Kci Real Property S-4 Registration of securities issued in business combination transactions

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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

KINETIC CONCEPTS, INC.
(Exact Name of Registrant as Specified in its Charter)

Texas (State or other Jurisdiction of Incorporation or Organization)	2590 (Primary Standard Industrial Classification Code Number)	74-1891727 (I.R.S. Employer Identification Number)
8023 Vantage Drive San Antonio, Texas 78230 (210) 524-9000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

Dennis E. Noll
Senior Vice President, General Counsel & Secretary
8023 Vantage Drive
San Antonio, Texas 78230
(210) 524-9000
(Name and address, including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

Copies to:
Kenton J. King Thomas J. Ivey Skadden, Arps, Slate, Meagher & Flom LLP 525 University Avenue Palo Alto, California 94301 (650) 470-4500	William J. McDonough Cox & Smith Incorporated 112 East Pecan Street San Antonio, Texas 78205 (210) 554-5268

SEE TABLE OF ADDITIONAL REGISTRANTS

Approximate date of commencement of proposed exchange of the securities: As soon as practicable after this registration statement becomes effective.

        If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.o

        If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering.o                        

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering.o

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered	Amount to be Registered	Proposed Maximum Offering Price Per Unit	Proposed Maximum Aggregate Offering Price(1)	Amount of Registration Fee
Series B 73/8% Senior Subordinated Notes due 2013	$205,000,000	100%	$205,000,000	$16,585
Guarantees of Series B 73/8% Senior Subordinated Notes due 2013	(2)	(2)	(2)	(2)

(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f) promulgated under the Securities Act of 1933, as amended.

(2)

Each of KCI Holding Company, Inc., KCI Real Holdings, L.L.C., KCI International, Inc., KCI Licensing, Inc., KCI Properties Limited, KCI Real Property Limited, KCI USA, Inc., KCI USA Real Holdings, L.L.C. and Medclaim, Inc. will guarantee the obligations of Kinetic Concepts, Inc. under the Series B 7³/8% Senior Subordinated Notes due 2013. Pursuant to Rule 457(n), no additional registration fee is being paid in respect of such guarantees.

The registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until the registrants shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities Exchange Commission, acting pursuant to said Section 8(a), may determine.

TABLE OF ADDITIONAL REGISTRANTS

Name of Additional Registrant*	State of Incorporation or Formation	Primary Standard Industrial Classification Code Number	I.R.S. Employer Identification Number
KCI Holding Company, Inc.	Delaware	2590	74-2804102
KCI Real Holdings, L.L.C.	Delaware	2590	N/A
KCI International, Inc.	Delaware	2590	51-0307888
KCI Licensing, Inc.	Delaware	2590	74-2928553
KCI Properties Limited	Texas	2590	74-2621178
KCI Real Property Limited	Texas	2590	74-2644430
KCI USA, Inc.	Delaware	2590	74-2152396
KCI USA Real Holdings, L.L.C.	Delaware	2590	N/A
Medclaim, Inc.	North Carolina	2590	56-2200462

*

The address and telephone number of the principal executive offices of each of the registrants listed below are the same as those of Kinetic Concepts, Inc.

The information in this prospectus is not complete and may be changed. We may not issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to exchange these securities and it is not soliciting an offer to buy these securities in any state where the offer, exchange or sale is not permitted.

Subject to completion, dated                        , 2003

PROSPECTUS

KINETIC CONCEPTS, INC.

Offer to exchange all outstanding Series A 7³/8% Senior Subordinated Notes due 2013 (which we refer to as the old notes) for Series B 7³/8% Senior Subordinated Notes due 2013 (which we refer to as the new notes) which have been registered under the Securities Act of 1933, as amended.

The exchange offer will expire at 5:00 p.m., New York City time, on                  , 2003, the 21st business day following the date of this prospectus, unless we extend the exchange offer in our sole and absolute discretion.

        The principal terms of the exchange offer are as follows:

•

We will exchange the new notes for all outstanding old notes that are validly tendered and not withdrawn pursuant to the exchange offer.



•

You may withdraw tendered old notes at any time prior to the expiration of the exchange offer.



•

The terms of the new notes are substantially identical to those of the outstanding old notes, except that the transfer restrictions and registration rights relating to the old notes do not apply to the new notes.



•

The exchange of old notes for new notes will not be a taxable transaction for U.S. federal income tax purposes, but you should see the discussion under the heading "Material United States Federal Income Tax Considerations" for more information.



•

We will not receive any proceeds from the exchange offer.



•

We issued the old notes in a transaction not requiring registration under the Securities Act, and as a result, transfer of the old notes is restricted. We are making the exchange offer to satisfy your registration rights, as a holder of the old notes.



•

There is no established trading market for the new notes or the old notes.

        Our obligations under the old notes are, and our obligations under the new notes will be, fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis, by KCI Holding Company, Inc., KCI Real Holdings, L.L.C., KCI International, Inc., KCI Licensing, Inc., KCI Properties Limited, KCI Real Property Limited, KCI USA, Inc., KCI USA Real Holdings, L.L.C. and Medclaim, Inc.

See the section entitled "Risk Factors" beginning on page 16 for a discussion of risks you should consider prior to tendering your outstanding old notes for exchange.

        Each broker-dealer that receives new notes for its own account in the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of these new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where the old notes were acquired as a result of market-making activities or other trading activities.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                        , 2003.

TABLE OF CONTENTS

        References in this prospectus to the "Company," "we," "our" or "us" refer to Kinetic Concepts, Inc. and our subsidiaries.

        When we use the term "notes" in this prospectus, the term includes the old notes and the new notes.

        You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.

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FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements. When used in this prospectus, the words "estimate," "project," "anticipate," "expect," "intend," "believe" and similar expressions are intended to identify forward-looking statements. All of the forward-looking statements contained in this prospectus are based on estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve risks and uncertainties beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this prospectus are not guarantees of future performance and we cannot assure any reader that such statements will be realized. In all likelihood, actual results will differ from those contemplated by such forward-looking statements. Any such differences could result from a variety of factors, including the following:

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foreign and domestic economic and business conditions;



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demographic changes;



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government regulations and changes in, or our failure to comply with, government regulations;



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changes in the health care reimbursement policies of Medicare Part B or other governmental or private payers;



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competition;



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the loss of any significant customers;



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our significant indebtedness;



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our ability to effectively protect our intellectual property and not infringe on the intellectual property of others;



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loss of any significant suppliers, especially sole-source suppliers;



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failure of new products and services to achieve market acceptance;



•

liability resulting from litigation; and



•

other factors discussed elsewhere in this document and in our filings with the Securities and Exchange Commission, or SEC.

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SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. Because this is only a summary, it may not contain all of the information you should consider when making your decision to tender your old notes in the exchange offer. To understand all of the terms of the exchange offer and for a more complete understanding of our business, you should carefully read this entire prospectus, particularly the section entitled "Risk Factors," and the documents incorporated by reference in this prospectus. In this prospectus, except as set forth under the "Description of the New Notes" and unless the context requires otherwise, the words "we," "our," and "us" refer to Kinetic Concepts, Inc. and its consolidated subsidiaries. For purposes of this prospectus, "KCI" refers to Kinetic Concepts, Inc.

KINETIC CONCEPTS, INC.

        Kinetic Concepts, Inc. is a global medical device company with leadership positions in (1) advanced wound care and (2) therapeutic surfaces which treat and prevent complications resulting from patient immobility. We design, manufacture, market and service a wide range of proprietary products which can significantly improve clinical outcomes while reducing the overall cost of patient care by accelerating the healing process or preventing complications. We have an infrastructure designed to meet the specific needs of medical professionals and patients across all health care settings, including acute care hospitals, extended care facilities and patients' homes both in the United States and abroad.

        Our advanced wound care systems are transforming the treatment of difficult-to-treat wounds. These systems incorporate our proprietary Vacuum Assisted Closure®, or V.A.C.®, technology, which has been clinically demonstrated to promote wound healing and reduce the cost of treating patients with difficult-to-treat wounds. V.A.C. systems help treat a broad spectrum of acute and chronic wounds including failed surgical closures, trauma wounds, partial thickness burns, serious pressure ulcers and diabetic ulcers and help improve outcomes of skin grafting procedures. V.A.C. systems work by applying negative pressure to wounds through proprietary foam dressings. V.A.C. therapy removes excess fluids that may interfere with wound healing, promotes growth of granulation tissue, draws the wound edges closer together, stimulates blood flow and reduces bacterial levels. V.A.C. therapy has been demonstrated to promote the healing of wounds that, in some cases, have been open for years. For the twelve-month period ended June 30, 2003, our V.A.C. products and related services generated $391.3 million in revenue, as compared to $244.5 million for the twelve-month period ended June 30, 2002.

        Our therapeutic surfaces, including specialty hospital beds, mattress replacement systems and overlays, are designed to address complications associated with immobility and obesity, such as pressure sores and pneumonia. These complications, if left untreated, can be life threatening. We offer a broad line of therapeutic surfaces designed to deliver pressure relief, pulmonary care and bariatric care. Our beds and mattress overlays help reduce the amount of pressure on a patient's skin by using air, foam, silicon beads or viscous fluid as support. We also manufacture beds which rotate to prevent and treat medical problems suffered by immobile patients, such as pneumonia and blood clots. Our line of bariatric care products, which are designed to accommodate obese individuals weighing up to 1,000 pounds, permits patients to be treated effectively and reduces the risk of injury to health care personnel related to handling these patients. For the twelve-month period ended June 30, 2003, therapeutic surfaces generated $272.5 million of revenue, as compared to $263.8 million for the twelve-month period ended June 30, 2002.

        Our customers generally prefer to rent our V.A.C. systems and therapeutic surfaces and purchase the related disposable products, such as V.A.C. dressings. Our network of service centers enables us to deliver products and services to our customers when needed. This allows our customers to obtain the right product for each patient without having to purchase and store large numbers of irregularly used

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items, thus avoiding substantial capital investments and costs associated with complex asset management and internal logistics. Our rental model and service center network also benefit us by improving capital efficiency and facilitating our ability to introduce new products.

        We have extensive contractual relationships and reimbursement coverage for the V.A.C. in the United States. In acute and extended care, we have contracts with nearly all major hospital, and most major extended care, group purchasing organizations. Hospitals and extended care facilities pay us directly for our services. In the home care market, we provide V.A.C. products and services directly to patients and bill third-party payers, including Medicare and private insurance. V.A.C. systems are covered by Medicare Part B.

        We have close relationships with key decision makers regarding the use of our products as a result of the clinical support and consultation we provide, and our education and training programs. Our worldwide sales organization consists of approximately 1,050 individuals, including approximately 350 domestic employees with medical or clinical backgrounds. In addition, we employ approximately 85 field-based specialists who train and consult with our customers regarding the often demanding and complex paperwork required by Medicare and private insurance companies.

        We have also dedicated significant time and resources to develop capabilities and expertise in third-party reimbursement, intellectual property protection, and new product development and commercialization. In addition, we have developed systems to support and manage the deployment of our domestic and international sales and service efforts. We believe these capabilities position us to continue to expand our product and service offerings and to strengthen our position with our customers.

Competitive Strengths

        We believe we have the following competitive strengths:

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Leading global market positions.



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Superior clinical efficacy.



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Product innovation and commercialization.



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Broad V.A.C. patent portfolio.



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Broad reach and customer relationships.



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Extensive service center network.



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Reimbursement expertise.



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Strong management team.

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Business Strategy

        We intend to continue to grow our business and to improve our market position by pursuing the following strategies:

•	Capture the current V.A.C. opportunity.
•	Establish V.A.C. therapy as the standard of care.
	—Increase penetration in home care markets.
	—Further penetrate the acute care market.
•	Maintain and expand our leadership position in therapeutic surfaces.
•	Expand presence in international markets.
•	Generate high returns on invested capital.

        KCI was founded in 1976 by James R. Leininger, M.D., and is incorporated in Texas. Fremont Partners, L.P. and Blum Capital Partners, L.P. recapitalized KCI in 1997 and, together with Dr. Leininger, continue to hold the majority of our outstanding equity. Our principal executive offices are located at 8023 Vantage Drive, San Antonio, Texas 78230, and our telephone number is (210) 524-9000. Our website is located at www.kci1.com. The information contained on our website is not a part of this prospectus.

THE RECAPITALIZATION

        The Old Notes.    On August 11, 2003, we issued and sold an aggregate of $205.0 million principal amount of Series A 7³/8% Senior Subordinated Notes due 2013 (the old notes to which this exchange offer relates), to qualified institutional buyers under Rule 144A and outside the United States in compliance with Regulation S. Our obligations under the old notes were fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by most of our direct and indirect domestic subsidiaries. In connection with the initial purchasers' purchase of the old notes, we agreed to consummate the exchange offer within 240 days after the consummation of the sale of the old notes.

        New Senior Credit Facility.    Concurrently with the issuance of the old notes, we entered into a new senior credit facility, consisting of a $480.0 million term loan facility and a $100.0 million revolving credit facility, for which Morgan Stanley Senior Funding, Inc. and Credit Suisse First Boston, acting through its Cayman Islands Branch, acted as joint lead arrangers, and Morgan Stanley Senior Funding, Inc. acted as administrative agent. Initially, we borrowed $480.0 million under the new term loan facility. Borrowings under the new senior credit facility are secured by a first priority security interest in substantially all of our existing and hereafter acquired assets, including substantially all of the capital stock or membership interests of all of our subsidiaries that are guarantors under this new credit facility and 65% of the capital stock or membership interests of certain of our foreign subsidiaries. (See "Description of the New Senior Credit Facility.")

        Redemption of our 9⁵/8% Senior Subordinated Notes.    As of June 30, 2003, we had outstanding $200.0 million in 9⁵/8% Senior Subordinated Notes due 2007. On August 11, 2003, we notified holders of these notes that, pursuant to their terms, we would redeem all such outstanding notes for a purchase price of 104.813% of their principal amount plus accrued but unpaid interest to the date of redemption. The redemption was completed on August 14, 2003. In addition, we paid approximately $1.4 million in consent fees related to amending the indenture governing the notes to allow for their early redemption.

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        Offering of Convertible Preferred Stock.    Concurrently with the issuance and sale of the old notes, we issued and sold $263.8 million of our Series A Convertible Preferred Stock. The preferred stock is entitled to quarterly dividends equal to the greater of 9% per annum (compounded quarterly) of the stated value or the amount of any common stock dividend the holder would have received on an as-converted basis, excluding the share repurchase described below. Dividends accrue and will accrete for the first three years and thereafter may be paid in cash or accrete at our option. The preferred stock is also entitled to its dividends through December 31, 2005, even if mandatorily converted beforehand. Holders of the preferred stock will have the right to force us to redeem their preferred stock starting in 2015, subject to our right to postpone redemption in certain situations. The preferred stock is convertible into common stock at any time at the option of the holder at a conversion price equal to $17.00 per share of common stock. The preferred stock will be mandatorily convertible into common stock upon an initial public offering if the price offered to the public is equal to or greater than $22.00 per share of common stock, and may be converted by us upon an initial public offering at a lower price if we elect to issue additional shares of our common stock to holders of our preferred stock. The preferred stock is also mandatorily convertible into common stock if the average closing price of our common stock for 20 consecutive trading days equals or exceeds $23.50 per share, and can be converted by us if the average closing price of our common stock for 20 consecutive trading days is less than $23.50 if we elect to issue additional shares of our common stock to holders of our preferred stock. The preferred stock is governed by a statement of designations which contains negative covenants including a limitation on additional indebtedness that we may incur and a limitation on our ability to repurchase junior securities. Except as otherwise required by law, the holders of the preferred stock are entitled to vote together with our common shareholders and are entitled to vote on an as-converted basis. KCI, Fremont Partners, L.P., Blum Capital Partners, L.P. and Dr. Leininger, and their affiliates, have entered into an Investors' Rights Agreement with the holders of the preferred stock, which agreement provides for "piggyback" registration rights, restrictions on transfer of the shares of the preferred stock, rights of first offer, "tag-along" rights and "bring-along" rights. Fremont Partners, L.P., Blum Capital Partners, L.P. and James R. Leininger, M.D., and their affiliates, purchased $190.0 million of the preferred stock in the aggregate.

        Share Repurchase.    On August 11, 2003, we commenced a tender offer to repurchase for cash up to $589.8 million of our common stock and vested stock options at a price of $17.00 per share. We refer to this transaction throughout this prospectus as the "share repurchase." On September 9, 2003, we completed the share repurchase of $589.0 million of our common stock and vested stock options. We intend to repurchase additional shares in an amount equal to the sum of (1) the net after-tax proceeds of the $75.0 million Hillenbrand antitrust settlement payment that we expect to receive in January 2004, (2) the tax benefits to the Company related to the recapitalization in an amount not to exceed $40.0 million and (3) the cash benefit received from the exercise of stock options as part of the share repurchase, if any.

        The issuance and sale of the old notes and the convertible preferred stock, the refinancing of our old senior credit facility with our new senior credit facility, the redemption of our 9⁵/8% Senior Subordinated Notes due 2007 and the share repurchase are referred to throughout this prospectus collectively as the "recapitalization."

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        The following sets forth the sources and uses of funds in connection with the recapitalization:

		Amount
		(in millions)
Source of Funds
Gross proceeds from the sale of the old notes		$	205.0
Borrowings under the new senior credit facility			480.0
Gross proceeds from the sale of convertible preferred stock			263.8
Proceeds from Hillenbrand settlement (net of taxes)			46.9
Tax benefits realized from transaction fees and expenses			31.9
Cash on hand			53.8
	Total		1,081.4
Use of Funds
Redemption of 95/8% Senior Subordinated Notes Due 2007(1)		$	211.1
Repayment of debt under the old senior credit facility			208.2
Share repurchase			634.0
Transaction fees and expenses for the recapitalization			28.1
	Total		1,081.4

(1)

Includes early redemption premium of 4.813% of the aggregate principal amount pursuant to the terms of the 9⁵/8% Senior Subordinated Notes due 2007, in addition to the payment of $1.4 million in consent fees related to amending the indenture governing such notes to allow for their early redemption.

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SUMMARY DESCRIPTION OF THE EXCHANGE OFFER

Old Notes	Series A 73/8% Senior Subordinated Notes due 2013, which we issued and sold on August 11, 2003.
New Notes	Series B 73/8% Senior Subordinated Notes due 2013, the issuance of which has been registered under the Securities Act. The form and the terms of the new notes are identical in all material respects to those of the old notes, except that the new notes:
	•	will have been registered under the Securities Act;
	•	will not bear restrictive legends restricting their transfer under the Securities Act;
	•	will not be entitled to registration rights that apply to the old notes; and
	•	will not contain provisions relating to liquidated damages in connection with the old notes under circumstances related to the timing of the exchange offer.
Exchange Offer	We are offering to issue up to $205,000,000 aggregate principal amount of the new notes in exchange for a like aggregate principal amount of the old notes to satisfy our obligations under the registration rights agreement that we entered into when the old notes were issued in transactions in reliance upon the exemption from registration provided by Rule 144A and Regulation S under the Securities Act.
Expiration Date; Tenders	The exchange offer will expire at 5:00 p.m., New York City time, on                  , 2003, the 21st business day following the date of this prospectus, unless extended in our sole and absolute discretion. By tendering your old notes, you represent to us that:
	•	you are not our "affiliate," as defined in Rule 405 under the Securities Act;
	•	any new notes you receive in the exchange offer are being acquired by you in the ordinary course of your business;
	•	at the time of the commencement of the exchange offer, neither you nor anyone receiving new notes from you has any arrangement or understanding with any person to participate in the distribution, as defined in the Securities Act, of the new notes in violation of the Securities Act;
	•	if you are a broker-dealer, you will receive the new notes for your own account in exchange for old notes that were acquired by you as a result of your market-making or other trading activities and that you will deliver a prospectus in connection with any resale of the new notes you receive. For further information regarding resales of the new notes by participating broker-dealers, see "Plan of Distribution;" and

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	•	if you are not a broker-dealer, you are not engaged in, and do not intend to engage in, the distribution of the new notes, as defined in the Securities Act.
Withdrawal; Non-Acceptance	You may withdraw any old notes tendered in the exchange offer at any time prior to 5:00 p.m., New York City time, on                  , 2003. To be effective, a written notice of withdrawal must be received by the exchange agent at the address set forth on page 33. The notice must specify:
	•	the name of the person having tendered the old notes to be withdrawn;
	•	the old notes to be withdrawn, including the principal amount of such old notes; and
	•	where certificates for old notes have been transmitted, the name in which such old notes are registered, if different from that of the withdrawing holder.
	If we decide for any reason not to accept any old notes tendered for exchange, the old notes will be returned to the registered holder at our expense promptly after the expiration or termination of the exchange offer. In the case of the old notes tendered by book-entry transfer into the exchange agent's account at The Depository Trust Company, which we sometimes refer to in this prospectus as DTC, any withdrawn or unaccepted old notes will be credited to the tendering holders' account at DTC. For further information regarding the withdrawal of the tendered old notes, see "The Exchange Offer—Withdrawal Rights."
Conditions to the Exchange Offer	The exchange offer is subject to customary conditions, which we may waive. See "The Exchange Offer—Conditions to the Exchange Offer" for more information regarding the conditions to the exchange offer.
Procedures for Tendering Old Notes	Unless you comply with the procedure described below under the caption "The Exchange Offer—Guaranteed Delivery Procedures," you must do one of the following on or prior to the expiration or termination of the exchange offer to participate in the exchange offer:
	•	tender your old notes by sending the certificates for your old notes, in proper form for transfer, a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other documents required by the letter of transmittal, to U.S. Bank, N.A., as exchange agent, at the address set forth on page 33; or

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	•	tender your old notes by using the book-entry transfer procedures described below and transmitting a properly completed and duly executed letter of transmittal, with any required signature guarantees, or an agent's message instead of the letter of transmittal, to the exchange agent. In order for a book-entry transfer to constitute a valid tender of your old notes in the exchange offer, U.S. Bank, N.A., as exchange agent, must receive a confirmation of book-entry transfer of your old notes into the exchange agent's account at DTC prior to the expiration or termination of the exchange offer. For more information regarding the use of book-entry transfer procedures, including a description of the required agent's message, see "The Exchange Offer—Book-Entry Transfers."
Guaranteed Delivery Procedures	If you are a registered holder of old notes and wish to tender your old notes in the exchange offer, but
	•	the old notes are not immediately available;
	•	time will not permit your old notes or other required documents to reach the exchange agent before the expiration or termination of the exchange offer; or
	•	the procedure for book-entry transfer cannot be completed prior to the expiration or termination of the exchange offer;
	then you may tender old notes by following the procedures described below under the caption "The Exchange Offer—Guaranteed Delivery Procedures."
Special Procedures for Beneficial Owners	If you are a beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your old notes in the exchange offer, you should promptly contact the person in whose name the old notes are registered and instruct that person to tender them on your behalf. If you wish to tender in the exchange offer on your own behalf, prior to completing and executing the letter of transmittal and delivering your old notes, you must either make appropriate arrangements to register ownership of the old notes in your name, or obtain a properly completed bond power from the person in whose name the old notes are registered.
Material United States Federal Income Tax Considerations	The exchange of the old notes for new notes in the exchange offer will not be a taxable transaction for United States federal income tax purposes. See "Material United States Federal Income Tax Considerations" for more information regarding the United States federal income tax consequences to you of the exchange offer.
Use of Proceeds	We will not receive any proceeds from the exchange offer.
Exchange Agent	U.S. Bank, N.A. is the exchange agent for the exchange offer. You can find the address and telephone number of the exchange agent below under the caption, "The Exchange Offer—Exchange Agent."

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Resales	Based on interpretations by the staff of the SEC, as set forth in no-action letters issued to third parties, we believe that the new notes you receive in the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery requirements of the Securities Act. However, you will not be able to freely transfer the new notes if:
	•	you are our "affiliate," as defined in Rule 405 of the Securities Act;
	•	you are not acquiring the new notes in the exchange offer in the ordinary course of business;
	•	you have an arrangement or understanding with any person to participate in the distribution, as defined in the Securities Act, of the new notes you will receive in the exchange offer;
	•	you are holding old notes that have or are reasonably likely to have the status of an unsold allotment in the initial offering; or
	•	you are a broker-dealer that received new notes for its own account in the exchange offer in exchange for old notes that were acquired as a result of market-making or other trading activities.
	If you fall within one of the exceptions listed above, you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction involving the new notes. See "The Exchange Offer—Procedures for Tendering Old Notes" for more information.
Broker-Dealers	Each broker-dealer that receives new notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. The letter of transmittal states that by so acknowledging and delivering a prospectus, a broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes which were received by the broker-dealer as a result of market making or other trading activities. See "Plan of Distribution" for more information.
Registration Rights Agreement	When we issued the old notes on August 11, 2003, we entered into a registration rights agreement with the initial purchasers of the old notes. Under the terms of the registration rights agreement, we agreed to:
	•	commence this exchange offer no later than 15 days after the registration statement of which this prospectus is a part has been declared effective by the Commission; and

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•	use our best efforts to have the exchange offer consummated no later than 240 days after the closing date for the issuance and sale of the old notes, which was August 11, 2003;
If we fail to meet our registration obligations, we are obligated under the registration rights agreement to pay, as liquidated damages, additional interest on the old notes at a rate of 0.5% per annum, with an additional 0.25% per annum for each subsequent 90-day period, up to a maximum of 1.0% per annum until the exchange offer is consummated or a shelf registration statement registering the old notes, as discussed below under "Consequences of Not Exchanging Your Old Notes," is declared effective by the SEC.
A copy of the registration rights agreement is included as an exhibit to the registration statement of which this prospectus is a part. See "Description of the New Notes—Registration Rights."

CONSEQUENCES OF NOT EXCHANGING YOUR OLD NOTES

        If you do not exchange your old notes in the exchange offer, you will continue to be subject to the restrictions on transfer described in the legend on the certificate for your old notes. In general, you may offer or sell your old notes only if they are:

•

registered under the Securities Act and applicable state securities laws;



•

offered or sold under an exemption from registration under the Securities Act and applicable state securities laws; or



•

offered or sold in a transaction not subject to the Securities Act and applicable state securities laws.

        We do not intend to register the old notes under the Securities Act. Under some circumstances set forth in the registration rights agreement, however, holders of the old notes, including holders who are not permitted to participate in the exchange offer or who may not freely sell new notes received in the exchange offer, may require us to file, and cause to become effective, a shelf registration statement covering resales of the old notes by these holders. For more information regarding the consequences of not tendering your old notes and our obligations to file a shelf registration statement, see "The Exchange Offer—Consequences of Exchanging or Failing to Exchange Old Notes" and "Description of the New Notes—Registration Rights."

10

SUMMARY DESCRIPTION OF THE NEW NOTES

        The new notes will represent the same debt as the old notes and will be issued subject to the same indenture, which is governed by New York law. The terms of the new notes and those of the outstanding old notes are substantially identical, except that the new notes:

•

will have been registered under the Securities Act;



•

will not bear restrictive legends restricting their transfer under the Securities Act;



•

will not be entitled to registration rights that apply to the old notes; and



•

will not contain provisions relating to liquidated damages in connection with the old notes under circumstances related to the timing of the exchange offer.

        The summary below describes the principal terms of the new notes. For a more complete description of the terms of the new notes, see "Description of the New Notes" in this prospectus.

Issuer	Kinetic Concepts, Inc.
Securities Offered	Up to $205,000,000 aggregate principal amount of Series B 73/8% Senior Subordinated Notes due 2013.
Maturity	May 15, 2013.
Interest	7.375% per annum, payable semi-annually in arrears on May 15 and November 15 commencing November 15, 2003.
Optional Redemption	We may redeem the new notes, at our option, in whole or in part, at any time or from time to time, on and after May 15, 2008, at the redemption prices listed in "Description of the New Notes—Optional Redemption." Prior to May 15, 2008, we will also have the option to redeem the new notes, in whole or in part, from time to time, at a price equal to the greater of 101% of the principal amount of the new notes or a "make-whole" redemption price as described in the "Description of the New Notes—Optional Redemption," plus accrued and unpaid interest.
	In addition, at any time, or from time to time, on or prior to May 15, 2006, we may, at our option and subject to some conditions, use the net proceeds from one or more equity offerings to redeem up to 35% of the original aggregate principal amount of new notes at a redemption price of 107.375% of their principal amount, plus accrued interest, if after each such redemption, at least 65% of the aggregate principal amount of new notes originally issued remains outstanding.
Ranking	The new notes will be our senior subordinated unsecured obligations. The new notes will rank junior to all of our existing and future senior indebtedness, will rankpari passu with any future senior subordinated indebtedness and will rank senior to any of our future indebtedness that is expressly subordinated to the new notes.
	As of June 30, 2003, on a pro forma basis, after giving effect to the recapitalization, we would have had outstanding $687.5 million of total debt, including $480.6 million of debt which would have been senior to the new notes.

11

Guarantees	Most of our existing and future domestic restricted subsidiaries will fully and unconditionally guarantee, jointly and severally on a senior subordinated basis, our obligation to pay principal, premium, if any, and interest on the new notes. The guarantees will rank junior to all existing and future senior indebtedness of these subsidiaries, will rankpari passu with all future senior subordinated indebtedness of these subsidiaries and will rank senior to all future indebtedness of these subsidiaries that is expressly subordinated to the guarantees. A substantial portion of our business is conducted through our foreign operating subsidiaries, which will not guarantee the notes. See note 18 to the consolidated financial statements included elsewhere in this prospectus.
Change of Control	Upon a change of control, we will be required to make an offer to purchase the new notes at a price equal to 101% of their principal amount plus accrued interest to the date of repurchase. We may not have sufficient funds available at the time of any change of control to make any required debt repayment.
Certain Covenants	The terms of the new notes will limit our ability and the ability of our subsidiaries to:
	•	incur additional indebtedness;
	•	create liens;
	•	pay dividends, repurchase capital stock, and make distributions in respect of capital stock;
	•	make investments or certain other restricted payments;
	•	sell assets;
	•	issue guarantees;
	•	enter into transactions with affiliates; and
	•	effect a consolidation or merger.
	These covenants are subject to a number of important qualifications and exceptions. See "Description of the New Notes—Covenants."

RISK FACTORS

        Before making a decision to tender your old notes in the exchange offer, you should carefully consider the specific factors we discuss under "Risk Factors," as well as other information included in this prospectus.

12

SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA

        The following tables summarize our consolidated financial data for the periods presented. You should read the following financial information together with the information under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this prospectus. The summary consolidated balance sheet data for fiscal 2002 and the summary consolidated statement of operations data for fiscal 2000, 2001 and 2002 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data for fiscal 1998 and 1999 are derived from our audited consolidated financial statements not included in this prospectus. The unaudited consolidated balance sheet data as of June 30, 2002 and 2003 and the unaudited consolidated statement of earnings data for the six months ended June 30, 2002 and June 30, 2003 have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting only of normal recurring adjustments, we consider necessary for the fair presentation of the information. Operating results for the six months ended June 30, 2003 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2003. The "As Adjusted" balance sheet data gives effect to the recapitalization as if it had occurred on June 30, 2003. The financial data for the last twelve months ended June 30, 2003 has been derived from the Company's audited consolidated financial statements for the year ended December 31, 2002 and the unaudited historical financial statements for the six months ended June 30, 2002 and 2003. The unaudited segment operating data for the five years ended December 31, 2002, the six months ended June 30, 2002 and 2003, and the last twelve months ended June 30, 2003 are derived from the company's accounting records.

		Years Ended December 31,															Six Months Ended June 30						Last Twelve Months Ended June 30,
		1998			1999			2000(1)			2001			2002			2002			2003			2003
		(in thousands, except ratio data)
Consolidated Statement of Earnings Data:
Revenue:
	Rental and service	$	258,482		$	245,983		$	274,331		$	361,634		$	453,060		$	209,010		$	270,296		$	514,346
	Sales and other		71,463			74,249			77,701			94,313			125,902			55,239			78,753			149,416
	Total revenue		329,945			320,232			352,032			455,947			578,962			264,249			349,049			663,762
Rental expenses			166,629			167,397			176,392			220,485			276,125			128,415			166,459			314,169
Cost of goods sold			26,219			29,811			29,645			32,952			51,824			21,369			28,358			58,813
	Gross profit		137,097			123,024			145,995			202,510			251,013			114,465			154,232			290,780
Selling, general and administrative expenses			69,537			75,208			80,294			114,828			141,594			63,763			85,395			163,226
Unusual item-litigation settlement(2)			—			—			—			—			(173,250	)		—			—			(173,250	)
Operating earnings			67,560			47,816			65,701			87,682			282,669			50,702			68,837			300,804
Interest income			616			348			897			280			496			109			747			1,134
Interest expense			(48,594	)		(46,502	)		(48,635	)		(45,116	)		(40,943	)		(20,692	)		(16,228	)		(36,479	)
Foreign currency gain (loss)			20			(1,356	)		(2,358	)		(1,638	)		3,935			2,448			4,156			5,643
	Earnings before income taxes and     minority interest		19,602			306			15,605			41,208			246,157			32,567			57,512			271,102
	Income taxes		7,851			620			6,476			17,307			96,001			12,538			21,567			105,030
	Earnings (loss) before minority     interest		11,751			(314	)		9,129			23,901			150,156			20,029			35,945			166,072
Minority interest in subsidiary loss			25			—			—			—			—			—			—			—
	Net earnings (loss)	$	11,776		$	(314	)	$	9,129		$	23,901		$	150,156		$	20,029		$	35,945		$	166,072
Other Financial Data:
EBITDA(3)			97,694			79,027			96,706			121,223			321,782			69,764			94,573			346,591
Depreciation and amortization(4)			29,473			32,219			32,466			34,899			34,682			16,505			20,833			39,010
Net capital expenditures(5)			28,406			22,046			30,281			43,953			53,143			27,601			35,047			60,589
Cash from operating activities			43,885			36,767			40,151			29,895			76,254			23,927			198,705			251,032
Ratio Data:
Ratio of Earnings to Fixed Charges(6)			1.3			0.9			1.2			1.7			2.4	(7)		2.3			3.7			3.1	(7)

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	As of June 30, 2003
	Actual			As Adjusted
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	102,973		$	44,815
Working capital(8)		165,174			122,335
Total assets		516,015			473,370
Total debt(9)		410,760			687,534
Convertible Preferred Stock		—			252,241
Total shareholders' deficit		(38,942	)		(606,821	)

				Years Ended December 31,										Six Months Ended June 30				Last Twelve Months Ended June 30,
				1998		1999		2000(1)		2001		2002		2002		2003		2003
				(in thousands)
Segment Operating Data:
USA
	V.A.C.
		Rental		$	21,747	$	28,552	$	55,343	$	134,428	$	214,979	$	94,209	$	139,843	$	260,613
		Sales			8,864		8,605		14,637		31,814		53,245		21,702		36,947		68,490
		Total V.A.C.			30,611		37,157		69,980		166,242		268,224		115,911		176,790		329,103
	Therapeutic surfaces/other
		Rental			186,617		160,538		153,852		156,704		150,793		75,618		74,235		149,410
		Sales			34,678		37,561		32,750		31,177		27,770		13,848		13,815		27,737
			Total therapeutic surfaces/other		221,295		198,099		186,602		187,881		178,563		89,466		88,050		177,147
		Total USA rental			208,364		189,090		209,195		291,132		365,772		169,827		214,078		410,023
		Total USA sales			43,542		46,166		47,387		62,991		81,015		35,550		50,762		96,227
			Subtotal—USA		251,906		235,256		256,582		354,123		446,787		205,377		264,840		506,250
International
	V.A.C.
		Rental			3,015		4,323		7,510		11,577		21,946		8,207		17,660		31,399
		Sales			3,918		5,396		8,256		12,182		23,244		9,611		17,187		30,820
			Total V.A.C.		6,933		9,719		15,766		23,759		45,190		17,818		34,847		62,219
	Therapeutic surfaces/other
		Rental			47,103		52,611		57,625		58,924		65,343		30,976		38,558		72,925
		Sales			24,003		22,646		22,059		19,141		21,642		10,078		10,804		22,368
			Total therapeutic surfaces/other		71,106		75,257		79,684		78,065		86,985		41,054		49,362		95,293
	Total International rental				50,118		56,934		65,135		70,501		87,289		39,183		56,218		104,324
	Total International sales				27,921		28,042		30,315		31,323		44,886		19,689		27,991		53,188
		Subtotal—International			78,039		84,976		95,450		101,824		132,175		58,872		84,209		157,512
Total revenue				$	329,945	$	320,232	$	352,032	$	455,947	$	578,962	$	264,249	$	349,049	$	663,762

(1)

In December 2000, we began reporting international results on a current-month basis. As a result of this change, the 2000 fiscal year included a 13th monthly period for the international segment which increased reported revenue and operating earnings by approximately $8.0 million and $1.1 million, respectively.

(2)

Includes accrual in connection with an installment payment of $175.0 million ($173.3 million net of expenses of $1.7 million) from Hillenbrand as part of an antitrust settlement. See note 16 to consolidated financial statements included elsewhere in this prospectus for discussion of the antitrust settlement.

(3)

We calculate EBITDA as net earnings plus depreciation and amortization (less amortization of loan issuance costs), income taxes and interest expense. We find EBITDA to be a useful measure of our ability to service our debt and our ability to generate cash for other purposes. EBITDA is a non-GAAP financial measure and should not be considered in isolation from, and is not intended to represent an alternative measure of, operating or net earnings or cash flow from operating activities, or any other measure of performance determined in accordance with GAAP. Other companies may calculate EBITDA differently, and our EBITDA calculation is not necessarily comparable with similarly titled figures for other companies. Therefore, in evaluating EBITDA data, you should consider, among other factors, the non-GAAP nature of

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EBITDA data, actual cash flows and net earnings, the actual availability of funds for debt service, capital expenditures and working capital.

We have provided below a reconciliation of EBITDA to net earnings, which we believe is the most directly comparable GAAP measure:

	Years Ended December 31,											Six Months Ended June 30				Last Twelve Months Ended June 30,
	1998		1999			2000(1)		2001		2002		2002		2003		2003
	(in thousands)
Net earnings	$	11,776	$	(314	)	$	9,129	$	23,901	$	150,156	$	20,029	$	35,945	$	166,072
Interest expense		48,594		46,502			48,635		45,116		40,943		20,692		16,228		36,479
Depreciation and amortization(4)		29,473		32,219			32,466		34,899		34,682		16,505		20,833		39,010
Income taxes		7,851		620			6,476		17,307		96,001		12,538		21,567		105,030
EBITDA	$	97,694	$	79,027		$	96,706	$	121,223	$	321,782	$	69,764	$	94,573	$	346,591

EBITDA for 2002 includes the installment payment of $175.0 million ($173.3 million net of expenses of $1.7 million) from Hillenbrand as part of an antitrust settlement that we accrued in January, 2003. EBITDA for all periods also includes the effects of payments aggregating $1.5 million per year that we have made since 1998 pursuant to a management services agreement with Fremont Partners, James R. Leininger, M.D. and Blum Capital. On August 11, 2003, the management services agreement was amended to, among other things, terminate the management fee and continue to provide for indemnification and reimbursement of expenses. We made final management fee payments of $300,000 and $450,000 in July and August 2003, respectively.

(4)

Excludes amortization of loan issuance costs of approximately $2.3 million for each of 1998 through 2002 and for the last twelve months ended June 30, 2003, and approximately $1.2 million for each of the six month periods ended June 30, 2002 and 2003, all of which are included in interest expense.

(5)

We calculate net capital expenditures as total expenditures for property, plant and equipment along with expenditures for inventory purchased to be converted into equipment for rental reduced by cash proceeds from dispositions of property, plant and equipment.

(6)

We calculate the ratio of earnings to fixed charges as net earnings plus income taxes and interest expense divided by interest expense plus estimated interest expense on our operating leases.

(7)

This calculation excludes the Hillenbrand antitrust settlement discussed in footnote (2) above.

(8)

Working capital represents total current assets less total current liabilities.

(9)

Total debt includes current and long-term debt, capital lease obligations and our liability associated with interest rate swaps.

15

RISK FACTORS

Our business faces significant risks. You should carefully consider the risks described below together with all other information contained in and incorporated by reference into this prospectus before making a decision to participate in the exchange offer.

Risks Related to the Exchange Offer and the New Notes

Holders who fail to exchange their old notes will continue to be subject to restrictions on transfer.

        If you do not exchange your old notes in the exchange offer, you will continue to be subject to the restrictions on transfer of your old notes described in the legend on the certificates for your old notes. The restrictions on transfer of your old notes arise because we issued the old notes under exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, you may only offer or sell the old notes if they are registered under the Securities Act and applicable state securities laws, or are offered and sold under an exemption from these requirements. We do not plan to register the old notes under the Securities Act. Furthermore, we have not conditioned the exchange offer on receipt of any minimum or maximum principal amount of old notes. As old notes are tendered and accepted in the exchange offer, the principal amount of remaining outstanding notes will decrease. This decrease will reduce the liquidity of the trading market for the old notes. We cannot assure you of the liquidity, or even the continuation, of the trading market for the outstanding old notes following the exchange offer. For further information regarding the consequences of tendering your old notes in the exchange offer, see the discussions below under the captions "The Exchange Offer—Consequences of Exchanging or Failing to Exchange Old Notes" and "Material United States Federal Tax Considerations."

You must comply with the exchange offer procedures in order to receive new, freely tradable notes.

        Delivery of new notes in exchange for old notes tendered and accepted for exchange pursuant to the exchange offer will be made only if you do one of the following prior to the expiration or termination of the exchange offer:

•

tender your old notes by sending the certificates for your old notes, in proper form for transfer, a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other documents required by the letter of transmittal, to U.S. Bank, N.A., as exchange agent, at the address set forth on page 33; or



•

tender your old notes by using the book-entry transfer procedures described below and transmitting a properly completed and duly executed letter of transmittal, with any required signature guarantees, or an agent's message instead of the letter of transmittal, to the exchange agent. In order for a book-entry transfer to constitute a valid tender of your old notes in the exchange offer, U.S. Bank, N.A., as exchange agent, must receive a confirmation of book-entry transfer of your old notes into the exchange agent's account at DTC prior to the expiration or termination of the exchange offer. For more information regarding the use of book-entry transfer procedures, including a description of the required agent's message, see "The Exchange Offer—Book-Entry Transfers."

        Therefore, holders of old notes who would like to tender old notes in exchange for new notes should be sure to allow enough time for the old notes to be delivered on time. We are not required to notify you of defects or irregularities in tenders of old notes for exchange. Old notes that are not tendered or that are tendered but we do not accept for exchange will, following consummation of the exchange offer, continue to be subject to the existing transfer restrictions under the Securities Act and, upon consummation of the exchange offer, certain registration and other rights under the registration

16

rights agreement will terminate. (See "The Exchange Offer—Procedures for Tendering Old Notes" and "The Exchange Offer—Consequences of Exchanging or Failing to Exchange Old Notes.")

Some holders who exchange their old notes may be deemed to be underwriters and these holders will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

        If you exchange your old notes in the exchange offer for the purpose of participating in a distribution of the new notes, you may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

Risks Related to Our Capital Structure

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the new notes.

        We have a significant amount of debt. As of June 30, 2003, we would have had, on a pro forma basis after giving effect to the recapitalization, $687.5 million of outstanding indebtedness (long-term debt, capital lease obligations and our liability associated with interest rate swaps), $480.6 million of which would have been senior to the new notes, and a shareholders' deficit of $606.8 million. This level of indebtedness could have important consequences for you, including the following:

•

it may be difficult for us to satisfy our obligations under our new senior credit facility and the new notes;



•

we may have to use a significant amount of our cash flow for scheduled debt service rather than for operations;



•

we may be less able to obtain other debt financing in the future;



•

we could be less able to take advantage of significant business opportunities, including acquisitions or divestitures;



•

our vulnerability to general adverse economic and industry conditions could be increased; and



•

we could be at a competitive disadvantage to competitors with less debt.

Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.

        We expect to obtain the money to make payments on our debt, including the new notes, and to fund working capital, capital expenditures and other general corporate requirements in part from our operations and the operations of our subsidiaries. Due to the large amount of principal and interest payments due under our debt, we may not generate enough cash from our operations to meet these obligations or to fund other liquidity needs. Our ability to generate cash in the future is, to some extent, subject to risks and uncertainties that are beyond our control. If we are unable to meet our debt obligations, we may need to refinance all or a portion of our indebtedness, sell assets or raise funds in the capital markets. Our ability to refinance will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

17

Restrictive covenants in the new senior credit facility and the indenture may restrict our ability to pursue our business strategies.

        The indenture and the new senior credit facility limit our ability, among other things, to:

•

incur additional indebtedness or contingent obligations;



•

pay dividends or make distributions to our shareholders;



•

repurchase or redeem our stock;



•

make investments;



•

grant liens;



•

make capital expenditures;



•

enter into transactions with our shareholders and affiliates;



•

sell assets; and



•

acquire the assets of, or merge or consolidate with, other companies.

        In addition, the new senior credit facility requires us to maintain certain financial ratios, including an interest coverage ratio and a leverage ratio. Specifically, we are obligated not to permit:

•

for any period of four consecutive quarters ending at the end of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, the ratio of EBITDA to consolidated cash interest expense to be less than certain specified ratios ranging from 4.30 to 1.00 for the fiscal quarter ending December 31, 2003 to 5.50 to 1.00 for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter;



•

as of the last day of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, the leverage ratio as defined in the new senior credit facility to be greater than certain specified leverage ratios ranging from 4.30 to 1.00, for the fiscal quarter ending December 31, 2003 to 2.50 to 1.00 for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter; or



•

for any period of four consecutive fiscal quarters ending at the end of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, EBITDA to be less than certain amounts ranging from $156.4 million for the fiscal quarter ending December 31, 2003 to $240.0 million for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter.

        We may not be able to maintain these ratios. Covenants in the new senior credit facility may also impair our ability to finance future operations or capital needs, or to enter into acquisitions or joint ventures or engage in other favorable business activities.

        If we default under the new senior credit facility, we could be prohibited from making any payments on the new notes. In addition, the lenders under the new senior credit facility could require immediate repayment of the entire principal. If those lenders require immediate repayment, we may not be able to repay them and also repay the new notes in full. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments under the new senior credit facility, or if we are unable to maintain the financial ratios under the new senior credit facility, we will be in default under the credit agreement, which could, in turn, cause a default under the new notes, the related indenture and any other debt obligations that we may incur from time to time.

18

Despite our substantial debt, we may incur additional indebtedness, including senior debt, which would increase the risks described above.

        We may be able to incur additional debt, including senior debt, in the future. The indenture for the new notes and our new senior credit facility do not completely prohibit us from incurring additional debt. As of June 30, 2003, on a pro forma basis after giving effect to the recapitalization, we would have had $89.1 million (net of outstanding letters of credit of $10.9 million) of total availability for potential borrowing under our new revolving credit facility, subject to our compliance with the financial and other covenants included in our new revolving credit facility. Any future borrowings we make under our new revolving credit facility will be senior to the new notes and the subsidiary guarantees. In addition, the indenture allows us to incur debt that may be senior to the notes. If new debt is added to KCI's and its subsidiaries' current debt levels, the risks related to KCI and the subsidiary guarantors' abilities to service that debt and its impact on our respective operations that we and they now face could increase.

Your right to receive payment on the new notes from KCI or its subsidiaries will be junior to some of KCI's and their obligations.

        The new notes and the guarantees will rank junior to all of KCI's and its subsidiary guarantors' existing and future senior indebtedness, including all indebtedness under our new senior credit facility. As a result of the subordination of the new notes, if KCI or its subsidiary guarantors become insolvent or enter into a bankruptcy or similar proceeding, then the holders of our senior indebtedness must be paid in full before you are paid. Also, we cannot make any cash payments to you if we have failed to make payments to holders of designated senior indebtedness.

The new notes will not be secured by any of our assets, and our assets will secure the new senior credit facility and possibly other debt.

        In addition to being subordinated to all of our existing and future indebtedness, other than the existing senior subordinated notes, certain trade payables and any future indebtedness that expressly provides that it ranks equal with, or subordinated in right of payment to, the new notes, the new notes will not be secured by any of our assets. Our obligations under the new senior credit facility will be secured by liens on substantially all of our assets, and the guarantees of certain of our subsidiaries under the new senior credit facility will be secured by liens on substantially all of such subsidiaries' assets. If we become insolvent or are liquidated, or if payment under the new senior credit facility or of other secured obligations are accelerated, the lenders under the new senior credit facility or the obligees with respect to the other secured obligations will be entitled to exercise the remedies available to a secured lender under applicable law and the applicable agreements and instruments. Accordingly, such lenders will have a prior claim with respect to such assets and there may not be sufficient assets remaining to pay amounts due on the new notes then outstanding.

Certain subsidiaries are not included as subsidiary guarantors.

        Upon the consummation of the recapitalization, the guarantors of the new notes will include only our domestic subsidiaries. The aggregate revenue and operating income of our subsidiaries that are not guarantors were $157.0 million and $27.1 million, respectively, for the twelve-month period ended June 30, 2003. As of June 30, 2003, those subsidiaries held 29.2% of our total assets.

        Because a substantial portion of our operations are conducted by foreign subsidiaries, our cash flow and our ability to service debt, including KCI's and its subsidiary guarantors' ability to pay the interest on and principal of the new notes when due are dependent to a significant extent on interest payments, cash dividends and distributions and other transfers of cash from our foreign subsidiaries. In addition, any payment of interest, dividends, distributions, loans or advances by our foreign subsidiaries

19

to KCI and its subsidiary guarantors, as applicable, could be subject to taxation or other restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdiction in which our foreign subsidiaries operate. Moreover, payments to KCI and its subsidiary guarantors by the foreign subsidiaries will be contingent upon these subsidiaries' earnings.

        Our foreign subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the new notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that KCI or the subsidiary guarantors have to receive any assets of any of the foreign subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of new notes to realize proceeds from the sale of any of those subsidiaries' assets, will be effectively subordinated to the claims of that subsidiary's creditors, including trade creditors and holders of debt of that subsidiary.

If a change of control occurs, we may not have sufficient funds to repurchase your new notes.

        Upon specified change of control events, you may require us to repurchase all or a portion of your new notes. If a change of control occurs, we may not be able to pay the repurchase price for all of the new notes submitted for repurchase. In addition, the terms of our new senior credit facility generally prohibit us from purchasing any of the new notes until we have repaid all debt outstanding under such new senior credit facility. Future credit agreements or other agreements relating to debt may contain similar provisions. We may not be able to secure the consent of our lenders under the applicable senior credit facility to repurchase the new notes or refinance the borrowings that prohibit us from repurchasing the new notes. If we do not obtain a consent or repay the borrowings, we could be unable to repurchase the new notes. (See "Description of the New Notes—Change of Control.")

The covenants in the indenture for the new notes may not prevent us from engaging in certain mergers or other transactions that may adversely affect you.

        The provisions of the indenture for the new notes (including the change of control provision) will not necessarily afford you protection in the event of a highly leveraged transaction, including a reorganization, recapitalization, restructuring, merger, takeover or other similar transaction involving us, that may adversely affect you. Such a transaction may not involve a change of the magnitude required under the definition of change of control in the indenture for the notes to trigger such provisions. Except as described under "Description of the New Notes—Change of Control," the indenture for the new notes will not contain provisions that permit the holders of the new notes to require us to repurchase the notes in the event of a reorganization, recapitalization, restructuring, merger, takeover or other similar transaction.

Issuance of the new notes and our subsidiaries' guarantees may be subject to fraudulent transfer laws.

        If KCI or any of its subsidiary guarantors becomes a debtor in a case under the United States Bankruptcy Code or otherwise encounters financial difficulty, under federal or state fraudulent transfer law, a court might avoid, or cancel, KCI's obligations with respect to the new notes or a guarantor's obligations with respect to its guarantee, if it finds that:

•

KCI or the subsidiary incurred the debt with the intent to hinder, delay or defraud creditors; or



•

KCI or the subsidiary received less than fair consideration or reasonably equivalent value for incurring the debt; and



•

when KCI or the subsidiary incurred the debt, or, in some jurisdictions, when payments became due on the debt, KCI or the subsidiary either:



(a)

was, or was rendered, insolvent;

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(b)

was left with unreasonably small capital with which to conduct our or its business; or



(c)

believed, or reasonably should have believed, that KCI or the subsidiary would incur debts beyond KCI's or its ability to pay.

        A court would likely find that neither KCI nor any subsidiary guarantors received fair consideration or reasonably equivalent value for incurring our respective obligations under the new notes and their guarantees, except to the extent we or the subsidiary benefited directly or indirectly from the issuance of the new notes.

        Whether an entity was, or was rendered, "insolvent" when it entered into or paid amounts due under its guarantee will vary depending on the law of the jurisdiction being applied. Generally, an entity would be considered insolvent if the sum of its debts is greater than all of its property at a fair valuation or if the present fair saleable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. In this context, "debts" include contingent and unliquidated debts.

        If a court avoided the notes or a subsidiary's guarantee, the court could redirect any repayments thereunder. In addition, a court could subordinate the new notes or the guarantees to our obligations to other existing and future creditors.

        To reduce the risk that a court will avoid the guarantees, each guarantee will include a "savings clause" limiting the subsidiary's guarantee obligation to the maximum amount that the subsidiary may incur and pay without the guarantee being subject to avoidance as a fraudulent transfer. We cannot assure you that this savings clause will be effective, or, if it is, that the guarantees, in the aggregate, will suffice to pay all amounts due under the new notes.

No public trading market for the new notes exists.

        There is currently no public market for the new notes. An active public market will likely never develop for the new notes because the new notes are not investment grade and we will not apply to list the new notes on any exchange or the Nasdaq National Market. As a result, you may be required to bear the financial risk of your investment in the new notes indefinitely. Any new notes traded after they are initially issued may trade at a discount from their initial offering price. The trading price of the new notes depends on prevailing interest rates, the market for similar securities and other factors, including economic conditions and our financial condition, performance and prospects. Historically, the market for noninvestment grade debt has been subject to disruptions that have caused substantial fluctuations in the prices of the securities.

        Although we do not intend to apply for listing or quotation of the new notes, we expect that the new notes will be designated for trading in the PORTAL Market. The placement agents are not obligated to do so and may cease such market-making at any time without notice. In addition, this market-making activity will be subject to the limitations imposed by the Securities Act and the Exchange Act, and may be limited during the effectiveness of a registration statement relating to the new notes. (See "Description of the New Notes" and "Plan of Distribution.")

Risks Related To Our Business

We face significant competition.

        The competition for our V.A.C. systems in wound healing and tissue repair consists in large part of wound-healing modalities which do not operate in a manner similar to V.A.C. systems, including traditional wound care dressings, advanced wound care dressings, skin substitutes, products containing growth factors and medical devices used for wound care. Recently, BlueSky Medical Corporation introduced a medical device which has been marketed to compete with the V.A.C. system. We have

21

filed suit against BlueSky and related parties seeking to enjoin their continued marketing and sales of the device, which we believe infringes our patent rights (see "Business—Legal Proceedings"). If any product similar to the V.A.C. system is introduced into the market by a legitimate competitor and protections afforded us under intellectual property laws do not operate to prevent the sale of the product, we could lose market share or experience downward pricing pressure from decreased demand.

        Our primary competitor in the therapeutic surface business is Hill-Rom Company, whose financial and other resources substantially exceed those zavailable to us. In Europe, we also face competition from Huntleigh Healthcare and Pegasus Limited.

        Competitive conditions could intensify in our markets. Competitors may:

•

develop or commercialize new technologies which are more effective than our products;



•

introduce new competing products with greater safety or efficacy or at lower prices;



•

secure exclusive arrangements with health care providers and GPOs;



•

devote greater resources to marketing and promotional campaigns;



•

secure regulatory clearances or approvals that surpass those of our products; or



•

obtain services, products and materials from suppliers on more favorable terms.

We may incur substantial costs in protecting our intellectual property, and if we are unable to effectively protect it, our competitive position would be harmed.

        We place considerable importance on obtaining and maintaining patent protection for our products. We have numerous patents on our existing products and processes and we file applications as appropriate for patents covering new technologies as they are developed. However, we cannot be sure that the patents we own, or in which we have rights, will be sufficiently broad to protect our technology position against competitors. Issued patents owned by, or licensed to, us may be challenged, invalidated or circumvented, or the rights granted under the patent may not provide us with competitive advantages. We would incur substantial costs and diversion of management resources if existing disputes are not resolved amicably, or if we have to assert our patent rights against others. Any unfavorable outcome in intellectual property disputes or litigation could have a material adverse effect on our business. In addition, we may not be able to detect infringement by third parties, and could lose our competitive position if we fail to do so quickly.

        Further, our efforts to protect our intellectual property rights may be less effective in some countries where intellectual property rights are not as well protected as in the United States. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. If we fail to adequately protect our intellectual property rights in these countries, it could be easier for our competitors to sell competing products.

        We also rely on a combination of copyright, trade secret and other laws, and contractual restrictions on disclosure, copying and transferring title, including confidentiality agreements with vendors, strategic partners, co-developers, employees, consultants and other third parties, to protect our proprietary rights. We cannot give assurance that such protections will prove adequate and that contractual agreements will not be breached, that we will have adequate remedies for any such breaches, or that our trade secrets will not otherwise become known to or independently developed by others. We have trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for our products in the marketplace. We cannot provide assurance that our trademarks will not be used by unauthorized third parties, or that we will be able to stop such unauthorized use if it occurs. We also have agreements with third parties that provide for licensing of patented or proprietary technologies. These agreements include royalty-bearing licenses. If we were to lose the rights to license these technologies or our costs to license these technologies were to materially increase, our business would suffer.

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We may be sued by third parties for alleged infringement of their proprietary rights.

        The markets in which we compete are characterized by a substantial amount of litigation over patent and other intellectual property rights. Our competitors, like companies in other high technology businesses, continually review other companies' products for possible conflicts with their own intellectual property rights. Determining whether a product infringes a third party's intellectual property rights involves complex legal and factual issues, and the outcome of this type of litigation is often uncertain. Third parties may claim that we are infringing their intellectual property rights, and we may be found to infringe those intellectual property rights.

        From time to time, we have received notices from third parties alleging infringement of patent or other intellectual property rights relating to their products, and we have ongoing lawsuits in which third parties have accused us of infringing and misappropriating their intellectual property. Any contest regarding patents or other intellectual property could be costly and time-consuming, and could divert our management and key personnel from our business operations. We may not prevail in any such contest. If we are unsuccessful, we may be subject to significant damages or injunctions against development and sale of our products, or may be required to enter into costly royalty or license agreements. We cannot be certain that any licenses required would be made available or that the terms of any proposed license would be acceptable.

Our intellectual property rights may be less effective in some foreign countries.

        Many U.S. companies have encountered problems in protecting their proprietary rights against infringement in foreign countries. If we fail to adequately protect our intellectual property rights in these countries, our competitors could more easily sell competing products.

If we are unable to develop new generations of products and enhancements to existing products, we may be unable to attract or retain customers.

        Our success is dependent upon the successful development, introduction and commercialization of new generations of products and enhancements to existing products. Our products are technologically complex and must keep pace with rapid and significant technological change, must comply with rapidly evolving industry standards and must compete effectively with new product introductions of our competitors. Accordingly, many of our products require significant planning, design, development and testing at the technological, product and manufacturing process levels. These activities require significant capital commitments and investments on our part, which we may be unable to recover.

        Our ability to successfully develop and introduce new products and product enhancements, and the associated costs, are also affected by our ability to:

•

properly identify customer needs;



•

solve the technical problems associated with product innovations designed to meet customer needs;



•

prove feasibility of new products;



•

limit the time required from proof of feasibility to commercialization;



•

predict and manage the timing, cost and results of regulatory approvals;



•

accurately predict and control costs associated with inventory overruns caused by phase-in of new products and phase-out of old products;



•

price our products competitively;



•

manufacture and deliver our products in sufficient volumes on time;



•

accurately predict and control costs associated with manufacturing, installation, warranty and maintenance of the products;



•

manage customer demands for retrofits of both new and old products; and

23

•

anticipate and compete successfully with competitors' efforts and intellectual property.

        As a result, we cannot be sure that we will be able to successfully develop, manufacture and commercialize new products or product enhancements. Without the successful introduction of new products and product enhancements, we may be unable to attract and retain customers and our revenue and operating results will suffer. In addition, even if customers accept new products or product enhancements, the revenue from such products may not be sufficient to offset the significant costs associated with making such products available to customers.

We depend on revenue from sales and rentals of V.A.C. products.

        For the twelve-month period ended June 30, 2003, we derived 59.0% of our revenue from V.A.C. sales and rentals. We expect that sales and rentals of V.A.C. products will continue to be the predominant source of our revenue for the foreseeable future. If revenue from our V.A.C. sales and rentals does not grow as we anticipate, our results of operations and financial condition could suffer.

We rely on the opportunity to provide education and training to health care professionals.

        In order to achieve market acceptance for our products, we are often required to educate health care professionals about the use of a new medical device, overcome objections to some of the effects of the device or its related treatment regimen and convince health care payers that the benefits of the device and its related treatment regimen outweigh its costs. For example, the complexity and dynamic nature of our V.A.C. products require education of health care professionals regarding the benefits and the required departures from customary practices. If health care professionals do not participate in education or training that we offer, our sales and marketing efforts will suffer. The timing of our competitors' introduction of products and the market acceptance of their products may also make this educational process more difficult.

Health care reform could decrease demand for our products.

        There are widespread legislative efforts to control health care costs in the United States and abroad, which we expect will continue in the future. In the past, these have included freezes in annual payment updates, cuts in payment reimbursement amounts and efforts to competitively bid durable medical equipment. We cannot assess the likelihood of similar legislative efforts in the future or the impact the enactment of any resulting legislation could have on our business.

Changes to third-party reimbursement policies could reduce the reimbursement we receive for our products.

        Our products are rented and sold to hospitals and skilled nursing facilities that receive reimbursement for the products and services they provide from various public and private third party payers, including Medicare, Medicaid and private insurance programs. We also act as a DME supplier and, as such, we furnish our products directly to customers and bill third-party payers such as Medicare, Medicaid and private insurance. As a result, the demand for our products in any specific care setting is dependent, in part, on the reimbursement policies (including coverage and payment policies) of the various payers in that setting. Some state and private payers make adjustments to their reimbursement policies to reflect federal changes as well as to make their own changes. If coverage and payment policies for our products are revised or otherwise withdrawn under existing Medicare or Medicaid policies, demand for our products could decrease. In addition, in the event any public or private third-party payers challenge our billing, documentation or other practices as inconsistent with their reimbursement policies, we could experience significant delays, reductions or denials in obtaining reimbursements. In light of increased controls on health care spending, especially on Medicare and Medicaid spending, there can be no assurance on the outcome of future coverage or payment decisions for any of our products by governmental or private payers.

        The Medicare Part B coverage policy covering V.A.C. systems is complex and requires extensive documentation. In addition, the reimbursement process for the non-governmental payer segment

24

requires extensive contract development and administration with several hundred payers, with widely varying requirements for documentation and administrative procedures, which can result in extended payment cycles. This has made billing home care payers more complex and time consuming than billing other payers. In 2003, the Centers for Medicare and Medicaid Services issued new regulations on inherent reasonableness of such charges and while these regulations do not impact us currently, future coverage or payment decisions could impact our V.A.C. systems or any of our other products. If providers, suppliers and other users of our products and services are unable to obtain sufficient reimbursement for the provision of our products, demand for our products will decrease.

We depend on our ability to timely collect reimbursement payments.

        As of June 30, 2003, we had $159.7 million of receivables outstanding, net of reserves of $32.3 million for doubtful accounts, and for the twelve month period ended June 30, 2003, our receivables were outstanding for an average of 79 days. If our collection policies and procedures are not effective, we may not be able to timely collect our reimbursement payments.

We may be subject to claims audits which would harm our business and financial results.

        As a health care supplier, we are subject to extensive government regulation, including laws regulating reimbursement under various government programs. The billing, documentation and other practices of health care suppliers are subject to government scrutiny, including claims audits. To ensure compliance with Medicare regulations, contractors, such as the Durable Medical Equipment Regional Carriers, or DMERCs, which serve as the government's agents for the processing of claims for products sold for home use, periodically conduct audits and request medical records and other documents to support claims submitted by us for payment of services rendered to our customers. Because we are a DME supplier, those audits involving home use involve audits of patient claims records. Such audits can result in delays in obtaining reimbursement and denials of claims for payment submitted by us.

        For example, we recently received the results of a routine review conducted by the DMERC for Region A. The review included a sample of 30 claims billed to Medicare for negative pressure wound therapy pumps and supplies between October 1, 2000, and December 31, 2001, from each of our top three billing locations in Region A. In their first review, the DMERC identified certain medical record documentation deficiencies. This resulted in an alleged overpayment of approximately $620,000. In rebuttal of those decisions, we submitted supplemental documentation to the Region A DMERC. After review of the additional information, the DMERC reduced the total amount of total overpayment to approximately $110,000. We are also reviewing the rebuttal decisions to determine which, if any, of the denied claims should be appealed for review by an administrative law judge.

        Also, in December 2002, we submitted a written request to the medical directors of the four DMERCs in which we requested clarification of a number of issues with respect to the DMERCs' "Negative Pressure Wound Therapy Policy." That policy establishes Medicare Part B reimbursement criteria for our V.A.C. products. In June 2003, we received a response from the medical directors and, in some instances, their interpretation of the policy differed from our interpretation. In September 2003, we learned that one of the DMERCs published in its regional newsletter an interpretation of the policy consistent with its June response. Also in September 2003, we began to experience an increase in Medicare Part B denials for V.A.C. placements. Although difficult to quantify, we estimate that the reimbursement coverage issues under the DMERCs' policy relate to less than 10% of our Medicare V.A.C. revenue, or approximately 1% of our overall revenue. We are currently analyzing clinical data for a follow-up response to the medical directors to support our interpretation of the policy. We intend to continue working with the medical directors in an effort to clarify the policy while at the same time maintaining coverage for all Medicare Part B beneficiaries for whom V.A.C. treatment is medically necessary. In the event that the medical directors do not agree to revise their interpretations on these issues, the rate of V.A.C. revenue growth could be impacted.

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        In addition, the government could demand significant refunds or recoupments of amounts paid by the government for claims which are determined by the government to be inadequately supported by the required documentation.

We depend upon a limited group of suppliers and, in some cases, sole-source suppliers.

        We obtain some of the components included in our products from a limited group of suppliers, and, in one case, a sole-source supplier. We have entered into a sole-source agreement with Avail Medical Products, Inc., or Avail, for V.A.C. disposables, effective October 2002 for our U.S.-related orders and mid-2003 for our international-related orders. This supply agreement has a three-year term with an automatic extension for an additional twelve months if neither party gives notice of termination. If we lose any supplier (including any sole-source supplier), we would be required to obtain one or more replacement suppliers and may be required to conduct a significant level of product development to incorporate new parts into our products. The need to change suppliers or to alternate between suppliers might cause material delays in delivery or significantly increase costs.

A high percentage of our sales are international, and economic, political and other risks associated with international sales and operations could adversely affect our sales or make them less predictable.

        For the twelve-month period ending June 30, 2003, approximately 24% of our revenue, and approximately 16% of our operating earnings (excluding the Hillenbrand settlement), were derived from our international segment. We intend to continue to expand our presence in international markets. Accordingly, our future results could be harmed by a variety of factors, including:

•

the difficulties in enforcing agreements and collecting receivables under many foreign countries' legal systems;



•

the longer payment cycles associated with many foreign customers;



•

the possibility that foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade;



•

fluctuations in exchange rates, which may affect product demand and adversely affect the profitability, in U.S. dollars, of products and services provided by us in foreign markets where payment for our products and services is made in the local currency;



•

our ability to obtain U.S. export licenses and other required export or import licenses or approvals;



•

changes in the political, regulatory, safety or economic conditions in a country or region; and



•

the protection of intellectual property in foreign countries may be more difficult to enforce.

We may not be able to maintain or expand our business if we are not able to retain, hire and integrate sufficient qualified personnel.

        Our future success depends on the continued service of members of our key executive, technical, sales, marketing and engineering staff. Our business has been growing rapidly and therefore depends on our ability to attract, expand, integrate, train and retain our management team, qualified engineering personnel and technical personnel. The loss of services of key employees could adversely affect our business. Competition for such personnel can be intense. We compete for key personnel with other medical equipment and technology companies, as well as universities and research institutions. Because the competition for qualified personnel is intense, costs related to compensation could increase if supply decreases or demand increases. If we are unable to hire, train or retain qualified personnel, we will not be able to maintain and expand our business.

If we are unable to manage rapid changes, our business may be harmed.

        We are currently experiencing significant growth in revenue, employees and number of product offerings. This growth has placed a significant strain on our management and our financial, operational,

26

marketing and sales systems. Any failure by us to properly manage our growth could impair our ability to attract and service customers and could cause us to incur higher operating costs and experience delays in the execution of our business plan. We have also experienced reductions in revenue in the past that required us to rapidly reduce costs.

We face significant costs in order to comply with laws and regulations governing the health care industry, and failure to comply with applicable regulations could limit our ability to promote and distribute our products and could subject us to civil or criminal penalties.

        Substantially all of our products are subject to regulation by the U.S. Food and Drug Administration, or FDA, and its foreign counterparts. Complying with FDA requirements and other applicable regulations imposes significant costs and expenses on our operations. If we fail to comply with applicable regulations, we could be subject to enforcement sanctions, our promotional practices may be restricted, and our marketed products could be subject to recall or otherwise impacted. In addition, new regulations, such as the U.S. Health Insurance Portability and Accountability Act of 1996, or HIPAA, that regulate the way we do business will result in increased compliance costs.

        In October 2002, an FDA inspector noted several noncompliance conditions after an inspection of our principal manufacturing facility. Although we believe we have adequately responded to the inspector's observations, the FDA may initiate an enforcement action based upon the observations.

        We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, privacy and security of individually identifiable health information, standardization of electronic data transactions and code sets, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. Changes in existing requirements or adoption of new requirements could cause us to incur significant compliance costs.

        We are also subject to various federal and state laws pertaining to health care fraud and abuse, including prohibitions on the submission of false claims and the payment or acceptance of kickbacks or other remuneration in return for the purchase or lease of our products. The United States Department of Justice and the Office of the Inspector General of the United States Department of Health and Human Services has launched an enforcement initiative which specifically targets the long term care, home health and DME industries. Sanctions for violating these laws include criminal penalties and civil sanctions, including fines and penalties, and possible exclusion from the Medicare, Medicaid and other federal health care programs. Although we believe our business arrangements comply with federal and state fraud and abuse laws, our practices may be challenged under these laws in the future.

Product liability claims could expose us to adverse judgments or could affect the demand for our products.

        The manufacturing and marketing of medical products necessarily entails an inherent risk of product liability claims. If a product liability claim is successfully asserted against us and we become liable for amounts in excess of our insurance coverage, we could be responsible for potentially large litigation damage awards and costs and expenses in litigating such a claim.

Our voting stock is controlled by three principal shareholders, whose interests may conflict with those of the holders of the new notes.

        Dr. Leininger, who is our founder and a member of our board of directors, beneficially owns 30.8% of our outstanding shares voting stock, which consists of common stock and preferred stock entitled to the same voting rights as our common stock. In addition, Fremont Partners, L.P. beneficially owns 36.5% of our outstanding shares of voting stock and Blum Capital Partners, L.P. beneficially owns 24.1% of our outstanding shares of voting stock. As a result of this ownership, Dr. Leininger, Fremont Partners, L.P. and Blum Capital Partners, L.P. are able to direct our affairs and to approve any matter requiring the approval of our shareholders. Such matters include the election of directors, the adoption of amendments to our articles of incorporation and approval of mergers or sales of substantially all our assets. The interests of our principal shareholders may conflict with the interests of the holders of the new notes. (See "Principal Shareholders.")

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THE EXCHANGE OFFER

Terms of the Exchange Offer; Period for Tendering Old Notes

        Subject to terms and conditions detailed in this prospectus, we will accept for exchange old notes that are properly tendered on or prior to the expiration date and not withdrawn as permitted below. The term "expiration date" means 5:00 p.m., New York City time,            , 2003, the 21st business day following the date of this prospectus. We may, however, in our sole discretion, extend the period of time that the exchange offer is open. The term "expiration date" means the latest time and date to which the exchange offer is extended.

        As of the date of this prospectus, $205,000,000 aggregate principal amount of old notes are outstanding. We are sending this prospectus, together with the letter of transmittal, to all holders of old notes that we are aware of on the date hereof.

        We expressly reserve the right, at any time, to extend the period of time that the exchange offer is open, and delay acceptance for exchange of any old notes, by giving oral or written notice of an extension to the holders of the old notes as described below. During any extension, all old notes previously tendered will remain subject to the exchange offer and may be accepted for exchange by us. Any old notes not accepted for exchange for any reason will be returned without expense to the tendering holder as promptly as practicable after the expiration or termination of the exchange offer.

        Old notes tendered in the exchange offer must be in denominations of principal amount of $1,000 and any integral multiple thereof.

        We expressly reserve the right to amend or terminate the exchange offer, and not to exchange any old notes, upon the occurrence of any of the conditions of the exchange offer specified under "—Conditions to the Exchange Offer." We will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the old notes as promptly as practicable. In the case of any extension, we will issue a notice by means of a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date.

Procedures for Tendering Old Notes

        Your tender to us of old notes as set forth below and our acceptance of the old notes will constitute a binding agreement between us and you upon the terms and subject to the conditions detailed in this prospectus and in the accompanying letter of transmittal. Except as set forth below, to tender old notes for exchange in the exchange offer, you must transmit a properly completed and duly executed letter of transmittal, including all other documents required by the letter of transmittal or, in the case of a book-entry transfer, an agent's message in place of the letter of transmittal, to U.S. Bank, N.A., as exchange agent, at the address set forth below under "—Exchange Agent" on or prior to the expiration date. In addition, either:

•

certificates for old notes must be received by the exchange agent with the letter of transmittal;



•

a timely confirmation of a book-entry transfer, which we refer to in this prospectus as a book-entry confirmation, of old notes, if this procedure is available, into the exchange agent's account at DTC pursuant to the procedure for book-entry transfer described beginning on page 31 must be received by the exchange agent prior to the expiration date, with an agent's message in lieu of the letter of transmittal; or



•

the holder must comply with the guaranteed delivery procedures described below.

        The term "agent's message" means a message, transmitted by DTC to and received by the exchange agent and forming a part of a book-entry confirmation, which states that DTC has received

28

an express acknowledgment from the tendering participant stating that such participant has received and agrees to be bound by the letter of transmittal and that we may enforce such letter of transmittal against such participant.

        The method of delivery of old notes, letters of transmittal and all other required documents is at your election and risk. If such delivery is by mail, it is recommended that you use registered mail, properly insured, with return receipt requested. In all cases, you should allow sufficient time to assure timely delivery. No letter of transmittal or old notes should be sent to us.

        Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the old notes surrendered for exchange are tendered:

•

by a holder of the old notes who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal; or



•

for the account of an eligible institution (as defined below).

        In the event that signatures on a letter of transmittal or a notice of withdrawal are required to be guaranteed, such guarantees must be by a firm which is a member of the Securities Transfer Agent Medallion Program, the Stock Exchanges Medallion Program or the New York Stock Exchange Medallion Program (we refer to each such entity as an "eligible institution" in this prospectus). If old notes are registered in the name of a person other than the signer of the letter of transmittal, the old notes surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as we or the exchange agent determine in our sole discretion, duly executed by the registered holders with the signature thereon guaranteed by an eligible institution.

        We or the exchange agent in our sole discretion will make a final and binding determination on all questions as to the validity, form, eligibility, including time of receipt, and acceptance of old notes tendered for exchange. We reserve the absolute right to reject any and all tenders of any particular old note not properly tendered or to not accept any particular old note which acceptance might, in our judgment or our counsel's, be unlawful. We also reserve the absolute right to waive any defects or irregularities or conditions of the exchange offer as to any particular old note either before or after the expiration date, including the right to waive the ineligibility of any holder who seeks to tender old notes in the exchange offer. Our or the exchange agent's interpretation of the terms and conditions of the exchange offer as to any particular old note either before or after the expiration date, including the letter of transmittal and the instructions thereto, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old notes for exchange must be cured within a reasonable period of time, as we determine. We are not, nor is the exchange agent or any other person, under any duty to notify you of any defect or irregularity with respect to your tender of old notes for exchange, and no one will be liable for failing to provide such notification.

        If the letter of transmittal is signed by a person or persons other than the registered holder or holders of old notes, such old notes must be endorsed or accompanied by powers of attorney signed exactly as the name(s) of the registered holder(s) that appear on the old notes.

        If the letter of transmittal or any old notes or powers of attorneys are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing. Unless waived by us or the exchange agent, proper evidence satisfactory to us of their authority to so act must be submitted with the letter of transmittal.

        By tendering old notes, you represent to us that, among other things:

•

the new notes acquired pursuant to the exchange offer are being obtained in the ordinary course of business of the person receiving such new notes whether or not such person is the holder; and

29

•

neither the holder nor such other person has any arrangement or understanding with any person, to participate in the distribution of the new notes.

        In the case of a holder that is not a broker-dealer, that holder, by tendering, will also represent to us that the holder is not engaged in or does not intend to engage in a distribution of the new notes.

        If you are our "affiliate," as defined under Rule 405 under the Securities Act, and engage in or intend to engage in or have an arrangement or understanding with any person to participate in a distribution of such new notes to be acquired pursuant to the exchange offer, you or any such other person:

•

could not rely on the applicable interpretations of the staff of the SEC; and



•

must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

        Each broker-dealer that receives new notes for its own account in exchange for old notes, where the old notes were acquired by the broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. (See "Plan of Distribution.") The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act.

Acceptance of Old Notes for Exchange; Delivery of New Notes

        Upon satisfaction or waiver of all of the conditions to the exchange offer, we will accept, promptly after the expiration date, all old notes properly tendered and will issue the new notes promptly after acceptance of the old notes. (See "—Conditions to the Exchange Offer.") For purposes of the exchange offer, we will be deemed to have accepted properly tendered old notes for exchange if and when we give oral, confirmed in writing, or written notice to the exchange agent.

        The holder of each old note accepted for exchange will receive a new note in the amount equal to the surrendered old note. Accordingly, registered holders of new notes on the record date for the first interest payment date following the consummation of the exchange offer will received interest accruing from the most recent date that interest has been paid on the old notes. Holders of new notes will not receive any payment in respect of accrued interest on old notes otherwise payable on any interest payment date, the record date for which occurs on or after the consummation of the exchange offer.

        In all cases, issuance of new notes for old notes that are accepted for exchange will only be made after timely receipt by the exchange agent of:

•

certificates for such old notes or a timely book-entry confirmation of such old notes into the exchange agent's account at DTC;



•

a properly completed and duly executed letter of transmittal or an agent's message in lieu thereof; and



•

all other required documents.

        If any tendered old notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if old notes are submitted for a greater principal amount than the holder desires to exchange, the unaccepted or non-exchanged old notes will be returned without expense to the tendering holder or, in the case of old notes tendered by book-entry transfer into the exchange agent's account at DTC pursuant to the book-entry procedures described below, the non-exchanged old notes will be credited to an account maintained with DTC, as promptly as practicable after the expiration or termination of the exchange offer.

30

Book-Entry Transfers

        For purposes of the exchange offer, the exchange agent will request that an account be established with respect to the old notes at DTC within two business days after the date of this prospectus, unless the exchange agent already has established an account with DTC suitable for the exchange offer. Any financial institution that is a participant in DTC may make book-entry delivery of old notes by causing DTC to transfer such old notes into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. Although delivery of old notes may be effected through book-entry transfer at DTC, the letter of transmittal or facsimile thereof or an agent's message in lieu thereof, with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the exchange agent at the address set forth under "—Exchange Agent" no later than 5:00 p.m., New York City time, on the expiration date or the guaranteed delivery procedures described below must be complied with.

Guaranteed Delivery Procedures

        If you desire to tender your old notes and your old notes are not immediately available, or time will not permit your old notes or other required documents to reach the exchange agent before the expiration date, a tender may be effected if:

•

the tender is made through an eligible institution;



•

prior to the expiration date, the exchange agent receives from such eligible institution a notice of guaranteed delivery, substantially in the form we provide, by telegram, telex, facsimile transmission, mail or hand delivery, setting forth your name and address, the amount of old notes tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery, the certificates for all physically tendered old notes, in proper form for transfer, or a book-entry confirmation, as the case may be, together with a properly completed and duly executed appropriate letter of transmittal or facsimile thereof or agent's message in lieu thereof, with any required signature guarantees and any other documents required by the letter of transmittal will be deposited by such eligible institution with the exchange agent; and



•

the certificates for all physically tendered old notes, in proper form for transfer, or a book-entry confirmation, as the case may be, together with a properly completed and duly executed appropriate letter of transmittal or facsimile thereof or agent's message in lieu thereof, with any required signature guarantees and all other documents required by the letter of transmittal, are received by the exchange agent within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery.

Withdrawal Rights

        You may withdraw your tender of old notes at any time prior to the expiration date. To be effective, a written notice of withdrawal must be received by the exchange agent at one of the addresses set forth under "—Exchange Agent." This notice must specify:

•

the name of the person having tendered the old notes to be withdrawn;



•

the old notes to be withdrawn, including the principal amount of each of such old notes; and



•

where certificates for old notes have been transmitted, the name in which such old notes are registered, if different from that of the withdrawing holder.

        If certificates for old notes have been delivered or otherwise identified to the exchange agent, then, prior to the release of the certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures

31

guaranteed by an eligible institution, unless such holder is an eligible institution. If old notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of DTC.

        We or the exchange agent will make a final and binding determination on all questions as to the validity, form and eligibility, including time of receipt, of such notices. Any old notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any old notes tendered for exchange but not exchanged for any reason will be returned to the holder without cost to the holder, or, in the case of old notes tendered by book-entry transfer into the exchange agent's account at DTC pursuant to the book-entry transfer procedures described above, the old notes will be credited to an account maintained with DTC for the old notes as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn old notes may be re-tendered by following one of the procedures described under "—Procedures for Tendering Old Notes" above at any time on or prior to the expiration date.

Conditions to the Exchange Offer

        Notwithstanding any other provision of the exchange offer, we are not required to accept for exchange, or to issue new notes in exchange for, any old notes and may terminate or amend the exchange offer, if any of the following events occur prior to acceptance of such old notes:

(a)

the exchange offer violates any applicable law or applicable interpretation of the staff of the SEC; or



(b)

there is threatened, instituted or pending any action or proceeding before, or any injunction, order or decree has been issued by, any court or governmental agency or other governmental regulatory or administrative agency or commission,



(1)

seeking to restrain or prohibit the making or consummation of the exchange offer or any other transaction contemplated by the exchange offer, or assessing or seeking any damages as a result thereof, or



(2)

resulting in a material delay in our ability to accept for exchange or exchange some or all of the old notes pursuant to the exchange offer;

or any statute, rule, regulation, order or injunction has been sought, proposed, introduced, enacted, promulgated or deemed applicable to the exchange offer or any of the transactions contemplated by the exchange offer by any government or governmental authority, domestic or foreign, or any action has been taken, proposed or threatened, by any government, governmental authority, agency or court, domestic or foreign, that in our sole judgment might, directly or indirectly, result in any of the consequences referred to in clauses (1) or (2) above or, in our reasonable judgment, might result in the holders of new notes having obligations with respect to resales and transfers of new notes which are greater than those described in this prospectus, or would otherwise make it inadvisable to proceed with the exchange offer; or

(c)

there has occurred:



(1)

any general suspension of or general limitation on prices for, or trading in, securities on any national securities exchange or in the over-the-counter market,



(2)

any limitation by a governmental agency or authority which may adversely affect our ability to complete the transactions contemplated by the exchange offer,

32

(3)

a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States or any limitation by any governmental agency or authority which adversely affects the extension of credit, or



(4)

a commencement of a war, armed hostilities or other similar international calamity directly or indirectly involving the United States, or, in the case of any of the foregoing, existing at the time of the commencement of the exchange offer, a material acceleration or worsening thereof; or



(d)

any change (or any development involving a prospective change) has occurred or is threatened in our business, properties, assets, liabilities, financial condition, operations, results of operations or prospects and our subsidiaries taken as a whole that, in our reasonable judgment, is or may be adverse to us, or we have become aware of facts that, in our reasonable judgment, have or may have adverse significance with respect to the value of the old notes or the new notes;



(i)

which in our reasonable judgment in any case, and regardless of the circumstances (including any action by us) giving rise to any such condition, makes it inadvisable to proceed with the exchange offer and/or with such acceptance for exchange or with such exchange.

        The foregoing conditions are for our sole benefit and may be asserted by us regardless of the circumstances giving rise to any condition or may be waived by us in whole or in part at any time in our reasonable discretion. Our failure at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right and each such right will be deemed an ongoing right which may be asserted at any time.

        In addition, we will not accept for exchange any old notes tendered, and we will not issue new notes in exchange for any such old notes, if at such time any stop order by the SEC is threatened or in effect with respect to the registration statement, of which this prospectus constitutes a part, or the qualification of the indenture under the Trust Indenture Act.

Exchange Agent

        U.S. Bank, N.A. has been appointed as the exchange agent for the exchange offer. All executed letters of transmittal and all other required documents should be directed to the exchange agent at the address set forth below. Questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for notices of guaranteed delivery should be directed to the exchange agent addressed as follows:

U.S. Bank, N.A., Exchange Agent
By Hand, Overnight Delivery or by Mail:
60 Livingston Avenue
St. Paul, Minnesota 55107
Attention: Corporate Trust Department
By Facsimile Transmission
(for Eligible Institutions only):
(651) 495-8097
Confirm by Telephone:
(651) 495-3913

Delivery of the letter of transmittal to an address other than as set forth above or transmission of such letter of transmittal via facsimile other than as set forth above does not constitute a valid delivery of the letter of transmittal.

33

Fees and Expenses

        The principal solicitation is being made by mail by U.S. Bank, N.A., as exchange agent. We will pay the exchange agent customary fees for its services, reimburse the exchange agent for its reasonable out-of-pocket expenses incurred in connection with the provision of these services and pay other registration expenses, including fees and expenses of the trustee under the indenture relating to the new notes, filing fees, blue sky fees and printing and distribution expenses. We will not make any payment to brokers, dealers or others soliciting acceptances of the exchange offer.

        Additional solicitation may be made by telephone, facsimile or in person by our and our affiliates' officers and regular employees and by persons so engaged by the exchange agent.

Accounting Treatment

        We will record the new notes at the same carrying value as the old notes, as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes. The expenses of the exchange offer will be amortized over the term of the new notes.

Transfer Taxes

        You will not be obligated to pay any transfer taxes in connection with the tender of old notes in the exchange offer unless you instruct us to register new notes in the name of, or request that old notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder. In those cases, you will be responsible for the payment of any potentially applicable transfer tax. (See "Material United States Federal Income Tax Considerations.")

Consequences of Exchanging or Failing to Exchange Old Notes

        If you do not exchange your old notes for new notes in the exchange offer, your old notes will continue to be subject to the provisions of the indenture regarding transfer and exchange of the old notes and the restrictions on transfer of the old notes described in the legend on your certificates. These transfer restrictions are required because the old notes were issued under an exemption from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the old notes may not be offered or sold unless registered under the Securities Act, except under an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not plan to register the sale of the old notes under the Securities Act, except under the limited circumstances described in "Description of the New Notes—Registration Rights".

