exclusive, perpetual right to use the only uterine activity monitors that have received pre-market approval from the Food and Drug Administration, or FDA, for home use on patients with a history of previous preterm birth. Our rights to the monitors had been a material competitive advantage in marketing our uterine activity monitoring services. In 2001, the FDA reclassified the monitors from Class III into Class II devices, which makes substantially equivalent devices available to our competitors, without their having to receive pre-market approval. As part of the reclassification, the FDA may impose special controls on the use of such devices. Although these developments have not had a negative impact on our home uterine activity monitoring business, we cannot predict what future impact these changes may have.

     Patent positions are uncertain and involve complex legal, scientific and factual questions. Our patent positions might not protect us against competitors with similar products or technologies because competing products or technologies may not infringe our patents. For certain of our products in development, there may be third parties who have patents or pending patents that they may claim prevent us from commercializing these products in certain territories. If our patent or other intellectual property rights or positions are infringed, challenged, invalidated, prevented or otherwise impaired, or we fail to prevail in any future intellectual property litigation, our business could be adversely affected.

     Effective trademark and other intellectual property protection may not be available in every country in which our products are made available. This could have a material adverse effect on our business, results of operations and financial condition. To date, we have not been notified that our products infringe the proprietary rights of third parties, but we cannot assure you that third parties will not claim infringement by us with respect to past, current and future products. We expect that participants in our markets increasingly will be subject to infringement claims as the number of competitors in our industry segment grows. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.

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

     Although we believe our Women’s and Children’s Health segment has a dominant market share, we have a large number of competitors. Competitors of our Women’s and Children’s Health segment include national, regional and local home health agencies, hospitals and other companies devoted primarily to providing services for the management of maternity patients. Our disease management businesses compete with pharmaceutical companies, case management companies and other companies engaged principally in the business of providing disease management services for one or more diseases or conditions. These businesses compete on a number of factors, including quality of care and service, reputation within the medical community, scope of products and services, geographical scope and price.

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     Competition in the diabetes product design, development and assembly component of our Health Enhancement segment also is based on quality, service and price. In addition, competition in research involving the development of new products and the improvement of existing products is particularly significant. Our foreign diabetes business competes with a large number of companies specifically involved in the distribution of diabetes supplies, as well as local pharmacies.

     We believe that our ability to offer customers an integrated health enhancement solution of services across chronic medical conditions is an increasingly important competitive requirement. We believe that our clinical expertise, advanced technology and coordinated approach to patient services will enable our Women’s and Children’s Health segment and the disease management component of our Health Enhancement segment to compete effectively. Similarly, we believe that the quality of Facet’s products, as well as its strong distribution system, value-added approach to customer service, and design and development expertise will continue to enable this business to maintain its significant market share, notwithstanding the highly competitive environment in which it operates. We also believe that the convenience of purchasing diabetes supplies through our foreign diabetes company will continue to be a competitive advantage for that business. There can be no assurance, however, that we will not encounter increased or more effective competition in the future, which could limit our ability to maintain or increase our business or render some products and services we offer obsolete or non-competitive and which could adversely affect our operating results.

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

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

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

     Regulation and Healthcare Industry Changes. We are subject to extensive and frequently changing federal, state, local and foreign regulation. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on operating methods, costs and reimbursement amounts provided by government and third-party payors. We believe our current arrangements and practices are in material compliance with applicable laws and regulations. There can be no assurance that we are in compliance with all applicable existing laws and regulations or that we will be able to comply with new laws or regulations. Changes in applicable laws or any failure to comply with existing or future laws, regulations or standards could have a material adverse effect on our results of operations, financial condition, business and prospects.

     Many states require providers of home health services, such as our Women’s and Children’s Health segment, to be licensed as home health agencies and to have medical waste disposal permits. Also, many states require QO, our cancer disease management subsidiary, to be licensed as a utilization review provider. Moreover, certain of our employees are subject to state laws and regulations regarding the ethics and professional practice of pharmacy and nursing. We may also be required to obtain certification to participate in governmental payment programs, such as state Medicaid programs. Some states have established Certificate of Need (“CON”) programs regulating the expansion of healthcare operations. The failure to obtain, renew or maintain any of the required licenses, certifications or CONs could adversely affect our business.

     Many of the products utilized by us for the provision of our services are classified as medical devices under the Federal Food, Drug and Cosmetic Act, or the FDC Act, and are subject to regulation by the FDA. In addition some of our services involve the use of drugs that are regulated by the FDA under the FDC Act.

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Although medical devices and drugs used by us are labeled for specific indications and cannot be promoted for any other indications, the FDA allows physicians to prescribe drugs and medical devices for “off-label” indications under the “practice of medicine” doctrine. Negative publicity concerning the off-label use of drugs and devices may adversely affect our Women’s and Children’s Health segment’s business. Our Facet business serves as an original equipment manufacturer for FDA regulated products which must comply with good manufacturing practice regulations. Our failure to comply with FDA requirements could result in FDA enforcement actions, which could include, but are not limited to, recalls, warning letters, fines, injunctions, and criminal prosecution. Any such enforcement actions could have a material adverse effect on our business, financial condition and results of operations.

     The Health Insurance Portability and Accountability Act of 1996, or HIPPA, governs electronic healthcare transactions and the privacy and security of medical records and other individually identifiable patient data. Healthcare providers and other affected entities had until April 2003 to comply with these privacy regulations. Further regulations establishing healthcare information security requirements have been issued with compliance required by April 2005. Any failure to comply with HIPPA could result in criminal penalties and civil sanctions.

     Although a very small component of our business relies on reimbursement by government payors, such as state Medicaid, that business is subject to particularly pervasive regulation by those agencies. In addition, our former pharmacy, lab and supplies businesses received reimbursement from both Medicare and state Medicaid, and we will continue to be exposed to claims related to those businesses until all applicable statutes of limitation have run. These regulations impose stringent requirements for provider participation in those programs and for reimbursement of products and services. We are subject to periodic audits or investigation by the Centers for Medicare and Medicaid Services, or CMS and/or its intermediaries, of our compliance with those requirements, and any deficiencies found may be extrapolated to cover a larger number of reimbursement claims. Additionally, many applicable laws and regulations are aimed at curtailing fraudulent and abusive practices in relation to those programs. These rules include the illegal remuneration provisions of the Social Security Act (sometimes referred to as the “Anti-Kickback” statute), which impose criminal and civil sanctions on persons who knowingly and willfully solicit, offer, receive or pay any remuneration, whether directly or indirectly, in return for, or to induce, the referral of a patient covered by a federal healthcare program to a particular provider of healthcare products or services. Related federal laws make it unlawful, in certain circumstances, for a physician to refer patients covered by federal healthcare programs to a healthcare entity with which the physician and/or the physician’s family have a financial relationship. Additionally, a large number of states have laws similar to the federal laws aimed at curtailing fraud and abuse and physician “self-referrals.” These rules have been interpreted broadly such that any financial arrangement between a provider and potential referral source may be suspect. While we believe our former and existing arrangements are proper, the government could take a contrary position or could investigate our practices.

     In addition to the laws described above, the Federal False Claims Act imposes civil liability on individuals or entities that submit false or fraudulent claims for payment to the government. HIPAA created two new federal crimes: “Healthcare Fraud” and “False Statements Relating to Healthcare Matters.” The Healthcare Fraud statute prohibits knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program. The False Statements Relating to Healthcare Matters statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact by any trick, scheme or device or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. The Federal False Claims Act allows actions to be brought on the government’s behalf by individuals under the Federal False Claims Act’s “qui tam” provision. A qui tam claim has been filed against the Company and our former subsidiary, Diabetes Self-Care, Inc., alleging improper claims for Medicare payments in the former pharmacy, laboratory and supplies division of our Health Enhancement segment. Although we recently sold that business, the purchaser did not assume liability for the qui tam claim. As is required by law, the federal government is conducting an investigation into the complaint to determine if it will intervene or join in this suit. We cooperating fully with the investigation. The matter is still in its preliminary stages, and we are unable to predict the ultimate disposition of the action or the investigation. An unfavorable outcome in the action could subject us to repayment obligations or loss of

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reimbursement, exclusion from participation in Medicare or Medicaid, substantial fines or penalties and other sanctions, which could have a material adverse effect on our financial position and results of operations. Defending a qui tam claim, even where there is little or no merit to the allegations, can be expensive and time consuming.

     Violation of these and other applicable rules can result in substantial fines and penalties, required repayment of monies previously recognized as income, as well as exclusion from future participation in government-sponsored healthcare programs.

     There can be no assurance that we will not become the subject of a regulatory or other investigation or proceeding or that our interpretations of applicable laws and regulations will not be challenged. The defense of any such challenge could result in adverse publicity, substantial cost to us and diversion of management’s time and attention. Thus, any such challenge could have a material adverse effect on our business, regardless of whether it ultimately is sustained.

     The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”), which was signed into law on December 8, 2003, provided funding for disease management demonstration programs to be implemented in targeted geographic areas across the country, and indicates that if the programs are successful, the programs will be expanded nationwide. The expansion of these programs could represent a significant opportunity for our disease management business.

     Employees. As of December 31, 2004, we employed a total of 1,162 full-time employees and 50 regular part-time employees. In addition, we employ an additional 826 part-time clinical employees to provide, among other things, patient training and backup support on an “as needed” basis. None of our employees are represented by a union. We consider our relationship with our employees to be good.

Available Information.

     The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as amended, will be made available free of charge on or through the Company’s website at www.matria.com as soon as reasonably practicable after the reports are filed with, or furnished to, the Commission. Matria’s Corporate Governance Guidelines and Code of Conduct were filed as an exhibit to its Annual Report on Form 10-K for the year ended December 31, 2003 and are available on its website. Waivers of the Guidelines or Code will be disclosed in an SEC filing on Form 8-K.

Item 2. Properties

     Our principal executive and administrative offices are located at 1850 Parkway Place, Marietta, Georgia, and total approximately 91,000 square feet. The facility is leased through February 28, 2010. Certain of our information technology departments occupy offices of approximately 12,400 square feet in Alpharetta, Georgia, with a lease term expiring December 2006.

     Our Health Enhancement disease management business has six locations, with its main care centers in Marietta, Georgia and Sunrise, Florida. These locations total approximately 104,000 square feet and have lease terms expiring on various dates through June 2009.

     Additional properties also are leased for our other operations. The Women’s and Children’s Health segment’s patient service centers are typically located in suburban office parks and range between 250 and 5,500 square feet of space, with an average of approximately 1,500 square feet. Total square footage for these facilities is approximately 54,000 square feet. These facilities are leased for various terms through 2008. Additionally, the Women’s and Children’s Health segment leases approximately 10,000 square feet for its customer support center.

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     Facet’s assembly and packaging facility consists of approximately 70,000 square feet of office and warehouse space in McDonough, Georgia. The lease term on this facility will expire in 2008. Facet also occupies approximately 12,500 square feet of space in the Matria headquarters building. This lease expires on February 28, 2010. In addition, Facet leases a 200 square foot office in Northampton, England under a lease that expires in July 2005, with automatic annual renewals.

     Our foreign disease management operations lease office facilities in Neumünster and Dresden, Germany, consisting of approximately 3,000 and 8,550 square feet, respectively. The Neumünster facility, which also includes warehouse space, is leased through December 2005, with automatic one year renewals. The Dresden facility, which also houses a retail shop, is leased for a term expiring in 2005, with automatic one year renewals. The business also leases an approximately 900 square foot office, warehouse and training facility in Kobande, Germany under a lease expiring in July 2006. In addition, this business operates numerous retail, training and footcare facilities throughout Germany in leased space ranging from 100 to 1,700 square feet,with remaining lease terms of two years or less. The business also leases warehouse space throughout Germany ranging from 125 to 6,300 square feet under leases with terms expiring in two years or less.

     These facilities are generally in good condition, and we believe that they are adequate for and suitable to our requirements.

Item 3. Legal Proceedings

     A qui tam action has been filed in the United States District Court for the Western District of Virginia by Sandra J. Clark, a former employee of the Company’s former domestic pharmacy and supplies division, against the Company and our subsidiary, Diabetes Self-Care, Inc. The complaint alleges improper claims by Diabetes Self-Care, Inc. for Medicare payments and seeks treble damages and civil penalties in unspecified amounts. As is required by law, the federal government is conducting an investigation of the complaint to determine if it will intervene or join in this suit. We are cooperating fully with the investigation. This matter is still in its preliminary stages, and we are unable to predict the ultimate disposition of the action or the investigation.

     We are subject to various legal claims and actions incidental to our business and the businesses of our predecessors, including product liability claims and professional liability claims. We maintain insurance, including insurance covering professional and product liability claims, with customary deductible amounts. There can be no assurance, however, that (i) additional suits will not be filed against us in the future, (ii) our prior experience with respect to the disposition of litigation is representative of the results that will occur in pending or future cases or (iii) adequate insurance coverage will be available at acceptable prices for incidents arising or claims made in the future. There are no other pending legal or governmental proceedings to which we are a party that we believe would, if adversely resolved, have a material adverse effect on us.

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

     Not applicable.

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Special Item. Executive Officers of the Company

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

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

     Mr. Petit has served as Chairman of the Board of the Company since the formation of the Company through the merger of Healthdyne Maternity Management, a division of Healthdyne, Inc. (“Healthdyne”) and Tokos Medical Corporation on March 8, 1996 and as Chief Executive Officer since October 5, 2000, and as President and Chief Executive Officer from October 5, 2000, to February 22, 2003. In addition, he served as a member of the three-person Office of President during a brief period in 1997. Mr. Petit was the founder of Healthdyne and served as its Chairman of the Board of Directors and Chief Executive Officer from 1970 until 1996. Mr. Petit is also a director of Intelligent Systems Corp. and Logility, Inc.

     Mr. Hall has been President and Chief Operating Officer since February 22, 2003, and previously served as Executive Vice President and Chief Operating Officer of the Company from October 22, 2002 to February 22, 2003. From 2000 to 2002, he was President and Chief Executive Officer of TSH & Associates, an independent consulting and management services company. From 1997 to 1999, Mr. Hall held executive positions that included President of ADP TotalSource, a division of Automated Data Processing, Inc. (ADP).

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

     Ms. Scoggins was appointed Vice President — Corporate Finance of the Company on July 22, 2004, and also was Vice President — Financial Planning and Analysis from February 28, 2001, to July 22, 2004, and previously was Vice President, Treasurer and Chief Accounting Officer of the Company from December 15, 1997, to February 28, 2001, and also Vice President and Controller from March 8, 1996, to December 15, 1997. Prior thereto, she was Vice President and Controller of Healthdyne from May 1995 to March 8, 1996; Vice President — Planning and Analysis of Healthdyne from May 1993 to May 1995; and Vice President and Chief Financial Officer of Home Nutritional Services, Inc., a former majority owned subsidiary of Healthdyne, from February 1990 to April 1993.

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

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     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.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Purchases of Equity Securities

     (a) Market Information. Matria’s common stock is traded in the over-the-counter market and is quoted on the Nasdaq National Market (“NASDAQ”) under the symbol “MATR.”