        Based on interpretations by the staff of the SEC, as set forth in no-action letters issued to third parties, we believe that the new notes you receive in the exchange offer may be offered for resale, resold or otherwise transferred without compliance with the registration and prospectus delivery provisions of the Securities Act. However, you will not be able to freely transfer the new notes if:

•

you are our "affiliate," as defined in Rule 405 under the Securities Act;



•

you are not acquiring the new notes in the exchange offer in the ordinary course of your business;



•

you have an arrangement or understanding with any person to participate in the distribution, as defined in the Securities Act, of the new notes you will receive in the exchange offer;



•

you are holding old notes that have, or are reasonably likely to have, the status of an unsold allotment in the initial offering; or

34

•

you are a broker-dealer that received new notes for its own account in the exchange offer in exchange for old notes that were acquired as a result of market-making or other trading activities.

        We do not intend to request the SEC to consider, and the SEC has not considered, the exchange offer in the context of a similar no-action letter. As a result, we cannot guarantee that the staff of the SEC would make a similar determination with respect to the exchange offer as in the circumstances described in the no action letters discussed above. Each holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of new notes and has no arrangement or understanding to participate in a distribution of new notes. If you are our affiliate, are engaged in or intend to engage in a distribution of the new notes or have any arrangement or understanding with respect to the distribution of the new notes you will receive in the exchange offer, you may not rely on the applicable interpretations of the staff of the SEC and you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction involving the new notes. If you are a participating broker-dealer, you must acknowledge that you will deliver a prospectus in connection with any resale of the new notes. In addition, to comply with state securities laws, you may not offer or sell the new notes in any state unless they have been registered or qualified for sale in that state or an exemption from registration or qualification is available and is complied with. The offer and sale of the new notes to "qualified institutional buyers" (as defined in Rule 144A of the Securities Act) is generally exempt from registration or qualification under state securities laws. We do not plan to register or qualify the sale of the new notes in any state where an exemption from registration or qualification is required and not available.

35

USE OF PROCEEDS

        We will not receive any proceeds from this exchange offer. Any old notes that are properly tendered and exchanged pursuant to the exchange offer will be retired and cancelled.

RATIO OF EARNINGS TO FIXED CHARGES

        The following table sets forth the ratio of earnings to fixed charges for the periods indicated. We have calculated the ratio of earnings to fixed charges in the following table as net earnings plus income taxes and interest expense divided by interest expense plus estimated interest expense on our operating leases.

	Years Ended December 31,							Six Months Ended June 30,		Last Twelve Months Ended June 30,
	1998	1999	2000		2001	2002		2002	2003	2003
Ratio of earnings to fixed charges	1.3	0.9	1.2	(1)	1.7	2.4	(2)	2.3	3.7	3.1	(2)

(1)

In December 2000, we began reporting international results on a current-month basis. As a result of this change, the 2000 fiscal year included a 13^th monthly period for the international segment which increased reported revenue and operating earnings by approximately $8.0 million and $1.1 million, respectively.

(2)

This calculation excludes pretax income of $173.3 million ($175.0 million, less expenses of $1.7 million) from Hillenbrand as part of an antitrust settlement. See note 16 to consolidated financial statements included elsewhere in this prospectus for discussion of the antitrust settlement.

36

CAPITALIZATION

        The following table sets forth our consolidated cash and cash equivalents and capitalization of KCI as of June 30, 2003, on an actual basis and on an as adjusted basis to give effect to the recapitalization as if the recapitalization had occurred on June 30, 2003. You should read the data set forth in the table below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of the New Senior Credit Facility" and our consolidated financial statements of KCI and related notes appearing elsewhere in this prospectus.

			As of June 30, 2003
			Actual			As Adjusted
			(in thousands)
Cash and cash equivalents			$	102,973		$	44,815	(1)
	Total debt:
	Existing credit facility		$	208,226		$	—
	93/8% Senior Subordinated Notes due 2007			200,000			—
	New senior credit facility(2)			—			480,000
	Notes			—			205,000
	Other debt and capitalized lease obligations			2,534			2,534
		Total debt		410,760			687,534
Convertible preferred stock				—			252,241
Shareholders' equity:
	Common stock, par value $0.001, 150,000,000 shares authorized and 71,122,556 issued and outstanding as of June 30, 2003, 37,809,205 issued and outstanding as adjusted			71			38
	Retained deficit			(39,425	)		(607,271	)
	Accumulated other comprehensive income			412			412
	Total shareholders' deficit			(38,942	)		(606,821	)
	Total capitalization		$	371,818		$	332,954

(1)

Calculation of cash on hand to be used to fund part of recapitalization:

Cash and cash equivalents at June 30, 2003, actual	$	102,973
Cash and cash equivalents at June 30, 2003, as adjusted		44,815
Net change in cash		58,158
Principal paid between June 30, 2003 and closing of this offering		—
Net interest payments included herein but not part of transaction		4,313
Expected cash to be used to fund part of recapitalization	$	53,845

(2)

At June 30, 2003, on a pro forma basis assuming the recapitalization had occurred on such date: (a) the total borrowing capacity under the new revolving credit facility was $100.0 million, subject to compliance with applicable covenants; (b) no amount was outstanding under the new revolving credit facility; and (c) borrowing availability under the new revolving credit facility was $89.1 million, after netting $10.9 million in outstanding letters of credit.

37

SELECTED CONSOLIDATED FINANCIAL DATA

        The following tables summarize our consolidated financial data for the periods presented. You should read the following financial information together with the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated balance sheet data for fiscal 2002 and the selected consolidated statement of earnings data for fiscal 2000, 2001 and 2002 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data for fiscal 1998 and 1999 are derived from our audited consolidated financial statements not included in this prospectus. The unaudited consolidated balance sheet data as of June 30, 2002 and 2003 and the unaudited consolidated statement of earnings data for the six months ended June 30, 2002 and June 30, 2003 have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting only of normal recurring adjustments, we consider necessary for the fair presentation of the information. Operating results for the six months ended June 30, 2003 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2003. The last twelve month period ended June 30, 2003 has been derived from our audited consolidated financial statements for the year ended December 31, 2002 and the unaudited historical financial statements for the six month period ended June 30, 2002 and 2003.

			Years Ended December 31,															Six Months Ended June 30,						Last Twelve Months Ended June 30,
			1998			1999			2000(1)			2001			2002			2002			2003			2003
			(in thousands)
Consolidated Statement of Earnings Data:
Revenue:
	Rental and service		$	258,482		$	245,983		$	274,331		$	361,634		$	453,060		$	209,010		$	270,296		$	514,346
	Sales and other			71,463			74,249			77,701			94,313			125,902			55,239			78,753			149,416
		Total revenue		329,945			320,232			352,032			455,947			578,962			264,249			349,049			663,762
Rental expenses				166,629			167,397			176,392			220,485			276,125			128,415			166,459			314,169
Cost of goods sold				26,219			29,811			29,645			32,952			51,824			21,369			28,358			58,813
		Gross profit		137,097			123,024			145,995			202,510			251,013			114,465			154,232			290,780
Selling, general and administrative expenses				69,537			75,208			80,294			114,828			141,594			63,763			85,395			163,226
Unusual item-litigation settlement(2)				—			—			—			—			(173,250	)		—			—			(173,250	)
		Operating earnings		67,560			47,816			65,701			87,682			282,669			50,702			68,837			300,804
Interest income				616			348			897			280			496			109			747			1,134
Interest expense				(48,594	)		(46,502	)		(48,635	)		(45,116	)		(40,943	)		(20,692	)		(16,228	)		(36,479	)
Foreign currency gain (loss)				20			(1,356	)		(2,358	)		(1,638	)		3,935			2,448			4,156			5,643
		Earnings before income taxes and
		minority interest		19,602			306			15,605			41,208			246,157			32,567			57,512			271,102
Income taxes				7,851			620			6,476			17,307			96,001			12,538			21,567			105,030
		Earnings (loss) before minority interest		11,751			(314	)		9,129			23,901			150,156			20,029			35,945			166,072
Minority interest in subsidiary loss				25			—			—			—			—			—			—			—
		Net earnings (loss)	$	11,776		$	(314	)	$	9,129		$	23,901		$	150,156		$	20,029		$	35,945		$	166,072
Other Financial Data:
EBITDA(3)				97,694			79,027			96,706			121,223			321,782			69,764			94,573			346,591
Depreciation and amortization				29,473			32,219			32,466			34,899			34,682			16,505			20,833			39,010
Net capital expenditures(4)				28,406			22,046			30,281			43,953			53,143			27,601			35,047			60,589
Cash from operating activities				43,885			36,767			40,151			29,895			76,254			23,927			198,705			251,032

38

	As of December 31,															As of June 30,
	1998			1999			2000			2001			2002			2002			2003
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	4,366		$	7,362		$	2,139		$	199		$	54,485		$	9,368		$	102,973
Working capital(5)		76,593			62,482			40,411			100,335			243,862			114,478			165,174
Total assets		306,117			283,261			288,091			343,193			618,059			387,021			516,015
Total debt(6)		515,651			502,780			489,119			509,540			523,443			525,518			410,760
Total shareholders' deficit		(261,588	)		(264,735	)		(257,953	)		(236,325	)		(80,436	)		(212,601	)		(38,942	)

(1)

In December 2000, we began reporting international results on a current-month basis. As a result of this change, the 2000 fiscal year included a 13th monthly period for the international segment which increased reported revenue and operating earnings by approximately $8.0 million and $1.1 million, respectively.

(2)

Includes accrual in connection with an installment payment of $175.0 million ($173.3 million, net of expenses of $1.7 million) from Hillenbrand as part of an antitrust settlement. See note 16 to consolidated financial statements included elsewhere in this prospectus for discussion of the antitrust settlement.

(3)

We calculate EBITDA as net earnings plus depreciation and amortization (less amortization of loan issuance costs), income taxes, and interest expense. We find EBITDA to be a useful measure of, our ability to service our debt and our ability to generate cash for other purposes. EBITDA is a non-GAAP financial measure and should not be considered in isolation from, and is not intended to represent an alternative measure of operating or net earnings or cash flow from operating activities, or any other measure of performance determined in accordance with GAAP. Other companies may calculate EBITDA differently, and our EBITDA calculation is not necessarily comparable with similarly titled figures for other companies. Therefore, in evaluating EBITDA data, you should consider, among other factors, the non-GAAP nature of EBITDA data, actual cash flows and net earnings, the actual availability of funds for debt service, and capital expenditures and working capital.

We have provided below a reconciliation of EBITDA to net earnings, which we believe is the most directly comparable GAAP measure (dollars in thousands):

	Years Ended December 31,											Six Months Ended June 30				Last Twelve Months Ended June 30,
	1998		1999			2000(1)		2001		2002		2002		2003		2003
Net earnings	$	11,776	$	(314	)	$	9,129	$	23,901	$	150,156	$	20,029	$	35,945	$	166,072
Interest expense		48,594		46,502			48,635		45,116		40,943		20,692		16,228		36,479
Depreciation and amortization(5)		29,473		32,219			32,466		34,899		34,682		16,505		20,833		39,010
Income taxes		7,851		620			6,476		17,307		96,001		12,538		21,567		105,030
EBITDA	$	97,694	$	79,027		$	96,706	$	121,223	$	321,782	$	69,764	$	94,573	$	346,591

EBITDA for 2002 includes the installment payment of $175.0 million ($173.3 million net of expenses of $1.7 million) from Hillenbrand as part of an antitrust settlement that we accrued in January, 2003. EBITDA for all periods also includes the effects of payments aggregating $1.5 million per year that we have made since 1998 pursuant to a management services agreement with Fremont Partners, James R. Leininger, M.D. and Blum Capital. On August 11, 2003, the management services agreement was amended to, among other things, terminate the management fee and continue to provide for indemnification and reimbursement of expenses. We made final management fee payments of $300,000 and $450,000 in July and August 2003, respectively.

(4)

We calculate net capital expenditures as total expenditures for property, plant and equipment along with expenditures for inventory purchased to be converted into equipment for rental reduced by cash proceeds from dispositions of property, plant and equipment.

(5)

Working capital represents total current assets less total current liabilities.

(6)

Total debt equals both current and long-term debt along with capital lease obligations and our liability associated with interest rate swaps.

39

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

        Kinetic Concepts, Inc. is a global medical device company with leadership positions in (i) advanced wound care and (ii) therapeutic surfaces which treat and prevent complications resulting from patient immobility. We design, manufacture, market and service a wide range of proprietary products which can significantly improve clinical outcomes while reducing the overall cost of patient care by accelerating the healing process or preventing complications. We have an infrastructure designed to meet the specific needs of medical professionals and patients across all health care settings, including acute care hospitals, extended care facilities and patients' homes both in the United States and abroad.

        Since the fourth quarter of 2000, our growth has been driven primarily by increased revenue from V.A.C. rentals and sales, which accounted for approximately 60.6% of total revenue in the first six months of 2003, up from approximately 50.6% in the first six months of 2002. We expect V.A.C. growth and the percentage of total revenue from V.A.C. rentals and sales to continue to increase, as it has in each of the last three years. Driven by continued market penetration, increased awareness and the introduction of two new V.A.C. systems in 2002, revenue for V.A.C. products and related services increased 60.0% from $244.5 million for the twelve months ended June 30, 2002 to $391.3 million for the twelve months ended June 30, 2003. Both the U.S. and international business segments contributed to this growth.

        We have direct operations in the United States, Canada, Europe, Australia and South Africa, and conduct additional business through distributors in Latin America, the Middle East and Asia. We manage our business in two geographical segments, our USA and International divisions. In the United States, which accounted for 76.0% of our revenue for the twelve months ended June 30, 2003, we have a substantial presence in all care settings. In acute and extended care, which accounted for more than half of our revenue, we bill our customers directly. In home care, where our revenue comes predominantly from V.A.C. products, we provide products and services directly to patients and bill third party payers, including Medicare and private insurance. Home care revenue is growing faster than the acute or extended care settings. For the twelve month period ended June 30, 2003, worldwide V.A.C. revenue from the combined acute and extended care settings grew approximately 63.0% and V.A.C. revenue from the home care setting grew approximately 56.0% as compared to the twelve month period ended June 30, 2002. The home care market accounted for approximately 44.0% of V.A.C. business and approximately 26.0% of our total revenue for the twelve month period ended June 30, 2003. V.A.C. systems used in the home are reimbursed by both government insurance (Medicare and Medicaid) and private insurance and managed care organization payers.

        Internationally, substantially all of our revenue is generated from the acute care setting. A small amount of international V.A.C. revenue comes from home care. We expect this percentage to increase to the extent that we gain home care reimbursement for V.A.C. therapy.

        Our international operations are subject to foreign currency fluctuations. As a result, we establish and evaluate our business using a constant exchange rate by country. By using a constant exchange rate for comparing our current year activity with prior periods, we effectively eliminate from our operations the variances arising from foreign currency fluctuations. We refer to this internal analysis as revenue and expenses, on a constant exchange basis, throughout this report.

        As part of the recapitalization, we made an offer to repurchase a portion of our outstanding vested options to purchase common stock. Options subject to the offer to repurchase are subject to variable plan accounting, requiring them to be "marked to market" during such time as it is probable that the options will be subject to an offer to repurchase. We expect this to result in a charge to earnings in the

40

third quarter of 2003 of approximately $68.2 million. (See "Summary—The Recapitalization—Share Repurchase.")

Results of Operations

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

        The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue as well as the change in each line item as compared to the first six months of the prior year (dollars in thousands):

			Six Months Ended June 30,
			Revenue Relationship				Variance
			2002		2003		$		%
Revenue:
	Rental and service		79	%	77	%	$	61,286	29.3	%
	Sales and other		21		23			23,514	42.6
		Total revenue	100		100			84,800	32.1
Rental expenses			49		48			38,044	29.6
Cost of goods sold			8		8			6,989	32.7
	Gross profit		43		44			39,767	34.7
Selling, general and administrative expenses			24		24			21,632	33.9
		Operating earnings	19		20			18,135	35.8
Interest income			—		—			638	nm
Interest expense			(8	)	(5	)		4,464	21.6
Foreign currency gain (loss)			1		1			1,708	69.8
		Earnings before income taxes	12		16			24,945	76.6
Income taxes			4		6			9,029	72.0
		Net earnings	8	%	10	%	$	15,916	79.5	%

41

        Total Revenue.    Our revenue is divided between two primary operating segments: USA and International. The following table sets forth, for the periods indicated, the amount of revenue derived from each of these segments (dollars in thousands):

			Six Months Ended June 30,
							Variance
			2002		2003		$			%
USA
V.A.C.
	Rental		$	94,209	$	139,843	$	45,634		48.4	%
	Sales			21,702		36,947		15,245		70.2
		Total V.A.C.		115,911		176,790		60,879		52.5
Therapeutic surfaces/other
	Rental			75,618		74,235		(1,383	)	(1.8	)
	Sales			13,848		13,815		(33	)	(0.2	)
		Total therapeutic surfaces/other		89,466		88,050		(1,416	)	(1.6	)
Total USA rental				169,827		214,078		44,251		26.1
Total USA sales				35,550		50,762		15,212		42.8
		Subtotal—USA	$	205,377	$	264,840	$	59,463		29.0	%
International
V.A.C.
	Rental		$	8,207	$	17,660	$	9,453		115.2	%
	Sales			9,611		17,187		7,576		78.8
		Total V.A.C.		17,818		34,847		17,029		95.6
Therapeutic surfaces/other
	Rental			30,976		38,558		7,582		24.5
	Sales			10,078		10,804		726		7.2
		Total therapeutic surfaces/other		41,054		49,362		8,308		20.2
Total International rental				39,183		56,218		17,035		43.5
Total International sales				19,689		27,991		8,302		42.2
		Subtotal—International	$	58,872	$	84,209	$	25,337		43.0	%
		Total revenue	$	264,249	$	349,049	$	84,800		32.1	%

        Total revenue in the first six months of 2003 increased $84.8 million, or 32.1%, from the prior-year period due primarily to increased demand for V.A.C. systems and related disposables. Rental revenue increased $61.3 million, or 29.3%, from the first six months of 2002 while sales revenue increased $23.5 million, or 42.6%, compared to the prior-year period. Revenue growth in the first six months of 2003 was driven by the launch of two new V.A.C. systems during 2002 along with enhanced V.A.C. sales and marketing efforts, which increased customer awareness of the benefits of V.A.C. therapy.

        Total domestic revenue for the first six months of 2003 increased $59.5 million, or 29.0%, from the prior-year period due to increased usage of V.A.C. systems and related disposables. Domestic rental revenue in the first six months of 2003 increased $44.3 million, or 26.1%, from the prior-year comparable period and domestic sales revenue in the first six months of 2003 increased $15.2 million, or 42.8%, from the prior-year period. The increase in total domestic revenue is due primarily to increased V.A.C. systems rentals resulting in increased demand for associated disposables, partially offset by a 27.2% decrease in sales of vascular products and a 11.3% decrease in rentals in the extended care market. V.A.C. units out on rent declined slightly in January 2003 due to a significant realignment of our domestic sales force. Since that time, demand for V.A.C. systems has increased

42

steadily. For the six month period ended June 30, 2003, average V.A.C. units out on rent increased 50.9% as compared to the same period a year ago.

        Domestic V.A.C. revenue increased in the first six months of 2003 by $60.9 million, or 52.5%, from the prior-year period due to an increase of both rental and sales revenue. V.A.C. rentals increased $45.6 million, or 48.4%, from the prior-year period. The increased rental revenue resulted from an increase in average units on rent per month of 50.9% for the six-month period which was offset by a 1.6% decline in average rental price. Some managed care organizations pay an all-inclusive daily rate which covers the rental of V.A.C. systems and all needed disposables. All revenue associated with all-inclusive pricing is included in rental revenue. We are beginning to experience a shift away from all-inclusive pricing in the home care setting with third party payers. As we contract with these third party payers, our contracts are providing separate pricing for rental and disposable sale products versus the all-inclusive pricing previously used. Therefore, we have experienced, and expect to continue experiencing, a shift in revenue between the rental classification and the sales classification. V.A.C. sales increased $15.2 million, or 70.2%, from the prior-year period due to the shift in pricing methodology discussed above along with increased demand for V.A.C. disposables associated with increased V.A.C. systems rentals. The cost of V.A.C. disposables, whether purchased through all-inclusive pricing or by itemized sale, is included in cost of goods sold.

        Domestic therapeutic surfaces/other revenue of $88.1 million for the six month period ended June 30, 2003 decreased $1.4 million, or 1.6%, from the prior-year period, primarily due to a $1.3 million, or 25.5%, decrease in total vascular-compression therapy revenue. The following table sets forth, for the periods indicated, the amount of revenue derived from each of our domestic care settings (dollars in thousands):

		Six Months Ended June 30,
						Variance
		2002		2003		$			%
Domestic therapeutic surfaces/other revenue
Acute/extended		$	79,539	$	79,186	$	(353	)	(0.4	)%
Home			4,759		5,014		255		5.4
Vascular-compression therapy			5,168		3,850		(1,318	)	(25.5	)
	Total	$	89,466	$	88,050	$	(1,416	)	(1.6	)%

        The majority of our therapeutic surfaces/other business is generated in the hospital, or acute care, setting. Average acute care rental therapeutic surface units on rent per month remained essentially unchanged compared to the prior-year period, while average pricing increased 1.1% due primarily to product mix changes. Our acute care revenue is fueled by growth in our bariatric line. Extended care rental units decreased 18.0% due to lower overall Medicare Part A reimbursement in nursing homes and continued local and regional competition. Home care therapeutic surface revenue increased 5.4% from the prior-year comparable period due to a change in our revenue mix. We experienced increased sales of lower-therapy wound care therapeutic surface units, which, in turn, decreased the rental of therapeutic surfaces in the home care setting. Overall, the average number of domestic therapeutic surface rental units per month for the first six months of 2003 declined 5.7% as compared to the prior-year period, but this decline was offset by a 4.1% price increase resulting from changes in our product mix.

        Revenue from our international operating unit for the first six months of 2003, including the favorable effects of foreign currency exchange rate fluctuations, increased $25.3 million, or 43.0%, over the comparable period in 2002. The majority of our international revenue is generated in the acute care setting. International rental revenue increased $17.0 million, or 43.5%, from the prior-year period and sales revenue was up $8.3 million, or 42.2%, compared to the prior year. Favorable foreign

43

currency exchange movements accounted for $11.6 million of the total international revenue increase when compared to the prior year period. On a constant exchange basis, total international revenue increased $13.8 million, or 21.8%, from the prior-year period, rental revenue increased $9.2 million, or 21.9%, and sales revenue increased $4.6 million, or 21.7%. The rental revenue increase reflects a 58.8% increase in V.A.C. systems out on rent along with a 5.2% increase in therapeutic surface rental units in use, primarily in overlays. We also experienced improved rental pricing for our V.A.C. systems and our therapeutic surfaces for the six months ended June 30, 2003 as compared to the same period in the prior year. The international sales increase was due to increased demand for V.A.C. systems and related disposables.

        Rental Expenses.    Rental, or "field," expenses of $166.5 million for the six-month period increased $38.0 million, or 29.6%, from $128.4 million in the prior-year period. The field expense increase was due primarily to increased labor, incentive compensation, parts, and product licensing expenses directly associated with the growth in V.A.C. therapy revenue. Of the $38.0 million variance in rental expenses for the six months ended June 30, 2003, approximately $7.9 million resulted from favorable foreign currency exchange movements. Field expenses for the first half of 2003 represented 61.6% of total rental revenue compared to 61.4% in the first half of 2002.

        Cost of Goods Sold.    Cost of goods sold of $28.4 million in the first six months of 2003 increased $7.0 million, or 32.7%, from $21.4 million in the prior year due to increased sales of V.A.C. disposables and higher excess and obsolescence inventory reserve provisions related to therapeutic surface products with low demand. Sales margins increased to 64.0% in the first six months of 2003 as compared to 61.3% in the prior-year period due to the shift away from all-inclusive pricing arrangements discussed above and cost reductions resulting from favorable pricing in our global supply contract for V.A.C. disposables entered into in December 2002.

        Gross Profit.    Gross profit in the first six months of 2003 increased approximately $39.8 million, or 34.7%, to $154.2 million from $114.5 million in the prior year due primarily to the year-to-year increase in revenue resulting from increased demand for V.A.C. systems and related disposables. Gross profit margin in the first six months of 2003 was 44.2%, up slightly from 43.3% in the prior year due primarily to the increase in revenue discussed above.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased $21.6 million, or 33.9%, to $85.4 million in the first six months of 2003 from $63.8 million in the prior-year period. This increase was due primarily to an increase in variable costs associated with increased revenue from V.A.C. systems along with increases in insurance costs of $2.0 million and professional fees of $2.6 million. As a percentage of total revenue, selling, general and administrative expenses increased slightly to 24.5% in the first six months of 2003 as compared to 24.1% in the first six months of 2002.

        Operating Earnings.    Operating earnings for the first six months of 2003 increased $18.1 million, or 35.8%, to $68.8 million compared to $50.7 million in the prior-year period. The increase in operating earnings was directly attributable to the increase in revenue, partially offset by higher operating costs and expenses. Operating margins for the first six months of 2003, were 19.7%, up from 19.2% in the prior-year period, due to the increase in revenue without a corresponding increase in costs and expenses.

        Non-GAAP Measure.    We find earnings before interest expense, taxes and depreciation and amortization, or EBITDA, to be useful for measuring our ability to service our debt and our ability to generate cash for other purposes. EBITDA is a non-GAAP measure and should not be considered in isolation from, and is not intended to represent an alternative measure of, operating or net earnings or cash flow or any other measure of performance determined in accordance with GAAP. In addition, our definition of EBITDA is not necessarily comparable to similarly titled measures reported by other

44

companies. The following table presents a reconciliation of EBITDA to net earnings, which we believe is the most directly comparable financial measure in accordance with GAAP for the six months ended June 30, 2003 and 2002 (dollars in thousands):

		Six Months Ended June 30,
		2002		2003
Net earnings		$	20,029	$	35,945
Interest expense			20,692		16,228
Depreciation and amortization(1)			16,505		20,833
Income taxes			12,538		21,567
	EBITDA	$	69,764	$	94,573

(1)

Excludes amortization of loan issuance costs, which is included in interest expense.

        EBITDA for the first six months of 2003 increased $24.8 million, or 35.6%, from the prior-year period due substantially to the change in operating earnings discussed above.

        Interest Expense.    Interest expense in the first six months of 2003 was $16.2 million compared to $20.7 million in the prior year. The interest expense decrease was due primarily to the partial paydown on our existing credit facility resulting from the $175 million litigation settlement payment received in January 2003. (See notes 5 and 9 to the unaudited condensed consolidated financial statements included elsewhere in this prospectus.)

        Net Earnings.    Net earnings of $35.9 million for the first six months of 2003 increased $15.9 million, or 79.5%, from the prior-year period due to the increase in operating earnings discussed above. Effective tax rates for the first six months of 2003 and 2002 were 37.5% and 38.5%, respectively.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

        The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue as well as the change in each line item as compared to the prior year (dollars in thousands):

			Year Ended December 31,
			Revenue Relationship				Variance
			2001		2002		$			%
Revenue:
	Rental and service		79	%	78	%	$	91,426		25.3	%
	Sales and other		21		22			31,589		33.5
		Total revenue	100		100			123,015		27.0
Rental expenses			49		48			55,640		25.2
Cost of goods sold			7		9			18,872		57.3
		Gross profit	44		43			48,503		24.0
Selling, general and administrative expenses			25		24			26,766		23.3
Unusual item-litigation settlement			—		(30	)		(173,250	)	nm
		Operating earnings(1)	19		49			194,987		222.3
Interest income			—		—			216		77.1
Interest expense			(10	)	(7	)		4,173		9.2
Foreign currency gain			—		1			5,573		340.2
		Earnings before income taxes	9		43			204,949		497.4
Income taxes			4		17			78,694		454.7
		Net earnings	5	%	26	%	$	126,255		528.2	%

(1)

Operating earnings for 2002 includes an unusual gain of $173.3 million, before taxes, as described in "—Liquidity and Capital Resources."

45

        Total Revenue.    Our revenue is divided between two primary operating segments: USA and International. The following table sets forth, for the periods indicated, the amount of revenue derived from each of these segments (dollars in thousands):

			Year Ended December 31,
							Variance
			2001		2002		$			%
USA
V.A.C.
	Rental		$	134,428	$	214,979	$	80,551		59.9	%
	Sales			31,814		53,245		21,431		67.4
		Total V.A.C.		166,242		268,224		101,982		61.3
Therapeutic surfaces/other
	Rental			156,704		150,793		(5,911	)	(3.8	)
	Sales			31,177		27,770		(3,407	)	(10.9	)
		Total therapeutic surfaces/other		187,881		178,563		(9,318	)	(5.0	)
Total USA rental				291,132		365,772		74,640		25.6
Total USA sales				62,991		81,015		18,024		28.6
Subtotal—USA			$	354,123	$	446,787	$	92,664		26.2	%
International
V.A.C.
	Rental		$	11,577	$	21,946	$	10,369		89.6	%
	Sales			12,182		23,244		11,062		90.8
		Total V.A.C.		23,759		45,190		21,431		90.2
Therapeutic surfaces/other
	Rental			58,924		65,343		6,419		10.9
	Sales			19,141		21,642		2,501		13.1
		Total therapeutic surfaces/other		78,065		86,985		8,920		11.4
Total International rental				70,501		87,289		16,788		23.8
Total International sales				31,323		44,886		13,563		43.3
		Subtotal—International	$	101,824	$	132,175	$	30,351		29.8	%
		Total revenue	$	455,947	$	578,962	$	123,015		27.0	%

        Total revenue in 2002 increased $123.0 million, or 27.0%, from the prior year due to increased demand for V.A.C. systems and related disposables. Rental revenue increased $91.4 million, or 25.3%, from 2001 while sales revenue increased $31.6 million, or 33.5%, compared to the prior year. This revenue growth was driven by sales and marketing efforts, which increased customer awareness of the benefits of V.A.C. therapy, as well as the launch of two new enhanced V.A.C. systems in 2002.

        Total domestic revenue for 2002 increased $92.7 million, or 26.2%, from the prior year due to increased usage of V.A.C. systems which was offset by a slight decline in surface and compression therapy systems use. Domestic rental revenue in 2002 increased $74.6 million, or 25.6%, from 2001 and domestic sales revenue in 2002 increased approximately $18.1 million, or 28.6%, from 2001. The increases in domestic rental and sales revenue are due primarily to increased V.A.C. systems rentals resulting in increased demand for associated disposables.

        Domestic V.A.C. revenue increased $102.0 million, or 61.3%, from 2001 due to an increase of both rental and sales revenue. Average units on-rent increased 61.7% for the year which was partially offset by a decline in average price of 1.1%.

46

        Domestic therapeutic surface revenue decreased $9.3 million, or 5.0%, due to lower unit volume in the extended and home care markets and lower average pricing caused in part by the negotiation and extension of a GPO contract with Novation, LLC, which became effective September 2001, which was partially offset by higher utilization of bariatric therapeutic surfaces.

		Years Ended December 31,
						Variance
Domestic therapeutic surfaces/other revenue
		2001		2002		$			%
Acute/extended		$	162,528	$	158,815	$	(3,713	)	$	(2.3	)%
Home			11,860		9,769		(2,091	)		(17.6	)
Vascular-compression therapy			13,493		9,979		(3,514	)		(26.0	)
	Total	$	187,881	$	178,563	$	(9,318	)		(5.0	)%

        Average acute/extended care therapeutic surface units on-rent were substantially unchanged compared to the prior year. Acute care units increased 3.7% due primarily to higher utilization of the FirstStep line and bariatric therapeutic surfaces. The acute care unit increase was offset by a volume decrease in the extended care market of 11.0% due to customer concerns arising from reimbursement pressures. Average home care therapeutic surface rental units on-rent decreased 22.1% due to continued competition in this market and our focus on the V.A.C. in the home market. Overall, average domestic therapeutic surface units on-rent for 2002 declined 2.3% as compared to the prior year.

        Revenue from our international operating unit for 2002, including the favorable effects of foreign currency exchange rate fluctuations, increased approximately $30.3 million, or 29.8%, over 2001. International rental revenue increased $16.8 million, or 23.8%, from 2001 and sales revenue was up approximately $13.5 million, or 43.3%, compared to the prior year. The rental revenue increase reflects higher therapeutic surface rental units in use in a majority of markets and growth in usage of V.A.C. systems. Growth in V.A.C. systems and therapeutic surface units, primarily in overlays, was partially offset by lower overall prices. The international sales increase was primarily due to increased demand for V.A.C. systems and related disposables. International therapeutic surface/other revenue was up $8.9 million, or 11.4%, due primarily to higher rentals in Canada, Germany, Italy, France, Austria and Australia, and higher sales in the United Kingdom, Austria, France and Australia, which were partially offset by lower sales in Germany. Favorable foreign currency exchange movements added approximately $4.7 million to total international revenue when compared to 2001. On a constant exchange basis, total international revenue increased $25.6 million, or 25.1%, from the prior year; rental revenue increased $13.7 million, or 19.5%, and sales revenue increased $11.9 million, or 37.8%.

        Rental Expenses.    Rental, or "field", expenses of $276.1 million increased $55.6 million, or 25.2%, from $220.5 million in the prior year. The field expense increase was due primarily to increased labor, product marketing, parts, supplies and product licensing expenses directly associated with the growth in V.A.C. revenue. Field expenses for 2002 represented 60.9% of total rental revenue compared to 61.0% in 2001.

        Cost of Goods Sold.    Cost of goods sold of $51.8 million in 2002 increased approximately $18.8 million, or 57.3%, from $33.0 million in the prior year due to increased V.A.C. disposable sales and higher excess and obsolescence inventory reserve provisions related to therapeutic surface products with low demand. Sales margins decreased to 58.8% in 2002 as compared to 65.1% in the prior year due, in part, to higher sales activity in the home care setting. Approximately 34.0% of home care revenue in 2002 was reimbursed by managed care and private insurance organizations. Many managed care providers prefer an all-inclusive per diem rate, which covers the cost of the rental and all disposables used. This per diem rate is recorded as rental revenue and is not allocated between rentals and sales. However, the all-inclusive managed care revenue was recorded as rental revenue, while the cost of V.A.C. disposables associated with these placements has been recorded in cost of goods sold.

47

        Gross Profit.    Gross profit in 2002 increased $48.5 million, or 24.0%, to $251.0 million from $202.5 million in the prior year due primarily to the year-to-year increase in revenue resulting from increased demand for V.A.C. systems and related disposables. Gross profit margin in 2002 was 43.4%, down slightly from 44.4% in 2001 due primarily to investing in sales and service to drive future revenue.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased $26.8 million, or 23.3%, to $141.6 million in 2002 from $114.8 million in 2001. This increase was due, in part, to higher administrative labor costs associated with hiring additional personnel for claims billing, and for consulting fees associated with the increased usage of V.A.C. systems and related disposables, particularly in the home. The 2002 results also included approximately $7.9 million of legal expenses associated with the antitrust lawsuit filed against Hillenbrand compared to $4.3 million in the prior year.

        Incentive compensation, engineering, depreciation, marketing, research and development expenses and provisions for insurance expense were all higher in the current year when compared to 2001. Expenditures for research and development represented approximately 3.1% of our total operating expenditures for the current year compared to 3.2% in 2001. On a comparable basis, as a percentage of total revenue, selling, general and administrative expenses of 25.0% in 2002 were flat compared to the prior year.

        The results for 2002 also reflect an accounting change required under Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. Under SFAS 142, goodwill and other intangible assets that have indefinite lives are no longer amortized ratably over the estimated useful life of the asset. The effect of this change in 2002 was to lower goodwill amortization by $3.4 million as compared to the prior year. (See note 5 to the consolidated financial statements included elsewhere in this prospectus.)

        Unusual Item—Litigation Settlement.    During the fourth quarter of 2002, we recorded a gain from the favorable settlement of an antitrust lawsuit filed against Hillenbrand. Net of expenses of $1.7 million, this transaction added $173.3 million of pre-tax income to the 2002 results. (See note 16 to consolidated financial statements included elsewhere in this prospectus.)

        Operating Earnings.    Operating earnings for 2002 increased $195.0 million, or 222.4%, to $282.7 million compared to $87.7 million in the prior year. Excluding the favorable effects of the litigation settlement, operating earnings would have increased $21.7 million, or 24.8%, to $109.4 million. The increase in operating earnings was directly attributable to the increase in revenue, partially offset by higher operating costs and expenses. Operating margins for 2002, excluding the favorable effects of the litigation settlement, were 18.9%, down slightly from 19.2% in the prior year, due to the increase in cost of goods sold plus higher spending for the international sales and service infrastructure, claims administration and higher legal expenses.

        Non-GAAP Measure.    We find earnings before interest expense, taxes and depreciation and amortization to be useful for measuring our ability to service our debt and our ability to generate cash for other purposes. EBITDA is a non-GAAP measure and should not be considered in isolation from, and is not intended to represent an alterative measure of, operating or net earnings or cash flow or any other measure of performance determined in accordance with GAAP. The following table represents a

48

reconciliation of EBITDA to net earnings which we believe is the most directly comparable financial measure under GAAP for the years ended December 31, 2002 and 2001 (dollars in thousands):

	Year Ended December 31,
	2001		2002
Net earnings	$	23,901	$	150,156
Interest expense		45,116		40,943
Depreciation and amortization(1)		34,899		34,682
Income taxes		17,307		96,001
EBITDA	$	121,223	$	321,782

(1)

Excludes amortization of loan issuance costs, which is included in interest expense.

        EBITDA for 2002 increased $200.6 million, or 165.4%, from the prior year due to the change in operating earnings discussed above, including the effects of the favorable settlement of an antitrust litigation against Hillenbrand. Amortization expense was lower year-to-year due to the change in accounting for goodwill as required by SFAS 142, Goodwill and Other Intangible Assets. (See note 5 to the consolidated financial statements included elsewhere in this prospectus.)

        Interest Expense.    Interest expense in 2002 was $40.9 million compared to $45.1 million in the prior year. The interest expense decrease was due to lower effective interest rates associated with our existing senior credit facility. (See note 4 to the consolidated financial statements included elsewhere in this prospectus.)

        Net Earnings.    Net earnings of $150.2 million for 2002 increased $126.3 million, or 528.2%, from the prior year due to the increase in operating earnings discussed previously, including the favorable impact of the litigation settlement. Excluding the litigation settlement, net earnings increased $19.8 million, or 83.0%, to $43.7 million. Effective tax rates for 2002 and 2001 were 39.0% and 42.0%, respectively.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

        The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue as well as the change in each line item as compared to the prior year (dollars in thousands):

				Year Ended December 31,
			��	Revenue Relationship				Variance
				2000		2001		$			%
Revenue:
	Rental and service			78	%	79	%	$	87,303		31.8	%
	Sales and other			22		21			16,612		21.4
		Total revenue		100		100			103,915		29.5
Rental expenses				50		49			44,093		25.0
Cost of goods sold				8		7			3,307		11.2
		Gross profit		42		44			56,515		38.7
Selling, general and administrative expenses				23		25			34,534		43.0
		Operating earnings		19		19			21,981		33.5
Interest income				—		—			(617	)	(68.8	)
Interest expense				(14	)	(10	)		3,519		7.2
Foreign currency gain (loss)				(1	)	—			720		30.5
		Earnings before income taxes		4		9			25,603		164.1
Income taxes				1		4			10,831		167.2
		Net earnings (loss)		3	%	5	%	$	14,772		161.8	%

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        Due to improvements in financial systems and processes, we began reporting international results on a current-month basis effective December 2000. Historically, we had presented international results using a one-month delay. As a result of this change, the 2000 fiscal year included a 13th monthly period for the international segment which increased reported revenue and operating earnings by approximately $8.0 million and $1.1 million, respectively. Unless otherwise noted, the results reported herein include the international 13th month for fiscal 2000.

        Total Revenue.    Our revenue is divided between two primary operating segments: USA and International. The following table sets forth, for the periods indicated, the amount of revenue derived from each of these segments (dollars in thousands):

			Year Ended December 31,
							Variance
			2000		2001		$			%
USA
V.A.C.
	Rental		$	55,343	$	134,428	$	79,085		142.9	%
	Sales			14,637		31,814		17,177		117.3
		Total V.A.C.		69,980		166,242		96,262		137.6
Therapeutic surfaces/other
	Rental			153,852		156,704		2,852		1.9
	Sales			32,750		31,177		(1,573	)	(4.8	)
		Total therapeutic surfaces/other		186,602		187,881		1,279		0.7
Total USA rental				209,195		291,132		81,937		39.2
Total USA sales				47,387		62,991		15,604		32.9
		Subtotal—USA	$	256,582	$	354,123	$	97,541		38.0	%
International
V.A.C.
	Rental		$	7,510	$	11,577	$	4,067		54.2	%
	Sales			8,256		12,182		3,926		47.6
		Total V.A.C.		15,766		23,759		7,993		50.7
Therapeutic surfaces/other
	Rental			57,625		58,924		1,299		2.3
	Sales			22,059		19,141		(2,918	)	(13.2	)
		Total therapeutic surfaces/other		79,684		78,065		(1,619	)	(2.0	)
Total International rental				65,135		70,501		5,366		8.2
Total International sales				30,315		31,323		1,008		3.3
		Subtotal—International	$	95,450	$	101,824	$	6,374		6.7	%
		Total revenue	$	352,032	$	455,947	$	103,915		29.5	%

        Total revenue in 2001 increased $103.9 million, or 29.5%, from the prior year due to increased demand for V.A.C. systems and related disposables. Rental revenue increased $87.3 million, or 31.8%, from 2000 while sales revenue increased $16.6 million, or 21.4%, compared to the prior year. Excluding the international 13th month for 2000, total revenue increased $111.9 million, or 32.5%, from 2000.

        Total domestic revenue for 2001 increased $97.5 million, or 38.0%, from the prior year due primarily to increased usage of V.A.C. systems. Domestic rental revenue increased $81.9 million, or 39.2%, due primarily to increased V.A.C. rentals. Domestic sales revenue increased $15.6 million, or 32.9%, from the prior year. This sales increase resulted from higher V.A.C. disposable sales, which were

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partially offset by lower sales of vascular products. The V.A.C. growth resulted from higher unit demand due to increased customer awareness of the benefits of V.A.C. therapy and the start of Medicare reimbursement for V.A.C. usage in the home setting. Domestic V.A.C. revenue increased $96.3 million, or 137.6%, in 2001 over 2000 due primarily to a 160.3% increase in average units on-rent, which was somewhat offset by a decline in average price realized of 6.6%. Domestic therapeutic surface and other revenue in 2001 increased, approximately $1.3 million, or 0.7%, over 2000, due to higher units on-rent in the acute and extended markets offset by lower units on-rent in the home care market and an approximate 3.3% increase in average price arising mostly from product mix changes in the extended and home care market. Improved product mix, including increased demand for pulmonary and bariatric products, resulted in higher average rental prices during 2001.

		Year Ended December 31,
						Variance
		2000		2001		$			%
Domestic therapeutic surfaces/other revenue
Acute/extended care		$	157,141	$	162,526	$	5,385		3.4	%
Home			13,699		11,860		(1,839	)	(13.4	)
Vascular-compression therapy			15,762		13,495		(2,267	)	(14.4	)
	Total	$	186,602	$	187,881	$	1,279		0.7	%

        Domestic therapeutic surface volumes for the year were up in both the acute and extended care settings but were substantially offset by lower home care therapeutic surface rentals caused by increased competition and the increased focus on V.A.C. placements in the home care market during 2001. Revenue from our international operating unit in 2001 increased $6.4 million, or 6.7%, net of foreign currency exchange rate fluctuations. The international revenue increase in 2001 reflects higher patient therapeutic surface rental units in a majority of the international division's markets caused by a marketing focus in those markets and growth in V.A.C. systems and related disposables usage caused by increased customer awareness of the benefits associated with V.A.C. technology, partially offset by unfavorable currency exchange fluctuations. Growth in rental volume for the period, primarily in overlays and V.A.C. systems, was partially offset by lower overall prices. The increase in international sales revenue was primarily due to increased demand for V.A.C. related disposables, offset by unfavorable currency exchange fluctuations and decreases in surface sales of 13.2%. International revenue unrelated to V.A.C. systems was down $1.6 million, or 2.0%, due primarily to lower home care sales in the German market and unfavorable currency exchange rate variances. Excluding the international 13th month for fiscal 2000, total international revenue increased $14.4 million, or 16.4%; rental revenue increased $10.8 million, or 18.0%, and sales revenue increased $3.6 million, or 12.9%. On a comparable, constant exchange basis and excluding the international 13th month, total international revenue increased $19.9 million, or 26.1%, rental revenue increased $14.4 million, or 27.6%, and sales revenue increased $5.5 million, or 22.9%.

        Rental Expenses.    Rental, or "field", expenses of $220.5 million increased $44.1 million, or 25.0%, from $176.4 million in the prior year. The field expense increase was due primarily to increased labor, marketing, parts, disposables, travel and product licensing expenses associated with the growth in V.A.C. revenue and was partially offset by currency fluctuations. Field expenses for 2001 represented 61.0% of total rental revenue compared to 64.3% in 2000. This relative decrease is attributable to the increase in rental revenue combined with a relatively fixed cost structure. Excluding the international 13th month, field expenses would have increased $48.7 million, or 28.4%, from $171.7 million in 2000.

        Cost of Goods Sold.    Cost of goods sold of $33.0 million in 2001 increased approximately $3.4 million, or 11.2%, from $29.6 million in the prior year due to higher sales volumes arising from increased V.A.C. disposable sales associated with V.A.C. rentals. Sales margins increased to 65.1% in

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2001 as compared to 61.8% in the prior year due to improved product mix and favorable manufacturing variances. On a comparable basis, excluding the international 13th month for 2000, cost of goods sold increased $4.4 million, or 15.6%.

        Gross Profit.    Gross profit increased $56.5 million, or 38.7%, to $202.5 million in 2001 from $146.0 million in 2000 due primarily to the year-to-year increase in rental revenue resulting from increased demand for V.A.C. systems and related disposables. On a comparable basis, excluding the international 13th month, gross profit increased $58.7 million, or 40.8%, from the prior year. Gross profit margin in 2001, on a comparable basis, was 44.4%, up from 41.8% in 2000.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased $34.5 million, or 43.0%, to $114.8 million in 2001 from $80.3 million in 2000. This increase was due primarily to higher labor costs, claims billings costs and consulting associated with the increased rentals and sales of V.A.C. systems and related disposables.

        In addition, incentive compensation, engineering, depreciation, research and development expenses and provisions for bad debts and insurance expense were higher in the current year when compared to 2000. On a comparable basis, as a percentage of total revenue, selling, general and administrative expenses were 25.2% in 2001 compared to 23.0% in 2000. Excluding the international 13th month for 2000, selling, general and administrative expenses increased $35.6 million, or 45.0%, from the prior year.

        Operating Earnings.    Operating earnings for 2001 increased $22.0 million, or 33.5%, to $87.7 million compared to $65.7 million in 2000. On a comparable basis, operating earnings increased $23.0 million, or 35.7%, from the prior year. The increase in operating earnings was directly attributable to the increase in rental revenue, largely offset by higher operating costs and expenses. On a comparable basis, operating profit margin in 2001 was 19.2%, up slightly from 18.8% in 2000.

        Non-GAAP Measure.    We find earnings before interest expense, taxes and depreciation and amortization to be useful for measuring our ability to service our debt and our ability to generate cash for other purposes. EBITDA is a non-GAAP measure and should not be considered in isolation from, and is not intended to represent an alternative measure of, operating or net earnings or cash flow or any other measure of performance determined in accordance with GAAP. The following table presents a reconciliation of EBITDA to net earnings which we believe is the most directly comparable financial measure in accordance with GAAP for the years ended December 31, 2001 and 2000 (dollars in thousands):

	Year Ended December 31,
	2000		2001
Net earnings	$	9,129	$	23,901
Interest expense		48,635		45,116
Depreciation and amortization(1)		32,466		34,899
Income taxes		6,476		17,307
EBITDA	$	96,706	$	121,223

(1)

Excludes amortization of loan issuance costs, which is included in interest expense.

        EBITDA for 2001 increased $24.5 million, or 25.4%, from the prior year due to the change in operating earnings discussed above.

        Interest Expense.    Interest expense in 2001 was $45.1 million compared to $48.6 million in 2000. The interest expense decrease was due to lower effective interest rates associated with our existing

52

senior credit facility obtained through fixed-rate interest contracts. (See note 4 to the consolidated financial statements included in this prospectus.)

        Net Earnings.    Net earnings in 2001 increased approximately $14.8 million, or 161.8%, from the prior year to $23.9 million due to the increase in operating earnings discussed previously. On a comparable basis, excluding the international 13th month for 2000, net earnings increased $15.5 million, or 185.7%. Effective income tax rates for 2001 and 2000 were 42.0% and 41.5%, respectively.

Liquidity and Capital Resources

General

        We require capital principally for capital expenditures, systems infrastructure, debt service and working capital, including the need for additional office space for our expanding workforce. Our capital expenditures consist primarily of manufactured rental assets and computer hardware and software. Working capital is required principally to finance accounts receivable and inventory. Our working capital requirements vary from period to period depending on manufacturing volumes, the timing of shipments and the payment cycles of our customers and payers.

Sources of Capital

        During the next twelve months, we expect our principal sources of capital to be cash flows from operating activities and availability under the new revolving credit facility. Based upon the current level of operations, we believe these sources of capital will be adequate to meet our anticipated cash requirements for interest payments, working capital and capital expenditures through 2004. Due to the anticipated growth in demand for V.A.C. systems going forward, slower payment cycles associated with certain payers and increased capital expenditures and working capital required to support and maintain such growth, our ability to generate cash flow sufficient to meet our 2005, 2006 and 2007 debt amortization requirements may be negatively impacted. In such an event, we may attempt to refinance all or a portion of our indebtedness, sell assets or raise funds in the capital markets. We cannot give any assurance that we will be successful in raising additional capital.

        During the first six months of 2003, our primary source of capital was cash from operations. The following table summarizes the net cash provided and used by operating activities, financing activities and investing activities for the six month periods ended June 30, 2003 and 2002 (dollars in thousands):

		Six Months Ended June 30,
		2002			2003
Net cash provided by operating activities		$	23,927		$	198,705	(1)
Net cash used by investing activities			(32,369	)		(37,696	)
Net cash provided (used) by financing activities			17,096			(114,010	)(2)
	Total	$	8,654		$	46,999

(1)

Includes receipt of $130.0 million, net of taxes paid, related to the Hillenbrand antitrust settlement.

(2)

Includes paydown of $107.0 million of indebtedness on the old senior credit facility utilizing funds received related to the Hillenbrand antitrust settlement.

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        At June 30, 2003, cash and cash equivalents of $103.0 million were available for general corporate purposes. On a pro forma basis assuming the consummation of the recapitalization as of June 30, 2003, cash and cash equivalents of $44.8 million would have been available for general corporate purposes and $89.1 million would have been available under the revolving portion of the new senior credit facility. (See "Summary—The Recapitalization.") We are committed to purchase approximately $16.9 million of inventory associated with new products over the next twelve months as of June 30, 2003. We did not have any other material purchase commitments as of June 30, 2003.

Working Capital

        At June 30, 2003, we had current assets of $308.2 million and current liabilities of $143.0 million resulting in a working capital surplus of $165.2 million, compared to a surplus of $243.9 million at December 31, 2002. The paydown of amounts outstanding under our existing senior credit facility with funds from the payment received pursuant to the Hillenbrand settlement accounted for a majority of this change. Operating cash flows for the first six months of 2003 were $198.7 million as compared to $23.9 million for the prior-year period. This increase in operating cash flows was due primarily to the Hillenbrand settlement, higher net earnings for the period of $15.9 million and improved working capital management. On a pro forma basis assuming the consummation of the recapitalization as of June 30, 2003, we would have had current assets of $250.0 million and current liabilities of $127.7 million. (See "Summary—The Recapitalization.")

        During the remainder of 2003, we expect demand for V.A.C. systems and related disposables to continue to increase, which could have the effect of increasing accounts receivable due to extended payment cycles for third party payers. We have adopted a number of policies and procedures to reduce these extended payment cycles, which we believe have been effective and will continue to improve our collection turnaround times. For example, our revenue for the first six months of 2003 grew 32.1% over the prior-year period and our receivables have increased only 15.3% for the same period. If we were to have an increase in accounts receivable, we would expect to manage such an increase with available cash on hand and, if necessary, through increased borrowing under our credit arrangements, the refinancing of existing indebtedness or through the incurrence of additional indebtedness through new lending arrangements. We expect that cash on hand, cash flow from operations and additional borrowings under our credit agreements will be sufficient to meet our working capital needs.

Capital Expenditures

        During the first six months of 2003, we made net capital expenditures of $35.0 million compared to $27.6 million in the prior-year period. The period-to-period increase is primarily due to purchases of materials for V.A.C. systems and other high-demand rental products. As of June 30, 2003, we have commitments to purchase new product inventory of $16.9 million over the next twelve months. Other than commitments for new product inventory we have no material long-term purchase commitments. We expect future demand for V.A.C. systems to increase, which will require increased capital expenditures over time.

Debt Service

        As part of the recapitalization, we issued $205.0 million aggregate principal amount of our Series A 7³/8% Senior Subordinated Notes Due 2013, which we refer to throughout this prospectus as the old notes. Concurrently with the offering of the old notes, we entered into a new senior credit facility, under which we have borrowed $480.0 million in term loans. As of June 30, 2003, on a pro forma basis assuming the consummation of the recapitalization as of such date, scheduled principal payments under the new senior credit facility for the years 2003, 2004 and 2005 would have been $2.4 million, $4.8 million and $4.8 million, respectively.

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Senior Credit Facility

        The new senior credit facility consists of $480.0 million in term loans and a $100.0 million revolving credit facility. The following table sets forth the amounts owing under each term loan and the revolving credit facility, the effective interest rates on such outstanding amounts, and amounts available for additional borrowing thereunder, as of August 31, 2003 (dollars in thousands):

Senior Credit Facility		Effective Interest Rate (1)	Amounts Outstanding		Amounts Available for Additional Borrowing
Revolving Credit Facility		—	$	—	$	88,700	(2)
Term Loan Facility		3.87%		480,000		—
	Total		$	480,000	$	88,700

(1)

Effective interest rates do not take into account existing interest rate hedging arrangements.

(2)

Amounts available under the revolving portion of our credit facility are reduced by $11.3 million of letters of credit issued on our behalf, none of which have been drawn upon by the beneficiaries thereunder.

        The new senior credit facility contains affirmative and negative covenants customary for similar facilities and transactions, including, but not limited to, quarterly and annual financial reporting and limitations on other debt, other liens or guaranties, mergers or consolidations, asset sales, certain investments, distributions to shareholders or share repurchases, early retirement of subordinated debt, capital expenditures, changes in the nature of the business, changes in organizational documents and documents evidencing or related to indebtedness that are materially adverse to the interests of the lenders under the new senior credit facilities and changes in accounting policies or reporting practices.

        In addition, the new senior credit facility contains financial covenants requiring us to meet certain leverage and interest coverage ratios and maintain minimum levels of EBITDA. Specifically, we are obligated not to permit:

•

for any period of four consecutive quarters ending at the end of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, the ratio of EBITDA to consolidated cash interest expense to be less than certain specified ratios ranging from 4.30 to 1.00, as defined in the new senior credit facility, for the fiscal quarter ending December 31, 2003 to 5.50 to 1.00 for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter;



•

as of the last day of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, the leverage ratio to be greater than certain specified leverage ratios ranging from 4.30 to 1.00 for the fiscal quarter ending December 31, 2003 to 2.50 to 1.00 for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter; or



•

for any period of four consecutive fiscal quarters ending at the end of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, EBITDA to be less than certain amounts ranging from $156.4 million for the fiscal quarter ending December 31, 2003 to $240.0 million for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter.

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Long Term Commitments

        The following table summarizes our contractual cash obligations as of June 30, 2003, on a pro forma basis assuming the consummation of the recapitalization, for each of the periods indicated (dollars in thousands).

Fiscal	Long-Term Debt Amortization		Capital Lease Obligations		Operating Lease Obligations		Purchase Obligations		Total
2003	$	2,400	$	151	$	16,805	$	16,931	$	36,287
2004		4,800		19		13,850		—		18,669
2005		4,800		—		11,473		—		16,273
2006		4,800		—		9,790		—		14,590
2007		4,800		—		7,633		—		12,433
2008		4,800		—		3,695		—		8,495
Thereafter		658,600		—		12,655		—		671,255

Quantitative and Qualitative Disclosure About Market Risk

        We are exposed to various market risks, including fluctuations in interest rates and variability in currency exchange rates. We have established policies, procedures and internal processes governing our management of market risk and the use of financial instruments to manage our exposure to such risk.

Interest Rate Risk

        We have variable interest rate debt and other financial instruments, which are subject to interest rate risk and could have a negative impact on our business if not managed properly. We have a risk management policy, which is designed to reduce the potential negative earnings effect arising from the impact of fluctuating interest rates. We use interest rate swap agreements to minimize the impact of fluctuating interest rates. These contracts are initiated within the guidance of corporate risk management policies and are reviewed and approved by our top financial management. We do not use financial instruments for speculative or trading purposes.

        On December 31, 2002, two of our then-existing interest rate swap agreements expired. Because of unfavorable movements in interest rates under the agreements in 2002 and 2001, we incurred additional interest expense of approximately $2.8 million and $2.1 million in 2002 and 2001, respectively.

        As of December 31, 2002, two $100 million interest rate swap agreements were in effect to take advantage of low interest rates. On January 31, 2003, we sold $20 million of our $100 million, 1.745% interest rate swap effective March 31, 2003 which resulted in an expense of approximately $74,000 which was recorded in the first quarter of 2003. As of June 30, 2003, the current interest rate swap agreements effectively fix the base-borrowing rate on 86% of our variable interest rate debt. The fair value of these swaps at inception was zero. Due to subsequent movements in interest rates, as of June 30, 2003, the fair values of the $80 million and $100 million swap agreements were negative and were adjusted to reflect a liability of approximately $300,000 and $1.6 million, respectively. Both of these swap agreements are still in effect. The 1.745% swap agreement matures on December 31, 2003 and the 2.375% swap agreement matures on December 31, 2004.

        Our new senior credit facility requires that we fix the base-borrowing rate applicable to at least 50% of the outstanding amount of our term loan under the new senior credit facility for a period of two years from the date of issuance.

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        In August 2003, we entered into six new interest rate swap agreements pursuant to which we fixed the rates on $250 million of our variable rate debt as follows:

2.150% per annum on $60 million of our variable rate debt through August 22, 2005;
2.130% per annum of $20 million of our variable rate debt through August 22, 2005;
2.135% per annum on $20 million of our variable rate debt through August 21, 2005;
2.755% per annum on $50 million of our variable rate debt through August 21, 2006;
2.775% per annum on $50 million of our variable rate debt through August 21, 2006;
2.788% per annum on $50 million of our variable rate debt through August 21, 2006.

        As a result of the eight swap agreements currently in effect, as of August 31, 2003, 89.6% of our variable interest rate debt outstanding is effectively fixed.

        All the swap agreements have quarterly interest payments, based on three month LIBOR, due on the last day of each March, June, September and December, commencing on September 30, 2003. The fair value of these swaps at inception was zero. Due to subsequent movements in interest rates, as of August 31, 2003, the fair values of the new swap agreements were positive.

        The table below provides information about our long-term debt and interest rate swaps, both of which are sensitive to changes in interest rates, as of the end of the 2001 and 2002 fiscal years. For long-term debt, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rated by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the field curve at the reporting date (dollars in thousands):

	December 31, 2002
	Expected maturity date
	2003		2004		2005		2006		2007		Total		Fair Value
Long-term debt
Fixed rate	—		—		—		—		$200,000		$200,000		$206,000
Average interest rate	—		—		—		—		9.625	%	9.625	%
Variable rate	$30,550		$86,750		$113,825		$90,725		—		$321,850		$321,850
Average interest rate	3.239	%	3.905	%	4.149	%	4.025	%	—		3.962	%
Interest rate swaps(1)
Variable to fixed	$100,000		$100,000		—		—		—		$200,000		$(1,341	)
Average pay rate	1.745	%	2.375	%	—		—		—		2.060	%
Average receive rate	1.400	%	1.400	%	—		—		—		1.400	%

	December 31, 2001
	Expected maturity date
	2002		2003		2004		2005		Thereafter		Total		Fair Value
Long-term debt
Fixed rate	—		—		—		—		$200,000		$200,000		$199,000
Average interest rate	—		—		—		—		9.625	%	9.625	%
Variable rate	$2,750		$42,050		$86,450		$84,650		$90,725		$306,625		$306,625
Average interest rate	5.599	%	4.719	%	5.561	%	5.806	%	5.435	%	5.476	%
Interest rate swaps(1)
Variable to fixed	$250,000		—		—		—		—		$250,000		$(2,512	)
Average pay rate	3.338	%	—		—		—		—		3.338	%
Average receive rate	1.910	%	—		—		—		—		1.910	%

(1)

Interest rate swaps are included in the variable rate debt under long-term debt.

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Foreign Currency and Market Risk

        We have direct operations in Western Europe, Canada, Australia and South Africa and distributor relationships in many other parts of the world. Our foreign operations are measured in their applicable local currencies. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we have operations. Exposure to these fluctuations is managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the applicable local currency.

        We maintain no other derivative instruments to mitigate our exposure to translation and/or transaction risk. International operations reported operating profit of $18.3 million for the year ended December 31, 2002. It is estimated that a 10% fluctuation in the value of the dollar relative to these foreign currencies at December 31, 2002 would change our net income for the year ended December 31, 2002 by approximately $1.3 million. Our analysis does not consider the implications that such fluctuations could have on the overall economic activity that could exist in such an environment in the U.S. or the foreign countries or on the results of operations of these foreign entities.

Critical Accounting Policies

        The SEC defines critical accounting policies as those that are, in management's opinion, very important to the portrayal of our financial condition and results of operations and require our management's most difficult, subjective or complex judgments. We are not aware of any reasonably possible events or circumstances that would result in different amounts being reported that would have a material effect on our results of operations or financial position. However, in preparing our financial statements in accordance with generally accepted accounting principles in the United States, we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex. Consequently, actual results could differ from our estimates. The accounting policies that are most subject to important estimates or assumptions include those described below. (See note 1 to the consolidated financial statements included elsewhere in this prospectus for further description of these items.)

Revenue Recognition

        We recognize revenue in accordance with Staff Accounting Bulletin No. 101 when each of the following four criteria are met:

1.

A contract or sales arrangement exists.



2.

Products have been shipped and title has transferred or services have been rendered.



3.

The price of the products or services is fixed or determinable.



4.

Collectibility is reasonably assured.

        We recognize rental revenue based on the number of days a product is in use by the patient/facility and the contracted rental rate. Reductions to rental revenue are recorded to provide for payment adjustments including (1) capitation agreements, (2) evaluation/free trial days, (3) credit memos, (4) rebates, (5) pricing adjustments, (6) utilization adjustments, (7) cancellations and (8) payer adjustments. In addition, we establish reserves against revenue to allow for uncollectible items relating to (1) unbilled receivables over 60 days old and (2) patient co-payments, based on historical collection experience.

Accounts Receivable—Allowance for Doubtful Accounts

        We utilize a combination of factors in evaluating the collectibility of account receivables. For unbilled receivables, we establish reserves against revenue to allow for denied or uncollectible items beginning at 60 days after the end of service or usage. Items that remain unbilled for more than

58

90 days or beyond an established billing window are reversed out of revenue and receivables. For billed receivables, we generally establish reserves for bad debt based on the length of time that the receivables are past due. The reserve rates vary by payer group and are based upon our historical experience on a weighted average basis. The reserves range in value from 0% for current amounts to 100% for amounts over 180 days for certain payer groups. In addition, we have recorded specific reserves for bad debt when we become aware of a customer's inability to satisfy its debt obligations, such as in the event of a bankruptcy filing. If circumstances change such as, higher than expected claims denials, payment defaults or an unexpected material adverse change in a major customer's or payer's ability to meet its obligations, our estimates of the realizability of amounts due from trade receivables could be reduced by a material amount. (See note 1 to the consolidated financial statements included elsewhere in this prospectus.)

Goodwill and Other Intangible Assets

        Goodwill represents the excess purchase price over the fair value of net assets acquired. Goodwill represented 7.5% and 12.5% of total assets at December 31, 2002 and December 31, 2001, respectively. Effective January 1, 2002, we applied the provisions of Statement of Financial Accounting Standards No. 142, ("SFAS 142"), Goodwill and Other Intangible Assets in our accounting for goodwill. SFAS 142 requires that goodwill and other intangible assets that have indefinite lives not be amortized but instead by tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that the asset might be impaired. For indefinite lived intangible assets, impairment is tested by comparing the carrying value of the asset to the fair value of the reporting unit to which they are assigned.

        Goodwill was tested for impairment during the first and fourth quarters of 2002 and will be tested for impairment at least annually, in the fourth quarter, using a two-step process. The first step is a comparison of an estimation of the fair value of a reporting unit with the reporting unit's carrying value. We have determined that our reporting units are our two operating segments—USA and International. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired, and as a result, the second step of the impairment test is not required. If required, the second step compares the fair value of reporting unit goodwill with the carrying amount of that goodwill. If we determine that reporting unit goodwill is impaired, the fair value of reporting unit goodwill would be measured by comparing the discounted expected future cash flows of the reporting unit with the carrying value of reporting unit goodwill. Any excess in the carrying value of reporting unit goodwill to the estimated fair value would be recognized as an expense at the time of the measurement. We recorded no impairments to our reporting units as a result of the implementation of SFAS 142 during 2002.

        The goodwill of a reporting unit will be tested annually or if an event occurs or circumstances change that would likely reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include, but are not limited to: a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition.

Inventory

        Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Costs include material, labor and manufacturing overhead costs. Inventory expected to be converted into equipment for short-term rental is reclassified to property, plant and equipment. We review our inventory balances monthly for excess sale products or obsolete inventory levels. Except where firm orders are on-hand, inventory quantities of sale products in excess of the last twelve months demand are considered excess and are reserved at 50% of cost. For rental products, we review both product usage and product life cycle to classify inventory as active, discontinued or obsolete. Obsolescence reserve balances are established on an increasing basis from 0% for active, high-demand products to 100% for obsolete products. The reserve is reviewed, and if necessary, adjustments made on a monthly

59

basis. We rely on historical information to support our reserve and utilize management's business judgment for "high risk" items, such as products that have a fixed shelf life. Once the inventory is written down, we do not adjust the reserve balance until the inventory is sold.

Long Lived Assets

        Property, plant and equipment are stated at cost. Betterments, which extend the useful life of the equipment, are capitalized. Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful lives (30 to 40 years for buildings and between three and five years for most of our other property and equipment) of the assets. We have not had an event that would indicate impairment of our tangible long-lived assets. If an event were to occur, we would review property, plant and equipment for impairment using an undiscounted cash flow analysis and if an impairment had occurred on an undiscounted basis, we would compute the fair market value of the applicable assets on a discounted cash-flow basis and adjust the carrying value accordingly.

Income Taxes

        We operate in multiple tax jurisdictions with different tax rates and must determine the allocation of income to each of our jurisdictions based on estimates and assumptions. In the normal course of our business, we will undergo scheduled reviews by taxing authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. Tax reviews often require an extended period of time to resolve and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates.

Legal Proceedings and Other Loss Contingencies

        We are subject to various legal proceedings, many involving routine litigation incidental to our business. The outcome of any legal proceeding is not within our complete control, is often difficult to predict and is resolved over very long periods of time. Estimating probable losses associated with any legal proceedings or other loss contingencies is very complex and requires the analysis of many factors including assumptions about potential actions by third parties. Loss contingencies are recorded as liabilities in the consolidated financial statements when it is both (1) probable or known that a liability has been incurred and (2) the amount of the loss is reasonably estimable, in accordance with Financial Accounting Standards Statement No. 5, "Accounting for Contingencies." If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. If a loss contingency is not probable or not reasonably estimable, a liability is not recorded in the consolidated financial statements.

New Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. This standard addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and to adjust its present value in each subsequent period. In addition, we must capitalize an amount equal to the adjustment by increasing the carrying amount of the related long-lived asset, which is depreciated over the remaining useful life of the related asset. We adopted SFAS 143 during the first quarter of 2003 and it did not have a significant effect on our financial position or results of operations.

        In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at

60

the time a company issues a guarantee, we must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We have adopted FIN 45 and have determined that it will not have a material impact on our financial position or results of operations.

        In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternate methods of transition for an entity that changes to the fair-value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure provisions of SFAS 123 to require expanded and more prominent disclosure of the effects of an entity's accounting policy in the summary of significant accounting policies section with respect to stock-based employee compensation. The amendment of the annual disclosure requirements of SFAS 123 is effective for fiscal years ending after December 15, 2002. We have included the amended disclosure requirement of SFAS 148 in note 1 to the consolidated financial statements included in this prospectus.

        In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," effective for fiscal years or interim periods beginning after June 15, 2003. FIN 46 addresses accounting for, and disclosure of, variable interest entities. FIN 46 requires the disclosure of the nature, purpose and exposure of any loss related to our involvement with variable interest entities. We adopted the provisions of FIN 46 for post-January 31, 2003 variable interest entities during the first quarter of 2003 and it did not have a significant effect on our financial position or results of operations. We continue to evaluate the potential effects of the consolidation provisions of FIN 46 that will be adopted during the quarter ended September 30, 2003.

        Specifically, we are evaluating the beneficial ownership of two Grantor Trusts which we acquired in December 1996 and December 1994. The assets held by each Trust consist of a McDonnell Douglas DC-10 aircraft and three engines. In connection with the acquisitions, KCI paid cash of $7.2 million and $7.6 million, respectively. The Trusts held debt of $48.4 million and $51.8 million, respectively, which is non-recourse to KCI. The DC-10 aircraft are leased to the Federal Express Corporation through June 2012 and January 2012, respectively. Federal Express pays monthly rent to a third party who, in turn, pays the entire amount to the holders of the non-recourse indebtedness, which is secured by the aircraft. The holder's recourse in event of a default is limited to the Trusts assets.

        In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends SFAS 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. The Company does not expect the adoption of SFAS 149, which will be effective for contracts entered into or modified after June 30, 2003, to have a material effect on its financial condition or results of operations.

        On May 15, 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The statement established standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 must be applied immediately to instruments entered into or modified after May 31, 2003. We have applied the terms of SFAS 150 to the convertible preferred stock issued as a part of the recapitalization and determined that it should be classified as equity and will be reported in the mezzanine section of our balance sheet. All dividends paid or accrued on the preferred stock will be reported as dividends in the statement of earnings. (See notes 1 and 11 to the consolidated financial statements included elsewhere in this prospectus for further description of these items.)

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BUSINESS

General

        Kinetic Concepts, Inc. is a global medical device company with leadership positions in (i) advanced wound care and (ii) therapeutic surfaces which treat and prevent complications resulting from patient immobility. We design, manufacture, market and service a wide range of proprietary products which can significantly improve clinical outcomes while reducing the overall cost of patient care by accelerating the healing process or preventing complications. We have an infrastructure designed to meet the specific needs of medical professionals and patients across all health care settings, including acute care hospitals, extended care facilities and patients' homes both in the United States and abroad.

        Our advanced wound care systems are transforming the treatment of difficult-to-treat wounds. These systems incorporate our proprietary Vacuum Assisted Closure, or V.A.C., technology, which has been clinically demonstrated to promote wound healing and reduce the cost of treating patients with difficult-to-treat wounds. V.A.C. systems help treat a broad spectrum of acute and chronic wounds including failed surgical closures, trauma wounds, partial thickness burns, serious pressure ulcers and diabetic ulcers and help improve outcomes of skin grafting procedures. V.A.C. systems work by applying negative pressure to wounds through proprietary foam dressings. V.A.C. therapy removes excess fluids that may interfere with wound healing, promotes growth of granulation tissue, draws the wound edges closer together, stimulates blood flow and reduces bacterial levels. V.A.C. therapy has been demonstrated to promote the healing of wounds that, in some cases, have been open for years.

        Our therapeutic surfaces, including specialty hospital beds, mattress replacement systems and overlays, are designed to address complications associated with immobility and obesity, such as pressure sores and pneumonia. These complications, if left untreated, can be life threatening. We offer a broad line of therapeutic surfaces designed to deliver pressure relief, pulmonary care and bariatric care. Our beds and mattress overlays help reduce the amount of pressure on a patient's skin by using air, foam, silicon beads or viscous fluid as support. We also manufacture beds which rotate to prevent and treat medical problems suffered by immobile patients, such as pneumonia and blood clots. Our line of bariatric care products, which are designed to accommodate obese individuals weighing up to 1,000 pounds, permits patients to be treated effectively and reduces the risk of injury to health care personnel related to handling these patients.

        Our customers generally prefer to rent our V.A.C. systems and therapeutic surfaces and purchase the related disposable products, such as V.A.C. dressings. Our network of 135 U.S. and 80 international service centers enables us to deliver products and services to our customers when needed. This allows our customers to obtain the right product for each patient when they need it, without having to purchase and store large numbers of irregularly used items, thus avoiding substantial capital investments and costs associated with complex asset management and internal logistics. Our rental model and service center network also benefit us by improving capital efficiency and facilitating our ability to introduce new products.

        We have extensive contractual relationships and reimbursement coverage for the V.A.C. in the United States. In acute and extended care, we have contracts with nearly all major hospital, and most major extended care, group purchasing organizations. Hospitals and extended care facilities pay us directly for our service. In the home care market we provide V.A.C. products and services directly to patients and bill third party payers, including Medicare and private insurance. V.A.C. systems are covered by Medicare Part B and we currently have V.A.C. contracts with private insurance covering over 110 million lives in the United States. This represents more than one-half of all individuals covered by private insurance in the United States and is five times the number of covered lives we had under contract as of mid-2000.

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        During 2002, we served approximately 2,100 medium to large hospitals in the United States. Our principal acute care marketing and selling priorities focus on expanding penetration in these existing accounts. Our first priority is to expand usage of V.A.C. systems among current V.A.C. users to other types of wound care patients.

        Our second priority is to extend that usage to other physicians and wound care nurses in those facilities. At the same time, we have also initiated marketing and selling efforts focused on an additional 500 similarly sized hospitals that are not current V.A.C. customers.

Clinical Applications

        Our advanced medical devices and therapeutic surfaces address four principal clinical applications:

Wound Healing and Tissue Repair

        Of the more than 10 million wounds treated worldwide by doctors, hospitals and clinics each year, approximately 10%–15% are complex, life threatening or difficult-to-treat conditions. We are the leading provider, in terms of revenue, of advanced technology systems used to treat these difficult wounds. V.A.C. products account for over half of our revenue.

        We estimate that the annual market opportunity in the United States for V.A.C. systems is approximately one million patients, representing approximately $2.3 billion in revenue. We also believe there is a significant market for our systems internationally. We expect these markets to continue to grow, as a result of several factors, including the acceptance of V.A.C. therapy as a treatment for additional wound types, medical trends such as continued growth in the incidence of diabetes, and the aging population.

        In the acute care setting, serious trauma wounds, failed surgical closures, amputations (especially those resulting from complications of diabetes), burns covering a large portion of the body and serious pressure ulcers present special challenges to the physician. In addition, when surgeons use skin grafts to close wounds, a substantial portion are not fully effective. Physicians and hospitals need a therapy that addresses the special needs of these wounds with high levels of clinical and cost effectiveness. Given the high cost and infection risk of treating these patients in health care facilities, the ability to achieve healthy wound beds and reduce bacterial levels in the wound are particularly important. Our V.A.C. Classic and V.A.C. ATS systems are designed to meet these needs.

        In the extended care and home care settings, different types of wounds—with different treatment implications—present the most significant challenges. Although a substantial number of acute wounds require post-discharge treatment, a majority of the challenging wounds in the home care setting are non-healing chronic wounds. These wounds often involve physiologic and metabolic complications such as reduced blood supply, compromised lymphatic system or immune deficiency that interfere with the body's normal wound healing processes. Diabetic ulcers, arterial and venous insufficiency wounds and pressure ulcers are often slow-to-heal wounds. These wounds develop due to a patient's impaired vascular and tissue repair capabilities. These conditions can also inhibit a patient's healing process, and wounds that develop often fail to heal for many months, and sometimes for several years. Difficult-to-treat wounds do not always respond to traditional therapies, such as hydrocolloids, hydrogels and alginates. Physicians and nurses look for therapies that can promote the healing process and overcome the obstacles of the patients' compromised conditions. They also seek therapies that are easy to administer, especially in the home care setting, where full-time skilled care is generally not available. In addition, because many of these patients are ambulatory, they want therapies which are minimally disruptive to their lives. Our V.A.C., mini V.A.C. and the V.A.C. Freedom systems are designed to allow patients mobility to conduct normal lives while their wounds heal.

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Therapies to Treat Complications of Immobility

        The most critically ill patient population is cared for in the intensive care unit, or ICU, of a hospital, where they can receive the most intense medical attention. Patients seen in the ICU usually suffer from serious acute and chronic complications from a wide variety of diseases and traumatic injuries. These patients often have, or develop, pulmonary complications, such as Acute Respiratory Distress Syndrome, directly resulting from their conditions or stemming from their impaired mobility. When a patient cannot move normally, due to spinal cord injury, stroke or other medical conditions, fluids tend to accumulate and the patient is at risk of developing pneumonia, blood clots and other medical problems. Some ICU patients are in such acute distress that their organ systems are at risk of failure and many are on some type of life-support. In 2001, there were approximately 1.6 million ICU patients in the United States with pulmonary complications and approximately 10,000 with unstable spinal cord injuries. Treating pulmonary complications requires special equipment and treatment methods. Because of the aggressive and specialized treatments required to address these life-threatening conditions, daily patient care costs in the ICU are relatively high. Our Kinetic Therapy systems provide movement to patients who cannot move themselves. These systems are designed to meet the special needs of ICU patients and have been shown in independent clinical studies to reduce the incidence of certain pulmonary complications and length of stay in the ICU. Our specialized therapies for ICU patients include the Roto Rest Delta and TriaDyne Proventa for the treatment of pulmonary complications associated with immobility. Movement is essential to human physiology.

Wound Treatment and Prevention

        Our therapeutic surfaces for pressure relief and pressure reduction provide therapy in the treatment of pressure sores, burns, ulcers, skin grafts and other skin conditions. They also help prevent the formation of pressure sores that develop in certain immobile individuals by reducing the amount of pressure on a patient's skin through the use of surfaces supported by air, foam, silicon beads, or viscous fluid. Our products also help to reduce shear, a major factor in the development of pressure ulcers, by reducing the amount of friction between the skin surface and the surface of the bed. In addition to providing pressure relief and pressure reduction, some of our products provide a pulsing of the surface cushions, known as pulsation therapy, which helps improve blood and lymphatic flow to the skin. Some of our products further promote healing and reduce nursing time by providing an automated "wound care" turn of approximately 25 degrees. This "nurse assist" feature reduces the need for nurses to manually turn and position patients.

Bariatric Care

        We offer a line of bariatric products, which are designed to accommodate obese individuals by providing the support they need and enabling hospital staff to care for them in a safe and dignified manner. Our bariatric care products generally are used for patients weighing from 300 to 600 pounds, although some are expandable and can accommodate patients weighing up to 1,000 pounds. These individuals are often unable to fit into standard-sized beds and wheelchairs. Our most sophisticated bariatric care products can serve as a bed, chair, weight scale and x-ray table, and provide therapeutic functions like those in our wound treatment and prevention systems. Moreover, treating obese patients is a significant staffing issue for many health care facilities because moving and handling obese patients increases the risk of injury to health care personnel. We believe that these products enable health care personnel to treat these patients in a manner which is safer for health care personnel and more dignified for the patient.

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Products

        We offer a wide range of products in each clinical application to meet the specific needs of different subsets of the market, providing innovative, cost effective, outcome driven therapies across multiple care settings.

Wound Healing and Tissue Repair

        Our four wound healing and tissue repair systems incorporate our proprietary V.A.C. technology. A V.A.C. system consists of the therapy unit and four types of disposables:

•

foam dressing;



•

occlusive drape;



•

tube; and



•

canister.

        The therapy unit consists of a pump that generates negative pressure and internal software that controls and monitors the application of the therapy. The therapy can be programmed for each individualized use. Recent advancements, which are incorporated in our V.A.C. ATS and V.A.C. Freedom, enable the unit to flexibly control the time, rate and application of negative pressure to the wound and adapt its operations as it senses the progress of the application of the therapy to the originally targeted levels. The V.A.C. unit also responds in real time to problems encountered during use and alerts users to any blockage or other interference with the pre-set protocol. The system has a number of on screen user assist features such as treatment protocols and suggestions to address specific patient issues.

        The negative pressure therapy is delivered to the wound cavity through a proprietary foam dressing cut to fit the wound size. The dressing is connected to the therapy unit through a tube which both delivers the negative pressure and senses the pressure delivered to the wound surface. An occlusive drape covers the dressing and secures the foam, thereby allowing negative pressure to be maintained at the wound site. The canister collects the fluids, or exudates, and helps reduce odors through the use of special filters. V.A.C. dressings are typically changed every 48 hours for non-infected wounds versus traditional dressings which often require dressing changes one or more times per day. Our original V.A.C. dressings were designed either to maximize granulation tissue growth in large open wounds or to help close superficial wounds where excessive granulation is undesirable. Newer versions address the unique physical characteristics of wounds such as grafts, diabetic foot ulcers and abdominal compartment syndrome.

        Each of our wound healing and tissue repair systems is targeted to meet the needs of specific care settings and wound or patient requirements.

The V.A.C.^ATS System was introduced in 2002 to meet the acute care requirements for a flexible, easy-to-use, high-capacity system that is effective with the largest and most challenging trauma, orthopedic reconstruction and abdominal wounds. The V.A.C.^ATS incorporates advanced features and controls to provide flexibility to customize the treatment protocol to the requirements of different wound types and physician preferences. It also incorporates our proprietary T.R.A.C. technology, which enables the system to monitor pressure at the wound site and automatically adjust system operation to maintain the desired therapy protocol. It also enables smart alarms to help ensure patient safety, and simplifies dressing changes.

The V.A.C. Freedom System, also introduced in 2002, was designed to meet the requirements for a robust, lightweight, high-performance device suitable for ambulatory patients. Similar to the V.A.C.^ATS system, it incorporates advanced features and T.R.A.C. technology, but in a 3.2 lbs. package adapted for

65

convenient unobtrusive use by more active patients. It also includes special filters that help reduce wound odor, a common and embarrassing problem for many ambulatory wound patients, and a controlled drawdown feature that helps reduce pain when therapy is initiated. While the design of the V.A.C. Freedom system addresses the treatment needs of chronic wound patients, its 300 cc canister capacity also makes it appropriate for patients with highly exudating wounds.

The mini V.A.C. System was specially designed for patients who need high levels of mobility. At 2.2 lbs., it provides a convenient solution for patients needing advanced wound healing performance in a highly portable package. It is best suited for smaller and drier wounds due to its smaller canister.

The V.A.C. Classic System is a first-generation system that provides the basic therapeutic functionality and wound healing capability of our other V.A.C. products. For those who do not require the advanced features of our newer V.A.C. products, it provides our most economical advanced wound-healing package.

Therapies to Treat Complications of Immobility

        Our Kinetic Therapy products include the TriaDyne Proventa, TriaDyne II, Roto Rest Delta and PediDyne products. The TriaDyne line is used primarily in acute care settings and provides patients with three distinct therapies on an air suspension surface. The TriaDyne line applies Kinetic Therapy by rotating the patient up to 45 degrees on each side and provides a novel feature of simultaneously turning the patient's torso and lower body in opposite directions while keeping the patient positioned in the middle of the bed. Our products also provide percussion therapy to loosen mucous buildup in the lungs and pulsation therapy to promote capillary and lymphatic flow. The Roto Rest Delta is a specialty bed that can rotate a patient up to 62 degrees on each side for the treatment of severe pulmonary complications. The Roto Rest has been shown to improve the care of patients suffering from multiple trauma, spinal cord injury, severe pulmonary complications, respiratory failure and deep vein thrombosis.

Wound Treatment and Prevention

        We offer a wide variety of therapeutic surfaces for wound treatment and prevention, providing pressure relief, pressure reduction or pulsation. Our pressure relief products include a variety of framed beds and overlays such as the KinAir III, KinAir MedSurg and KinAir IV framed beds; the FluidAir Elite and FluidAir II; the FirstStep, FirstStep Plus, FirstStep Select, FirstStep Advantage and TriCell overlays; TheraRest and the AtmosAir family of mattress replacement and seating surfaces; and the RIK fluid mattress and overlay. Our pulsation products include the TheraPulse and TheraPulse II framed beds and the DynaPulse overlay.

        The KinAir III, KinAir MedSurg and KinAir IV have been shown to provide effective skin care therapy in the treatment of pressure sores, burns and post-operative skin grafts and flaps and to help prevent the formation of pressure sores and certain other complications of immobility. The FluidAir Elite and FluidAir II support the patient on a low-pressure surface of air-fluidized beads providing pressure relief and shear relief for skin grafts or flaps, burns and pressure sores. The FirstStep family of overlays is designed to provide pressure relief and help prevent and treat pressure sores. Both the AtmosAir family and the TheraRest products are for-sale mattress replacement products for the prevention of pressure sores. The proprietary AtmosAir utilizes atmospheric pressure to deliver dynamic pressure relief. The RIK mattress and the RIK overlay are static, non-powered products that provide pressure relief using a patented viscous fluid and a patented anti-shear layer.

        The TheraPulse and TheraPulse II framed beds and the DynaPulse overlay provide a more aggressive form of treatment through a continuous pulsating action which gently massages the skin to help improve capillary and lymphatic circulation in patients suffering from severe pressure sores, burns, skin grafts or flaps, swelling or circulatory problems.

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Bariatric Care

        Our bariatric products provide a range of therapy options and the proper support needed by obese patients and enable nurses to properly care for these patients in a safe and dignified manner. The most advanced product in this line is the BariAir therapy system, which can serve as a bed, cardiac chair or x-ray table. The BariAir provides low air loss pressure relief, continuous turn assist, percussion and step-down features designed for both patient comfort and nurse assistance. This product can be used for patients who weigh up to 850 pounds. We believe that the BariAir is the most advanced product of its type available today. The BariKare bed is our most frequently used bariatric product. It provides a risk management platform for patients weighing up to 850 pounds and is used primarily in hospitals. In 1996, we introduced the FirstStep Select Heavy Duty overlay which, when placed on a BariKare bed, provides pressure-relieving therapy. Our AirMaxxis product provides a therapeutic air surface for the home environment for patients weighing up to 650 pounds. The Maxxis 300 and Maxxis 400 provide a home care bariatric bed frame for patients weighing up to 600 pounds and 1,000 pounds, respectively.

        The newest product in our bariatric product line is the BariMaxx II. The BariMaxx II provides a basic risk management platform for patients weighing up to 1,000 pounds for those customers looking for a set of features including built-in scales and an expandable frame at a lower cost. Additionally, the BariMaxx II side exit feature allows the caregiver to assist patients in a more traditional exit of the bed. This is an important factor in a patient's rehabilitation and prepares them for facility discharge. Our bariatric beds are now combined with an EZ-Lift patient transfer system and other accessories such as wheelchairs, walkers and commodes to create a complete bariatric offering.

Corporate Organization

        Our business has two geographical segments: USA and International.