     The following table sets forth, for the calendar quarters indicated, the high and low sales prices of Matria common stock as quoted on NASDAQ from January 1, 2003 through December 31, 2004 (adjusted to reflect the three-for-two stock split effected on February 4, 2005):

     (b) Holders. The approximate number of stockholders of the Company as of March 1, 2005 was 1,750 record holders and 5,500 street holders.

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

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(d) Equity Compensation Plan Information.

     The following table gives information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under all existing equity compensation plans as of December 31, 2004, adjusted to reflect the three-for-two stock split effected on February 4, 2005.

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Item 6. Selected Financial Data

     The following sets forth selected consolidated financial data with respect to the Company’s operations. The data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes thereto. The statement of operations data for the five years ended December 31, 2004 and the related balance sheet data have been derived from the audited consolidated financial statements of the Company.

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

     The following discussion and analysis should be read in conjunction with the other financial information and consolidated financial statements and related notes appearing elsewhere in this Annual Report. The discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” in this Annual Report. The historical results of operations are not necessarily indicative of future results.

Executive Overview

     We provide comprehensive, integrated disease management services and related products that offer cost-saving solutions for many of the most costly medical conditions and chronic diseases, including diabetes, cardiovascular diseases, respiratory disorders, obstetrical conditions, cancer, obesity, depression, chronic pain and hepatitis C. We seek to improve patient outcomes and lower healthcare costs through a broad range of disease management programs and direct clinical services. We emphasize a multidisciplinary approach to care that involves our clinicians working with physicians to oversee the adherence to treatment plans. We focus on the management of patients between visits to their physician, the improvement of the patient’s compliance with the physician’s care plan and the avoidance of controllable and costly events, such as emergency room visits and hospital admissions. To serve this critical aspect of patient care, we have invested heavily in disease management information technology, care center infrastructure and a national network of skilled multidisciplinary clinicians.

     We provide services to self-insured employers, private and government sponsored health plans, pharmaceutical companies and patients. Our employer clients are primarily Fortune 1000 companies that self-insure the medical benefits provided to their employees, dependents and retirees. Our health plan customers are regional and national health plans, as well as government-sponsored health plans, such as state Medicaid programs.

     We have two reportable business segments: Health Enhancement and Women’s and Children’s Health.

	•	Health Enhancement. At December 31, 2004, our Health Enhancement segment was comprised of our disease management business, our foreign diabetes business and Facet Technologies, LLC (“Facet”), our diabetes product design, development, assembly and distribution operation.
		The disease management component of our Health Enhancement segment currently offers disease management services to employers and health plans for diabetes, cardiovascular disease, respiratory disorders, cancer, obesity, depression, and chronic pain. We began our disease management business in 1998, focusing solely on respiratory disease management. In 1999, we added diabetes disease management through an acquisition in which we acquired our former pharmacy and supplies business, as well as Facet. In 2002, we developed programs for cardiac, depression and chronic pain disease management and expanded into cancer disease management with the acquisition of Quality Oncology, Inc. (“QO”). In 2003, we launched an initiative to offer disease management services through pharmaceutical corporations in support of complex drug therapies and began to offer disease management services for Hepatitis C. In 2004, we added obesity to our disease management programs.
		Our disease management programs seek to reduce medical costs and improve patient care for the chronically ill as well as those who are at the highest risk for significant and costly episodes of illness. We use our proprietary technology platform, which we refer to as TRAXTM, to identify patients with the potential for high-cost events and to proactively manage the care of the patients

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identified. We help these individuals take more responsibility for their disease and avoid expensive medical events. Cost savings generally are realized through a reduction in emergency room visits and admissions to the hospital and shorter hospital stays. Our programs, which were developed in accordance with national clinical standards, are designed to increase patient compliance with the physician’s plan of care.

Effective October 1, 2003, we purchased certain assets of Options Unlimited Comprehensive Rehabilitative Services, Inc., now Matria Case Management, a company specializing in case management for health plans, third-party administrators and employers. We have integrated this company’s case management services with our existing disease management services and are offering these services to employers and health plans.

The disease management programs serve patients in the United States through our facilities in Atlanta, Georgia, McLean, Virginia, Sunrise, Florida, El Sequndo, California, Houston, Texas, and Huntington, New York.

Our foreign diabetes division provides diabetes products and supplies and certain value-added services directly to patients in Germany through its main facilities in Neumünster and Dresden, Germany and depots maintained in physician offices and clinics. Most revenues are received directly from the German national healthcare system.

Our Health Enhancement segment also includes Facet, a leading designer, developer, assembler and distributor of products for the diabetes market, which we acquired in 1999. Facet has 30% to 50% of the world market share in each of the three major product lines used by patients with diabetes to obtain blood samples for testing blood glucose levels: standard lancets, lancing devices and safety lancets. Facet operates from facilities in Marietta, Georgia, McDonough, Georgia, and Northhampton, England. Its products are shipped primarily to North and South America, Europe and Asia.

On June 30, 2004, we completed the sale of substantially all of the assets, excluding trade and certain other receivables, of our domestic direct to consumer pharmacy and supplies business. As part of the transaction, the Company and the buyer entered into a strategic relationship whereby the buyer will provide diabetes and respiratory supplies to our disease management customers. As part of the sale, the buyer had the option to buy Matria Labs, Inc., a direct-to-consumer laboratory business, for $1. The purchase option expired, unexercised, in November 2004. The Company had previously made the decision to exit the lab business in the event buyer did not exercise the purchase option. As a result of the sale of the domestic pharmacy and supplies business and the discontinuance of the lab business, the accompanying consolidated financial statements reflect the operations of these divisions as discontinued operations for all periods presented.

•

Women’s and Children’s Health. Our Women’s and Children’s Health segment offers a wide range of clinical and disease management services designed to assist physicians and payors in the cost-effective management of maternity patients. The segment manages patients with gestational diabetes, hypertension, hyperemesis, and anticoagulation disorders, as well as patients experiencing or at risk for preterm labor. In addition, this segment recently launched a strategic initiative to provide services for children through neonatal intensive care case management. In connection with this initiative, in 2004, we changed the name of our Women’s Health segment to Women’s and Children’s Health. Our Women’s and Children’s Health segment is headquartered in Marietta, Georgia and has 39 sites of service throughout the United States, seven of which are monitoring centers. All 39 sites are fully accredited as home care organizations by the Joint Commission on Accreditation of Health Care Organizations. In addition, the segment has two after-hours centers. Most revenues are received directly from the patient’s health plan.

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     Industry Factors

     Total healthcare spending in the United States is expected to exceed $1.9 trillion in 2005, with predictions that healthcare spending will increase to $3.3 trillion in 2013. According to the Centers for Disease Control, a majority of that spending is attributed to the more than 125 million Americans suffering from chronic diseases. In particular, patients with chronic conditions account for 96% of all home healthcare visits, 88% of all prescriptions, 76% of all in-patient hospital stays and 72% of all physician visits. Moreover, healthcare spending to treat chronic diseases is rapidly rising due to noncompliant patients, uninformed patients who select expensive drug therapies, lack of coordinated systems and protocols to track and follow-up with high-acuity patients and the inability of medical professionals to fully address the day-to-day challenges faced by their patient populations. All of these trends are causing healthcare industry participants to focus on solutions that lower costs through improved patient health and outcomes.

     Employers are especially affected by these trends. In addition to double digit increases in direct healthcare costs, employers are experiencing an increase in indirect costs associated with absenteeism and other lost employee productivity. The National Academy on Aging has found that chronic diseases are now recognized as a major source of lost productivity, estimating that the total dollar loss from chronic conditions ranges from $200 billion to $300 billion annually. Employers are seeking solutions to the impact healthcare is having on their profit margins and the additional financial burden being placed on their employees through increased premiums, co-pays, coinsurance and deductibles. Employers are more proactive in their management of healthcare costs and increasingly view disease management as a meaningful and effective tool to address their healthcare problems.