        With approximately 1,575 employees as of June 30, 2003, our USA division serves the domestic acute care, extended care and home care markets with the full range of our products. The domestic division distributes our medical devices and therapeutic surfaces to over 3,400 acute care hospitals and more than 4,200 extended care facilities and also directly serves the home care market through our service center network. Our USA division accounted for approximately 77%, 78% and 73% of our total revenue in the years ended December 31, 2002, 2001 and 2000, respectively.

        During 2002, our International division had direct operations in 15 foreign countries including Germany, Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland, Australia, Italy, Denmark, Sweden, Ireland, Belgium, Spain and South Africa. The International division distributes our medical devices and therapeutic surfaces through a network of 80 service centers. Our international corporate office is located in Amsterdam, the Netherlands. As of June 30, 2003, international manufacturing and engineering operations are based in the United Kingdom. In addition, our International division serves the demands of a growing global market through relationships with approximately 70 active independent distributors in Latin America, the Middle East, Asia and Eastern Europe. The International division consists of approximately 1,050 employees who are responsible for all sales, service and administrative functions within the various countries we serve. Our International division accounted for approximately 23%, 22% and 27% of our total revenue in the years ended December 31, 2002, 2001 and 2000, respectively.

Sales and Marketing Organization

        We have broad reach across all health care settings. In the United States, for example, we have relationships with more than more than 3,400 acute care hospitals, more than 4,200 extended care facilities and approximately 2,700 home health care agencies. Our worldwide sales organization consists of approximately 1,050 individuals, many with medical or clinical backgrounds. Our sales organization is organized by care setting. Since physicians and nurses are critical to the adoption and use of advanced

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medical devices, a major element of the sales force's responsibility is to educate and train these medical practitioners in the application of our products, including the specific knowledge necessary to assure that the use of our devices results in optimal clinical and economic outcomes. In 2003, we expect that our sales staff will make more than 110,000 contacts with these targeted clinical decision-makers. In addition we employ approximately 85 field-based specialists who train and consult with our customers regarding the often demanding and complex paperwork required by Medicare and private insurance companies.

        Our domestic sales support staff includes approximately 350 employees with medical or clinical backgrounds. The principal responsibility of approximately 200 of these clinicians is to make product rounds and assist facilities and home health agencies to develop their protocols. Our clinicians educate the hospital, long-term care facility or home health agency staff on the use of our products.

        Our international sales support staff includes more than 350 employees in 15 foreign countries. In addition, in each foreign market where we have a presence, we sell our products through our direct sales force or through local distributors with local expertise.

Service Organization

        Our USA division has a national 24-hour, seven day-a-week customer service communications system, which allows us to quickly and efficiently respond to our customers' needs. The domestic division distributes our medical devices and therapeutic surfaces to more than 3,400 acute care hospitals and more than 4,200 extended care facilities through a network of 135 domestic service centers and also directly serves the home care market through our extensive service center network. Our USA division's network gives us the ability to deliver our products to any major Level I domestic trauma center within hours. Our International division distributes our medical devices and therapeutic surfaces through a network of 80 service centers.

        In addition to delivery, pick-up, and technical support services, our service organization cleans, disinfects, and reconditions products between rentals. To assure availability when products are needed, the service organization manages our rental fleet of approximately 50,000 units, deploying units to meet individual service center demand patterns while maintaining high levels of rental asset utilization. Service is provided by more than 750 people in the United States and more than 380 people internationally.

Research and Development

        Innovation, through new products and significant enhancements to existing products, is essential to our success. It is one of the most critical components of the value we provide to our customers. Our primary focus for innovation is to increase the clinical and economic benefit of our products to our customers and their patients. In addition, we strive to make our products user-friendly and increase their operational efficiency, both of which are critical in the demanding and sometimes short-staffed world of health care today. Significant investments in our 2002 research and development included:

•

new wound healing devices and dressing types tailored to the needs of different care settings and wound types;



•

new technologies in wound healing and tissue repair;



•

new applications of V.A.C. technology and enhanced therapeutic effectiveness through improved understanding of the V.A.C. systems' various mechanisms of action;



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new therapeutic surface to address critical needs of Acute Respiratory Distress Syndrome, cardiac arrest and stroke patients; and



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significant upgrades to several of our core therapeutic surfaces products.

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        Expenditures for research and development in each of the last three years ended December 31, were as follows (dollars in thousands):

	Fiscal
	2000			2001			2002
Research and development spending	$	7,000		$	12,492		$	15,952
Percentage of total revenue		2	%		3	%		3	%

        In addition, we are conducting 11 prospective, randomized and controlled clinical studies specifically designed to provide statistically significant evidence of V.A.C. therapy's clinical efficacy for treating a wide range of targeted wound types.

Manufacturing

        We entered into a sole-source agreement with Avail for our disposable products related to V.A.C. systems, effective October 2002, for our U.S. related orders and which will commence in mid-2003 for our international related orders. This supply agreement has a three-year term with an automatic extension for an additional twelve months if neither party gives notice of termination. Either party may terminate this supply agreement without cause upon 24-months' written notice. In 2002, approximately 13% of our total revenue was generated from the sale of these disposable supplies. We, together with Avail, will maintain certain levels of on-hand supply. In the event that Avail is unable to fulfill the terms of this agreement, we have identified other suppliers that could provide such inventory to meet our needs. However, in the event that we are unable to replace a shortfall in supply, our revenue could be negatively impacted in the short term.

Competition

        We believe that the principal competitive factors within our markets are clinical efficacy, cost of care, clinical outcomes and service. Furthermore, we believe that a national presence with full distribution capabilities is important to serve large, national and regional health care group purchasing organizations or GPOs. We have contracts with nearly all major hospital, and most major extended care, GPOs for the V.A.C. The medical device industry is highly competitive and is characterized by rapid product development and technological change. In order to remain competitive with other companies in our industry, we must continue to develop new cost-effective products and technologies.

        In wound healing and tissue repair, we compete with other treatment methods offered by a number of companies in the advanced wound care business. These methods are substantially different than the V.A.C. and include traditional wound care dressings, advanced wound care dressings (hydrogels, hydrocolloids, alginates), skin substitutes, products containing growth factors and medical devices used for wound care. Many of these devices can be used to compete with the V.A.C. or as adjunctive therapy which complements the V.A.C. For example, caregivers may use one of our V.A.C. systems to prepare a healthy wound bed in order to reduce the wound size, and then use a skin substitute to manage the wound to final closure.

        With respect to therapeutic surfaces for treatment of pulmonary complications in the ICU, wound treatment and prevention and bariatric care, our primary competitors are Hill-Rom Company, Huntleigh Healthcare and Pegasus Limited. We also compete on a regional, local and market segment level with a number of smaller companies.

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Market Outlook

Health Care Reform

        Health care reform legislation will most likely remain focused on reducing the cost of health care. We believe that efforts by private payers to contain costs through managed care and other efforts will continue in the future as efforts to reform the health care system continue. The Balanced Budget Act of 1997 (the "BBA") significantly reduced the annual increases in federal spending for Medicare and Medicaid, changed the payment system for both skilled nursing facilities ("SNFs") and home health care services from cost-based to prospective payment systems and allowed states greater flexibility in controlling Medicaid costs at the state level. Although certain increases in reimbursement payments have subsequently been approved, the overall effect of the BBA continues to place increased pricing pressure on us and our customers. In particular, the changes in the method by which Medicare Part A reimburses SNFs has dramatically changed the manner in which our SNF customers make rental and purchase decisions.

        Certain portions of the BBA were amended by the Balanced Budget Refinement Act of 1999 (the "Refinement Act") and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"). In essence, the Refinement Act and BIPA attempted to lessen the detrimental economic impact which the BBA had on the health care industry. Regarding SNF reimbursement, some payment relief had been provided under the Refinement Act and BIPA, however, some of the relief expired on September 30, 2002. Because that reimbursement relief was not carried over into 2003, our therapeutic surfaces revenue in the extended care market is down approximately 12% for the six months ended June 30, 2003 as compared to the same period in 2002.

        On February 11, 2003, the Centers for Medicare and Medicaid Services ("CMS," formerly the Health Care Financing Administration) made effective an interim final rule implementing "inherent reasonableness" authority, which allows the agency and carriers to adjust payment amounts by up to 15% per year for certain items and services covered by Medicare Part B when the existing payment amount is determined to be grossly excessive or grossly deficient. The regulation lists factors that may be used by CMS and the carriers to determine whether an existing reimbursement rate is grossly excessive or grossly deficient and to determine what is a realistic and equitable payment amount. CMS may make a larger adjustment each year if they undertake prescribed procedures for determining the appropriate payment amount for a particular service. Using this authority, CMS and the carriers may reduce reimbursement levels for certain items and services covered by Medicare Part B.

        In addition, the BBA authorized CMS to explore possible ways of changing Medicare reimbursement rates so that they better reflect market levels. Specifically, the BBA authorized CMS to implement up to five competitive bidding systems by December 31, 2002, to evaluate how competitive bidding would impact Medicare program payments, access, diversity of product selection and quality. Under competitive bidding, CMS would change its approach to reimbursing products and services covered by Medicare Part B from the current fee schedule amount to an amount that would be established through a bidding process between the agency and suppliers. Two systems covering eight products have been completed and federal lawmakers are now considering expanding competitive bidding to the national level, which could reduce the number of suppliers providing products and services to Medicare beneficiaries and the amounts paid for such products and services. We do not know what impact inherent reasonableness and competitive bidding, if expanded to a national level, would have on us or the reimbursement of our products.

Health Insurance Portability and Accountability Act (HIPAA) Compliance

        The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") covers a variety of provisions which will impact our business including the privacy of patient health care information, the security of that information and the standardization of electronic data transactions for billing. Sanctions

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for violating HIPAA include criminal penalties and civil sanctions. The U.S. Department of Health and Human Services has promulgated regulations pursuant to a legislative mandate in HIPAA, which became effective in April 2003. In order to ensure our compliance with the HIPAA regulations by the April 2003 deadline, KCI established a multi-disciplinary HIPAA Compliance Team, which defined the legal requirements, reviewed KCI's prior HIPAA compliance efforts and developed a comprehensive compliance plan. We also designated a HIPAA Privacy Officer and HIPAA Information Security Officer to oversee the implementation of the compliance plan and monitor modifications to the current regulations.

        HIPAA regulations regarding standardization of electronic data billing transactions will also impact our business. At the present time, we invoice third-party payers using a variety of different systems. When the American National Standard Institute format for electronic data billing transactions is implemented in 2003, as required by HIPAA, we will transition our billing to that standardized format. In some instances, it may be difficult for us to differentiate between products which are covered by a single billing code but have different prices. Therefore, we have applied to CMS for additional product codes to support our current billing practices. However, there can be no assurance that CMS will establish any or all of the requested billing codes. We are beginning to work with our vendors in order to make the transition to standardized billing codes as smooth as possible. However, there can be no assurance that the transition to standardized billing codes will not create billing difficulties or business interruptions for us.

        Our cost of compliance with HIPAA could be significant. Moreover, although we believe our business practices comply with HIPAA, there can be no assurance that our practices will not be challenged under these laws in the future or that such a challenge would not have a material adverse effect on our business, financial condition or results of operations.

Consolidation of Purchasing Entities

        The many health care reform initiatives in the United States have caused health care providers to examine their cost structures and reassess the manner in which they provide health care services. This review, in turn, has led many health care providers to merge or consolidate with other members of their industry in an effort to reduce costs or achieve operating synergies. A substantial number of our customers, including proprietary hospital groups, GPOs, hospitals, national nursing home companies and national home health care agencies, have been affected by this consolidation. An extensive service and distribution network and a broad product line are key to servicing the needs of these larger provider networks. In addition, the consolidation of health care providers often results in the re-negotiation of contracts and the granting of price concessions. Finally, as GPOs and integrated health care systems increase in size, each contract represents a greater concentration of market share and the adverse consequences of losing a particular contract increases considerably.

Reimbursement of Health Care Costs

        The demand for our products is dependent in part on the reimbursement policies of the various payers. In order to be reimbursed, products generally must be found to be reasonable and necessary for the diagnosis or treatment of medical conditions and must otherwise fall within the payers' recognized categories of covered items and services. Our products are either rented or purchased, principally by hospitals and SNFs which receive reimbursement for the products and services they provide from various public and private third-party payers, including Medicare, Medicaid and private insurance programs. In the home care market, we provide our products and services to patients and bill insurance companies, including Medicare Part B and private insurance.

        The importance of payer coverage policies was recently demonstrated by our experience with our V.A.C. technology in the home care setting. On October 1, 2000, a Medicare Part B policy was

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approved, which provided for reimbursement codes, an associated coverage policy and allowable rates for the V.A.C. devices and V.A.C. disposable products in the home care setting. The policy facilitated claims processing, permitted electronic claims submissions and created a more uniform claims review process. Because many payers look to Medicare for guidance in coverage, a specific Medicare policy is often relied upon by other payers.

        A significant portion of our wound healing device revenue is derived from home placements, which are reimbursed by both governmental and non-governmental third-party payers. The reimbursement process for home care placements requires extensive documentation, which has slowed the cash receipts cycle relative to the rest of the business.

        In light of increased scrutiny on Medicare spending, there can be no assurance regarding the outcome of future coverage or payment decisions for any of our products or services by governmental or non-governmental third-party payers. (See "Business—Market Outlook.")

Patient Demographics

        U.S. Census Bureau statistics indicate that the 65-and-over age group is one of the fastest growing population segments and is expected to be approximately 40 million by the year 2010. Management of wounds and circulatory problems is crucial for elderly patients. These patients frequently suffer from deteriorating physical conditions and their wound problems are often exacerbated by circulatory problems, incontinence and poor nutrition.

        Obesity is increasingly being recognized as a serious medical complication. In 2001, approximately 1,135,000 patients in U.S. hospitals had a primary or secondary diagnosis of obesity. Obese patients tend to have limited mobility and are, therefore, at risk for circulatory problems and skin breakdown.

Properties and Facilities

        Our corporate headquarters are currently located in a 170,400 square foot building in San Antonio, Texas, which was originally purchased in January 1992. In June 1997, we acquired a 2.6-acre tract of land adjacent to our corporate headquarters. There are four buildings on the land which contain an aggregate of approximately 40,000 square feet. In August 2002, we sold our corporate headquarters facility and adjacent land and buildings under a 10-year sale/leaseback arrangement. We utilize approximately 143,000 square feet of the headquarters building with the remaining space being leased to unrelated entities. We also lease approximately 28,300 square feet of the adjacent buildings that are used for general corporate purposes. In addition, in October 2001, we entered into a 66-month lease of office space at another location in San Antonio to be used as our customer service center. As of December 31, 2002, we leased approximately 88,500 square feet of office space under this lease.

        We conduct domestic manufacturing, shipping, receiving, engineering and storage activities in a 171,100 square foot facility in San Antonio, Texas, which we purchased in January 1988, and an adjacent 32,600 square foot facility purchased in 1993. Operations are conducted with approximately 75% cumulative utilization of plant and equipment. We also lease two storage facilities in San Antonio, Texas. We lease approximately 135 domestic distribution centers, including each of our seven regional headquarters.

        Internationally, we lease approximately 80 service centers. Our international corporate office is located in Amsterdam, The Netherlands. International manufacturing and engineering operations are based in the United Kingdom and are conducted in an 24,800 square foot plant, with 100% cumulative utilization of plant and equipment.

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        The following is a summary of our major facilities:

Location	Description	Segment	Owned or Leased
KCI Tower, 8023 Vantage Drive San Antonio, TX	Corporate Headquarters	KCI	Leased
4958 Stout Drive San Antonio, TX	Manufacturing Plant	KCI	Owned
KCI North 5800 Farinon Drive, San Antonio, TX	Customer Service Center	KCI USA	Leased
Regus Building, Beech Avenue 54-80, 1119 PW Schipol-Rijk, The Netherlands	International Corporate Headquarters	KCI International	Leased
Unit 12, 11 Nimrod Way, Wimbome, Dorset, United Kingdom	Manufacturing Plant	KCI International	Leased

Patents, Trademarks and Licenses

        We rely on a combination of patents, copyrights, trademarks, trade secret and other laws, and contractual restrictions on disclosure, copying and transfer of title, including confidentiality agreements with vendors, strategic partners, co-developers, employees, consultants and other third parties, to protect our proprietary rights in our products, new developments, improvements and inventions. We seek patent protection in the United States and abroad. We have approximately 100 issued U.S. patents relating to our existing and prospective lines of therapeutic surfaces and medical devices. We also have more than 50 pending U.S. patent applications. Many of our specialized beds, medical devices and services are offered under proprietary trademarks and service marks. We have more than 45 trademarks and service marks registered with the United States Patent and Trademark Office. We also have agreements with third parties that provide for licensing of patented or proprietary technology.

        Most of the V.A.C. patents in our patent portfolio have an average life of 20 years from their date of filing. Our base V.A.C. patents begin to expire in 2013. However, many of our follow-on patents are relatively young. We have multiple patents covering unique aspects and improvements for the system.

        On October 6, 1993, we entered into a license agreement with Wake Forest University that we rely on in connection with our V.A.C. business. Under this agreement, Wake Forest University licensed to us on a worldwide, exclusive basis the right to use, lease, sell and sublicense its rights to certain patents that are integral to the technology that we incorporate in our V.A.C. products. The term of the agreement continues for as long as the underlying patents are in effect, subject to Wake Forest University's right to terminate earlier if we fail to make required royalty payments or are otherwise in material breach or default of the agreement.

Employees

        As of June 30, 2003, we had 3,817 employees. Approximately 1,350 of these employees are located in San Antonio, Texas and perform functions associated with corporate, manufacturing, finance and administration. Our employees are not represented by labor unions and we consider our employee relations to be good.

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Government Regulation

United States

        Our products are subject to regulation by numerous governmental authorities, principally the United States Food and Drug Administration, or the FDA, and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the clinical testing, manufacture, labeling, distribution, sale and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution. The FDA also has the authority to demand the repair, replacement or refund of the cost of any device that we manufacture or distribute that violates statutory or regulatory requirements.

        In the United States, medical devices are classified into one of three classes (Class I, II or III) on the basis of the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness. Although many Class I devices are exempt from certain FDA requirements, Class I devices are subject to general controls (for example, labeling, pre-market notification and adherence to the Quality System Regulations). Class II devices are subject to general and special controls (for example, performance standards, post-market surveillance, patient registries and FDA guidelines). Generally, Class III devices are high-risk devices that receive significantly greater FDA scrutiny to ensure their safety and effectiveness (for example, life-sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed Class I or Class II devices). Before a new medical device can be introduced in the market, the manufacturer must generally obtain FDA clearance ("510(k) clearance") or pre-market application ("PMA") approval. All of our current products have been classified as Class I or Class II devices, which typically are marketed, based upon 510(k) clearance or related exemptions. A 510(k) clearance will generally be granted if the submitted information establishes that the proposed device is "substantially equivalent" in intended use and technological characteristics to a legally marketed Class I or Class II medical device or to a Class III device on the market since May 28, 1976, for which PMA approval has not been required. A PMA approval requires proof to the FDA's satisfaction of the safety and effectiveness of a Class III device. A clinical study is generally required to support a PMA application and is sometimes required for a 510(k) pre-market notification. For "significant risk" devices, such clinical studies generally require submission of an application for an Investigational Device Exemption, or IDE. The FDA's 510(k) clearance process usually takes from four to twelve months, but may take longer. The PMA approval process is much more costly, lengthy and uncertain. The process generally takes from one to three years, however, it may take even longer.

        Devices that we manufacture or distribute are subject to pervasive and continuing regulation by the FDA and certain state agencies, including record-keeping requirements and mandatory reporting of certain adverse experiences resulting from use of the devices. Labeling and promotional activities are subject to regulation by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses and the FDA scrutinizes the labeling and advertising of medical devices to ensure that unapproved uses of medical devices are not promoted.

        Manufacturers of medical devices for marketing in the United States are required to adhere to applicable regulations, including the Quality System Regulation ("QSR," formerly the Good Manufacturing Practice regulation), which imposes design, testing, control and documentation requirements. Manufacturers must also comply with the Medical Device Reporting ("MDR") regulation, which generally requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or

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contribute to a death or serious injury if it were to recur. We are subject to routine inspection by the FDA and certain state agencies for compliance with QSR requirements, MDR requirements and other applicable regulations.

Fraud and Abuse Laws

        The Company may also be subject to federal and state physician self-referral laws. Federal physician self-referral legislation (commonly known as the Stark Law) prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain "designated health services" if the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral, and any person collecting any amounts in connection with an unlawful referral is obligated to refund such amounts. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a health care provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state.

        In addition, HIPAA created two new federal crimes: (i) health care fraud and (ii) false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing or attempting to execute a scheme or artifice to defraud any health care benefit program, including private payers. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items or services. This statute applies to any health benefit plan, not just Medicare and Medicaid. Additionally, HIPAA granted expanded enforcement authority to the U.S. Department of Health and Human Services and the U.S. Department of Justice ("DOJ") and provided enhanced resources to support the activities and responsibilities of the Office of the Inspector General ("OIG") and DOJ by authorizing large increases in funding for investigating fraud and abuse violations relating to health care delivery and payment.

        Under separate statutes, submission of claims for payment or causing such claims to be submitted that are "not provided as claimed" may lead to civil money penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded state health programs. These false claims statutes include the federal False Claims Act, which prohibits the knowing filing of a false claim or the knowing use of false statements to obtain payment from the U.S. federal government. When an entity is determined to have violated the False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. Suits filed under the False Claims Act, known as "qui tam" actions, can be brought by any individual on behalf of the government and such individuals (known as "relators" or, more commonly, as "whistleblowers") may share in the amounts paid by the entity to the government in fines or settlement. In addition, certain states have enacted laws modeled after the federal False Claims Act. Qui tam actions have increased significantly in recent years causing greater numbers of health care companies to have to defend false claim actions, pay fines or be excluded from the Medicare, Medicaid or other federal or state health care programs as a result of an investigation arising out of such action. Because we directly submit claims for payment for certain of our products, we are subject to these false claims statutes, and, therefore, could become subject to "qui tam" actions.

        The OIG has taken certain actions, which suggest that arrangements between manufacturers or suppliers of durable medical equipment or medical supplies and SNFs (or other providers) may be under continued scrutiny. In June 1995, the OIG issued a Special Fraud Alert setting forth fraudulent and abusive practices that the OIG had observed in the home health industry. Later that same year, OIG issued another Special Fraud Alert describing certain relationships between SNFs and suppliers that the OIG viewed as abusive under the federal anti-kickback statute. In July 1999, the OIG

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published OIG compliance program guidance for the durable medical equipment, prosthetics, orthotics and supply (DMEPOS) industry developed by the OIG in cooperation with, and with input from, the Health Care Financing Administration ("HCFA"), which is now known as the Centers for Medicare and Medicaid Services, the DOJ and representatives of various trade associations and health care practice groups. The guidance identifies specific areas of DMEPOS industry operations that may be subject to fraud and abuse. Furthermore, the OIG Work Plan for 2002 focused on arrangements between durable medical equipment manufacturers and/or suppliers. These initiatives create an environment in which there will continue to be significant scrutiny regarding compliance with federal and state fraud and abuse laws.

        Several states also have referral, fee splitting and other similar laws that may restrict the payment or receipt of remuneration in connection with the purchase or rental of medical equipment and supplies. State laws vary in scope and have been infrequently interpreted by courts and regulatory agencies, but may apply to all health care products or services, regardless of whether Medicaid or Medicare funds are involved.

Claims Audits

        The industry in which we operate is generally characterized by long collection cycles for accounts receivable due to complex and time-consuming documentation requirements for obtaining reimbursement from private and governmental third-party payers. Such protracted collection cycles can lead to delays in obtaining reimbursement. Moreover, the four durable medical equipment regional carriers ("DMERCs"), private organizations that contract to serve as the government's agents for the processing of claims for products and services provided under Part B of the Medicare program for home use, and Medicaid agencies periodically conduct pre-payment and post-payment reviews and other audits of claims submitted. Medicare and Medicaid agents are under increasing pressure to scrutinize health care claims more closely. Reviews and/or similar audits or investigations of our claims and related documentation could result in denials of claims for payment submitted by us. Further, the government could demand significant refunds or recoupments of amounts paid by the government for claims which, upon subsequent investigation, are determined by the government to be inadequately supported by the required documentation.

        On June 20, 2003, we received two letters from the Region A DMERC concerning the results of a post-payment review conducted on Medicare Part B claims for our V.A.C. systems and related disposables for dates of service between January 1, 2000 and December 31, 2001. We received a third and final letter on June 27, 2003. The reviews, which concern 30 claims at each of our top three billing locations in Region A, identified certain medical record documentation deficiencies. This resulted in an alleged overpayment to us of approximately $620,000. Subsequently, we submitted rebuttal documentation for claims used in all three audits. Upon review of our submissions, the Region A DMERC reduced the overpayment for the three audits to a total of approximately $110,000.

ISO Certification

        Due to the harmonization efforts of a variety of regulatory bodies worldwide, certification of compliance with the ISO 9000 series of International Standards ("ISO Certification") has become particularly advantageous and, in certain circumstances, necessary for many companies in recent years. We received ISO 9001 and EN46001 Certification in the fourth quarter of 1997 and Medical Device Agency registration in the fourth quarter of 2002 and therefore are certified to apply the CE mark for direct selling and distributing of our products within the European community. In addition, we received certification for ISO 13485 in the fourth quarter of 2002 and certification with Health Canada and, therefore, are certified to sell and distribute our products within Canada.

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Environmental Laws

        We are subject to various federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of nonhazardous and hazardous substances and wastes, and emissions and discharges into the environment. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or operated properties, or properties to which substances or wastes were sent from current or former operations at our facilities. From time to time, we have incurred costs and obligations for correcting environmental noncompliance matters and for cleanup of certain of our properties and third party sites. We believe we have complied with our environmental obligations to date in all material respects and that such liabilities will not have a material adverse effect on our business or financial performance. There can be no assurance, however, that such liabilities in the future would not have a material adverse effect on our business or financial performance.

Other Laws

        We are subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, manufacturing practices and fire hazard control.

International

        Sales of medical devices outside of the United States are subject to regulatory requirements that vary widely from country to country. Pre-market clearance or approval of medical devices is required by certain countries. The time required to obtain clearance or approval for sale in a foreign country may be longer or shorter than that required for clearance or approval by the FDA and the requirements vary. Failure to comply with applicable regulatory requirements can result in loss of previously received approvals and other sanctions and could have a material adverse effect on our business, financial condition or results of operations.

Reimbursement

        Our products are rented and sold principally to hospitals, extended care facilities and directly to patients who receive payment coverage for the products and services they utilize from various public and private third-party payers, including the Medicare and Medicaid programs and private insurance plans. In the home care market, we provide our products and services to patients and bill insurance companies, including Medicare Part B and private insurance. As a result, the demand and payment for our products are dependent, in part, on the reimbursement policies of these payers. The manner in which reimbursement is sought and obtained for any of our products varies based upon the type of payer involved and the setting to which the product is furnished and in which it is utilized by patients.

        We believe that government and private efforts to contain or reduce health care costs are likely to continue. These trends may lead third-party payers to deny or limit reimbursement for our products, which could negatively impact the pricing and profitability of, or demand for, our products.

Medicare

        Medicare is a federally funded program that provides health coverage primarily to the elderly and disabled. Medicare is composed of three parts: Part A, Part B and Part C. Medicare Part A (hospital insurance) covers, among other things, inpatient hospital care, home health care and skilled nursing facility services. Medicare Part B (supplemental medical insurance) covers various services, including those services provided on an outpatient basis. Medicare Part B also covers medically necessary durable medical equipment and medical supplies. Medicare Part C, also known as "Medicare+Choice," offers beneficiaries a choice of various types of health care plans, including several managed care options. The Medicare program has established guidelines for the coverage and reimbursement of certain equipment, supplies and support services. In general, in order to be reimbursed by Medicare, a health care item or service furnished to a Medicare beneficiary must be reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body part. Effective October 1, 2000, we received Medicare Part B reimbursement codes, an associated coverage policy and allowable rates for our V.A.C. systems and related disposables in the home care setting.

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        The methodology for determining the amount of Medicare reimbursement of our products varies based upon, among other things, the setting in which a Medicare beneficiary receives health care items and services. Most of our products are furnished in a hospital, skilled nursing facility or the beneficiary's home.

Hospital Setting

        Since the establishment of the prospective payment system in 1983, acute care hospitals are generally reimbursed for certain patients by Medicare for inpatient operating costs based upon prospectively determined rates. Under the prospective payment system, or PPS, acute care hospitals receive a predetermined payment rate based upon the Diagnosis-Related Group, or DRG, which is assigned to each Medicare beneficiary's stay, regardless of the actual cost of the services provided. Certain additional or "outlier" payments may be made to a hospital for cases involving unusually high costs or lengths of stay. Accordingly, acute care hospitals generally do not receive direct Medicare reimbursement under PPS for the distinct costs incurred in purchasing or renting our products. Rather, reimbursement for these costs is included within the DRG-based payments made to hospitals for the treatment of Medicare-eligible inpatients who utilize the products. Long-term care and rehabilitation hospitals also are now paid under a PPS rate that does not directly account for all actual services rendered. Since PPS payments are based on predetermined rates, and may be less than a hospital's actual costs in furnishing care, hospitals have incentives to lower their inpatient operating costs by utilizing equipment and supplies, such as our products, that will reduce the length of inpatient stays, decrease labor or otherwise lower their costs.

        Certain specialty hospitals also use our products. Such specialty hospitals are exempt from the PPS and, subject to certain cost ceilings, are reimbursed by Medicare on a reasonable cost basis for inpatient operating and capital costs incurred in treating Medicare beneficiaries. Consequently, such hospitals may have additional Medicare reimbursement for reasonable costs incurred in purchasing or renting our products. There has been little experience with PPS for long-term care and rehabilitation hospitals. A final rule for rehabilitation hospital PPS became effective on January 1, 2002. A final ruling was published in October 2002 implementing PPS for long-term care hospitals, effective January 1, 2003. We cannot predict the impact of the rehabilitation hospital PPS or the long-term care hospital PPS on the health care industry or on our financial position or results of operations.

Skilled Nursing Facility Setting

        On July 1, 1998, reimbursement for SNFs under Medicare Part A changed from a cost-based system to a prospective payment system which is based on resource utilization groups ("RUGs"). Under the RUGs system, a Medicare patient in a SNF is assigned to a RUGs category upon admission to the facility. The RUGs category to which the patient is assigned depends upon the medical services and functional support the patient is expected to require. The SNF receives a prospectively determined daily payment based upon the RUGs category assigned to each Medicare patient. These payments are intended generally to cover all inpatient services for Medicare patients, including routine nursing care, capital-related costs associated with the inpatient stay and ancillary services. Effective July 2002, the daily payments were based on the national average cost. Although the Refinement Act and BIPA increased the payments for certain RUGs categories, certain provisions of the Refinement Act and BIPA covering these payment increases expired on September 30, 2002 and, in effect, the RUGs rates for the most common categories of SNF patients decreased. Because the RUGs system provides SNFs with fixed daily cost reimbursement, SNFs have become less inclined to use products which had previously been reimbursed as variable ancillary costs.

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Home Setting

        Our products are also provided to Medicare beneficiaries in home care settings. Medicare, under the Part B program, reimburses beneficiaries, or suppliers accepting an assignment of the beneficiary's Part B benefit, for the purchase or rental of DME for use in the beneficiary's home or a home for the aged (as opposed to use in a hospital or skilled nursing facility setting). As long as the Medicare Part B coverage criteria are met, certain of our products, including air fluidized beds, air-powered flotation beds, alternating pressure air mattresses and our V.A.C. systems and related disposables are reimbursed in the home setting under the DME category known as "Capped Rental Items." Pursuant to the fee schedule payment methodology for this category, Medicare pays a monthly rental fee (for a period not to exceed 15 months for products other than the V.A.C. system, for which the base treatment period may not exceed four months) equal to 80% of the established allowable charge for the item. The patient (or his or her insurer) is responsible for the remaining 20%.

Medicaid

        The Medicaid program is a cooperative federal/state program that provides medical assistance benefits to qualifying low income and medically needy persons. State participation in Medicaid is optional and each state is given discretion in developing and administering its own Medicaid program, subject, among other things, to certain federal requirements pertaining to eligibility criteria and minimum categories of services. The Medicaid program finances approximately 50% of all care provided in nursing facilities nationwide. We sell or rent our products to nursing facilities for use in furnishing care to Medicaid recipients. Typically, nursing facilities receive Medicaid reimbursement directly from states for the incurred costs. However, the method and level of reimbursement, which generally reflects regionalized average cost structures and other factors, varies from state to state and is subject to each state's budget constraints. Current economic conditions have resulted in reductions in funding for many state Medicaid programs. Consequently, states are revising their policies for coverage of durable medical equipment in long-term care facilities and the home. We cannot predict the impact of the policy changes on our Medicaid revenue.

Private Payers

        Many third-party private payers, including indemnity insurers, employer group health insurance programs and managed care plans, presently provide coverage for the purchase and rental of our products. The scope of coverage and payment policies varies among third-party private payers. Furthermore, many such payers are investigating or implementing methods for reducing health care costs, such as the establishment of capitated or prospective payment systems.

        We believe that government and private efforts to contain or reduce health care costs are likely to continue. These trends may lead third-party payers to deny or limit reimbursement for our products, which could negatively impact the pricing and profitability of, or demand for, our products.

Legal Proceedings

        On August 16, 1995, we filed a civil antitrust lawsuit against Hillenbrand. On September 27, 2002, a jury found in KCI's favor. On December 31, 2002, we settled our antitrust lawsuit with Hillenbrand.

        On February 21, 1992, Novamedix Limited, or Novamedix, filed a lawsuit against us in the United States District Court for the Western District of Texas. Novamedix manufactures a product that directly competes with the PlexiPulse. The suit alleges that the PlexiPulse infringes several patents held by Novamedix, that we breached a confidential relationship with Novamedix and a variety of ancillary claims. Novamedix seeks injunctive relief and monetary damages. A judicial stay which was in effect with respect to all patent claims in this case has been lifted. Although it is not possible to reliably predict the outcome of this litigation or the damages, which could be awarded, we believe that our

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defenses to these claims are meritorious and that the litigation will not have a material adverse effect on our business, financial condition or results of operations.

        On July 1, 1998, Mondomed N.V. filed an opposition in the European Patent Office to a European patent owned by Wake Forest University, which we license for V.A.C. systems. They were joined in this opposition by Paul Hartmann A.G. on December 16, 1998. On February 17, 2002, the Opposition Division of the European Patent Office issued a non-binding Preliminary Opinion in our favor. The opposing parties will have additional opportunities to assert their arguments in relation to an oral hearing that will be held prior to the issuance of a Final Opinion. A final date for the oral hearing has not been set. Although it is not possible to reliably predict the outcome of the opposition, we believe that the patent will be upheld.

        In August 2003, KCI and Wake Forest University filed a lawsuit against BlueSky Medical Corporation and related parties alleging infringement of multiple claims under two V.A.C. patents, arising from the manufacturing and marketing of a medical device by BlueSky. KCI and Wake Forest have asserted additional related claims which, together with the infringement claims, which claims we believe are meritorious.

        We are a party to several lawsuits arising in the ordinary course of our business. Provisions have been made in our financial statements for estimated exposures related to these lawsuits. In the opinion of management, the disposition of these matters will not have a material adverse effect on our business, financial condition or results of operations.

        The manufacturing and marketing of medical products necessarily entails an inherent risk of product liability claims. We currently have certain product liability claims pending for which provision has been made in our financial statements. Management believes that resolution of these claims will not have a material adverse effect on our business, financial condition or results of operations. We have not experienced any significant losses due to product liability claims and management believes that we currently maintain adequate liability insurance coverage.

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MANAGEMENT

Directors and Executive Officers

        Set forth below are the names, ages and positions of the directors and executive officers of KCI, together with certain other key personnel.

Name	Age	Position
Robert Jaunich II	63	Chairman of the Board
Dennert O. Ware	61	Director, President and Chief Executive Officer
James R. Leininger, M.D.	59	Director, Chairman Emeritus
John P. Byrnes	44	Director
Ronald W. Dollens	56	Director
James T. Farrell	38	Director
Harry R. Jacobson, M.D.	56	Director
N. Colin Lind	47	Director
David J. Simpson	56	Director
C. Thomas Smith	65	Director
Donald E. Steen	56	Director
Dennis E. Noll	48	Senior Vice President, General Counsel and Secretary
Christopher M. Fashek	54	President, KCI USA
Jorg W. Menten	46	President, KCI International
Martin J. Landon	44	Vice President, Chief Financial Officer (Acting)
G. Frederick Rush	54	Vice President, Corporate Development
Michael J. Burke	56	Vice President, Manufacturing
Rush E. Cone	53	Vice President, Human Resources
Daniel C. Wadsworth, Jr.	50	Vice President, Global Research and Development
Steven J. Hartpence	54	Vice President, Business Systems

        Robert Jaunich II    became a director and Chairman of the Board in November 1997. Mr. Jaunich is a Managing Director of Fremont Partners, which manages $1.6 billion targeted to private equity investments. He is also a member of the Board of Directors and Executive Committee of Fremont Group, a private investment company with assets in excess of $10 billion under management across a broad array of asset classes. Prior to joining Fremont Group in 1991, he was Executive Vice President and a member of the Chief Executive Office of Jacobs Suchard AG, a Swiss-based chocolate, sugar confectionery and coffee company. He currently serves as a director of CNF Transportation, Inc., as Chairman of the Managing General Partner of Crown Pacific Partners, L.P. and as Chairman of Juno Lighting, Inc. and several other privately held corporations.

        Dennert O. Ware    joined KCI in April 2000 as our President and Chief Executive Officer. Mr. Ware also serves as a director of KCI. From 1997 to his joining KCI in April 2000, he served as President and Chief Executive Officer of Roche Diagnostics Corporation, formerly Boehringer Mannheim Corporation, a manufacturer and distributor of medical diagnostic equipment. Mr. Ware served as President of the Biochemicals Division of Boehringer Mannheim from 1994 to 1997. Mr. Ware joined Boehringer Mannheim in 1972.

        James R. Leininger, M.D.    is the founder of KCI and served as Chairman of the Board of Directors from 1976 until 1997. From January 1990 to November 1994, Dr. Leininger served as President and Chief Executive Officer of KCI. From 1975 until October 1986, Dr. Leininger was also a director of the Emergency Department of the Baptist Hospital System in San Antonio, Texas.

        John P. Byrnes    became a director in 2003. He has served as Chief Executive Officer of Lincare Holdings Inc., a home health care company since January 1997 and as a director of Lincare since

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May 1997. Mr. Byrnes was appointed Chairman of the Board of Lincare Holdings Inc. in March 2000. Mr. Byrnes has been President of Lincare since June 1996. Prior to becoming President, Mr. Byrnes served Lincare in a number of capacities over a ten-year period, including serving as the Company's Chief Operating Officer throughout 1996.

        Ronald W. Dollens    became a director in 2000. Since 1994, Mr. Dollens has served as President, Chief Executive Officer and a director of Guidant Corporation, a corporation that pioneers lifesaving technology for millions of cardiac and vascular patients worldwide. Previously, he served as President of Eli Lilly and Company's Medical Devices and Diagnostics Division from 1991 until 1994. Mr. Dollens joined Eli Lilly and Company in 1972. Mr. Dollens also held the position of President and Chief Executive Officer of Guidant's subsidiary, Advanced Cardiovascular Systems, Inc. Mr. Dollens currently serves on the boards of Beckman Coulter, Inc., the Advanced Medical Technology Association, the Eiteljorg Museum, St. Vincent Hospital Foundation, the Indiana Health Industry Forum, Alliance for Aging Research and Butler University. In 2003, he was elected to serve a two-year term as Chairman of the Healthcare Leadership Council.

        James T. Farrell    became a director in November 1997. Mr. Farrell is a Managing Director of Fremont Partners and also a Partner of Fremont Group. Before joining Fremont Group in 1991, he was an associate at ESL Partners, a private investment partnership. In 1985, he began his career at Copley Real Estate Advisors, a real estate investment advisor firm that has since merged with AEW Capital Management L.P., Mr. Farrell is a former director of Coldwell Banker Corporation. He serves as a director of the nonprofit Pacific Research Institute, as the Chairman of the Board of Directors at Tapco International Corporation and Resun Leasing, Inc.

        Harry R. Jacobson, M.D.    became a director in 2003. Dr. Jacobson is Vice Chancellor for Health Affairs of Vanderbilt University, Nashville, Tennessee, a position he has held since 1997. He has been a director of Renal Care Group since 1995 and was Chairman of the Board of Directors of Renal Care from 1995 to 1997. He also currently serves as Professor of Medicine at Vanderbilt University Medical Center, a position he has held since 1985.

        N. Colin Lind    became a director in November 1997. Mr. Lind is a Managing Partner of Blum Capital Partners, L.P. ("BCP"), a public strategic block and private equity investment firm with approximately $2.5 billion in assets under management. Mr. Lind joined BCP in 1986. He currently serves on the board of PRG-Schultz International, Inc. and has previously been a director of three public and nine private companies.

        David J. Simpson    became a director in 2003. Mr. Simpson was appointed Vice President, Chief Financial Officer and Secretary of Stryker Corporation, a worldwide medical products and services company from 1987 to 2002. He is currently Executive Vice President of Stryker Corporation. He had previously been Vice President and Treasurer of Rexnord Inc., a manufacturer of industrial and aerospace products and is currently a director of Regeneration Technologies, Inc.

        C. Thomas Smith    became a director in 2003. Prior to his retirement in April 2003, Mr. Smith served as Chief Executive Officer and President of VHA Inc., a member-owned and member-driven health care cooperative, since 1991. From 1977 to 1991, Mr. Smith was President of Yale-New Haven Hospital and President of Yale-New Haven Health Services Corp. From 1971 to 1976, he was Vice President and Executive Director of Hospitals and Clinics and a member of the board of trustees for Henry Ford Hospital in Detroit. From January 1987 until April 2003, Mr. Smith was a member of the VHA board. He also served on the boards of Novation, LLC and the Healthcare Leadership Council. Mr. Smith is a past Chairman of the Council of Teaching Hospitals and a former member of the boards of the Association of American Medical Colleges, the International Hospital Federation, the Hospital Research and Educational Trust, the National Committee on Quality Healthcare, the Jackson Hole Group and Genentech, Inc. He also currently serves on the board of Neoforma, Inc.

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        Donald E. Steen    became a director in 1998. Mr. Steen founded United Surgical Partners International, Inc. ("USPI") in February 1998 and has served as its Chief Executive Officer and Chairman since that time. Mr. Steen served as President of the International Group of HCA—The Healthcare Company, formerly known as Columbia/HCA Healthcare Corporation, from 1995 until 1997 and as President of the Western Group of HCA from 1994 until 1995. Mr. Steen founded Medical Care International, Inc., a pioneer in the surgery center business, in 1982. Mr. Steen is also a member of the board of directors of Horizon Health Corporation.

        Dennis E. Noll    joined KCI in February 1992 as our Senior Corporate Counsel and was appointed Vice President, General Counsel and Secretary in January 1993. Mr. Noll was promoted to Senior Vice President in September 1995. Prior to joining KCI in February 1992, Mr. Noll was a shareholder of the law firm of Cox & Smith Incorporated.

        Christopher M. Fashek    joined KCI in February 1995 as President, KCI USA. Prior to KCI, he served as General Manager, New Zealand at Sterling Winthrop, a division of Eastman Kodak, from February 1993 to February 1995, and served as Vice President of Sales at Sterling Winthrop USA, a division of Eastman Kodak, from 1989 until February 1993.

        Jorg W. Menten    joined KCI in July 2001 as President, KCI International. From August 1999 to June 2001, Mr. Menten was Chief Financial Officer of 4Sigma GmbH, a health care services venture in Hamburg, Germany. From April 1998 to July 1999, Mr. Menten was Executive Vice President, Finance and Controlling of F. Hoffman—LaRoche AG, a pharmaceutical company in Basel, Switzerland. Prior to April 1998, Mr. Menten was Chief Financial Officer of Boehringer Mannheim Europe in Amsterdam, the Netherlands.