     The Medicare program has also been significantly affected by the rising costs of healthcare due to the general aging of the population and the increased prevalence of chronic and high cost conditions among the elderly. Studies have shown that a relatively small number of beneficiaries with certain chronic illnesses — asthma, diabetes, congestive heart failure and related cardiac conditions, hypertension, coronary artery disease, cardiovascular and cerebrovascular conditions, and chronic lung disease — account for a disproportionate share of Medicare fee-for-service expenditures. Patients with these conditions typically receive fragmented care from providers at multiple sites and require repeated hospitalization. Pursuant to recent Medicare reform legislation, disease management demonstration programs will be established in ten regions of the country to test whether providing coordinated-care services to Medicare fee-for-service beneficiaries with complex chronic conditions can yield better clinical outcomes without increasing program costs. In addition, a number of states are pursuing disease management pilots in their Medicaid programs. Last year, the Centers for Medicare and Medicaid Services, or CMS, issued a release urging states to adopt disease management programs and announcing the availability of federal matching funding.

     Business Strategy

     Our goal is to further expand our position as a leading provider of disease management services. We seek to achieve this goal by pursuing the following strategies:

     Capitalize on our Position as an Industry Leader in the Disease Management Market. We believe our extensive experience, established infrastructure and list of existing customers provide us a significant competitive advantage as we seek to capitalize on the growing market for disease management. We have more than 15 years of experience in providing disease management and related services. Our established infrastructure includes our proprietary TRAX^TM technology platform, care center operations located throughout the United States, supply distribution channels and a national network of skilled multi-disciplinary clinicians.

     Leverage Our TRAX^TM Technology. We will continue to make significant investments in TRAX^TM in order to better identify patients for intervention and improve treatment plans for these identified patients. A

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major challenge of disease management programs is to link the design and monitoring of treatment plans with the actual clinical services and fulfillment of drugs and related supplies. We believe that our TRAX^TM technology platform is uniquely capable of addressing this issue and coordinating both treatment objectives and treatment activities.

     Further Penetrate All Key Segments of the Growing Disease Management Market. We intend to expand our customer base within the employer, health plan, state and federal governments, and pharmaceutical markets.

	•	Employers. We have identified this sector as a prime customer target as employers seek to improve employee productivity by reducing absenteeism and other forms of lost productivity.
	•	Regional and National Health Plans. Although health plans have been in the medical management business for several years, they increasingly are seeking disease management as an opportunity to minimize medical cost inflation.
	•	Medicaid. In August 2003, we entered into an agreement with Pfizer Inc.’s Health Solutions Group to provide disease management services to state Medicaid programs under contract with Pfizer. We believe this alliance represents a significant market opportunity.
	•	Pharmaceutical Companies. We implemented a contract with Schering Plough Corp. to provide disease management services for patients infected with the hepatitis C virus. The program helps patients complete their individualized Peg-Intron therapy regimen, providing their best chance for achieving sustained viral response.

     Continue to Expand Our Service Offering. We believe that the ability to offer customers an integrated health enhancement solution of services across multiple chronic medical conditions is an increasingly important competitive requirement. We are continuously seeking to expand our product and service offerings. For example, we entered the cancer disease management field by acquiring Quality Oncology in 2002, and in 2003 we developed our depression and low back pain management programs, and expanded our case management services through the acquisition of Options Unlimited. In 2004, we added obesity management to our disease management services.

     Cross-Selling Within Our Company. We believe there is a significant opportunity to expand our disease management business by cross-selling other products and services to existing customers as they realize the cost savings and better patient outcomes that our programs provide.

     While the magnitude of growth in new accounts provides us with challenges, we have an established framework for assisting employers and health plans in managing and integrating their disease management programs. We have expansion capacity in our care centers and have continued the rapid development of our TRAX^TM technology platform and capabilities for the disease management processes and related connectivity and integration. We do not foresee any abnormal pricing pressure relative to our disease management programs over the next year.

     Medical statistics indicate that one in eight births is preterm, with that number on the rise. Preterm delivery is the leading cause of neonatal mortality and birth-related morbidity and results in significantly higher cost than full-term pregnancies. Our Women’s and Children’s Health segment’s services have proven effective in extending pregnancy and reducing costs. However, the reimbursement rates have been decreasing for certain services, and patient access to services that manage high-risk pregnancies has been reduced.

     We have 29.8 million covered lives under all our contracts as of December 31, 2004 compared with 14.2 million and 7.2 million as of December 31, 2003 and 2002, respectively.

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     Components of Revenues and Expenses

     Revenues — Our Health Enhancement segment provides services through its patient service centers and designs, develops, assembles, packages and distributes diabetes products. Revenues for services are recognized when services are provided, and revenues from product sales are recognized when products are shipped. Our disease management services are billed and paid for primarily on the basis of (i) monthly fees for each employee or member enrolled in a health plan, (ii) each member identified with a particular chronic disease or condition under contract, (iii) each member enrolled in our program or (iv) a fixed rate per case. Billings for certain services occur in advance of services being performed. Such amounts are recorded as unearned revenues in the balance sheet, and revenues are recognized as services are performed.

     Our Women’s and Children’s Health segment revenues are generated by providing services through patient service centers. Revenues from this segment are recognized as the related services are rendered and are net of contractual allowances and related discounts. Our clinical services business is reimbursed on a fee-for-service or per item basis.

     In 2004, revenues from continuing operations were derived from the following types of customers and third-party payors: approximately 48% from direct payors (including corporations and health plans), 25% from third-party private payors, 22% from foreign healthcare systems and 5% from domestic government payors.

     Cost of Revenues — Cost of revenues consists primarily of clinical labor and supplies related to the provision of services, and cost of materials purchased and labor in the assembly and distribution operations.

     Selling and Administrative Expenses — Selling and administrative expenses include salaries, incentives, benefits and related expenses for personnel in sales, customer service and administrative activities, facility and marketing costs and legal, accounting and other professional fees.

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Results of Operations

     2004 Compared to 2003

     The following table summarizes key components and variations in our financial statements to facilitate understanding of our results of operations. An explanation of the results follows the table.

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     Revenues increased $42.1 million, or 16.7%, in 2004 compared to 2003. This increase resulted from strong growth in our Health Enhancement segment, where revenues increased $43.7 million, or 27.7%. The growth was attained primarily in the disease management component of this segment, which experienced a $23.3 million, or 80.1%, increase over 2003. The increase was primarily due to new disease management contracts and an increase in performance based revenues from existing contracts. Our foreign diabetes division revenues increased $10.4 million, or 19.5%, compared to 2003. In addition, Facet’s revenues increased $9.8 million, or 12.9%, over the prior year, primarily due to higher sales volume. Revenues in our Women’s and Children’s Health segment decreased $1.7 million, or 1.8%, in 2004 compared to 2003, due primarily to a continued decline in the patient census for preterm labor management services and lower rates of revenue per day of service in 2004. Health plans have been limiting patient access to services that manage high-risk pregnancies.

     Cost of revenues as a percentage of revenues decreased to 57.7% in 2004, from 58.7% in 2003. The cost of revenues as a percentage of revenues in our Health Enhancement segment decreased due to the improved margins in our domestic disease management services and the leveraging impact of higher revenues. The decreases in our Health Enhancement segment were partially offset by an increase in the cost of revenues as a percentage of revenues in our Women’s and Children’s Health segment. The Women’s and Children’s Health increase in cost of revenues as a percentage of revenues was primarily the result of a change in the patient drug therapy mix and lower rates of revenue per day of service in 2004.

     Selling and administrative expenses increased $17.7 million to $95.9 million in 2004, compared to $78.2 million in 2003. Selling and administrative expenses as a percentage of revenues increased to 32.6% in 2004, from 31.0% in 2003. This increase was largely attributable to increased overhead expenses needed to manage the Company’s revenue growth and additional spending in the information technology area. In addition, the Company experienced higher public company expenses in 2004.

     We provide for estimated uncollectible accounts as revenues are recognized. The provision for doubtful accounts was 0.9% of revenue in 2004, compared with 1.4% of revenues in 2003. Collection experience in our Women’s and Children’s Health segment is trending favorably, resulting in a decrease in the provision in 2004. The provision is adjusted periodically based upon our quarterly evaluation of historical collection experience, recoveries of amounts previously provided, industry reimbursement trends, audit activity and other relevant factors.

     Interest expense, net, decreased by $4.0 million, or 29.3%, in 2004 compared to 2003. The decrease is related primarily to the reduction in interest rate due to the issuance of 4.875% convertible debt in May and June 2004 and the retirement of substantially all of the 11% Senior Notes in June 2004. Weighted average interest rates, including amortization of debt discount and expense and gains from terminated interest rate swap transactions, were 8.62% and 11.34% for 2004 and 2003, respectively.

     Other income, net, included income of $939,000 for 2004, compared to income of $1.5 million for 2003. Other income includes collections of notes and receivables that were previously written-off, royalties and other miscellaneous items and favorable currency adjustments on a euro-denominated receivable.

     On March 29, 2004, we commenced a tender offer for all of our unsecured 11% Senior Notes, which had an aggregate principal amount of $122 million. We received valid tenders from holders of $120 million in aggregate principal amount of the 11% Senior Notes. On June 30, 2004, we completed the repurchase of the 11% Senior Notes tendered in the tender offer with proceeds from the issuance of convertible senior subordinated debt and with the proceeds from the sale of assets of the pharmacy and supplies business. The retirement of the 11% Senior Notes resulted in a loss of $22.9 million.

     The income tax benefit was $2.3 million for 2004, compared to an income tax expense of $4.2 million for 2003. Reflected in 2004 and 2003 were various non-deductible permanent differences between tax and financial reporting. Cash outflows for income taxes in 2004 and 2003 totaled $7.7 million and $1.2 million, respectively, being comprised of federal alternative minimum taxes, state and foreign taxes. As of December 31, 2004, our remaining net operating losses of $36.5 million, the tax effect of which are reflected on the balance sheet in the deferred tax asset, will be available to offset future taxable income.

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     On June 30, 2004, we completed the sale of substantially all of the assets, excluding trade and certain other receivables, of our domestic direct to consumer pharmacy and supplies business. In 2004, we recorded a gain on the sale of $30.9 million, net of income taxes of $20.9 million. Goodwill of $16.3 million related to the disposition was charged against the gain. In connection with the sale, the Company increased the allowance for doubtful accounts for the retained receivables by $11.9 million to provide for the estimated effect the sale of the business and the fourth quarter decision to outsource the collection effort to a third party could have on collections. Also related to the sale, liabilities totaling $1.5 million were recorded for employee termination benefits and other costs related to the discontinued operations. Both charges are a direct result of the decision to dispose of the business and are included as part of the gain on sale. Loss from discontinued operations, net of income taxes, was $658,000 in 2004, compared to earnings of $1.3 million in 2003.

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     2003 Compared to 2002

     The following table summarizes key components and variations in our financial statements to facilitate understanding of our results of operations. An explanation of the results follows the table.

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     In 2003, revenues increased $39.7 million, or 18.7%, compared to 2002. This increase resulted from strong growth in our Health Enhancement segment, where revenues increased $43.4 million, or 37.9%, partially offset by a decrease in our Women’s and Children’s Health segment. Of the Health Enhancement segment increase, $12.7 million was attributable to the acquisition of QO, effective October 2002. The remaining growth was attained primarily in the disease management and foreign diabetes business components of this segment, which experienced an additional $23.5 million increase over 2002. The increase was due to an increase in covered lives of new and existing accounts, along with a favorable exchange rate impact. In addition, Facet’s revenues increased $7.3 million over the prior year, primarily due to higher sales volume. Revenues in our Women’s and Children’s Health segment decreased $3.7 million, or 3.8%, in 2003 compared to 2002, due primarily to a continued decline in the patient census for preterm labor management services and lower rates of revenue per day of service in 2003. Health plans have been limiting patient access to services that manage high-risk pregnancies.

     Cost of revenues as a percentage of revenues decreased slightly to 58.7% in 2003, from 58.9% in 2002. The cost of revenues as a percentage of revenues in our Health Enhancement segment decreased due to the following factors: the effects of our acquisition of QO, whose cost of revenues as a percentage of revenues was lower than for other components of this segment; and improved margins in disease management services due to the leveraging impact of higher revenues. The decreases in our Health Enhancement segment were partially offset by an increase in the cost of revenues as a percentage of revenues in our Women’s and Children’s Health segment. Our Women’s and Children’s Health increase in cost of revenues as a percentage of revenues was primarily the result of a change in the patient drug therapy mix and lower rates of revenue per day of service in 2003.

     Selling and administrative expenses as a percentage of revenues decreased to 31.0% in 2003, from 39.8% in 2002. The decrease in this percentage was primarily due to higher revenue in 2003 and to special items in 2002. Selling and administrative expenses in 2002 included a charge of $14.2 million for the termination and restructuring of a retirement plan, as discussed below. Also in 2002, the Company recorded a non-cash charge of $2.5 million related to the retirement of a $3.5 million note receivable from a former executive. The note, which was acquired from a predecessor organization and matured on June 30, 2002, stipulated that the balance could be settled in full by surrender of collateral consisting of 187,500 shares of our common stock, generating a charge equal to the difference between the book value of the note and the closing market value on June 30, 2002 of the 187,500 shares. Selling and administrative expenses for 2002 also included $2.9 million of severance costs. Other fluctuations in 2003 and 2002 generally offset each other.

     On December 31, 2002, we terminated and restructured our split-dollar insurance retirement plan for certain former and current employees and recorded charges totaling approximately $14.2 million. The decision to terminate the program, which utilized split-dollar life insurance as the funding mechanism, was prompted in part by concerns that such a vehicle may no longer be permitted for some current officers under certain provisions of the Sarbanes-Oxley Act of 2002, as well as anticipation that additional funding, in excess of amounts originally contemplated, would have been required under the former plan. The plan was terminated for the group including certain former employees and Matria’s Chairman and Chief Executive Officer. The plan for the other current employees was replaced by a Supplemental Executive Retirement Plan. The expense of $14.2 million recognized in 2002 represents the net present value of the targeted benefits under the plan (including tax mitigation amounts) of approximately $13.6 million, and $575,000 related to transaction costs and the net shortfall in the refund of cumulative premiums paid by us. We satisfied our obligations to participants by relinquishing our collateral interests in the split-dollar policies and through net incremental payments of approximately $3.1 million (the effect of which was mitigated by the elimination of future premium obligations of $3.7 million).

     We provide for estimated uncollectible accounts as revenues are recognized. The provision for doubtful accounts was 1.4% of revenues in 2003, compared with 2.6% of revenues in 2002. The provision for

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doubtful accounts as a percentage of revenues in our Health Enhancement segment was 0.1% in 2003, compared to 0.3% in 2002. The provision for doubtful accounts as a percentage of revenues in our Women’s and Children’s Health segment was 3.4% in 2003, compared to 5.3% in 2002. Collection experience in our Women’s and Children’s Health segment trended favorably in 2003, resulting in a decrease in the provision. The provision is adjusted periodically based upon our quarterly evaluation of historical collection experience, recoveries of amounts previously provided, industry reimbursement trends, audit activity and other relevant factors.