        Martin J. Landon    has served as Vice President and Acting Chief Financial Officer since December 2002. Mr. Landon joined KCI in May 1994 as Senior Director of Corporate Development and was promoted to Vice President, Accounting and Corporate Controller in October 1994. From 1987 to May 1994, Mr. Landon worked for Intelogic Trace, Inc., an independent computer maintenance company, where his last position was Vice President and Chief Financial Officer.

        G. Frederick Rush    joined KCI as Vice President, Corporate Development in June 2000. Prior to joining KCI, Mr. Rush was Senior Vice President, Strategy and Business Development for Roche Diagnostics Corporation, formerly Boehringer Mannheim Corporation from April 1998 to April 2000. During a portion of this time, he also served as Vice President, Laboratory Diagnostics from May 1999 to February 2000. From August 1995 to April 1998, Mr. Rush was Senior Vice President, Global Marketing and Sales for Boehringer Mannheim Biochemicals. Prior to that he was Vice President Strategy and Business Development for Boehringer Mannheim Diagnostics.

        Michael J. Burke    joined KCI in September 1995 as Vice President, Manufacturing. Prior to KCI, Mr. Burke worked for Sterling Winthrop, Inc., a division of Eastman Kodak Company, for 25 years, where he served as Vice President, Manufacturing and as General Manager, Sterling Health HK/China since 1992.

        Rush E. Cone    joined KCI in January 2001 as Vice President, Human Resources. From March 1999 to December 2000, Mr. Cone was a Senior Consultant with Holland & Davis, L.L.P., a general consulting firm. From August 1996 to March 1999, Mr. Cone, a licensed attorney, was head of Administration for Pacific Gas & Electric ("PG&E") Gas Transmission in Texas. Prior to August 1996, Mr. Cone worked in various legal and operational positions within PG&E and its predecessor, Valero Energy Corporation.

        Daniel C. Wadsworth, Jr.    joined KCI in March 2002 as Vice President, Research and Development. Prior to joining KCI, Mr. Wadsworth worked for C.R. Bard, Inc., a worldwide health

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care products company focused on vascular, urology, and oncology disease states, for 18 years, where he most recently served as Staff Vice President, New Technology and Research Alliances.

        Steven J. Hartpence    joined KCI in October 2001 as Vice President, Reimbursement Systems and was promoted to Vice President, Business Systems in December 2002. Prior to joining KCI, Mr. Hartpence worked for Sigma-Aldrich Corporation, a biochemical and organic chemical products company, for 9 years, where he most recently served as Vice President, Engineering.

Executive Compensation

        The following table sets forth the compensation paid or accrued by Kinetic Concepts, Inc. to the Chief Executive Officer and each of the four most highly compensated executive officers (collectively, the "named executive officers") for their services for the years ended December 31, 2002, 2001 and 2000.

	Annual Compensation								Long Term Compensation Awards
Name and Principal Position	Year	Salary		Bonus			Other Annual Compensation(1)		Securities Underlying Options	All Other Compensation(2)
Dennert O. Ware Chief Executive Officer & President	2002 2001 2000	$	495,000 467,000 318,750	$	314,991 400,950 190,500		$	— — 332,799	— — 5,500,000	$	6,039 3,917 1,755
Dennis E. Noll Senior Vice President, General Counsel & Secretary	2002 2001 2000	$	233,200 220,000 153,900	$	323,716 170,200 84,000		$	— — —	— — 85,714	$	2,727 1,664 1,478
Christopher M. Fashek President, KCI USA	2002 2001 2000	$	247,200 246,600 239,250	$	139,239 144,067 97,000		$	— — —	— — 128,571	$	3,228 2,225 2,179
G. Frederick Rush Vice President, Corporate Development	2002 2001 2000	$	251,505 235,500 125,340	$	127,332 177,100 —		$	— — —	— 100,000 396,429	$	3,231 2,145 460
Michael J. Burke Vice President, Manufacturing	2002 2001 2000	$	221,220 213,333 200,000	$	106,080 109,200 84,000		$	— — —	— — 85,714	$	3,300 2,021 1,966
William M. Brown(3) Vice President & Chief Financial Officer	2002 2001 2000	$	260,303 252,300 226,000	$	860,000 149,122 95,000	(4)	$	— — 52,245	— — 128,571	$	4,515 3,250 3,074

(1)

The personal benefits provided to each of the named executive officers under various programs did not exceed 10% of the individual's combined salary and bonus in any year except Messrs. Ware and Brown. Mr. Ware received $204,399 for reimbursement of relocation expenses and $128,400 for reimbursement for the payment of taxes in 2000. Mr. Brown received $27,435 for reimbursement of relocation expenses and $18,290 for reimbursement for the payment of taxes in 2000.

(2)

The "All Other Compensation" column includes a contribution of $2,000 in 2002 and $1,000 in 2001 and 2000 to our 401(k) plan for the named individuals and a premium for term life insurance in an amount which varied depending on the age of the executive officer.

(3)

Mr. Brown served as KCI's Vice President and Chief Financial Officer from July 1998 to December 2002.

(4)

Mr. Brown received $750,000 as part of a severance package.

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Management Plans

        In April 2000, we established the CEO Special Bonus Plan. This plan establishes a bonus pool for our chief executive officer of up to $13 million, which is payable based on meeting specific performance guidelines. Part one of this plan consists of the payment of up to $8 million in the event of an initial public offering or a sale transaction, in either case, where the per share price is at least $4.8125. If the per share price is less than $4.8125, however, the payment will be reduced by an amount equal to $175,000 multiplied by a fraction, the numerator of which is $4.8125 minus the per share price, and the denominator of which is .05. Part two of this plan consists of the additional payment of $5 million upon the consummation of an initial public offering or a sales transaction, in either case, where the per share price is equal to $9.00 or more or when the closing price of KCI's common stock on a national exchange or the Nasdaq National Market for thirty consecutive days has been at least $9.00 per share. The bonuses payable under the CEO Special Bonus Plan are payable to Dennert O. Ware, our chief executive officer. The Board of Directors may alter, amend, suspend or terminate the CEO Special Bonus Plan in whole or in part at any time, but no amendment may adversely affect awarded benefits previously granted without Mr. Ware's consent.

        In April 2000, we established the 2000 Special Bonus Plan. This plan establishes a 2000 bonus pool of up to $6 million, which is payable based on meeting specific performance guidelines. Part one of this plan consists of payment of $4 million in the event of an initial public offering or sale transaction, in either case, where the per share price is at least $4.8125. If the per share price is less than $4.8125, however, the payments will be reduced by an amount equal to $87,500 multiplied by a fraction, the numerator of which is $4.8125 minus the per share price and the denominator of which is .05. Part two of this plan consists of the additional payment of up to $2 million upon the consummation of an initial public offering or sale transaction, in either case, where the per share price is equal to $9.00 or more or when the closing price of KCI's common stock on a national exchange or the Nasdaq National Market for thirty consecutive days has been at least $9.00 per share. The bonuses under the 2000 Special Bonus Plan will be paid to members of management who received stock options in April 2000 and who are chosen by the Board of Directors, in its sole discretion, at the time of any initial public offering or a sale transaction. The Board of Directors may alter, amend, suspend or terminate the 2000 Special Bonus Plan in whole or in part at any time but no amendment may adversely affect awarded benefits of any participant without the participant's consent.

Employment and Severance Agreements

        Upon hiring each of the named officers, KCI and the named officer each signed an offer letter outlining the terms of employment for such officer. Each of the offer letters set forth standard terms summarizing salary, bonus and benefits. None of the offer letters establishes a term of employment for any named officer. For information on the most recent salary and bonus information for the named officers, see "—Executive Compensation." Under Mr. Ware's offer letter, he is entitled to severance equal to one year's salary in the event he leaves the employment of KCI for a reason other than an act of malfeasance or moral turpitude. None of the other named officers has any severance arrangement.

Compensation of the Board of Directors

        During 2002, each director who was not an employee of KCI or its affiliates received an annual fee of $15,000 plus $2,500 for each board meeting attended. Aggregate fees paid to directors in 2002 were $67,500. Except for the foregoing and except for reimbursement of travel expenses to attend board meetings, the directors of KCI received no other compensation for services as directors.

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2003 Non-Employee Directors Stock Plan

        Our 2003 Non-Employee Directors Stock Plan became effective on May 28, 2003. The directors plan provides for the automatic grant to our non-employee directors of options to purchase shares of our common stock, restricted stock that is subject to vesting requirements and unrestricted stock that is not subject to vesting requirements.

Maximum Number of Shares

        The maximum aggregate number of shares of common stock that may be issued in connection with grants under the directors plan is 400,000 shares, subject to adjustment as provided for in the directors plan.

        If an option or restricted stock granted under this plan is forfeited, expires or terminates, the forfeited shares that are not purchased again become again available for issuance under the directors plan.

Administration

        The directors plan is administered by a committee of the board of directors. The committee has the authority to:

•

interpret the director plan;



•

prescribe the form of any agreement and notice and manner for executing such agreement and giving such notice;



•

amend all agreements under the director plan;



•

adopt, amend and rescind rules for the administration of the director plan;



•

make all determinations it deems advisable for the administration of the director plan;



•

amend the terms of outstanding options and impose terms and conditions on the shares of stock issued under the director plan;



•

impose restrictions, conditions or limitations as to the timing and manner of any resales, subject to consent of any participant whose rights would be adversely materially affected; and



•

waive conditions and/or accelerate the exercisability or vesting of an option or stock award under the director plan.

Automatic Option Grants and Restricted Stock Awards

        Each non-employee director who is not receiving a management fee from us or who was not appointed by any of our shareholders who receive a management fee from us and serving on May 28, 2003 will automatically be granted on such date (1) an option to purchase a number of shares of stock equal to $50,000 divided by the fair market value of the stock and (2) a restricted stock award equal to $50,000 divided by the fair market value of the stock as of the date of grant. Each such person who is elected to be a non-employee director after May 28, 2003 will automatically be granted an option to purchase a number of shares equal to $50,000 divided by the fair market value of the stock and a restricted stock award equal to $50,000 divided by the fair market value of the stock as of the date of grant, which is the first date after May 28, 2003 that the person is elected to serve as a board member. Each non-employee director who is receiving a management fee from us and each non-employee director who is a principal of, or a non-employee director appointed by, a shareholder of ours which is receiving a management fee from us, will automatically be granted an option to purchase a number of shares equal to $50,000 divided by the fair market value of the stock and a restricted stock award equal

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to $50,000 divided by the fair market value of the stock as of the date of grant, which is the earlier of the date on which an underwriting agreement is executed and priced in connection with the initial public offering of common stock or the date such management fee is terminated. Each year thereafter, each non-employee director will automatically be granted an additional option to purchase a number of shares of stock equal to $50,000 divided by the fair market value of the stock and a restricted stock award equal to $50,000 divided by the fair market value of the stock on the anniversary of the initial grant date. Each option will vest over three years with one-twelfth of the number of shares of stock subject to the option vesting every three months, provided that the non-employee director is serving as a board member.

Option Terms

        The right to exercise an option will terminate seven years after the grant date. Generally, options will terminate three months after the optionholder's service terminates. However, if such termination is due to the optionholder's death or disability, the option may be exercised within 12 months after such death or disability. If an optionholder is terminated as a board member on account of fraud, dishonesty or other acts detrimental to our interests, the option will terminate as of the date of such termination.

Restricted Stock Terms

        The restricted stock award is granted to a non-employee director only pursuant to an agreement which sets forth the terms and conditions of the restricted stock award. The agreement may contain additional provisions and restrictions that are not inconsistent with the directors plan. During the restriction period a non-employee director may not sell, assign, transfer, pledge or otherwise dispose of the shares of stock subject to the restricted stock award except as provided for in the directors plan. The restriction period for the restricted stock is three years. However, if during the restriction period, the non-employee director is terminated as a board member by death or disability, or in the event the non-employee director fails to be re-elected to serve as a board member, then for each full year such director served as a board member, one-third of the shares of stock subject to the restricted share award will be deemed fully vested and the restriction with respect to these shares will lapse on the date of termination.

Unrestricted Stock Awards and Terms

        Each non-employee director who is not receiving a management fee from us or who was not appointed by any of our shareholders who receive a management fee from us and serving on May 28, 2003 will automatically be granted on such date an unrestricted stock award with respect to a number of shares of stock equal to $10,000 divided by the fair market value of the stock as of the date of grant. Each such person who is elected to be a non-employee director after May 28, 2003 will automatically be granted an unrestricted stock award with respect to a number of shares of stock equal to $10,000 divided by the fair market value of the stock as of the date of grant. Each non-employee director who is receiving a management fee from us and each non-employee director who is a principal of, or a non-employee director appointed by, a shareholder of ours which is receiving a management fee from us, will automatically be granted an unrestricted stock award with respect to a number of shares of stock equal to $10,000 divided by the fair market value of the stock as of the date of grant, which is the earlier of the date on which any underwriting agreement is executed and priced in connection with the initial public offering of common stock or the date such management fee is terminated. Each year thereafter on the anniversary of the initial grant date, each non-employee director will automatically be granted an additional unrestricted stock award with respect to a number of shares of stock equal to $10,000 divided by the fair market value of the stock on such date. Ownership of shares under an unrestricted stock award vests immediately upon the grant date.

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Other Provisions

        Transactions such as stock dividends, stock splits, reverse stock splits, subdivisions consolidations or other similar events may change the number of shares subject to the directors plan and to outstanding options. In that event, the committee may appropriately adjust the directors plan as to the maximum number of shares of stock with respect to which options or stock awards may be granted and the exercise price of options. The committee may not modify the directors plan or the terms of any options or stock awards then outstanding or to be granted under the directors plan to provide for the issuance under the directors plan of a different class or stock or kind of securities.

        Generally, all options that are outstanding becomes fully vested and exercisable and the restriction period on an outstanding restricted stock award automatically expires and all restrictions imposed under such restricted stock award immediately lapse upon the occurrence of any of the following events:

•

any person other than an individual who is a shareholder on the date of the adoption of the directors plan becomes the "beneficial owner" of our securities representing more than 50% of the total voting power represented by our then outstanding voting securities;



•

shareholder approval of a merger or consolidation in which we are not the surviving corporation; or



•

shareholder approval of a liquidation or a sale or disposition of all of substantially all of our assets.

        In the event of any one of the above events, the committee may, in its own discretion, provide that:

•

any outstanding option be assumed by the surviving corporation or any successor corporation;



•

any outstanding option be converted into a right to receive cash in an amount equal to the aggregate value of the consideration that would have been paid or issued in exchange for shares of the stock had the option been exercised immediately prior to the above-mentioned events less the aggregate exercise price of the option;



•

any outstanding option cannot be exercised; or



•

any outstanding option may be dealt with in any other manner determined in the discretion of the committee.

Option Grants and Exercises in Last Fiscal Year

        No options were granted to or exercised by any of the named executive officers during 2002.

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Fiscal Year-End Option Value

        The following table sets forth certain information concerning the number and value of the options held by the named executive officers at the end of the fiscal year ended December 31, 2002. There were no options exercised in 2002 by any of the named executive officers.

Name	Number of Underlying Unexercised Options at FY-End Exercisable/ Unexercisable	Unexercised Value of Options at In-the-Money FY-End Exercisable/ Unexercisable(1)
Dennert O. Ware	2,625,000	$	5,742,188
	2,875,000		1,914,063
Dennis E. Noll	536,000	$	1,503,750
	69,714		52,500
Christopher M. Fashek	1,024,800	$	3,346,125
	104,571		78,750
G. Frederick Rush	142,000	$	266,875
	354,429		575,313
Michael J. Burke	593,600	$	2,124,750
	69,714		52,500
William M. Brown(2)	—		—
	—		—

(1)

KCI's common stock is not publicly traded. In August 2001, the Board of Directors determined that the fair market value of our common stock, for purposes of the Kinetic Concepts, Inc. Management Equity Plan, was $7.00. Accordingly, for purposes of this calculation, the fair market value of the common stock as of December 31, 2002 was assumed to be $7.00 per share.

(2)

Mr. Brown's options were cancelled in connection with his severance agreement in December 2002.

Indemnification of Directors and Officers and Limitation of Liability

        Texas Law, our Restated Articles of Incorporation and our Second Amended and Restated By-Laws contain provisions for indemnification of our directors and officers.

        Article 2.02-1 of the Texas Business Corporation Act, or TBCA, provides generally that a person sued as a director, officer, employee or agent of a corporation, or while serving at the request of the corporation as a director, officer, partner, employee, agent, or similar functionary of another enterprise, may be indemnified by the corporation against judgments, penalties, fines, settlements and reasonable expenses if it is determined that such person has conducted himself in good faith and it is reasonably believed, in the case of conduct in his official capacity with the corporation, that his conduct was in the corporation's best interests, and in all other cases, that his conduct was at least not opposed to the corporation's best interests (and, in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful). Indemnification of a person found liable to the corporation or found liable on the basis that personal benefit was improperly received by him is limited to reasonable expenses actually incurred by the person in connection with the proceeding, and shall not be made if the person is found liable for willful or intentional misconduct in the performance of his duty to the corporation. Indemnification is mandatory, however, in the case of such person being wholly successful, on the merits or otherwise, in the defense of the proceeding.

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        Article 2.02-1 of the TBCA also authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or who is or was serving at the request of the corporation as a director officer, employee agent or similar functionary of another entity or enterprise against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against that liability under Article 2.02-1.

        Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act provides that a corporation's articles of incorporation may limit or eliminate the directors' liability for monetary damages to the corporation or its shareholders for an act or omission in the director's capacity as a director, except that no limitation or elimination of liability is permitted to the extent the director is found liable for a breach of the duty of loyalty, an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law, a transaction involving an improper personal benefit to the director, or an act or omission for which liability is expressly provided by an applicable statute.

        Article Eight paragraph (2) of our Amended and Restated Articles of Incorporation states that, to the extent permitted by the TBCA, a director of the Company shall not be personally liable to the Company or its shareholders for monetary damages for an act or omission in the director's capacity as a director, except for liability for (a) a breach of the director's duty of loyalty to the Company or its shareholders, (b) an act or omission not in good faith that constitutes a breach of duty of the director to the Company or an act or omission that involves intentional misconduct or a knowing violation of the law, (c) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, or (d) an act or omission for which the liability for the director is expressly provided for by statute.

        Article Twelve of our Amended and Restated Articles of Incorporation states that we shall indemnify our directors to the fullest extent provided by the TBCA.

        Article VIII, Section 2 of our Restated By-Laws provides that, subject to certain conditions, we shall indemnify a director who acted in good faith and in a manner which he reasonably believed to be in, or not opposed to, our best interests, and in the case of any criminal proceeding, had no reasonable cause to believe the conduct was unlawful. Indemnification would cover expenses reasonably incurred, including attorneys' fees, judgments, fines and amounts paid in settlement.

        Article VIII, Section 16 of our Restated By-Laws provide that our board of directors may cause us to purchase and maintain insurance on behalf of any present or past director, officer, employee or agent (including any such person who is serving, at the request of the Company, in a similar or related capacity for another entity), insuring against any liability asserted against such person incurred in the capacity of such position or arising out of such status, regardless of whether we would have the power to indemnify such person.

        We will indemnify each of Fremont Partners, James R. Leininger, M.D. and Blum Capital Partners and its respective directors, members, officers, employees, agents, representatives and affiliates for losses, damages, costs or expenses which it may suffer arising out of its performance of services under the Management Services Agreement, provided that it will not be indemnified for losses resulting primarily from its gross negligence or willful misconduct.

        We maintain directors' and officers' liability insurance and intend to continue to maintain this insurance in the future.

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PRINCIPAL SHAREHOLDERS

Beneficial Ownership of Capital Stock

        Based upon information received upon request from the persons concerned, each person known to be the beneficial owner of more than five percent of our outstanding common stock or our Series A Convertible Preferred Stock, each director, nominee for director, named executive officer and all directors and executive officers as a group, owned beneficially, as of September 15, 2003, the number and percentage of outstanding shares of common stock and Series A Convertible Preferred Stock indicated in the following table. Unless otherwise indicated, the address of each of the individuals listed in this table is c/o Kinetic Concepts, Inc., 8023 Vantage Drive, San Antonio, Texas 78230.

		Common Stock			Series A Convertible Preferred Stock
Name		Shares Beneficially Owned(1)	Percent of Class		Shares Beneficially Owned	Percent of Class
Fremont Partners, L.P. and related parties(2)(3)		20,821,393	45.54	%	75,872	28.76	%
Blum Capital Partners, L.P. and related parties(4)		13,754,771	31.14	%	50,122	19.00	%
DLJ Merchant Banking and related parties(2)(5)		2,227,748	5.14	%	37,000	14.03	%
Goldman, Sachs & Co. and related parties(2)(6)		2,107,329	4.87	%	35,000	13.27	%
Directors and Executive Officers
	Robert Jaunich II(2)(7)	20,821,393	45.54	%	75,872	28.76	%
	James R. Leininger, M.D.(8)	17,559,315	39.02	%	64,006	24.26	%
	Dennert O. Ware(9)	2,023,000	4.69	%	—	—
	John P. Byrnes(10)(11)	66,625	*		1,000	*
	Ronald W. Dollens(10)(12)	78,283	*		—	—
	James T. Farrell(2)(7)	20,821,393	45.54	%	75,872	28.76	%
	Harry R. Jacobson, M.D.(10)(13)	36,520	*		500	*
	N. Colin Lind(4)(14)	13,754,771	31.14	%	50,122	19.00	%
	David J. Simpson(10)(15)	21,468	*		250	*
	C. Thomas Smith(10)(16)	9,065	*		44	*
	Donald E. Steen(10)(17)	97,752	*		—	—
	Dennis E. Noll(9)	314,432	*		—	—
	Christopher M. Fashek(9)	599,271	1.44	%	—	—
	G. Frederick Rush(9)	128,894	*		—	—
	Michael J. Burke (9)	347,725	*		—	—
	Rush E. Cone(9)	46,240	*		—	—
	Steven J. Hartpence(9)	16,000	*		—	—
	Martin J. Landon(9)	80,920	*		—	—
	Jorg W. Menten(9)	34,680	*		—	—
	Daniel C. Wadsworth, Jr.(9)	16,000	*		—	—
Directors and Officers as a Group		56,052,354	99.31	%	191,794	72.70	%

*

Less than one percent (1%).

(1)

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, (i) shares of common stock subject to options held by that person that are currently exercisable or become exercisable within 60 days of September 15, 2003 are considered to be beneficially owned by such person and (ii) shares of common stock which can be acquired upon the conversion of Series A Convertible Preferred Stock within 60 days of September 15, 2003 are

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considered to be beneficially owned by such person. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

(2)

The person or entity named has sole voting power and investment power with respect to all shares indicated.

(3)

Shares of common stock currently held by Fremont Partners, L.P. and its related parties include (i) 8,655,164 shares held by Fremont Acquisition Co. II, L.L.C., (ii) 2,154,186 shares held by Fremont Acquisition Co. IIA, L.L.C., (iii) 3,318,502 shares held by Fremont-KCI Co-Investment Co., L.L.C. and (iv) 2,125,327 shares held by Fremont-KCI Co-Investments II, L.L.C. Shares of Series A Convertible Preferred Stock held by Fremont Partners, L.P. includes (i) 47,824 shares held by Fremont Partners III, L.P., (ii) 2,176 shares held by Fremont Partners III Side-By-Side, L.P., (iii) 21,355 shares held by Fremont Acquisition Company II, L.L.C., and (iv) 4,517 shares held by Fremont Acquisition Company IIA, L.L.C. The address for Fremont Partners, L.P. and its related parties is 199 Fremont Street, Suite 2300, San Francisco, CA 94105.

(4)

Shares of common stock held by Blum Capital Partners, L.P. and its related parties include (i) 9,641,891 shares held by RCBA-KCI Capital Partners, L.P., (ii) 598,115 shares held by Stinson Capital Partners II, L.P., (iii) 486,907 shares held by Blum Strategic Partners II, L.P. and (iv) 10,040 shares held by Blum Strategic Partners II GmbH & Co. KG. Shares of Series A Convertible Preferred Stock held by Blum Capital Partners, L.P. and its related parties includes (i) 2,273 shares held by Blum Strategic Partners II, L.P., (ii) 47 shares held by Blum Strategic Partners II GmbH and Co. KG, (iii) 2,792 shares held by Stinson Capital Partners II, L.P., and (iv) 45,010 shares held by RCBA-KCI Capital Partners, L.P.

Blum Capital Partners, L.P. serves as the general partner of RCBA-KCI Capital Partners, L.P. and Stinson Capital Partners II, L.P. with voting and investment discretion. The shares owned by RCBA-KCI Capital Partners, L.P. and Stinson Capital Partners II, L.P. may be deemed to be owned indirectly by the following parties: (a) Blum Capital Partners, L.P.; (b) Richard C. Blum & Associates, Inc., the sole general partner of Blum Capital Partners, L.P.; and (c) Richard C. Blum, Chairman of Richard C. Blum and Associates, Inc. Richard C. Blum & Associates, Inc., Blum Capital Partners, L.P. and Mr. Blum disclaim beneficial ownership of these shares, except to the extent of any pecuniary interest therein.

Blum Strategic GP II, L.L.C. serves as the general partner of Blum Strategic Partners II, L.P. and as the managing limited partner of Blum Strategic Partners II GmbH & Co. KG. The shares owned by Blum Strategic Partners II, L.P. and Blum Strategic Partners II GmbH & Co. KG, may be deemed to be owned indirectly by the following parties: (a) Blum Strategic GP II, L.L.C., the general partner of Blum Strategic Partners II, L.P. and the managing limited partner of Blum Strategic Partners II GmbH & Co. KG.; and (b) Richard C. Blum, a managing member of Blum Strategic GP II, L.L.C. Both Blum Strategic GP II, L.L.C. and Mr. Blum disclaim beneficial ownership of these shares, except to the extent of any pecuniary interest therein. The address for Blum Capital Partners, L.P. and its related parties is 909 Montgomery Street, Suite 400, San Francisco, CA 94133.

(5)

Shares of Series A Convertible Preferred Stock held by DLJ Merchant Banking and its related parties include (i) 29,311 shares held by DLJ Merchant Banking Partners III, L.P., (ii) 2,018 shares held by DLJ Merchant Banking III, Inc., on behalf of DLJ Offshore Partners III, C.V., (iii) 518 shares held by DLJ Merchant Banking III, Inc., on behalf of DLJ Offshore Partners III-1, C.V., (iv) 369 shares held by DLJ Merchant Banking III, Inc., on behalf of DLJ Offshore Partners III-2, C.V., (v) 245 shares held by DLJ MB PartnersIII GmbH & Co. KG, (vi) 99 shares held by Millennium Partners II, L.P. and (vii) 4,440 shares held by MBP III Plan Investors, L.P. The address for DLJ Merchant Banking and its related parties is Eleven Madison Ave., 16th Floor, New York, NY 10010.

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(6)

Shares of Series A Convertible Preferred Stock held by Goldman, Sachs & Co. and its related parties includes (i) 18,864 shares held by GS Capital Partners 2000, L.P., (ii) 6,854 shares held by GS Capital Partners 2000 Offshore, L.P., (iii) 788 shares held by GS Capital Partners 2000 GmbH & Co. Beteiligungs KG, (iv) 5,994 shares held by GS Capital Partners 2000 Employee Fund, L.P., and (v) 2,500 shares held by Goldman Sachs Direct Investment Fund 2000, L.P. The address for Goldman, Sachs & Co. and its related parties is 85 Broad Street, 10^th Floor, New York, NY 10004.

(7)

Messrs. Jaunich and Farrell are managing directors of Fremont Partners, L.P. and certain of its related parties. The shares shown include the shares beneficially owned by Fremont Partners, L.P. and such related parties. Messrs. Jaunich and Farrell disclaim beneficial ownership of the shares held by Fremont Partners, L.P. and such related parties, except to the extent of their respective proportionate pecuniary interest in such shares.

(8)

Includes 10,100 shares of common stock held by J&E Investments, L.P., in which Mr. Leininger is a 1% general partner. Mr. Leininger disclaims beneficial ownership in such shares, except to the extent of his proportionate pecuniary interest in such shares.

(9)

Shares consist entirely of common stock acquirable upon the exercise of options.

(10)

The persons named are outside directors and are not affiliated with Fremont Partners, L.P. or Blum Capital Partners, L.P.

(11)

Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares), 416 shares acquirable upon the exercise of options and 60,209 shares acquirable upon the conversion of Series A Convertible Preferred Stock.

(12)

Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares) and 72,283 shares acquirable upon the exercise of options.

(13)

Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares), 416 shares acquirable upon the exercise of options and 30,104 shares acquirable upon the conversion of Series A Convertible Preferred Stock.

(14)

N. Colin Lind is the managing director of Richard C. Blum & Associates, Inc., which is the general partner of Blum Capital Partners, L.P. and a Managing Member of Blum Strategic GP II, L.L.C., which is the general partner of Blum Strategic Partners II, L.P. and the Managing limited partner of Blum Strategic Partners II GmbH & Co. KG. Mr. Lind disclaims beneficial ownership of the shares held by Blum Capital Partners, L.P. and its related parties, except to the extent of his proportionate pecuniary interest in such shares.

(15)

Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares), 416 shares acquirable upon the exercise of options and 15,052 shares acquirable upon the conversion of Series A Convertible Preferred Stock.

(16)

Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares), 416 shares acquirable upon the exercise of options and 2,649 shares acquirable upon the conversion of Series A Convertible Preferred Stock.

(17)

Common stock holdings include 39,536 shares currently held (5,000 of which are restricted shares) and 58,216 shares acquirable upon the exercise of options.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Pursuant to a Management Services Agreement entered into in November 1997 by and among KCI, Fremont Partners, L.P., James R. Leininger, M.D., and Blum Capital Partners, L.P., we have made semi-annual payments to each of Fremont Partners, L.P., James R. Leininger, M.D., and Blum Capital Partners, L.P. of approximately $300,000, $250,000 and $200,000 respectively, as a management fee. On August 11, 2003, we amended the Management Services Agreement to, among other things, terminate the management fee and continue to provide for indemnification and reimbursement of expenses. We made final management fee payments of $300,000 and $450,000 in July and August 2003, respectively, relating to services performed through June 30, 2003. Fremont Partners, Dr. Leininger and Blum Capital Partners own approximately 36.5%, 30.8% and 24.1%, respectively, of the outstanding voting stock of KCI. In addition, Dr. Leininger serves as Chairman Emeritus on the board of directors and each of Blum and Fremont have representatives who serve on the board of directors.

        KCI will indemnify each of Fremont Partners, Dr. Leininger and Blum Capital Partners and their respective directors, members, officers, employees, agents, representatives and affiliates for losses, damages, costs or expenses which they may suffer arising out of their performance of services under the Management Services Agreement, provided that they will not be indemnified for losses resulting primarily from their gross negligence or willful misconduct.

        For 2002, we purchased critical care frames used to manufacture one of our therapeutic surface products from Stryker Corporation in the amount of approximately $3.6 million. David J. Simpson, one of our directors, is an executive officer of Stryker Corporation.

        Fremont Partners, L.P., Blum Capital Partners, L.P. and James R. Leininger, M.D., and their affiliates, purchased an aggregate $190.0 million of the convertible preferred stock we offered concurrently with the offering of the old notes. In addition, John P. Byrnes, Harry R. Jacobson, M.D., David J. Simpson and C. Thomas Smith, all of whom are non-employee directors of the Company, purchased an aggregate $1.316 million of the convertible preferred stock that we offered in connection with the recapitalization. (See "Summary—The Recapitalization.")

        In connection with the preferred stock sale, Fremont Partners, L.P., Blum Capital Partners, L.P. and James R. Leininger, M.D., and their affiliates, along with certain other non-affiliates that concurrently purchased additional preferred stock as part of the recapitalization, entered into an Investors' Rights Agreement with us. The Investor Rights' Agreement provides for, among other things, "piggy-back" registration rights, restrictions on transfer of the shares of preferred stock, rights of first offer, "tag-along" rights and "bring-along" rights. (See "Description of the Investors' Rights Agreement.")

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DESCRIPTION OF THE SHAREHOLDER RIGHTS AGREEMENT

        In connection with the recapitalization in 1997, we entered into an Agreement Among Shareholders ("Shareholder Rights Agreement"), dated November 5, 1997, with Fremont Partners, L.P. ("Fremont"), Richard C. Blum & Associates, L.P. ("RCBA"), James R. Leininger, M.D. and other shareholders as of the date of the agreement. The following is a summary of the material provisions of the Shareholder Rights Agreement, as amended on June 25, 2003 and August 11, 2003, but does not restate the agreement in its entirety.

Transfer of Shares

        Restrictions on Transfer.    Subject to certain exceptions, no shares of common stock may be sold, transferred, pledged or hypothecated until six months after the common stock has been the subject of a public offering.

        Tag-Along Rights.    If, at any time after the restrictions on transfer have expired, a shareholder proposes to sell common stock for value, subject to certain exceptions and notice provisions, the shareholder must offer to include in the proposed sale shares of common stock designated by any of the other shareholders on apro rata basis. If the consideration to be received includes any securities, only shareholders that are accredited investors under the Securities Act may include their shares in the sale.

        Drag-Along Rights.    If, at any time after the restrictions on transfer have expired, Fremont or RCBA, or certain of their affiliates, proposes to sell all of the common stock they own to a third party, they will have the right to require Dr. Leininger to include all of the shares he holds in such sale, subject to certain notice requirements. Dr. Leininger is not required to sell his shares if he holds less than 10% of the issued and outstanding shares on the date he receives notice.

Governance and Voting

        Until the common stock is the subject of a public offering, the Board of Directors of KCI is required to have at least eight members, consisting of (1) one designated by Fremont, (2) one designated by Fremont Partners III, L.P., an affiliate of Fremont, (3) two designated by RCBA, (4) Dr. Leininger (so long as he shall own at least 15% of the outstanding equity of KCI), (5) Dennert O. Ware (or any successor chief executive officer and (6) two or more independent outside directors, not affiliated with Fremont or RCBA and) designated by the unanimous vote of the nominating committee of KCI's board of directors. The nominating committee shall comprise (i) Dr. Leininger, (ii) one director designated by Fremont and (iii) one director designated by RCBA.

Preemptive Rights

        Each shareholder has the right to purchase up to that shareholder'spro rata share of any capital stock that KCI may propose to sell or issue. The preemptive rights granted to Dr. Leininger will be suspended if at the time of the proposed issuance and sale of capital stock, the exercise of that right would result in Fremont or RCBA, alone or together with certain of their affiliates, collectively holding less than a majority of the issued and outstanding shares of common stock. The preemptive rights do not apply to any issuance as a dividend or stock split or in an underwritten public offering.

Registration Rights

        Demand Registration.    If there has not been a public offering five years after the Shareholder Rights Agreement, each shareholder may make one written request to KCI for the registration of at least 33% of their shares under Form S-3. Each shareholder also has the right to request an additional registration of at least 33% of their shares held between one and three years following a public

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offering. The order of sale is: (1) the demand registration; (2) any shares pursuant to a piggyback registration right; and (3) the shares of KCI. The shareholder shall select the investment bankers and managers subject to KCI's approval. KCI will pay any related expenses.

        Piggyback Registration Rights.    KCI is obligated to provide 20 days written notice to shareholders if it prepares and files a registration statement (other than on Form S-4, Form S-8 or other limited purpose form) in connection with KCI's or another security holder's proposed offer and sale of common stock or equity securities convertible into common stock. Each shareholder then has ten days to notify KCI of the number of shares the shareholder desires to be included in the registration statement. The order of sale for a piggyback registration will be KCI's shares and then the shares requested by the shareholders on apro rata basis. KCI will pay expenses related to such registration.

        Indemnification.    KCI will indemnify each shareholder, underwriter and controlling person for losses, damages, liabilities, costs, or expenses caused by any alleged untrue statement or alleged omission of a material fact by KCI in a registration statement, any prospectus contained in a registration statement, or any amendment or supplement thereto. Each shareholder will indemnify KCI, its directors and officers, any controlling person, and any underwriter for losses, damages, liabilities, costs, or expenses caused by any alleged untrue statement or alleged omission of a material fact made by KCI in a registration statement, any prospectus contained in a registration statement, or any amendment or supplement thereto, in reliance upon information furnished in writing by the shareholder.

        Holdback Agreements.    Each shareholder will not effect any public sale or distribution of common stock or any securities convertible into common stock during the 14 days prior to and the 180 days following the effective date of any registration statement (except as part of the registration statement) if reasonably requested by the managing underwriter.

        Pursuant to a Waiver and Consent, effective September 27, 2002, the shareholders party to the Shareholder Rights Agreement and KCI consented to certain actions, including: (1) the pledge by Dr. Leininger of shares owned by him constituting 19.947% of the outstanding common stock of KCI to JPMorgan Chase Bank as administrative agent for the benefit of the lenders under the Shareholders' Agreement, including Bank One, NA, and pursuant to a Security and Pledge Agreement; (2) the exercise of any of the rights or remedies with respect to a disposition of those shares pursuant to the Security and Pledge Agreement; and (3) any subsequent transfer by JPMorgan Chase Bank, Bank One, NA or any of their respective affiliates to any person who agrees to be bound by the Shareholder Rights Agreement. Further, the shareholders and KCI waived certain rights under the Shareholder Rights Agreement, including tag-along and participation rights.

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DESCRIPTION OF THE INVESTORS' RIGHTS AGREEMENT

        In connection with the sale and issuance of Series A Convertible Preferred Stock as part of the recapitalization, we entered into an Investors' Rights Agreement ("Investors' Rights Agreement"), dated August 11, 2003, with (a) Fremont Partners III, L.P., Fremont Partners III Side-By-Side, L.P., Fremont Acquisition Company II, L.L.C., Fremont Acquisition Company IIA, L.L.C., Blum Strategic Partners II, L.P., Blum Strategic Partners II GmbH & Co., KG, Stinson Capital Partners II, L.P., RCBA-KCI Capital Partners, L.P. and James R. Leininger, M.D. (collectively, the "Sponsors") and (b) GS Capital Partners 2000, L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs KG, GS Capital Partners 2000 Employee Fund, L.P., Goldman Sachs Direct Investment Fund 2000, L.P., DLJ Merchant Banking Partners III, L.P., DLJ Merchant Banking III, Inc., DLJ MB Partners III GmbH & Co. KG, Millennium Partners II, L.P., MBP III Plan Investors, L.P., John P. Byrnes, Harry R. Jacobson, M.D., David J. Simpson and C. Thomas Smith (together with the Sponsors, the "Investors"). The following is a summary of the material provisions of the Investors' Rights Agreement, but does not restate the agreement in its entirety.

Registration Rights

        Piggyback Registration Rights.    If KCI proposes to register the public offering of any of its capital stock under the Securities Act (other than in connection with (i) an initial firm commitment underwritten public offering, (ii) a registration relating solely to the sale of securities to participants in a KCI benefit plan, (iii) a registration relating to a corporate reorganization or other transaction under Rule 145 of the Securities Act or (iv) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of (A) the Series A Preferred Stock and any common stock issued or issuable upon conversion of such stock and (B) any common stock issued as a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in (A) above (collectively, "Registrable Securities")), KCI is obligated to give each Investor prompt written notice of the proposed registration. Upon receipt by KCI of the written request of any Investor given within 20 days after mailing of notice by KCI, KCI must, subject to certain exceptions, use its reasonable best efforts to cause to be registered under the Securities Act all Registrable Securities that each Investor has requested to be registered. If the total amount of Registrable Securities requested by Investors to be included in the offering, together with the securities to be included in the offering by KCI and any other shareholder that is not an Investor, exceeds the amount of securities that the underwriters determine in their sole discretion is compatible with the success of the offering, then the company is required to include in the offering only that number of Registrable Securities and securities to be included by shareholders that are not Investors that the underwriters determine will not jeopardize the success of the offering. In that case, the number of securities to be included in the offering will be apportionedpro rata among the selling Investors and other shareholders who are not Investors.

        Indemnification.    KCI will indemnify each Investor, the partners or officers, directors, shareholders, members, managers, employees, subsidiaries and other affiliates of each Investor, any underwriter for such Investor and each person, if any, who controls such Investor or underwriter within the meaning of the Securities Act or the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages, liabilities (joint or several) and legal and other expenses to which they may become subject under the Securities Act, the Exchange Act or any state securities laws or otherwise, caused by (a) any untrue or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained in the registration statement, or any amendment or supplement thereto, (b) any violation or alleged violation by KCI of the Act, the Exchange Act or any state securities laws or otherwise. Each Investor will indemnify KCI, its directors, officers, persons who control KCI within the meaning of the Securities Act, any underwriter, any other Investor selling securities in such registration statement and

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any controlling person of any such underwriter or other Investor against any losses, claims, damages, liabilities (joint or several) and legal and other expenses to which they may become subject under the Securities Act, the Exchange Act or any state securities laws or otherwise, caused by an untrue statement or alleged untrue statement or omission or alleged omission made in the registration statement, any such preliminary prospectus or final prospectus or any amendments or supplements, to the extent that such statement or omission was made in reliance upon and in conformity with written information furnished by the Investor expressly for use in connection with the registration.

        Market Stand-Off Agreement.    Each Investor will not (a) transfer or dispose of, directly or indirectly, any Registrable Securities, other than those included in the registration, or (b) enter into any swap or other arrangement that transfers to another any of the economic consequences of ownership of the Registrable Securities for a period equal to (x) 180 days after the consummation of an initial firm commitment underwritten public offering, (y) 90 days after the effective date of any registration with respect to any offering subsequent such initial offering or (z) in each case, any longer period of time as may be reasonably requested or shorter period as may reasonably be deemed appropriate by the managing underwriter in connection with such offering.

Transfer of Shares

        Restrictions on Transfer.    Subject to certain exceptions, prior to the consummation of an initial firm commitment underwritten public offering of shares of common stock, no Investor may, directly or indirectly, (a) transfer or otherwise dispose of any shares of Series A Preferred Stock or shares of common stock issuable on conversion of such shares, subject to certain exceptions, or (b) transfer any shares of Series A Preferred Stock or shares of common stock issuable on conversion of such shares to a direct or indirect competitor of KCI or to any person with a material interest in, or a material degree of control over a competitor of KCI, without the prior written consent of KCI's board of directors.

        Rights of First Offer.    Beginning on August 11, 2010, if any Investor desires to transfer any shares of Series A Preferred Stock or shares of common stock issued or issuable on conversion of such stock, subject to certain exceptions, such Investor must, prior to soliciting a written offer from a third-party, deliver to each of KCI and the Sponsors a written notice offering such shares first to the Company and secondly to the Sponsors. KCI then has 30 days to exercise its right of first offer. If KCI does not exercise its right of first offer, then the Sponsors have the option to exercise a right of first offer within 10 days after the end of the 30-day period. The rights of first offer terminate upon the consummation of an initial firm commitment underwritten public offering of shares of common stock.

        Tag-Along Rights.    If any Sponsor or any of its affiliates proposes to enter into any agreement to sell shares of Series A Preferred Stock or KCI common stock to any person (other than transfers among each Sponsor and its affiliates) that, when taken together with all other sales of Series A Preferred Stock or common stock by Sponsor and its affiliates (other than transfers among such Sponsor and its affiliates) from and after August 11, 2003, would exceed 50% of the aggregate number of shares of common stock (on an as-converted basis) owned by that Sponsor and its affiliates on August 11, 2003, then, subject to certain exceptions and notice provisions, each Investor has the right, but not the obligation, to participate in that sale or transfer of such shares of Series A Preferred Stock or common stock by the Sponsor and its affiliates on apro rata basis and on the same terms and subject to the same conditions as those on which the Sponsor and its affiliates propose to transfer their shares.

        Bring-Along Rights.    If one or more of the Sponsors and/or any of their affiliates propose to enter into any agreement to sell or otherwise dispose of any KCI common stock or Series A Preferred Stock that would constitute 50% or more of the outstanding KCI common stock (on an as-converted basis) held by the Sponsors and their affiliates on August 11, 2003, then, subject to certain exceptions and notice provisions, the Sponsor and/or any of its affiliates have the right to compel each of the Investors

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and any permitted transferees of the Investors to sell, free and clear of any liens or encumbrances, shares of Series A Preferred Stock and/or KCI common stock on apro rata basis with the Sponsor and/or any of its affiliates, for the same consideration as the Sponsor and/or its affiliates would receive and on the same terms and subject to the same conditions as the Sponsor and/or its affiliates are able to obtain.

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DESCRIPTION OF THE NEW NOTES

        The form and the terms of the new notes and the old notes are identical in all material respects, except that the new notes:

•

will have been registered under the Securities Act;



•

will not bear restrictive legends restricting their transfer under the Securities Act;



•

will not be entitled to registration rights that apply to the old notes; and



•

will not contain provisions relating to liquidated damages in connection with the old notes under circumstances related to the timing of the exchange offer.

        The Series B Senior Subordinated Notes due 2013 (the "New Notes") will be issued under an Indenture, dated as of August 11, 2003 by and among Kinetic Concepts, Inc., the Guarantors and U.S. Bank National Association, as Trustee (the "Trustee").

        The following summary of selected provisions of the Indenture is not complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the Indenture, including the definitions of terms in the Indenture and those terms made a part of the Indenture by reference to the TIA as in effect on the date of the Indenture. We urge you to read the Indenture because it, and not this description, defines your rights as holders of the New Notes. The definitions of some of the capitalized terms used in the following summary are set forth below under "—Definitions." For purposes of this section, references to "KCI" include only Kinetic Concepts, Inc. and not its Subsidiaries.

General

        The New Notes will be unsecured obligations of KCI, ranking subordinate in right of payment to all Senior Debt of KCI.

        The New Notes will be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples. Initially, the Trustee will act as paying agent and registrar for the New Notes. The New Notes may be presented for registration or transfer and exchange at the offices of the Registrar, which initially is the Trustee's corporate trust office at 60 Livingston Ave, St. Paul, Minnesota 55107-2292. KCI may change any Paying Agent and Registrar without notice to Holders of the New Notes. KCI will pay principal, and premium, if any, on the New Notes at the Trustee's corporate office in New York, New York. At KCI's option, interest may be paid at the Trustee's corporate trust office or by check mailed to the registered address of Holders.

        In this exchange offer, KCI will issue up to $205 million aggregate principal amount of New Notes in exchange for up to $205 million aggregate principal amount of the Series A Senior Subordinated Notes due 2013 (the "Old Notes"). The Indenture will provide for the issuance of an unlimited amount of additional Senior Subordinated Notes due 2013 ("Additional Notes") having identical terms and conditions to the Notes offered in this offering. Additional Notes may be issued in one or more series from time to time subject to the limitations set forth under "—Covenants—Limitation on Incurrence of Additional Indebtedness." The Old Notes, the New Notes and the Additional Notes (if any) are referred to collectively in this section as the "Notes".

        Interest on the New Notes will accrue at the rate of 7.375% per annum and will be payable semiannually in cash on each May 15 and November 15, commencing on November 15, 2003, to the persons who are registered Holders at the close of business on May 1 and November 1 immediately preceding the applicable interest payment date. Interest on the New Notes will accrue from and including the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance of the Old Notes. Interest will be computed on the basis of a

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360-day year of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed. The New Notes offered hereby, the Old Notes and any Additional Notes would be treated as a single class for all purposes under the Indenture.

        The New Notes will not be entitled to the benefit of any mandatory sinking fund.

Optional Redemption

        The Notes will be redeemable, at KCI's option, in whole at any time or in part from time to time, on and after May 15, 2008, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on May 15 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption:

If Redeemed During the 12-Month Period Commencing	Redemption Price
2008	103.688	%
2009	102.458	%
2010	101.229	%
2011 and thereafter	100.000	%

        In addition, at any time prior to May 15, 2008, KCI may, at its option, redeem the Notes, in whole or in part, from time to time, upon not less than 30 nor more than 60 days' notice at a redemption price equal to the greater of (i) 101% of the principal amount of the Notes so redeemed, plus accrued and unpaid interest, and (ii) the Make-Whole Premium with respect to the Notes, or the portions thereof, to be redeemed, plus, to the extent not included in the Make-Whole Premium, accrued and unpaid interest to the date of redemption.

        At any time, or from time to time, on or prior to May 15, 2006, KCI may, at its option, on one or more occasions use all or a portion of the net cash proceeds of one or more Equity Offerings to redeem the Notes issued under the Indenture at a redemption price equal to 107.375% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of redemption;provided that at least 65% of the principal amount of Notes originally issued remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Equity Offering, KCI shall make such redemption not more than 90 days after the consummation of any such Equity Offering.

Selection and Notice of Redemption

        In the event that less than all of the Notes are to be redeemed at any time, selection of such Notes, or portions thereof, for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which such Notes are listed or, if such Notes are not then listed on a national securities exchange, on apro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate;provided, however, that no Notes of a principal amount of $1,000 or less shall be redeemed in part;provided, further, that if a partial redemption is made with the proceeds of an Equity Offering, selection of the Notes or portions thereof for redemption shall be made by the Trustee only on apro rata basis or on as nearly apro rata basis as is practicable (subject to DTC procedures), unless such method is otherwise prohibited.

        Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days, before the redemption date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A Note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions

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thereof called for redemption as long as KCI has deposited with the paying agent funds in satisfaction of the applicable redemption price pursuant to the Indenture.

Subordination

        The payment of all Obligations on the New Notes is subordinated in right of payment to the prior payment in full in cash or Cash Equivalents of all Obligations on Senior Debt. Upon any payment or distribution of assets of KCI of any kind or character, whether in cash, property or securities, to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors or marshaling of assets of KCI or in a bankruptcy, reorganization, insolvency, receivership or other similar proceeding relating to KCI or its property, whether voluntary or involuntary, all Obligations due or to become due upon all Senior Debt shall first be paid in full in cash or Cash Equivalents, or such payment duly provided for to the satisfaction of the holders of Senior Debt, before any payment or distribution of any kind or character is made on account of any Obligations on the Notes, or for the acquisition of any of the Notes for cash or property or otherwise.

        If any default occurs and is continuing in the payment when due, whether at maturity, upon any redemption, by declaration or otherwise, of any principal of, interest on, unpaid drawings for letters of credit issued in respect of, or regularly accruing fees or commissions with respect to, any Senior Debt, no payment or distribution of any kind or character shall be made by or on behalf of KCI or any other Person on its or their behalf with respect to any Obligations on the Notes or to acquire any of the Notes for cash or property or otherwise.

        In addition, if any other event of default occurs and is continuing with respect to any Designated Senior Debt, as such event of default is defined in the instrument creating or evidencing such Designated Senior Debt, permitting the holders of such Designated Senior Debt then outstanding to accelerate the maturity thereof and if the Representative for the respective issue of Designated Senior Debt gives written notice of the event of default to the Trustee (a "Default Notice"), then, unless and until all events of default have been cured or waived or have ceased to exist or the Trustee receives notice from the Representative for the respective issue of Designated Senior Debt terminating the Blockage Period (as defined below), during the 180 days after the delivery of such Default Notice (the "Blockage Period"), neither KCI nor any other Person on its behalf shall:

(a)

make any payment or distribution of any kind or character with respect to any Obligations on the Notes, or



(b)

acquire any of the Notes for cash or property or otherwise.

        Notwithstanding anything herein to the contrary, in no event will a Blockage Period extend beyond 180 days from the date the payment on the Notes was due and only one such Blockage Period may be commenced within any 360 consecutive days. No event of default which existed or was continuing on the date of the commencement of any Blockage Period with respect to the Designated Senior Debt shall be, or be made, the basis for commencement of a second Blockage Period by the Representative of such Designated Senior Debt whether or not within a period of 360 consecutive days, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days (it being acknowledged that any subsequent action, or any breach of any financial covenants for a period commencing after the date of commencement of such Blockage Period that, in either case, would give rise to an event of default pursuant to any provisions under which an event of default previously existed or was continuing shall constitute a new event of default for this purpose).

        By reason of such subordination, in the event of the insolvency of KCI, creditors of KCI who are not holders of Senior Debt, including the Holders of the New Notes, may recover less, ratably, than holders of Senior Debt.

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        As of June 30, 2003, on apro forma basis after giving effect to the recapitalization, KCI and the Guarantors would have had approximately $480.6 million of Senior Debt outstanding and $89.1 million of availability under the Credit Agreement.

Guarantees

        Each Guarantor unconditionally guarantees, on a senior subordinated basis, jointly and severally, to each Holder and the Trustee, the full and prompt performance of KCI's obligations under the Indenture and the Notes, including the payment of principal of and interest on the Notes. The Guarantees are subordinated to Guarantor Senior Debt on the same basis as the Notes are subordinated to Senior Debt. The obligations of each Guarantor are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture, will result in the obligations of such Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in an amountpro rata, based on the net assets of each Guarantor, determined in accordance with GAAP.

        Each Guarantor may consolidate with or merge into or sell its assets to KCI or another Guarantor that is a Wholly Owned Restricted Subsidiary of KCI without limitation, or with or into or to other Persons upon the terms and conditions set forth in the Indenture. See "Covenants—Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold by KCI and/or by one or more of KCI's Restricted Subsidiaries, the Guarantor's Guarantee will be automatically and unconditionally released. In addition, any Guarantor that is designated as an Unrestricted Subsidiary in accordance with the terms of the Indenture will be relieved of its obligations under its Guarantee.

Change of Control

        The Indenture provides that upon the occurrence of a Change of Control, KCI will make an offer described below (the "Change of Control Offer") and each Holder will have the right to require that KCI purchase all or a portion of such Holder's Notes at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of purchase.

        The Indenture provides that, prior to the mailing of the notice referred to below, but in any event within 30 days following any Change of Control, KCI will:

(a)

obtain the requisite consents under the Credit Agreement (so long as the terms of which provide that a Change of Control would result in a default or event of default or would otherwise require repayment) and all other Senior Debt (the terms of which provide that a Change of Control would result in a default or event of default or would otherwise require repayment) to permit the repurchase of the Notes as provided below, or



(b)

in the event a consent is not obtained with respect to such Credit Agreement or any such other Senior Debt, repay in full and terminate all commitments under Indebtedness under such Credit Agreement or such other Senior Debt, as the case may be, or offer to repay in full and terminate all commitments under all Indebtedness under such Credit Agreement or such other Senior Debt, as the case may be, and to repay the Indebtedness owed to each lender which has accepted such offer.

        KCI shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Notes pursuant to the provisions described below. KCI's failure to comply with

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the covenant described in the first sentence of this paragraph shall be governed by clause (c) and not clause (b) under "Events of Default" below.

        Within 30 days following the date upon which the Change of Control occurred, KCI must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 45 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third business day prior to the Change of Control Payment Date.

        If a Change of Control Offer is made, there can be no assurance that KCI will have available funds sufficient to pay the Change of Control purchase price for all the Notes that might be delivered by Holders seeking to accept the Change of Control Offer. In the event KCI is required to purchase outstanding Notes pursuant to a Change of Control Offer, KCI expects that it would seek third party financing to the extent it does not have available funds to meet its purchase obligations. However, there can be no assurance that KCI would be able to obtain such financing.

        Neither the Board of Directors of KCI nor the Trustee may waive the covenant relating to a Holder's right of redemption upon a Change of Control. Restrictions in the Indenture on the ability of KCI and its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on its property, to make Restricted Payments and to make Asset Sales may also make more difficult or discourage a takeover of KCI, whether favored or opposed by the management of KCI. Consummation of any of these transactions may require redemption or repurchase of the Notes, and there can be no assurance that KCI or the acquiring party will have sufficient financial resources to effect that redemption or repurchase. The restrictions in the Indenture described above, as well as the restrictions on transactions with Affiliates described below may make more difficult or discourage any leveraged buyout of KCI or any of its Subsidiaries by the management of KCI. While those restrictions cover a wide variety of arrangements which have traditionally been used to effect highly leveraged transactions, the Indenture may not afford the Holders of Notes protection in all circumstances from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction.

        KCI will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Change of Control" provisions of the Indenture, KCI shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of the Indenture by virtue thereof.

Registration Rights

        The Company and the placement agents for the Old Notes entered into a Registration Rights Agreement on the Issue Date. The following is a summary of the material provisions of the Registration Rights Agreement.

        KCI and each Guarantor have agreed with the placement agents, that they will use their best efforts, at their cost, to file and cause to become effective a registration statement with respect to a registered offer (the "Exchange Offer") to exchange the Old Notes for an issue of subordinated notes of KCI (the "Exchange Notes"), guaranteed by the Guarantors, with terms identical to the Old Notes (except that the Exchange Notes will not bear legends restricting transfer).

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        KCI and the Guarantors are obligated to cause the Exchange Offer to remain open for not less than 20 business days after the date KCI mails notice of the Exchange Offer to Holders of the Old Notes. For each Old Note surrendered to KCI under the Exchange Offer, the Holder will receive an Exchange Note of equal principal amount. Interest on each Exchange Note shall accrue from the last interest payment date on which interest was paid on the Old Notes so surrendered or, if no interest has been paid on such Old Notes, from the Issue Date.

        If KCI effects the Exchange Offer, KCI will be entitled to close the Exchange Offer 20 business days after the commencement thereof,provided that it has accepted all Old Notes validly surrendered in accordance with the terms of the Exchange Offer. Old Notes not tendered in the Exchange Offer will bear interest at the rate of 7.375% per annum and be subject to all of the terms and conditions specified in the Indenture and to the transfer restrictions described in "Transfer Restrictions."

        In the event that applicable interpretations of the staff of the SEC do not permit KCI to effect the Exchange Offer, or under other specified circumstances, KCI and the Guarantors will, at their cost, use their best efforts to cause to become effective a shelf registration statement (the "Shelf Registration Statement") with respect to resales of the Old Notes. KCI and the Guarantors will use their best efforts to keep such Shelf Registration Statement effective until the expiration of the time period referred to in Rule 144(k) under the Securities Act of 1933, as amended (the "Securities Act") after the Issue Date, or such shorter period that will terminate when all Old Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. KCI and the Guarantors will, in the event of such a shelf registration, provide to each Holder of Old Notes copies of the prospectus, notify each Holder of Old Notes when the Shelf Registration Statement for the Old Notes has become effective and take certain other actions as are required to permit resales of the Old Notes. A Holder that sells its Old Notes pursuant to the Shelf Registration Statement:

(1)

generally will be required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to purchasers;



(2)

will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales; and



(3)

will be bound by the provisions of the Registration Rights Agreement that are applicable to such Holder (including indemnification obligations).

        In the event that the Exchange Offer is not consummated and a Shelf Registration Statement is not declared effective on or prior to the date that is 240 days after the Issue Date, the annual interest rate borne by the Old Notes will be increased by 0.5% over the interest rate of 7.375% per annum otherwise applicable to such Old Notes. The amount of additional interest will increase by an additional 0.25% for each subsequent 90-day period, up to a maximum additional 1.0% over the rate of 7.375% per annum initially applicable to the Old Notes, until the Exchange Offer is consummated or a Shelf Registration Statement is declared effective. Once the Exchange Offer is consummated or a Shelf Registration Statement is declared effective, the annual interest rate borne by the Old Notes shall be changed to again be the rate of 7.375% per annum.

Covenants

Overview.

        In the Indenture, KCI has agreed to covenants that limit its and its Restricted Subsidiaries' ability, among other things, to:

•

incur additional debt;



•

pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments;

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•

place limitations on distributions from Restricted Subsidiaries;



•

issue or sell capital stock of Restricted Subsidiaries;



•

issue guarantees;



•

sell or exchange assets;



•

enter into transactions with affiliates;



•

create liens; and



•

effect mergers.

Limitation on Incurrence of Additional Indebtedness.

(a)

KCI will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, acquire, become liable, contingently or otherwise, with respect to, or otherwise become responsible for payment of (collectively, "incur") any Indebtedness;provided, however, that if no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, KCI or any of its Restricted Subsidiaries may incur Indebtedness (including, without limitation, Acquired Indebtedness) if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of KCI and its Restricted Subsidiaries is greater than 2.0 to 1.0.

        Notwithstanding the foregoing, KCI and any Restricted Subsidiary (except as specified below) may incur each and all of the following:

(1)

Indebtedness under the Notes offered hereby and the Guarantees thereof;



(2)

Indebtedness incurred pursuant to the Credit Agreement in an aggregate principal amount at any time outstanding not to exceed $580.0 million, less



(A)

the aggregate amount of any Indebtedness of Securitization Entities in Qualified Securitization Transactions incurred at a time that KCI is not able to incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of this clause (a),provided that KCI may elect in writing to the Trustee to have the amount of said reduction resulting from such Indebtedness incurred in connection with a Qualified Securitization Transaction to be reduced by an amount (the "Transferred Reduction Amount") up to the then remaining amount of Indebtedness that could be incurred pursuant to clause (13) below, and in the event of such election, the amount of Indebtedness that can be incurred pursuant to clause (13) below will be reduced by the Transferred Reduction Amount,



(B)

the amount of all scheduled principal payments actually made by KCI (excluding any such payment to the extent such payment is made with the proceeds of Indebtedness incurred at the time of repayment), and



(C)

the amount of all required permanent prepayments of Indebtedness under the Credit Agreement actually made with the proceeds of an Asset Sale;

        The aggregate amount of reductions under subclauses (A), (B) and (C) above at any time can be established by KCI by providing the Trustee with an officers' certificate setting forth the calculations for such amount.

(3)

Indebtedness of Foreign Subsidiaries not to exceed $40.0 million (or the equivalent amount thereof, at the time of incurrence, in other foreign currencies) at any time outstanding pursuant to this clause (3);

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(4)

other Indebtedness of KCI and its Restricted Subsidiaries outstanding on the Issue Date reduced by the amount of any scheduled amortization payments or permanent mandatory prepayments when actually paid or permanent reductions thereon;



(5)

Interest Swap Obligations of KCI covering Indebtedness of KCI or any of its Restricted Subsidiaries and Interest Swap Obligations of any Restricted Subsidiary of KCI covering Indebtedness of such Restricted Subsidiary;provided, however, that such Interest Swap Obligations are entered into for the purpose of fixing or hedging interest rate risk with respect to any floating and/or fixed rate on Indebtedness incurred in accordance with the Indenture to the extent the notional principal amount of such Interest Swap Obligation does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates and not with the purpose of speculation;



(6)

Indebtedness under Currency Agreements;provided that such Currency Agreements do not increase the Indebtedness of KCI and its Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder;



(7)

Indebtedness of a Restricted Subsidiary of KCI to KCI or to a Restricted Subsidiary of KCI for so long as such Indebtedness is held by KCI or a Restricted Subsidiary of KCI, in each case subject to no Lien (other than a Lien in connection with the Credit Agreement and Permitted Liens which are not consensual) held by a Person other than KCI or a Restricted Subsidiary of KCI;provided that if as of any date any Person other than KCI or a Restricted Subsidiary of KCI owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness (other than a Lien in connection with the Credit Agreement and Permitted Liens which are not consensual), such date shall be deemed the incurrence of Indebtedness which is not allowed by this clause (7);



(8)

Indebtedness of KCI to a Restricted Subsidiary of KCI for so long as such Indebtedness is held by a Restricted Subsidiary of KCI, in each case subject to no Lien (other than a Lien in connection with the Credit Agreement and Permitted Liens which are not consensual);provided that (A) any Indebtedness of KCI to any Restricted Subsidiary of KCI (other than a Restricted Subsidiary which is a Guarantor) is unsecured and subordinated, pursuant to a written agreement, to KCI's obligations under the Indenture and the Notes and (B) if as of any date any Person other than a Restricted Subsidiary of KCI owns or holds any such Indebtedness or any Person holds a Lien in respect of such Indebtedness (other than a Lien in connection with the Credit Agreement and Permitted Liens which are not consensual), such date shall be deemed the incurrence of Indebtedness which is not allowed by this clause (8);



(9)

Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business;provided, however, that such Indebtedness is extinguished within five business days of incurrence;



(10)

Indebtedness represented by performance bonds, warranty or contractual service obligations, standby letters of credit or appeal bonds, in each case to the extent incurred in the ordinary course of business of KCI or such Restricted Subsidiary in accordance with customary industry practices, in amounts and for the purposes customary in KCI's industry;



(11)

the incurrence by a Securitization Entity of Indebtedness in a Qualified Securitization Transaction that is not recourse to KCI or any Subsidiary of KCI (except for Standard Securitization Undertakings);



(12)

Refinancing Indebtedness;

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(13)

additional Indebtedness of KCI and its Restricted Subsidiaries in an aggregate principal amount not to exceed $100.0 million at any one time outstanding (which may be Indebtedness under the Credit Agreement in addition to that permitted by clause (2)); and



(14)

Acquired Indebtedness, and refinancings or replacements thereof, not to exceed $50.0 million at any one time outstanding pursuant to this clause (14).

(b)

For purposes of determining any particular amount of Indebtedness under this"Limitation on Incurrence of Additional Indebtedness" covenant, Indebtedness incurred under the Credit Agreement on or prior to the Issue Date shall be treated as incurred pursuant to subclause (2) of the second paragraph of section (a) of this"Limitation on Incurrence of Additional Indebtedness" covenant. For purposes of determining compliance with this"Limitation on Incurrence of Additional Indebtedness" covenant, in the event that an item of Indebtedness at any time could have been incurred (regardless of when it was actually incurred) under more than one of the types of Indebtedness described above (other than Indebtedness incurred under the Credit Agreement on or prior to the Issue Date, which shall be treated as incurred pursuant to subclause (2) of the second paragraph of clause (a) of this"Limitation on Incurrence of Additional Indebtedness" covenant), including under the first paragraph of clause (a) of this covenant, KCI, in its sole discretion, shall classify, and at any such time may reclassify, such item of Indebtedness.

Limitation on Restricted Payments.

        KCI will not and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly,

(1)

declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock of KCI or warrants, options or other rights to acquire Qualified Capital Stock (but excluding any debt security or Disqualified Capital Stock convertible into, or exchangeable for, Qualified Capital Stock)) on or in respect of shares of KCI's Capital Stock to holders of such Capital Stock,



(2)

purchase, redeem or otherwise acquire or retire for value any Capital Stock of KCI or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock,



(3)

make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness of KCI that is subordinate or junior in right of payment to the Notes, or



(4)

make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (1), (2), (3) and (4) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto:



(A)

a Default or an Event of Default shall have occurred and be continuing,



(B)

KCI is not able to incur at least $1.00 of additional Indebtedness under the first paragraph of clause (a) of the covenant described under"Limitation on Incurrence of Additional Indebtedness," or



(C)

the aggregate amount of Restricted Payments (including such proposed Restricted Payment but excluding the Distribution) made subsequent to the Issue Date (the amount expended for such purposes, if other than in cash, being the fair market value of such

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property as determined reasonably and in good faith by the Board of Directors of KCI, whose determination shall be conclusive) shall exceed the sum, without duplication, of:

(1)

50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of KCI earned during the period beginning on the first day of the fiscal quarter which includes the Issue Date and ending on the last day of the last fiscal quarter that precedes the date the Restricted Payment occurs (the "Reference Date") for which a financial statement relating to such fiscal quarter has been filed or furnished in a report with the SEC (treating such period as a single accounting period); plus



(2)

100% of the aggregate net cash proceeds received by KCI from any Person (other than a Subsidiary of KCI) from the issuance and sale subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock of KCI (other than the Preferred Stock to the extent that the net cash proceeds therefrom are or are expected to be used to fund the Distribution and other than proceeds of Qualified Capital Stock to the extent that they are used pursuant to clause (14) of Permitted Investments); plus



(3)

100% of the aggregate net cash proceeds received after the Issue Date by KCI from the issuance or sale (other than to a Subsidiary of KCI) of debt securities or Disqualified Capital Stock (other than the Preferred Stock to the extent that the net cash proceeds therefrom are or are expected to be used to fund the Distribution) that have been converted into or exchanged for Qualified Capital Stock of KCI, together with (without duplication) any net cash proceeds received by KCI at the time of such conversion or exchange; plus



(4)

to the extent not otherwise included in the Consolidated Net Income of KCI, an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in Unrestricted Subsidiaries resulting from the payments in cash of interest on Indebtedness, dividends, repayments of loans or advances or other transfers of assets, in each case to KCI or a Restricted Subsidiary or from the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary; plus



(5)

to the extent not otherwise included in Consolidated Net Income, net cash proceeds from sale of Investments which were treated as Restricted Payments, but not to exceed the amounts so treated; plus



(6)

without duplication of any amounts included in clauses (C)(2) and (C)(3) above, 100% of the aggregate net cash proceeds of any equity contribution received by KCI from a holder of KCI's Capital Stock other than proceeds of a Capital Contribution to the extent that they are used pursuant to clause (14) of Permitted Investments.

        Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit:

(1)

the payment of any dividend or redemption payment within 60 days after the date of declaration of such dividend or redemption payment if the dividend or redemption payment would have been permitted on the date of declaration;



(2)

the acquisition of any shares of Capital Stock of KCI, either:



(A)

solely in exchange for shares of Qualified Capital Stock of KCI (or warrants, options or other rights to acquire Qualified Capital Stock of KCI (but excluding any debt security or Disqualified Capital Stock convertible into, or exchangeable for, Qualified Capital Stock)), or

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(B)

through the application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of KCI) of shares of Qualified Capital Stock of KCI (or warrants, options or other rights to acquire Qualified Capital Stock of KCI (but excluding any debt security or Disqualified Capital Stock convertible into, or exchangeable for, Qualified Capital Stock));



(3)

the acquisition of any Indebtedness of KCI or of any Guarantor that is subordinate or junior in right of payment to the Notes or such Guarantor's Guarantee, as the case may be, either:



(A)

solely in exchange (i) for shares of Qualified Capital Stock of KCI (or warrants, options or other rights to acquire Qualified Capital Stock of KCI (but excluding any debt security or Disqualified Capital Stock convertible into, or exchangeable for, Qualified Capital Stock)); or (ii) Refinancing Indebtedness; or



(B)

through the application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of KCI) of (i) shares of Qualified Capital Stock of KCI (or warrants, options or other rights to acquire Qualified Capital Stock of KCI (but excluding any debt security or Disqualified Capital Stock convertible into, or exchangeable for, Qualified Capital Stock)); or (ii) Refinancing Indebtedness;



(4)

the purchase of any Subordinated Indebtedness at a purchase price not greater than 101% of the principal amount thereof in the event of a Change of Control in accordance with provisions similar to the "—Change of Control" covenant;provided that prior to such purchase KCI has made the Change of Control Offer as provided in such covenant with respect to the Notes and has purchased all Notes validly tendered for payment in connection with such Change of Control Offer and that no Default or Event of Default is in existence prior to or as a result of such purchase;



(5)

so long as no Default or Event of Default shall have occurred and be continuing, repurchases by KCI of Equity Interests of KCI from employees, consultants or directors of KCI or any of its Subsidiaries or their authorized representatives upon or within 270 days after the death, disability or termination of employment, consultancy, or directorships of such employees, consultants or directors, in an amount not to exceed (A) a cumulative amount equal to $10.0 million per fiscal year (or partial fiscal year) beginning with the fiscal year that included the Issue Date, minus (B) the aggregate amount of Restricted Payments made pursuant to this clause (5);provided, however, that the aggregate amount of Restricted Payments made pursuant to this clause (5) shall not exceed $30.0 million in the aggregate from and after the Issue Date;



(6)

the repurchase of Equity Interests deemed to occur upon the exercise of stock options if such Equity Interests represent a portion of the exercise price of such stock options;



(7)

for the avoidance of doubt only, payments pursuant to the Management Agreement;



(8)

other Restricted Payments pursuant to this clause (8) not to exceed $30.0 million in the aggregate from and after the Issue Date;



(9)

the acquisition of, or declaration or payment of dividends (other than dividends paid in Disqualified Capital Stock) on, Equity Interests of KCI in connection with the consummation of the Distribution, but excluding any dividends declared or paid on the preferred stock issued in connection with the consummation of the Distribution;



(10)

after the Holding Company Merger, payments to the Parent pursuant to this clause (10), (i) to enable the Parent to pay the Federal, state, local, or foreign tax liabilities of itself, and of KCI and its Subsidiaries for which it is liable; such payment shall be determined assuming that the Parent, KCI, and the Subsidiaries file a consolidated Federal (and where actually filed,

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consolidated, combined, unitary or similar returns for state, local or foreign purposes) tax return with the Parent as the Parent and KCI and the Subsidiaries as members and that the Parent has no substantial assets other than the stock of KCI and any tax payments shall either be used by the Parent to pay such tax liabilities within 90 days of the Parent's receipt of such payment or refunded to the payee, and (ii) in an aggregate amount not to exceed $10 million per year in order to pay legal and accounting expenses, payroll and other compensation expenses in the ordinary course of business, and other corporate overhead expenses in the ordinary course of business; and

(11)

for the avoidance of doubt, the distribution of any Equity Interests of any Subsidiary of KCI for the purpose of establishing a holding company structure in compliance with the covenant described under"—Merger, Consolidation and Sale of Assets."

        In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (C) of the immediately preceding paragraph, amounts expended pursuant to clauses (2)(A), (3)(A), (3)(B)(ii), (6), (7), (9), (10) and (11) shall be excluded in such calculation and amounts expended pursuant to clauses (1), (2)(B), (3)(B)(i), (4), (5) and (8) shall be included in such calculation.

        Not later than (a) 5 days after making any Restricted Payment in excess of $5 million or the last Restricted Payment of a series of related Restricted Payments in excess of $5 million, or (b) 45 days after the end of any fiscal quarter in which KCI and Restricted Subsidiaries made Restricted Payments in excess of $2.5 million, KCI shall deliver to the Trustee an officers' certificate stating that such Restricted Payment (or Restricted Payments) complies with the Indenture and setting forth in reasonable detail the basis upon which the required calculations were computed, which calculations may be based upon KCI's latest available internal quarterly financial statements;provided, however, that no such officer's certificate shall be required in connection with Restricted Payments made pursuant to clauses (2)(A), (3)(A), (3)(B)(ii), (6), (9), (10) and (11) or payments pursuant to the Management Agreement pursuant to clause (7) of the immediately preceding paragraph.

Limitation on Asset Sales.

        KCI will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless:

(1)

KCI or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by KCI's Board of Directors),



(2)

at least 75% of the consideration received by KCI or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents and is received at the time of such dispositionprovided that for purposes of this provision, the amount of



(A)

any liabilities (as shown on the most recent balance sheet of KCI or such Restricted Subsidiary or in the notes thereto) of KCI or such Restricted Subsidiary that are assumed by the transferee of any such assets (other than liabilities that are by their termspari passu with or subordinated to the Notes or the guarantee of the Guarantors, as applicable) and



(B)

any securities or other obligations received by KCI or any such Restricted Subsidiary from such transferee that are immediately converted by KCI or such Restricted Subsidiary into cash or Cash Equivalents (or (i) are Marketable Securities that are actually sold for cash or Cash Equivalents within 180 days of the consummation of such Asset Sale or (ii) as to which KCI or such Restricted Subsidiary has received at or prior to the consummation of the Asset Sale a commitment (which may be subject to customary conditions) from a

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nationally recognized investment, merchant or commercial bank to convert into cash or Cash Equivalents within 180 days of the consummation of such Asset Sale and which are thereafter actually converted into cash or Cash Equivalents within such 180-day period)

will be deemed to be cash or Cash Equivalents (and shall be deemed to be Net Cash Proceeds for purposes of the following provisions as and when reduced to cash or Cash Equivalents) to the extent of the net cash or Cash Equivalents realized thereon, and

(3)

upon the consummation of an Asset Sale, KCI shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within 365 days of receipt thereof either:



(A)

to repay or prepay any Senior Debt and, in the case of any Senior Debt under any revolving credit facility, effect a permanent reduction in the availability under such revolving credit facility,



(B)

to make an investment (or shall have entered into a binding commitment to make such an investment within 180 days) in properties and assets that replace the properties and assets that were the subject of such Asset Sale or in properties and assets that will be used in the business of KCI and its Subsidiaries as existing on the Issue Date or in businesses which are the same, similar or reasonably related or complementary to the businesses in which KCI and its Restricted Subsidiaries are engaged on the Issue Date ("Replacement Assets"), or



(C)

a combination of prepayment and investment permitted by the foregoing clauses (3)(A) and (3)(B).

        On the 366th day after an Asset Sale or such earlier date, if any, as the Board of Directors of KCI or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (3)(A), (3)(B) and (3)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have not been applied (or committed to the purchase of replacement assets) on or before such Net Proceeds Offer Trigger Date as permitted in clauses (3)(A), (3)(B) and (3)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by KCI or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days following the applicable Net Proceeds Offer Trigger Date, from all Holders on apro rata basis, that amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase;provided, however, that if at any time any non-cash consideration received by KCI or any Restricted Subsidiary of KCI, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this covenant. KCI may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $10.0 million resulting from one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not just the amount in excess of $10.0 million, shall be applied as required pursuant to this paragraph).

        In the event of the transfer of substantially all (but not all) of the property and assets of KCI and its Restricted Subsidiaries as an entirety to a Person in a transaction permitted under"—Merger, Consolidation and Sale of Assets," the successor corporation shall be deemed to have sold the properties and assets of KCI and its Restricted Subsidiaries not so transferred for purposes of this covenant, and shall comply with the provisions of this covenant with respect to such deemed sale as if it were an

112

Asset Sale. In addition, the fair market value of such properties and assets of KCI or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for purposes of this covenant.

        Notwithstanding the two immediately preceding paragraphs, KCI and its Restricted Subsidiaries will be permitted to consummate an Asset Sale without complying with such paragraphs to the extent (a) the consideration for such Asset Sale constitutes Replacement Assets and (b) such Asset Sale is for fair market value.

        Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 25 days following the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with the procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be purchased on apro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 business days or such longer period as may be required by law.

        If a Net Proceeds Offer is made, there can be no assurance that KCI will have available funds sufficient to pay the Net Proceeds Offer Amount for all the Notes that might be delivered by Holders seeking to accept the Net Proceeds Offer. In the event KCI is required to purchase outstanding Notes pursuant to a Net Proceeds Offer, KCI expects that it would seek third party financing to the extent it does not have available funds to meet its purchase obligations. However, there can be no assurance that KCI would be able to obtain such financing. In addition, the terms of the instruments relating to Senior Debt of KCI or a Restricted Subsidiary of KCI may require the Net Proceeds be used to repay or prepay Senior Debt.

        KCI will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Asset Sale" provisions of the Indenture, KCI shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Asset Sale" provisions of the Indenture by virtue thereof.

Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries.

        KCI will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary of KCI to:

(a)

pay dividends or make any other distributions on or in respect of its Capital Stock to KCI or any of its Restricted Subsidiaries;



(b)

make loans or advances or to pay any Indebtedness or other obligation owed to KCI or any other Restricted Subsidiary of KCI; or



(c)

transfer any of its property or assets to KCI or any other Restricted Subsidiary of KCI,

        except for such encumbrances or restrictions existing under or by reason of:

(1)

applicable law;



(2)

the Indenture;



(3)

customary non-assignment provisions of any contract or any lease governing a leasehold interest of any Restricted Subsidiary of KCI;

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(4)

any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Restricted Subsidiaries, or the properties or assets of any Restricted Subsidiaries, other than the Person or such Person's Subsidiaries or the properties or assets of the Person so acquired or such Person's Subsidiaries;



(5)

agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date;



(6)

any agreement to sell assets or Capital Stock permitted under the Indenture to any Person pending the closing of such sale;



(7)

any instrument governing a Permitted Lien, to the extent and only to the extent such instrument restricts the transfer or other disposition of assets subject to such Permitted Lien;



(8)

restrictions on cash or other deposits imposed by customers under contracts entered into in the ordinary course of business;



(9)

customary provisions in joint venture agreements and other similar agreements;



(10)

the documentation relating to Indebtedness of Foreign Subsidiaries incurred pursuant to the terms of the Indenture,provided that such encumbrances or restrictions are not more restrictive than those contained in the Credit Agreement;



(11)

the Credit Agreement;



(12)

the documentation relating to other Indebtedness permitted to be incurred subsequent to the Issue Date pursuant to the provisions of the covenant described under"—Limitations on Incurrence of Additional Indebtedness";provided that such encumbrances or restrictions are not more restrictive than those contained in the Credit Agreement;



(13)

the documentation relating to Indebtedness of a Securitization Entity in connection with a Qualified Securitization Transaction;provided that such restrictions apply only to such Securitization Entity; or



(14)

an agreement governing Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement referred to in subclause (2), (4), (5) or (11) of this clause (c);provided, however, that the provisions relating to such encumbrance or restriction contained in any such Indebtedness are no less favorable to KCI in any material respect as determined by the Board of Directors of KCI in their reasonable and good faith judgment than the provisions relating to such encumbrance or restriction contained in agreements referred to in such subclause (2), (4), (5) or (11) of this clause (c).

        Nothing contained in this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent KCI or any Subsidiary of KCI from creating, incurring, assuming or suffering to exist any Permitted Liens.

Limitation on Preferred Stock of Restricted Subsidiaries.

        KCI will not permit any of its Restricted Subsidiaries to issue any Preferred Stock (other than to KCI or to a Wholly Owned Restricted Subsidiary of KCI) or permit any Person (other than KCI or a Wholly Owned Restricted Subsidiary of KCI) to own any Preferred Stock of any Restricted Subsidiary of KCI.

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Limitation on Liens Securing Indebtedness.

        KCI will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind securing any Indebtedness against or upon any property or assets of KCI or any of its Restricted Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom to secure any Indebtedness unless:

(1)

in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Notes or any Guarantee, the Notes and such Guarantee, as the case may be, are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens, and



(2)

in all other cases, the Notes and the Guarantees are equally and ratably secured, except for



(A)

Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date;



(B)

Liens securing Indebtedness incurred under the Credit Agreement;



(C)

Liens securing Senior Debt and Liens securing Guarantor Senior Debt;



(D)

Liens securing the Notes and the Guarantees;



(E)

Liens of KCI or a Restricted Subsidiary of KCI on assets of any Subsidiary of KCI;



(F)

Liens securing Refinancing Indebtedness which is incurred to Refinance any Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture; provided, however, that such Liens



(i)

are no less favorable to the Holders and are not more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being Refinanced and



(ii)

do not extend to or cover any property or assets of KCI or any of its Restricted Subsidiaries not securing the Indebtedness so Refinanced; and



(G)

Permitted Liens.

Prohibition on Incurrence of Senior Subordinated Debt.

        KCI will not, and will not permit any Guarantor to, incur or suffer to exist Indebtedness that is senior in right of payment to the Notes or any Guarantee, as the case may be, and expressly contractually subordinate in right of payment to any other Indebtedness of KCI or such Guarantor, as the case may be.

Merger, Consolidation and Sale of Assets.

        KCI will not, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of KCI to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of KCI's assets (determined on a consolidated basis for KCI and KCI's Restricted Subsidiaries) whether as an entirety or substantially as an entirety to any Person (other than KCI or any Wholly Owned Restricted Subsidiary that is a Guarantor) unless:

(1)

either

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(A)

with respect to such a consolidation or merger, KCI shall be the surviving or continuing corporation or



(B)

the Person (if other than KCI) formed by such consolidation or into which KCI is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of KCI and of KCI's Restricted Subsidiaries substantially as an entirety (the "Surviving Entity")



(i)

shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and



(ii)

shall expressly assume, by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Notes and the performance of every covenant of the Notes, the Indenture and the Registration Rights Agreement on the part of KCI to be performed or observed;



(2)

immediately after giving effect to such transaction and the assumption contemplated by clause (1)(B)(ii) above (including giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction), KCI or such Surviving Entity, as the case may be, shall be able to incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of clause (a) of the covenant described above under"—Limitation on Incurrence of Additional Indebtedness";



(3)

immediately after giving effect to such transaction and the assumption contemplated by clause (1)(B)(ii) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall have occurred or be continuing; and



(4)

KCI or the Surviving Entity, as the case may be, shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with the applicable provisions of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied.

        For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries of KCI, the Capital Stock of which constitutes all or substantially all of the properties and assets of KCI, shall be deemed to be the transfer of all or substantially all of the properties and assets of KCI.

        The Indenture provides that upon any consolidation, combination or merger or any transfer of all or substantially all of the assets of KCI in accordance with the foregoing, in which KCI is not the continuing corporation, the successor Person formed by such consolidation or into which KCI is merged or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, KCI under the Indenture and the Notes with the same effect as if such surviving entity had been named as such.

        Each Guarantor (other than any Guarantor whose Guarantee is to be released in accordance with the terms of the Guarantee and the Indenture in connection with any transaction complying with the provisions of the"—Limitation on Asset Sales" covenant) will not, and KCI will not cause or permit any

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Guarantor to, consolidate with or merge with or into any Person other than KCI or any other Guarantor unless:

(1)

the entity formed by or surviving any such consolidation or merger (if other than the Guarantor) or to which such sale, lease, conveyance or other disposition shall have been made is a Person organized and existing under the laws of the United States or any State thereof or the District of Columbia;



(2)

such entity assumes by supplemental indenture all of the obligations of the Guarantor on the Guarantee; and



(3)

immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing.

        Any merger or consolidation of a Guarantor with and into KCI (with KCI being the surviving entity) or another Guarantor that is a Wholly Owned Restricted Subsidiary of KCI need only comply with clause (4) of the first paragraph of this covenant.

        The foregoing restrictions shall not apply to any transaction involving (A) a merger of KCI and one of its Subsidiaries for the purposes of establishing a holding company structure (the "Holding Company Merger") or (B) the merger of KCI and one of its Subsidiaries for the purpose of reincorporating into another jurisdiction. Either of the transactions described in clause (A) or clause (B) of this paragraph may be effected individually or in connection with one or more related transactions; provided that (i) such transaction or transactions (individually or taken as a whole) is not for the purposes of evading the provisions set forth in this section and (ii) clause (1) of the first paragraph of this covenant applies to such transaction or transactions.

Limitations on Transactions with Affiliates.

(a)

KCI will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than:

(1)

Affiliate Transactions permitted under clause (b) below; and

(2)

Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of KCI or such Restricted Subsidiary.

        All Affiliate Transactions (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other property with a fair market value in excess of $1.5 million shall be approved by the Board of Directors of KCI or such Restricted Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution delivered to the Trustee stating that such Board of Directors has determined that such transaction complies with the foregoing provisions. If KCI or any Restricted Subsidiary of KCI enters into an Affiliate Transaction (or a series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $20.0 million, KCI or such Restricted Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or series of related transactions to KCI or the relevant Restricted Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the Trustee.

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(b)

The restrictions set forth in clause (a) shall not apply to:

(1)

fees and compensation paid to and indemnity provided on behalf of, officers, directors, employees or consultants of KCI or any Restricted Subsidiary of KCI in the ordinary course of business of KCI or such Restricted Subsidiary;

(2)

transactions exclusively between or among KCI and any of its Restricted Subsidiaries or exclusively between or among such Restricted Subsidiaries,provided such transactions are not otherwise prohibited by the Indenture;

(3)

any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) in any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Holders in any material respect than the original agreement as in effect on the Issue Date;

(4)

so long as no Default or Event of Default has occurred and is continuing, the payment of amounts owing pursuant to the Management Agreement;

(5)

issuance of employee stock options approved by the Board of Directors of KCI and the shareholders of KCI;

(6)

transactions effected as part of a Qualified Securitization Transaction;

(7)

Restricted Payments permitted by, and Permitted Investments made in accordance with, the Indenture;

(8)

any sale or issuance of Equity Interests of KCI (other than Disqualified Capital Stock) to any Affiliate of KCI and the entering into and performance of any obligations under any investors' rights agreement, any management rights agreement or other customary agreements entered into in connection with such sale or issuance;

(9)

declaration and payment of the Distribution;

(10)

the sale of the Preferred Stock, the net proceeds of which are or will be used for the Distribution, on substantially the terms described in this prospectus, and the entering into and performance of any obligations under any investors' rights agreement, any management rights agreement or other customary agreements entered into in connection therewith;

(11)

payment of bonuses to and purchases of Equity Interests from employees, directors and consultants of KCI or any Restricted Subsidiary; and

(12)

the distribution of any Equity Interests of any Subsidiary of KCI for the purpose of establishing a holding company structure in compliance with the covenant described under"—Merger, Consolidation and Sale of Assets."