     Interest expense, net, increased by $218,000, or 1.6%, in 2003 compared to 2002, due to a higher average outstanding debt balance offset somewhat by a lower average interest rate. The weighted average interest rates (including amortization of debt discount and expense and gains from terminated interest rate swap transactions) on all outstanding indebtedness were 11.34% and 11.89% for 2003 and 2002, respectively.

     Other income (expense), net, included income of $1.5 million for 2003, compared to expense of $3.2 million for 2002. Included in 2003 was income from favorable currency adjustments on a euro-denominated receivable, joint ventures, royalties, collections of accounts receivable of a former business that had previously been written off and other miscellaneous items. Other expense in 2002 included the write-off of approximately $2.5 million related to the original TRAXÔ platform, which was made obsolete due to the latest generation of this software, which was put into production on July 1, 2002. The 2002 amount also included a charge of $692,000 to write-off unamortized loan origination costs associated with the cancellation of our former bank credit agreement (see “Liquidity and Capital Resources” below where the replacement facility is discussed).

     The income tax expense of $4.2 million for 2003 reflected a higher expense than the statutory rate due to state income taxes, various non-deductible permanent differences between tax and financial reporting and a higher foreign income tax rate. The income tax benefit of $4.4 million for 2002 reflected a lower benefit than the statutory tax rate due to state income taxes and various non-deductible permanent differences between tax and financial reporting. Cash outflows for income taxes in 2003 and 2002 totaled $1.2 million and $247,000, respectively, being comprised of federal alternative minimum taxes, state and foreign taxes.

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Liquidity and Capital Resources

     Operating Activities

     As of December 31, 2004, we had cash and cash equivalents of $37.4 million. Net cash provided by continuing operations decreased from $15.5 million in 2003 to $5.7 million in 2004. The decrease was primarily due to increases in accounts receivable and inventories and a decrease in accounts payable. The increase in accounts receivable was primarily attributable to the revenue growth in our Health Enhancement segment. Inventory increased primarily due to shortened lead-times in our Facet division and to meet revenue growth. In addition, accounts payable decreased due to reduced payment cycles for one of Facet’s major vendors. Net cash provided by continuing operations was $23.2 million in 2002. This was attributable to an increase in accounts payable and other accrued liabilities and a decrease in accounts receivable.

     Our accounts receivable days’ sales outstanding, or DSO, were 52 days as of December 31, 2004, compared to 50 days as of December 31, 2003. The 2004 DSO amount consists of 45 days for our Health Enhancement segment, compared to 40 days in 2003, and 67 days for our Women’s and Children’s Health segment, compared to 68 days in 2003. The increase in our Health Enhancement segment was attributable to increased days’ sales outstanding in our health plan customer receivables.

     Net cash flows provided by (used in) operating activities related to the discontinued operations of our direct to consumer pharmacy, laboratory and supplies business and our former cardiac event monitoring company, Quality Diagnostic Services, Inc. (“QDS”), were $3.6 million, $(3.4) million and $(2.7) million in 2004, 2003 and 2002, respectively.

     Investing Activities

     Net cash provided by (used in) investing activities totaled $67.8 million in 2004, $(13.3) million in 2003 and $(19.6) million in 2002.

     On June 30, 2004, we completed the sale of substantially all of the assets, excluding trade and certain other receivables, of our direct-to-consumer diabetic and respiratory supplies business. At the closing, we received cash proceeds, net of transaction costs, of approximately $101.1 million. We used approximately $20.5 million of the proceeds we received from the sale to satisfy the earn-out payment owed to Quality Oncology, and we used approximately $53 million of the proceeds we received from the sale to complete the funding of our tender offer for our 11% Senior Notes.

     Continuing operations’ capital expenditures of $9.7 million in 2004, $8.1 million in 2003 and $9.9 million in 2002 relate primarily to the replacement and enhancement of computer information systems. Discontinued operations’ capital expenditures of $456,000 in 2004, $3.4 million in 2003 and $6.2 million in 2002 relate primarily to the pharmacy, laboratory and supplies computer information systems.

     The 2003 cash used in investing activities included $603,000 related to our acquisition of Options Unlimited. In 2004, we paid additional consideration to Options Unlimited of $200,000. In 2002, cash used in investing activities included $3.5 million for the acquisition of two businesses. In February 2002, we acquired certain assets of ChoicePoint’s lab business for $650,000 in cash. After a 120-day period, ChoicePoint reimbursed us $143,000 under a guarantee of collection of acquired accounts receivable. On September 30, 2002, we acquired QO for initial consideration of approximately $20 million, consisting of $3 million in cash and approximately 1,335,000 shares of common stock. The common stock is reflected on our balance sheet at a price of $12.545 per share. The price is the 5-day average of the closing stock prices between June 3 and June 7, 2002, based on a measurement date of June 5, which was the date that the closing stock price fell below the $12.765 minimum price in the purchase and sale agreement and the number of shares became fixed. An

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additional 63,000 shares were issued in February 2003 pursuant to a purchase price adjustment. Additional consideration of $20.5 million cash was paid in 2004 based upon QO’s 2003 operating results.

     In addition, we acquired MarketRing in June 2002 in a non-cash transaction. Our Chairman and Chief Executive Officer and four other directors of Matria were stockholders of MarketRing. The terms of the MarketRing acquisition were negotiated by an independent committee of our Board of Directors and approved by the vote of our disinterested directors. The purchase price was paid by the issuance of approximately 402,000 shares of our common stock valued at approximately $3.8 million (based on the average closing price of our common stock during the three-day trading period ended June 14, 2002). In 2003, we issued approximately 39,000 additional shares related to the acquisition.

     Restricted cash increased to $3.8 million in 2004, compared to $455,000 in 2003. In September 2004, we set aside $3.0 million pledged as collateral in an agreement with one of our major suppliers. The agreement expires in May 2005. Other restricted funds are collateral for insurance policies and amounts held in escrow related to customer contracts. Generally, such funds are held in interest-bearing investment accounts or certificates of deposit.

     Financing Activities

     Net cash used in financing activities was $49.1 million for 2004, compared to cash provided by financing activities of $3.2 million and $1.3 million in 2003 and 2002, respectively.

     On March 29, 2004, we commenced a tender offer for all of our unsecured 11% Senior Notes, which had an aggregate principal amount of $122 million. We received valid tenders from holders of $120 million in aggregate principal amount of our 11% Senior Notes. On June 30, 2004, we completed the repurchase of our 11% Senior Notes tendered in the tender offer with proceeds from the issuance of convertible senior subordinated notes as described below and with the proceeds from the sale of assets of the pharmacy and supplies business. The retirement of the 11% Senior Notes resulted in a net cash payment of $136.5 million.

     On May 5, 2004, we completed the sale of $75 million in aggregate principal amount of 4.875% convertible senior subordinated notes due 2024. On June 3, 2004, the initial purchaser of the notes exercised its option to purchase an additional $11.3 million in aggregate principal amount of the notes. We received proceeds, net of discount, of $83.2 million from the issuance of the convertible senior subordinated notes. Under certain circumstances, the convertible senior subordinated notes are convertible into shares of our common stock at a conversion rate of 50.873 shares per $1,000 principal amount of the notes (equal to an initial conversion price of approximately $19.64 per share). Interest is payable on May 1 and November 1 of each year, beginning in November 2004. The convertible senior subordinated notes are unsecured and are guaranteed by certain of our domestic subsidiaries. We used the proceeds, net of discount, of $83.2 million from the issuance of the convertible senior subordinated notes and proceeds from the sale of substantially all of the assets of our direct to consumer diabetic and respiratory supplies business to fund the repurchase of $120 million in aggregate principal amount of 11% Senior Notes tendered in the tender offer as described above.

     In October 2002, we entered into a new revolving credit facility with a borrowing capacity of the lesser of $35 million or 80% of eligible accounts receivable. The facility is collateralized by cash, accounts receivable, inventories, intellectual property and certain other of our assets. Borrowings under this facility bear interest at the LIBOR rate plus 2.9% (5.18% at December 31, 2004), and the facility requires a non-utilization fee of 0.5% of the unused borrowing capacity. Interest and the commitment fee are payable monthly. The facility is effective until October 2005. Thereafter, the term will be automatically extended for annual successive periods unless either party provides notice to the contrary not less than 60 days prior to the end of the period. We plan to extend the revolving credit facility or replace it in 2005. As of December 31, 2004, there was no outstanding balance under this agreement, and approximately $23.1 million was available for borrowing under this credit facility. Under the revolving credit facility, we are required to maintain certain financial ratios. As of December 31, 2004, we were in compliance with the financial covenants in all of our credit instruments.

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     Proceeds were received from participants under our stock purchase and stock option plans totaling $6.6 million, $816,000 and $1.9 million in 2004, 2003 and 2002, respectively.

     We believe that our cash, other liquid assets, operating cash flows and revolving credit facility, taken together, will provide adequate resources to fund ongoing operating requirements, planned capital expenditures and contractual obligations through at least 2005.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

     We have various contractual obligations that are appropriately recorded as liabilities in our consolidated financial statements. Certain other items, such as operating lease obligations, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. The following sets forth our future minimum payments required under contractual obligations as of December 31, 2004:

     Interest payments of $4.4 million under our 11% Senior Notes and our convertible senior subordinated notes will be payable in 2005. Capital expenditures of approximately $11 million are estimated in 2005 as we continue to enhance our computer information systems.

     In September 2004, we set aside $3.0 million pledged as collateral in an agreement with one of our major suppliers. The agreement expires in May 2005. We have other restricted funds of $823,000 as of December 31, 2004, that are used as collateral for insurance policies and amounts held in escrow related to customer contracts. Funds are held in interest-bearing investment accounts or certificates of deposit.

     As of December 31, 2004, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Other Factors Affecting Liquidity

     On October 3, 2003, we filed with the Commission a universal shelf registration statement on Form S-3 relating to $150 million of common stock, preferred stock, debt securities, depositary shares, warrants and units. The registration statement became effective on October 28, 2003. We may publicly offer these securities from time to time at prices and on terms to be determined at the time of the relevant offerings. We believe that the shelf registration statement will assist in providing us with flexibility in raising debt and/or equity financing. There can be no assurance, however, that financing will be available in amounts or on terms acceptable to us, if at all. Any sale of additional equity or convertible securities covered by the registration statement could result in additional dilution to our stockholders.

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     Uncertainties

     A qui tam action has been filed in the United States District Court for the Western District of Virginia by a former employee of our former domestic pharmacy and supplies division, against the Company and our subsidiary, Diabetes Self-Care, Inc. The complaint alleges improper claims by Diabetes Self-Care, Inc. for Medicare payments and seeks treble damages and civil penalties in unspecified amounts. As is required by law, the federal government is conducting an investigation of the complaint to determine if it will intervene or join in this suit. We are cooperating fully with the investigation. This matter is still in its preliminary stages, and we are unable to predict the ultimate disposition of the action or the investigation.

     We are subject to various legal claims and actions incidental to our business and the businesses of our predecessors, including product liability claims and professional liability claims. We maintain insurance, including insurance covering professional and product liability claims, with customary deductible amounts. There can be no assurance, however, that (i) additional suits will not be filed against us in the future, (ii) our prior experience with respect to the disposition of litigation is representative of the results that will occur in pending or future cases or (iii) adequate insurance coverage will be available at acceptable prices for incidents arising or claims made in the future. There are no other pending legal or governmental proceedings to which we are a party that we believe would, if adversely resolved, have a material adverse effect on us.

     For a discussion of other risks and uncertainties that may affect our business, see “Risk Factors” in Item 1 of this Annual Report.

Critical Accounting Estimates

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

     Revenue Recognition and Allowances for Uncollectible Accounts. Revenues for our Women’s and Children’s Health segment are generated by providing services through patient service centers. Revenues from this segment are recognized as the related services are rendered and are net of contractual allowances and related discounts. Our Health Enhancement segment provides services through its patient service centers, provides supplies to patients, and designs, develops, assembles, packages and distributes diabetes products. Revenues for services are recognized when services are provided, and revenues from product sales are recognized when products are shipped. Revenues from this segment are recorded net of contractual allowances and other discounts.

     Our clinical services and our foreign supply businesses are reimbursed on a fee-for-service or per item basis. Other aspects of disease management, however, are paid for primarily on the basis of (i) monthly fees for each employee or member enrolled in a health plan, (ii) each member identified with a particular chronic disease or condition under contract, (iii) each member enrolled in our program or (iv) a fixed rate per case. Billings for certain services occur in advance of services being performed. Such amounts are recorded as unearned revenues in the balance sheet, and revenues are recognized as services are performed. Some of the contracts for these services provide that a portion of our fees is at risk subject to our performance against financial cost savings and clinical criteria. Thus, a portion of our revenues are accrued in the period the services are provided and adjusted in future periods when final settlement is determined. These estimates are continually reviewed and adjusted as information related to performance levels and associated fees become available. These reviews and adjustments have not resulted in a material reduction in any recent period of revenue previously reported. In 2004, 3.6% of our revenues recognized were at risk under these arrangements.

     A significant portion of our revenues is billed to third-party reimbursement sources. Accordingly, the ultimate collectibility of a substantial portion of our trade accounts receivable is susceptible to changes in third-party reimbursement policies. In addition, the collectibility of all of our accounts receivable varies based on

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

     Goodwill and Identifiable Intangible Assets. As of December 31, 2004, we reported goodwill and identifiable intangible assets at carrying amounts of $134.2 million and $1.1 million, respectively. The total of $135.3 million represents approximately 44% of total assets as of December 31, 2004. Our identifiable intangible assets are amortized over their respective estimated useful lives. Our goodwill is no longer amortized to expense.

     We review goodwill and identifiable intangibles for impairment annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In testing for impairment, we calculate the fair value of the reporting units to which the goodwill and identifiable intangibles relate based on the present value of estimated future cash flows. Based on the evaluation, management concluded that no impairment of recorded goodwill and intangibles exists at December 31, 2004. The approach utilized is dependent on a number of factors including estimates of future revenues and costs, appropriate discount rates and other variables. We base our estimates on assumptions that we believe to be reasonable, but which are unpredictable and inherently uncertain. Therefore, future impairments could result if actual results differ from those estimates.

     Accounting for Income Taxes. We account for income taxes using an asset and liability approach. Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and net operating loss and tax credit carryforwards. Additionally, the effect on deferred taxes of a change in tax rates is recognized in earnings in the period that includes the enactment date.

     The income tax benefit was $2.3 million for 2004 compared to an income tax expense of $4.2 million for 2003. Reflected in 2004 and 2003 were various non-deductible permanent differences between tax and financial reporting. As of December 31, 2004, our remaining net operating losses of $36.5 million, the tax effect of which is reflected on the balance sheet in the deferred tax asset, will be available to offset future taxable income liabilities. Based on projections of taxable income in 2005 and future years, management believes that it is more likely than not that we will fully realize the value of the recorded deferred income tax assets. The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced.

     The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See the Notes to Consolidated Financial Statements which contain additional accounting policies and other disclosures required by generally accepted accounting principles.

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

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Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share Based-Payment (“SFAS 123R”). SFAS 123R establishes standards for the accounting for transactions in which and entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement requires a public entity to measure the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.

This Statement applies to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that date. Compensation cost will be recognized on or after the required effective date for the portion of outstanding awards, for which the requisite service has not been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. The Statement is effective for the first interim period or annual period that begins after June 15, 2005. We have concluded that SFAS 123R will have a negative impact on our financial position and results of operations. If we elect the retrospective method, we expect that the impact of expensing existing stock options, as well as the impact of any anticipated stock option grants and restricted stock awards, to be approximately $0.10 to $0.15 per share in 2005. If we elect the prospective method, we expect that the impact of expensing stock options, as well as the impact of any anticipated stock option grants and restricted stock awards, to be approximately $0.05 to $0.08 per share in 2005. We do not expect the impact of SFAS 123R to have a material impact on our cash flow or liquidity. See Note 6 to the consolidated financial statements for assumptions used calculating the fair value of employee stock options.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs (“SFAS 151”). This Statement clarifies the accounting for the abnormal amount of idle facilities expense, freight, handling costs and wasted material. This Statement requires that those items be recognized as current-period expense. In addition, the Statement requires that allocation of fixed overhead to the cost of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred after December 31, 2005. We are currently assessing the impact of SFAS 151 on our financial condition and results of operations.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29 (“SFAS 153”). SFAS 153 amends the guidance in APB Opinion No. 29 to eliminate the exception for nonmonetary assets of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 specifies that a nonmonetary asset has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and shall be applied prospectively. We do not expect the impact of SFAS 153 on our financial position, results of operations or cash flows to be material.

In September 2004, the Emerging Issues Task Force reached a consensus on Issue No. 04-08, The Effect of Contingently Convertible Debt on Diluted Earnings per Share (“EITF 04-08”) where contingently convertible instruments should be included in diluted earnings per share, if dilutive, regardless of whether the market price trigger has been met. This required us to include in the diluted earnings per share calculation the effect of our issuance of 4.875% convertible senior subordinated notes in 2004. EITF 04-08 had a $0.01 and $0.02 dilutive effect on our third and fourth quarters of 2004, respectively, but no effect in our annual calculation since the inclusion of the shares would have been antidilutive.

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Item 7A. Quantitative and Qualitative Disclosure about Market Risk

     We are exposed to market risk from changes in foreign currency exchange rates. Our operations outside the United States, with sales denominated in currencies other than the U.S. dollar (primarily in Germany), generated approximately 22% of total revenues in the year ended December 31, 2004. In the normal course of business, these operations are exposed to fluctuations in currency values. In addition, we have certain receivables and payables denominated in currencies other than the U.S. dollar, primarily the euro. We do not consider the impact of currency fluctuations to represent a significant risk and have chosen not to hedge our foreign currency exposure. Based on our results for 2004 and balances as of December 31, 2004, a hypothetical 10% change in the currency exchange rates would impact annual pre-tax earnings by approximately $1.1 million.

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Item 8. Financial Statements and Supplementary Data

     The following Consolidated Financial Statements of the Company and its subsidiaries are included as pages F-1 through F-35 of this Annual Report on Form 10-K:

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

     None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2004. No process, no matter how well designed and operated, can provide absolute assurance that the objectives of the process are met in all cases. However, our disclosure controls and procedures are designed to provide reasonable assurance that the certifying officers will be alerted on a timely basis to material information relating to the Company (including the Company’s consolidated subsidiaries) required to be included in our reports filed or submitted under the Exchange Act.

     Based on such evaluation, such officers have concluded that our disclosure controls and procedures were effective as of December 31, 2004, to provide reasonable assurance that the objectives of the disclosure controls and procedures were met.

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Management’s Report on Internal Control Over Financial Reporting and Report of Independent Registered Public Accounting Firm

“Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Controls” and “Management’s Report on Internal Control Over Financial Reporting” and are included on pages F-2 and F-3 of this Report.

Changes in Internal Control over Financial Reporting

     There have been no significant changes in the Company’s internal control over financial reporting during the year ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

     None.

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PART III

Item 10. Directors and Executive Officers of the Registrant.

     Information concerning the directors of the Company will be included under the caption “Election of Directors” of the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on June 1, 2005, to be filed with the Commission and incorporated by reference herein. Additional information relating to the executive officers of the Company is included as a Special Item in Part I of this Annual Report on Form 10-K.

Item 11. Executive Compensation.

     Information required by this item will be contained in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on June 1, 2005, to be filed with the Commission and incorporated by reference herein.

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

     Information required by this item will be contained in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on June 1, 2005, to be filed with the Commission and incorporated by reference herein.

     For purposes of determining the aggregate market value of the Company’s common stock held by non-affiliates as shown on the cover page of this report, shares held by all directors and executive officers of the Company have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons may be “affiliates” of the Company as defined by the rules of the Commission.

Item 13. Certain Relationships and Related Transactions.

     Information required by this item will be contained in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on June 1, 2005, to be filed with the Commission and incorporated by reference herein.

Item 14. Principal Accountant Fees and Services

     Information required by this item will be contained in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on June 1, 2005, to be filed with the Commission and incorporated by reference herein.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

     (a)(1) The following consolidated financial statements of the Company and its subsidiaries are included as pages F-1 through F-35 of this Annual Report on Form 10-K:

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

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

     (a)(3) Exhibits:

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

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45

46

47

48

49

The following exhibits are filed as part of this Report:

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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.

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Parker H. Petit as his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or would do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

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52

Report of Independent Registered Public Accounting Firm

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

Under date of March 14, 2005, we reported on the consolidated balance sheets of Matria Healthcare, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and comprehensive earnings (loss) and cash flows for each of the years in the three-year period ended December 31, 2004, as contained in the 2004 annual report to shareholders. These consolidated financial statements and our report thereon are included in the annual report on Form 10-K for the year 2004. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

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

/s/ KPMG LLP

Atlanta, Georgia
March 14, 2005

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Matria Healthcare, Inc. and Subsidiaries

54

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

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, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and comprehensive earnings (loss), and cash flows for each of the years in the three-year period ended December 31, 2004. 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.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Matria Healthcare, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Matria Healthcare, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2005, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Atlanta, Georgia
March 14, 2005

F-1

Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Controls

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

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Matria Healthcare, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Matria Healthcare, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Matria Healthcare, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Matria Healthcare, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and comprehensive earnings (loss), and cash flows for each of the years in the three-year period ended December 31 2004, and our report dated March 14, 2005, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Atlanta, Georgia
March 14, 2005

F-2

Management’s Report on Internal Control Over Financial Reporting

     The management of Matria Healthcare, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company maintains accounting and internal control systems which are intended to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with management’s authorization and accounting records are reliable for preparing financial statements in accordance with accounting principles generally accepted in the United States of America.

     Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, risk.

     The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control – Integrated Framework.

     Based on our assessment management believes that, as of December 31, 2004, the Company’s internal control over financial reporting is effective based on those criteria.

     Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, has been audited by KPMG LLP, the independent registered public accounting firm who also audited the Company’s consolidated financial statements. KPMG LLP’s attestation report on management’s assessment of the Company’s internal control over financial reporting appears on page F-2 hereof.

F-3

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

F-4

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements .

F-5

MATRIA HEALTHCARE, INC. AND SUBSIDIARIES