Additional Subsidiary Guarantees.

        If KCI or any of its Restricted Subsidiaries transfers or causes to be transferred, in one transaction or a series of related transactions, any property to any Restricted Subsidiary (other than a Foreign Subsidiary or a Securitization Entity) that is not a Guarantor and that has total assets with a book value in excess of $500,000 after giving effect to such transfer, or if KCI or any of its Restricted Subsidiaries shall organize, acquire or otherwise invest in another Restricted Subsidiary (other than a Foreign Subsidiary or a Securitization Entity) having total assets with a book value in excess of $500,000 that is not already a Guarantor, then such transferee or acquired or other Restricted Subsidiary shall within 15 days of the end of the next succeeding fiscal quarter (unless the book value of such Restricted Subsidiary is in excess of $5.0 million in which case, contemporaneously with the

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organization, acquisition or other investment in such Restricted Subsidiary, as the case may be) (a) execute and deliver to the Trustee a supplemental indenture in form reasonably satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of KCI's obligations under the Notes and the Indenture on the terms set forth in the Indenture and (b) deliver to the Trustee an opinion of counsel that such supplemental indenture has been duly authorized, executed and delivered by such Restricted Subsidiary and constitutes a legal, valid, binding and enforceable obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture.

Reports to Holders.

        The Indenture provides that KCI will deliver to the Trustee within 15 days after the filing of the same with the SEC, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which KCI is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further provides that, notwithstanding that KCI may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, KCI will file with the SEC, to the extent permitted, and provide the Trustee and Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. KCI will also comply with the other provisions of TIA section 314(a).

Limitation on Repurchase of Equity Interests from Employees.

        KCI will not, nor will it permit any of its Restricted Subsidiaries to, repurchase any Equity Interest issued to any officer, employee, director or consultant pursuant to the terms of the Management Equity Plan other than:

(a)

a repurchase of any Equity Interest that is made pursuant to the Distribution;



(b)

a repurchase of any Equity Interest that is made after the death or Permanent Disability of such officer, employee, director or consultant;



(c)

a repurchase of any Capital Stock which has been owned by such officer, employee, director or consultant for a period of time greater than six months;



(d)

a repurchase of any Equity Interest in connection with a Change of Control or in connection with a merger or consolidation, or sale, assignment, transfer, lease, conveyance, or disposition of all or substantially all of KCI's assets, which is permitted pursuant to the terms of the covenant described herein under the heading"—Merger, Consolidation and Sale of Assets";



(e)

a repurchase of any Equity Interest at any point in time which all options issued and outstanding under the Management Equity Plan are subject to variable plan accounting pursuant to the accounting provisions of Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees" (APB25);



(f)

a repurchase of any Equity Interest to the extent necessary or advisable pursuant to Section 10 or 13 of the Management Equity Plan; however, for purposes of clarity, KCI's call right upon a participant's termination of employment, except in the event of death or Permanent Disability, described in Section 10(a) of the Management Equity Plan shall not be considered necessary or advisable;



(g)

a repurchase of any Equity Interest to the extent used to satisfy Minimum Tax Withholding requirements associated with the exercise of such Equity Interest; or



(h)

a repurchase of any Equity Interest at any point subsequent to KCI's adoption of the accounting provisions of Financial Accounting Standards Board Issuance No. 123—"Accounting for Stock-Based Compensation" (FAS 123), or any other fair value method of

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accounting generally accepted in the United States, such that the repurchase of such Equity Interest would not trigger liability accounting for all options under the Management Equity Plan.

        Notwithstanding the foregoing, KCI and its Restricted Subsidiaries will need to comply with the other covenants contained in the Indenture in connection with such repurchases, including the covenant described above under"—Limitation on Restricted Payments."

Events of Default

        The following events are defined in the Indenture as "Events of Default":

(a)

the failure to pay interest on any Notes when the same becomes due and payable and the default continues for a period of 30 days (whether or not such payment shall be prohibited by the subordination provisions of the Indenture);



(b)

the failure to pay the principal on any Notes, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or not such payment shall be prohibited by the subordination provisions of the Indenture);



(c)

a default in the observance or performance of any other covenant or agreement contained in the Indenture which default continues for a period of 30 days after KCI receives written notice specifying the default (and demanding that such default be remedied) from the Trustee or the Holders of at least 25% of the outstanding principal amount of the Notes (except in the case of a default with respect to the "Merger, Consolidation and Sale of Assets" covenant, which will constitute an Event of Default with such notice requirement but without such passage of time requirement);



(d)

the failure to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of KCI or any Restricted Subsidiary of KCI (other than a Securitization Entity) and such failure continues for a period of 30 days or more, or the acceleration of the final stated maturity of any such Indebtedness (which acceleration is not rescinded, annulled or otherwise cured within 30 days of receipt by KCI or such Restricted Subsidiary of notice of any such acceleration) if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, in each case with respect to which the 30-day period described above has passed, aggregates $25.0 million or more at any time;



(e)

one or more judgments which exceeds in the aggregate $25.0 million (excluding judgments to the extent covered by insurance by a reputable insurer as to which the insurer has acknowledged coverage) shall have been rendered against KCI or any of its Significant Subsidiaries that is a Restricted Subsidiary of KCI and such judgments remain undischarged, unvacated, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable;



(f)

certain events of bankruptcy affecting KCI or any of its Significant Subsidiaries; or



(g)

any of the Guarantees ceases to be in full force and effect or any of the Guarantees is declared to be null and void and unenforceable or any of the Guarantees is found to be invalid or any of the Guarantors denies its liability under its Guarantee (other than (1) by reason of release of a Guarantor in accordance with the terms of the Indenture or (2) in connection with the bankruptcy of a Guarantor, so long as the aggregate assets of such Guarantor and any other Guarantor whose Guarantee ceased or ceases to be in full force as a results of a bankruptcy are less than $25 million).

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        If an Event of Default (other than an Event of Default specified in clause (f) above with respect to KCI) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Notes may declare the principal of and accrued interest on all the Notes to be due and payable by notice in writing to KCI and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same

(a)

shall become immediately due and payable, or



(b)

if there are any amounts outstanding under the Credit Agreement, shall become immediately due and payable upon the first to occur of an acceleration under the Credit Agreement or 5 business days after receipt by KCI and the representative under the Credit Agreement of such Acceleration Notice.

        If an Event of Default specified in clause (f) above with respect to KCI occurs and is continuing, then all unpaid principal of, and premium, if any, and accrued and unpaid interest on all of the outstanding Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder.

        The Indenture provides that, at any time after a declaration of acceleration with respect to the Notes as described in the preceding paragraph, the Holders of a majority in principal amount of the Notes may rescind and cancel such declaration and its consequences:

(a)

if the rescission would not conflict with any judgment or decree,



(b)

if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration,



(c)

to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid,



(d)

if KCI has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances, and



(e)

in the event of the cure or waiver of an Event of Default of the type described in clause (f) of the description above of Events of Default, the Trustee shall have received an officers' certificate and an opinion of counsel that such Event of Default has been cured or waived.

        No such rescission shall affect any subsequent Default or impair any right consequent thereto.

        The Holders of a majority in principal amount of the Notes may waive any existing Default or Event of Default under the Indenture, and its consequences, except a default in the payment of the principal of or interest on any Notes.

        Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture and under the TIA. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable indemnity. Subject to all provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the then outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee.

        Under the Indenture, KCI is required to provide an officers' certificate to the Trustee promptly upon any such officer obtaining knowledge of any Default or Event of Default (provided that such officers shall provide such certification at least annually whether or not they know of any Default or

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Event of Default) that has occurred and, if applicable, describe such Default or Event of Default and the status thereof.

No Personal Liability of Incorporators, Shareholders, Officers, Directors, or Employees

        No recourse for the payment of the principal of, premium, if any, or interest on any of the Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of KCI in the Indenture, or in any of the Notes or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, shareholder, officer, director, employee or controlling person of KCI or of any successor Person thereof. Each Holder, by accepting the Notes, waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws.

Legal Defeasance and Covenant Defeasance

        KCI may, at its option and at any time, elect to have its obligations and the obligations of the Guarantors discharged with respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that KCI shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes, and satisfied all of their obligations with respect to the Notes, except for

(A)

the rights of Holders to receive payments from a trust established by KCI in respect of the principal of, premium, if any, and interest on the Notes when such payments are due,



(B)

KCI's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payments,



(C)

the rights, powers, trust, duties and immunities of the Trustee and KCI's obligations in connection therewith, and



(D)

the Legal Defeasance provisions of the Indenture.

        In addition, KCI may, at its option and at any time, elect to have the obligations of KCI released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, reorganization and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Notes.

        In order to exercise either Legal Defeasance or Covenant Defeasance,

(A)

KCI must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the Notes on the stated date for payment thereof or on the applicable redemption date, as the case may be;



(B)

in the case of Legal Defeasance, KCI shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that



(i)

KCI has received from, or there has been published by, the Internal Revenue Service a ruling or



(ii)

since the date of the Indenture, there has been a change in the applicable U.S. federal income tax law,

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in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Legal Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred;

(C)

in the case of Covenant Defeasance, KCI shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Covenant Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred;



(D)

(i) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or (ii) in the case of Legal Defeasance, no Defaults or Events of Default from bankruptcy or insolvency events shall have occurred at any time in the period ending on the 123rd day after the date of deposit;



(E)

KCI shall have delivered to the Trustee an opinion of counsel to the effect that such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under the Indenture or any other material agreement or instrument to which KCI or any of its Restricted Subsidiaries is a party or by which KCI or any of its Restricted Subsidiaries is bound;



(F)

KCI shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by KCI with the intent of preferring the Holders over any other creditors of KCI or with the intent of defeating, hindering, delaying or defrauding any other creditors of KCI or others;



(G)

KCI shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with;



(H)

KCI shall have delivered to the Trustee an opinion of counsel to the effect that creation of the defeasance trust does not violate the Investment Company Act of 1940, as amended, and, assuming that no Holder is an "insider" as that term is defined in the United States Bankruptcy Code, after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law; and



(I)

certain other customary conditions precedent are satisfied.

Satisfaction and Discharge

        The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when:

(a)

either



(1)

all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by KCI and thereafter repaid to KCI or discharged from such trust) have been delivered to the Trustee for cancellation, or

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(2)

all Notes not theretofore delivered to the Trustee for cancellation have become due and payable or have been called for redemption in accordance with the Indenture and KCI has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Notes to the date of deposit (or to the date of redemption in the case of the Notes being called for redemption) together with irrevocable instructions from KCI directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be;



(b)

KCI has paid all other sums payable under the Indenture by KCI; and



(c)

KCI has delivered to the Trustee an officers' certificate and an opinion of counsel stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with.

Modification of the Indenture

        From time to time, KCI, the Guarantors and the Trustee, without the consent of the Holders, may amend the Indenture for certain specified purposes, including:

(1)

curing ambiguities, defects or inconsistencies,



(2)

to comply with any requirements of the Commission in order to effect or maintain qualification under TIA, or



(3)

to make any change that will provide any additional benefit to the Holders or does not adversely affect rights of any Holder,

so long as such change does not, in the opinion of the Trustee, adversely affect the rights of any of the Holders in any material respect. In formulating its opinion on such matters, the Trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely on an opinion of counsel.

        Other modifications and amendments of the Indenture may be made with the consent of the Holders of a majority in principal amount of the then outstanding Notes issued under the Indenture, except that, without the consent of each Holder affected thereby, no amendment may:

(1)

reduce the amount of Notes whose Holders must consent to an amendment;



(2)

reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Notes;



(3)

reduce the principal of or change or have the effect of changing the fixed maturity of any Notes, or change the date on which any Notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor;



(4)

make any Notes payable in money other than that stated in the Notes;



(5)

make any change in provisions of the Indenture protecting the right of each Holder to receive payment of principal of and interest on such Note on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of Notes to waive Defaults or Events of Default;



(6)

amend, change or modify in any material respect the obligation of KCI to make and consummate a Change of Control Offer in the event a Change of Control has occurred or make and consummate a Net Proceeds Offer with respect to any Asset Sale that has been

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consummated, or, following the occurrence or consummation of a Change of Control or Asset Sale, modify any of the provisions or definitions with respect thereto;

(7)

modify or change any provision of the Indenture or the related definitions affecting the subordination or ranking of the Notes or any Guarantee in a manner which adversely affects the Holders;



(8)

release any Guarantor from any of its obligations under its Guarantee or the Indenture otherwise than in accordance with the terms of the Indenture; or



(9)

amend, change or modify in any material respect any provision of the Indenture relating to an offer to redeem upon an Event of Failure.

Governing Law

        The Indenture provides that it, the Notes and the Guarantees are governed by, and construed in accordance with, the laws of the State of New York.

The Trustee

        The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such rights and powers vested in it by the Indenture, and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs.

        The Indenture and the provisions of the TIA contain certain limitations on the rights of the Trustee, should it become a creditor of KCI or a Guarantor, to obtain payments of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. Subject to the TIA, the Trustee is permitted to engage in other transactions; provided that if the Trustee acquires any conflicting interest as described in the TIA, it must eliminate such conflict or resign.

Book-Entry; Delivery and Form

        The certificates representing the New Notes will be issued in fully registered form without interest coupons. Except as described below, the New Notes will be initially represented by one or more global notes in fully registered form without interest coupons. The global notes will be deposited with, or on behalf of, The Depository Trust Company, or DTC, and registered in the name of Cede & Co., as nominee of DTC, or will remain in the custody of the Trustee pursuant to the FAST Balance Certificate Agreement between DTC and the Trustee.

        Ownership of beneficial interests in a global note will be limited to persons who have accounts with DTC or persons who hold interests through participants. Ownership of beneficial interests in each global note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants).

        Investors may hold their interests in a Regulation S global note directly through Euroclear or Clearstream, if they are participants in such systems, or indirectly through organizations that are participants in such system. However, upon issuance we intend to settle by delivering interests in the Regulation S global note solely through Euroclear or Clearstream. Euroclear and Clearstream will hold interests in the Regulation S global notes on behalf of their participants through DTC.

        So long as DTC, or its nominee, is the registered owner or holder of a global note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the New Notes

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represented by such global note for all purposes under the Indenture and the New Notes. No beneficial owner of an interest in a global note will be able to transfer that interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture and, if applicable, those of Euroclear and Clearstream.

        Payments of the principal of, and interest on, a global note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither KCI, the Trustee nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a global note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

        KCI expects that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a global note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such global note as shown on the records of DTC or its nominee. KCI also expects that payments by participants to owners of beneficial interests in such global note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants.

        Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. Transfers between participants in Euroclear and Clearstream will be effected in the ordinary way in accordance with their respective rules and operating procedures.

        KCI expects that DTC will take any action permitted to be taken by a holder of New Notes (including the presentation of New Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in a global note is credited and only in respect of such portion of the aggregate principal amount of New Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the New Notes, DTC will exchange the applicable global note for certificated notes, which it will distribute to its participants.

        KCI understands that: DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies and certain other organizations that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants").

        Although DTC, Euroclear and Clearstream are expected to follow the foregoing procedures in order to facilitate transfers of interests in a global note among participants of DTC, Euroclear and Clearstream, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither KCI nor the Trustee will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

        If DTC is at any time unwilling or unable to continue as a depositary for the global notes and a successor depositary is not appointed by KCI within 90 days, KCI will issue certificated notes in exchange for the global notes. Holders of an interest in a global note may receive certificated notes in accordance with the DTC's rules and procedures, in addition to those provided for under the Indenture.

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Definitions

        Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided.

"Acquired Indebtedness" means Indebtedness of a Person or any of its Subsidiaries (1) existing at the time such Person becomes a Restricted Subsidiary of KCI or at the time it merges or consolidates with KCI or any of its Restricted Subsidiaries or (2) which becomes Indebtedness of KCI or a Restricted Subsidiary in connection with the acquisition of assets from such Person, and in each case not incurred by such Person or its Subsidiary in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of KCI or such acquisition, merger or consolidation.

"Affiliate" means, with respect to any specified Person, any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative of the foregoing.

"Asset Acquisition" means (1) an Investment by KCI or any Restricted Subsidiary of KCI in any other Person pursuant to which such Person shall become a Restricted Subsidiary of KCI or any Restricted Subsidiary of KCI, or shall be merged with or into KCI or any Restricted Subsidiary of KCI, or (2) the acquisition by KCI or any Restricted Subsidiary of KCI of the assets of any Person (other than a Restricted Subsidiary of KCI) which constitute all or substantially all of the assets of such Person or comprises any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business.

"Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by KCI or any of its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than KCI or a Restricted Subsidiary of KCI of:

(1)

any Capital Stock of any Restricted Subsidiary of KCI; or



(2)

any other property or assets of KCI or any Restricted Subsidiary of KCI other than in the ordinary course of business;provided, however, that Asset Sales shall not include:



(a)

a transaction or series of related transactions for which KCI or its Restricted Subsidiaries receive aggregate consideration of less than $5.0 million,



(b)

the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of KCI as permitted under the"Merger, Consolidation and Sale of Assets" covenant above or any such disposition that constitutes a Change of Control,



(c)

sales of accounts receivable, equipment and related assets (including contract rights) of the type specified in the definition of "Qualified Securitization Transaction" to a Securitization Entity for the fair market value thereof, including cash in an amount at least equal to 75% of the fair market value thereof,



(d)

transfers of accounts receivable, equipment and related assets (including contract rights) of the type specified in the definition of "Qualified Securitization Transaction" (or a fractional undivided interest therein) by a Securitization Entity in a Qualified Securitization Transaction,



(e)

Investments and Restricted Payments that are not prohibited by the Indenture, or

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(f)

the distribution of any Equity Interests of any Subsidiary of KCI for the purpose of establishing a holding company structure in compliance with the covenant described under"Merger, Consolidation and Sale of Assets."

"Board of Directors" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof; provided that as the term "Board of Directors" is used in the definition of "Continuing Directors" it shall refer only to the board of directors and not to any committee thereof.

"Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee.

"Capital Contribution" means any contribution to the equity of KCI from a direct or indirect parent of KCI for which no consideration is given.

"Capital Stock" means (1) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person and (2) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person.

"Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP.

"Cash Equivalents" means

(1)

marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof;



(2)

marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the four highest ratings obtainable from either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's");



(3)

commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-2 from S&P or at least P-2 from Moody's;



(4)

certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $100.0 million;



(5)

repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (1) above entered into with any bank meeting the qualifications specified in clause (4) above;



(6)

investments in money market funds which invest substantially all their assets in securities of the types described in clauses (1) through (5) above; and

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(7)

investments made by Foreign Subsidiaries in local currencies in instruments issued by or with entities of such jurisdiction having correlative attributes to the foregoing.

"Change of Control" means the occurrence of one or more of the following events:

(1)

any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of KCI or, after a Holding Company Merger, Parent to any Person (other than to KCI or a Guarantor) or group of related Persons (other than KCI and the Guarantors) for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of the Indenture);



(2)

the approval by the holders of Capital Stock of KCI or, after a Holding Company Merger, Parent of any plan or proposal for the liquidation or dissolution of KCI or, after a Holding Company Merger, Parent (whether or not otherwise in compliance with the provisions of the Indenture);



(3)

any Person or Group (other than any of the Permitted Holder(s) or any underwriters in connection with an offering of Qualified Capital Stock registered under the Securities Act) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of KCI or, after a Holding Company Merger, Parent; or



(4)

the first day on which a majority of the members of the Board of Directors of KCI or, after a Holding Company Merger, Parent are not Continuing Directors.

"Common Stock" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock.

"Comparable Treasury Issue" means the U.S. Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Notes that would be utilized at the time of selection and in accordance with customary financial practice in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an investment banking firm of national reputation selected by KCI.

"Comparable Treasury Price" means, with respect to a redemption date, (1) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations for such redemption date, or (2) if KCI obtains fewer than three such Reference Security Dealer Quotations, the average of all such quotations.

"Consolidated EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of:

(1)

Consolidated Net Income, and



(2)

to the extent Consolidated Net Income has been reduced thereby,



(A)

all income taxes of such Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP for such period (other than income taxes attributable to extraordinary, unusual or nonrecurring gains or losses or taxes attributable to sales or dispositions outside the ordinary course of business) and any payments to the Parent pursuant to clause (10) of the last paragraph of the covenant described above under"Limitation on Restricted Payments,"

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(B)

Consolidated Interest Expense,



(C)

the aggregate charges for depreciation, amortization and impairment of goodwill or other intangible assets of such Person and its Restricted Subsidiaries for such period,



(D)

the unrealized foreign currency losses of such Person and its Restricted Subsidiaries for such period,



(E)

other non-cash charges of such Person and its Restricted Subsidiaries for such period, less (i) any non-cash charges increasing Consolidated Net Income during such period and (ii) the amount of all cash payments made by such Person or any of its Restricted Subsidiaries during such period, to the extent such payments relate to non-cash charges that were added back in determining Consolidated EBITDA for such period or any prior period,



(F)

for purposes of determining KCI Consolidated Fixed Charge Coverage Ratio (and the components thereof) for any Four Quarter Period that includes the Issue Date, the Transaction Expenses,



(G)

management fees paid pursuant to the Management Agreement paid within the twelve month period immediately prior to the Issue Date; provided that the obligation to pay management fees under the Management Agreement is terminated prior to August 31, 2003 and no further payments are made after August 2003, or required to be made, thereunder,



(H)

cash expenses for stock option and stock repurchase for the twelve month period immediately prior to the Issue Date and cash expenses related thereto incurred on or after the Issue Date, and



(I)

research and development expense write-offs during the twelve month period immediately prior to the Issue Date.

in each case as determined on a consolidated basis for such Person and its Restricted Subsidiaries in accordance with GAAP.

"Consolidated Fixed Charge Coverage Ratio" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the four full fiscal quarters (the "Four Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on apro forma basis for the period of such calculation to:

(1)

the incurrence or repayment of any Indebtedness of such Person or any of its Restricted Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period and



(2)

any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result

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of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA (provided that such Consolidated EBITDA shall be included only to the extent includable pursuant to the definition of "Consolidated Net Income") attributable to the assets which are the subject of the Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Four Quarter Period.

        If such Person or any of its Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio,"

(1)

interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date;



(2)

if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four Quarter Period; and



(3)

notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements.

"Consolidated Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (1) Consolidated Interest Expense, plus (2) the product of (A) the amount of all dividend payments on any series of Preferred Stock of such Person (other than (x) dividends paid in Qualified Capital Stock and (y) dividends on the Preferred Stock, the net proceeds of which will be used for the Distribution, to the extent they are paid in kind or accrete, except to the extent they constitute Disqualified Capital Stock) paid, accrued or scheduled to be paid or accrued during such period times (B) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local tax rate of such Person, expressed as a decimal.

"Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication:

(1)

the aggregate of the interest expense of such Person and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, including without limitation,



(A)

any amortization of debt discount,



(B)

the net costs under Interest Swap Obligations,



(C)

all capitalized interest, and

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(D)

the interest portion of any deferred payment obligation, but excluding amortization or write-off of deferred financing costs;

but, in all cases, excluding dividends on the Preferred Stock, the net proceeds of which will be used for the Distribution, to the extent that they are paid in kind or accrete, except to the extent they constitute Disqualified Capital Stock; and

(2)

the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP.

"Consolidated Net Income" means, with respect to any Person, for any period, the aggregate net income (or loss) of such Person and its Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAPminus, after the Holding Company Merger, any payments to the Parent pursuant to clause (10) of the last paragraph of the covenant described above under"Covenants—Limitation on Restricted Payments";provided that there shall be excluded therefrom:

(1)

after-tax gains from Asset Sales or abandonments or reserves relating thereto,



(2)

after-tax items classified as extraordinary or nonrecurring gains,



(3)

the net income (but not loss) of any Restricted Subsidiary of the referent Person to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by a contract, operation of law or otherwise,



(4)

the net income of any Person in which the referent Person has an interest, other than a Restricted Subsidiary of the referent Person, except to the extent of cash dividends or distributions paid to the referent Person or to a Restricted Subsidiary of the referent Person by such Person,



(5)

any restoration to income of any contingency reserve in accordance with GAAP, except to the extent that provision for such reserve was made out of Consolidated Net Income accrued at any time following the Issue Date,



(6)

income or loss attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued),



(7)

in the case of a successor to the referent Person by consolidation or merger or as a transferee of the referent Person's assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets,



(8)

after-tax gains from the installment payment due in January 2004 in connection with the antitrust litigation settlement with Hillenbrand Industries, Inc., and



(9)

tax benefits from the exercise of employee stock options to the extent proceeds from such exercise are used to fund the Distribution.

"Continuing Directors" means, as of the date of determination, any member of the Board of Directors of KCI, or, after a Holding Company Merger, Parent who (1) was a member of the Board of Directors of KCI on the date of the Indenture or (2) was nominated for election or elected to the Board of Directors of KCI, or, after a Holding Company Merger, Parent, with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election.

"Credit Agreement" means the Credit Agreement to be dated on or about the Issue Date, among KCI, the lenders party thereto in their capacities as lenders thereunder, Morgan Stanley Senior Funding Inc., as Administrative Agent, and Credit Suisse First Boston, acting through its Cayman

132

Islands branch, as Syndication Agent, together with the documents related thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented, restated or otherwise modified from time to time, including any agreement and related documents (including, without limitation, any loan agreement, note, note purchase agreement and indenture) extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder (provided that such increase in borrowings is permitted by the "Limitation on Incurrence of Additional Indebtedness" covenant above) or adding Restricted Subsidiaries of KCI as additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such agreement and related documents or any successor or replacement agreement and related documents and whether by the same or any other agent, lender, group of lenders or otherwise and whether through any credit facilities or other borrowing or lending arrangements, including through issuing senior or subordinated notes.

"Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect KCI or any Restricted Subsidiary of KCI against fluctuations in currency values.

"Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default.

"Designated Senior Debt" means (1) Indebtedness under or in respect of the Credit Agreement and (2) any other Indebtedness constituting Senior Debt which, at the time of determination, has an aggregate principal amount of at least $25.0 million and is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by KCI.

"Disqualified Capital Stock" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof on or prior to the final maturity date of the Notes;provided that any Capital Stock that would not constitute Disqualified Capital Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes shall not constitute Disqualified Capital Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in "Covenants—Limitation on Asset Sales" and "Change of Control" and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to KCI's repurchase of such Notes as are required to be repurchased pursuant to the "Covenants—Limitation on Asset Sales" and "Change of Control."

"Distribution" means one or more dividends on, or repurchases or redemptions of, Equity Interests (including the cash settlement of employee stock options or other employee incentive plans) prior to March 31, 2004 in an aggregate amount not to exceed $300.0 million plus (1) net cash proceeds from the sale of Preferred Stock completed prior to March 31, 2004, (2) the net cash proceeds (on an after tax basis) received from the installment payment due in January 2004 in connection with the antitrust litigation settlement with Hillenbrand Industries, Inc., which amount shall not exceed $47.0 million, (3) the estimated tax benefit to KCI from the recapitalization, including the exercise or repurchase of stock options in connection therewith, which amount shall not exceed $40.0 million and (4) the cash proceeds received from the exercise of stock options repurchased in connection with the recapitalization.

"Equity Interests" of a Person means Capital Stock or partnership, participation or membership interests of such Person and all warrants, options or other rights to acquire Capital Stock or

133

partnership, participation or membership interests of such Person (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock or partnership, participation or membership interests of such Person).

"Equity Offering" means any offering of Qualified Capital Stock of KCI.

"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto.

"fair market value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair market value shall be determined by the Board of Directors of KCI acting reasonably and in good faith.

"Fremont" means Fremont Partners, L.P. and its Affiliates.

"Foreign Subsidiary" means any Restricted Subsidiary of KCI which (x)(1) is not organized under the laws of the United States, any state thereof or the District of Columbia and (2) conducts substantially all of its business operations in a country other than the United States of America or (y) is a holding company whose only assets are Investments in a Person or Persons which meet the criteria specified in clause (x) of this definition and assets which are incidental to ownership of such Investment.

"GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, as in effect on the Issue Date.

"Guarantee" means the guarantee of the obligations under the Indenture and the Notes by each of the Guarantors on the terms set forth in the Indenture.

"Guarantor" means (1) each of the domestic Subsidiaries of KCI on the Issue Date that has guaranteed the Notes under the Indenture and (2) each of KCI's Restricted Subsidiaries that in the future executes a supplemental indenture in which such Restricted Subsidiary agrees to be bound by the terms of the Indenture as a Guarantor; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its respective Guarantee is released in accordance with the terms of the Indenture.

"Guarantor Senior Debt" means, with respect to any Guarantor, the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy or the commencement of any bankruptcy, insolvency, reorganization, receivership or other similar proceeding at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) and fees and expenses (including costs of collection), indemnity obligations on, and all other amounts and obligations owing in respect of, any Indebtedness (other than guarantees of the Previously Existing Notes) of a Guarantor, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Guarantee of such Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy or the commencement of any bankruptcy, insolvency, reorganization, receivership or other similar proceeding at the rate provided for in the documentation with respect

134

thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing in respect of,

(1)

all monetary obligations of every nature of KCI or such Guarantor under the Credit Agreement, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, commissions, expenses and indemnities,



(2)

all Interest Swap Obligations of such Guarantor, and



(3)

all obligations of such Guarantor under Currency Agreements,

in each case whether outstanding on the Issue Date or thereafter incurred.

        Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include:

(1)

any Indebtedness of such Guarantor to a Subsidiary of such Guarantor or any Affiliate of such Guarantor or any of such Affiliate's Subsidiaries,



(2)

Indebtedness of such Guarantor to, or guaranteed by such Guarantor on behalf of, any shareholder, director, officer or employee of such Guarantor or any Restricted Subsidiary of such Guarantor (including, without limitation, amounts owed for compensation),



(3)

Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services,



(4)

Indebtedness represented by Disqualified Capital Stock,



(5)

any liability for federal, state, local or other taxes owed or owing by such Guarantor,



(6)

Indebtedness incurred in violation of the Indenture provisions set forth under the"Limitation on Incurrence of Additional Indebtedness" covenant (but, as to any such obligation, no such violation shall be deemed to exist for purposes of this clause (vi) if the holder(s) of such Indebtedness or their representative and the Trustee shall have received an officers' certificate of KCI to the effect that the incurrence of such Indebtedness does not (or, in the case of revolving credit Indebtedness or other Indebtedness available to be borrowed under the Credit Agreement after the date of the initial borrowing thereunder, that the incurrence of the entire committed amount thereof at the date on which the initial borrowing thereunder is made would not) violate such provisions of the Indenture),



(7)

Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to KCI or any Guarantor and



(8)

any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of such Guarantor.

"Holder" means any holder of Notes.

"Indebtedness" means with respect to any Person, without duplication,

(1)

all Obligations of such Person for borrowed money,



(2)

all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments,



(3)

all Capitalized Lease Obligations of such Person,



(4)

all Obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or more or are being contested in good faith by appropriate proceedings),

135

(5)

all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction,



(6)

guarantees and other contingent obligations in respect of Indebtedness of other Persons of the type referred to in clauses (1) through (5) above and clause (8) below,



(7)

all Obligations of any other Person of the type referred to in clauses (1) through (6) which are secured by any Lien on any property or asset of such Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured,



(8)

all Obligations under Currency Agreements and Interest Swap Obligations of such Person, and



(9)

all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock.

        For purposes of this prospectus, the amount of any Indebtedness referred to in clause (8) of the preceding paragraph shall be the net amounts (including by offset of amounts payable thereunder), including any net termination payments, required to be paid to a counterparty rather than any notional amount with regard to which payments may be calculated.

"Independent Financial Advisor" means a firm (1) which does not, and whose directors, officers and employees or Affiliates do not, have a direct or indirect material financial interest in KCI and (2) which, in the judgment of the Board of Directors of KCI, is otherwise independent and qualified to perform the task for which it is to be engaged, and may include a commercial or investment banking, appraisal or accounting firm.

"Interest Swap Obligations" means the obligations of any Person pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements.

"Investment" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any other Person. "Investment" shall exclude extensions of trade credit by KCI and its Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of KCI or such Restricted Subsidiary, as the case may be. For the purposes of the"Limitation on Restricted Payments" covenant,

(1)

"Investment" shall include and be valued at the fair market value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary (proportionate to KCI's equity interest in such Subsidiary) and shall exclude, and

136

the aggregate amount of all Restricted Payments made as Investments since the Issue Date shall exclude and be reduced by, the fair market value of the net assets of any Unrestricted Subsidiary (proportionate to KCI's equity interest in such Subsidiary) at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary, such exclusion and reduction not to exceed the amount of Investments previously made by the referent person and its Restricted Subsidiaries and treated as Restricted Payments, and

(2)

the amount of any Investment shall be the original cost of such Investment, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of dividends or distributions in connection with such Investment or any other amounts received in respect of such Investment;provided that no such payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If KCI or any Restricted Subsidiary of KCI sells or otherwise disposes of any Common Stock of any direct or indirect Restricted Subsidiary of KCI such that, after giving effect to any such sale or disposition, it ceases to be a Subsidiary of KCI, KCI shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Capital Stock of such Restricted Subsidiary not sold or disposed of.

"Issue Date" means the date of original issuance of the Old Notes.

"Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest).

"Make-Whole Premium" means, with respect to a Note, the sum of the present values of the remaining scheduled payments of interest, principal and premium thereon (not including any portion of such payments of interest accrued as of the date of redemption) as if the Notes were redeemed on May 15, 2008 pursuant to the first paragraph under "—Optional Redemption" on such date, discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points.

"Management Agreement" means the management agreement among KCI, Fremont and RCBA, in effect on the Issue Date and includes the amendment expected to be entered into as described in this prospectus, and which provides for the payment or accrual of not more than $2,000,000 of compensation annually beginning on November 1 and ending on October 31 of the following year.

"Management Equity Plan" means KCI's Management Equity Plan in effect on the Issue Date, as the same may be amended from time to time, or any successor stock option plan which governs the terms of stock options which were initially granted under the Management Equity Plan.

"Marketable Securities" means any security listed for trading on any U.S. national securities exchange or listed for quotation on the NASDAQ National Market.

"Minimum Tax Withholding" means the amount which KCI or any of its Restricted Subsidiaries is required to withhold in connection with employer's minimum statutory withholding of taxes, including without limitation, federal and state withholding requirements, and FICA and Medicare taxes.

"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest), received by KCI or any of its Restricted Subsidiaries from such Asset Sale net of:

(1)

reasonable out-of-pocket expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions),

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(2)

taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements,



(3)

repayment of Indebtedness that is required to be repaid in connection with such Asset Sale, and



(4)

appropriate amounts (determined by KCI in good faith) to be provided by KCI or any Restricted Subsidiary, as the case may be, as a reserve, against any post closing adjustments or liabilities associated with such Asset Sale and retained by KCI or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale.

"Non-Recourse Indebtedness" means Indebtedness secured only by an asset and which is expressly stated to be without recourse to KCI or its Restricted Subsidiaries from the date of incurrence of such Indebtedness.

"Obligations" means all obligations for principal, premium, interest, penalties, fees, commissions, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness.

"Parent" means, after the Holding Company Merger, any Person that, directly or indirectly, holds all or substantially all of the Qualified Capital Stock of KCI.

"Permanent Disability", (i) with respect to any person who is an employee of KCI or any of its Restricted Subsidiaries, shall mean, and is defined in the same manner as, such term or similar term is defined in an employment agreement applicable to the employee or, (ii) in the case of a person who does not have an employment agreement that defines such term or a similar term, shall mean that the person is unable to perform substantially all of his or her duties as an employee of KCI or any of its Restricted Subsidiaries by reason of illness or incapacity for a period of more than six consecutive months, or six months in the aggregate during any 12-month period, established by medical evidence reasonably satisfactory to KCI or any of its Restricted Subsidiaries.

"Permitted Holder(s)" means RCBA, Fremont, James R. Leininger, M.D., and his Affiliates and, after the Holding Company Merger, any Parent.

"Permitted Investments" means:

(1)

Investments by KCI or any Restricted Subsidiary of KCI in any Person that is or will become immediately after such Investment a Restricted Subsidiary of KCI or that will merge or consolidate into KCI or a Restricted Subsidiary of KCI;



(2)

Investments in KCI by any Restricted Subsidiary of KCI; provided that any Indebtedness evidencing such Investment is unsecured and subordinated, pursuant to a written agreement, to KCI's obligations under the Notes and the Indenture;



(3)

investments in cash and Cash Equivalents;



(4)

loans and advances to employees and officers of KCI and its Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not in excess of $10.0 million at any one time outstanding pursuant to this clause (4);



(5)

Currency Agreements and Interest Swap Obligations entered into in the ordinary course of KCI's or its Restricted Subsidiaries' businesses and otherwise in compliance with the Indenture;



(6)

Investments in Unrestricted Subsidiaries not to exceed $10.0 million at any one time outstanding pursuant to this clause (6);

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(7)

Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers;



(8)

Investments made by KCI or its Restricted Subsidiaries as a result of consideration received in connection with an Asset Sale made in compliance with the"Limitation on Asset Sales" covenant;



(9)

Investments existing on the date of the Indenture;



(10)

accounts receivable, advances, loans, guarantees or extensions of credit created or acquired in the ordinary course of business, consistent with past or industry practice;



(11)

any Investment by KCI or a Wholly Owned Restricted Subsidiary of KCI in a Securitization Entity or any Investment by a Securitization Entity in any other Person in connection with a Qualified Securitization Transaction;provided that any Investment in a Securitization Entity is in the form of a Purchase Money Note or an equity interest;



(12)

Investments committed to by KCI or its Restricted Subsidiaries on the Issue Date not to exceed $1.5 million in the aggregate pursuant to this clause (12);



(13)

Investments in Strategic Joint Ventures not to exceed $20.0 million outstanding at any one time pursuant to this clause (13); and



(14)

any Investment in any Person solely in exchange for Qualified Capital Stock or, after the Holding Company Merger, Capital Stock of the Parent, or from a Capital Contribution or the net cash proceeds of any substantially concurrent sale of KCI's Qualified Capital Stock.

"Permitted Liens" means the following types of Liens:

(1)

Liens for taxes, assessments or governmental charges or claims either (A) not delinquent or (B) contested in good faith by appropriate proceedings and as to which KCI or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP;



(2)

statutory, contractual and common law Liens of landlords to secure rent payments and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof;



(3)

Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);



(4)

judgment Liens securing judgments not giving rise to an Event of Default;



(5)

easements, rights-of-way, zoning restrictions, restrictive covenants, minor imperfections in title and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of KCI or any of its Restricted Subsidiaries;

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(6)

any interest or title of a lessor under any Capitalized Lease Obligation;provided that such Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligation;



(7)

purchase money Liens to finance property or assets (including the cost of construction) of KCI or any Restricted Subsidiary of KCI acquired in the ordinary course of business;provided, however, that (A) the related purchase money Indebtedness shall not exceed the cost of such property or assets and shall not be secured by any property or assets of KCI or any Restricted Subsidiary of KCI other than the property and assets so acquired or constructed and (B) the Lien securing such Indebtedness shall be created within 180 days of such acquisition or construction;



(8)

Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods;



(9)

Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof;



(10)

Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of KCI or any of its Restricted Subsidiaries, including, without limitation, liability to insurance carriers under insurance or self-insurance arrangements, including rights of offset and set-off;



(11)

Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under the Indenture;



(12)

Liens securing Indebtedness under Currency Agreements;



(13)

Liens securing Acquired Indebtedness incurred in accordance with the"Limitation on Incurrence of Additional Indebtedness" covenant;provided that (A) such Liens secured such Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by KCI or a Restricted Subsidiary of KCI and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Indebtedness by KCI or a Restricted Subsidiary of KCI and (B) such Liens do not extend to or cover any property or assets of KCI or of any of its Restricted Subsidiaries other than the property or assets (or the proceeds thereof) that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of KCI or a Restricted Subsidiary of KCI and are no more favorable to the lienholders than those securing the Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by KCI or a Restricted Subsidiary of KCI;



(14)

Liens arising under the Indenture;



(15)

leases or subleases granted to others that do not materially interfere with the business of KCI and its Restricted Subsidiaries;



(16)

Liens in connection with any filing of Uniform Commercial Code financing statements regarding leases;



(17)

Liens securing Non-Recourse Indebtedness incurred pursuant to the Indenture;



(18)

Liens arising from a bank or financial institution honoring a check or draft inadvertently drawn against insufficient funds in the ordinary course of business; and



(19)

Liens on assets transferred to a Securitization Entity or on assets of a Securitization Entity, in either case incurred in connection with a Qualified Securitization Transaction.

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"Person" means an individual, partnership, corporation, unincorporated organization, limited liability company, trust or joint venture, or a governmental agency or political subdivision thereof.

"Preferred Stock" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation.

"Previously Existing Credit Agreement" means the Credit Agreement dated November 3, 1997, among KCI, certain subsidiary borrowers thereto and the financial institutions named therein, as amended from time to time.

"Previously Existing Notes" means KCI's existing 9⁵/8% Senior Subordinated Notes due 2007, Series A and the 9⁵/8% Senior Subordinated Notes due 2007, Series B and the related guarantees, which were redeemed as part of the recapitalization.

"Purchase Money Note" means a promissory note of a Securitization Entity evidencing a line of credit, which may be irrevocable, from KCI or any Subsidiary of KCI in connection with a Qualified Securitization Transaction to a Securitization Entity, which note shall be repaid from cash available to the Securitization Entity, other than amounts required to be established as reserves pursuant to agreements, amounts paid to investors in respect of interest, principal and other amounts owing to such investors, amounts paid in connection with the purchase of newly generated receivables or newly acquired equipment and amounts paid for administrative costs in the ordinary course of business.

"Qualified Capital Stock" means any Capital Stock that is not Disqualified Capital Stock.

"Qualified Securitization Transaction" means any transaction or series of transactions that may be entered into by KCI or any of its Subsidiaries pursuant to which KCI or any of its Subsidiaries may sell, convey or otherwise transfer to (1) a Securitization Entity (in the case of a transfer by KCI or any of its Subsidiaries) and (2) any other Person (in the case of a transfer by a Securitization Entity), or may grant a security interest in, any accounts receivable or equipment (whether now existing or arising or acquired in the future) of KCI or any of its Subsidiaries, and any assets related thereto including, without limitation, all collateral securing such accounts receivable and equipment, all contracts and contract rights and all guarantees or other obligations in respect of such accounts receivable and equipment, proceeds of such accounts receivable and equipment and other assets (including contract rights) which are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving accounts receivable and equipment.

"RCBA" means Blum Capital Partners, L.P. and its Affiliates.

"Reference Treasury Dealer" means (1) Morgan Stanley & Co. Incorporated and its successors;provided, however, that if the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), KCI is required to substitute therefor another Primary Treasury Dealer, and (2) any other Primary Treasury Dealer selected by KCI.

"Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Independent Investment Banker by the Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date.

"Refinance" means, in respect of any security or Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have correlative meanings.

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"Refinancing Indebtedness" means any Indebtedness that is the result of any Refinancing by KCI or any Restricted Subsidiary of KCI of Indebtedness incurred in accordance with the "Limitation on Incurrence of Additional Indebtedness" covenant (other than pursuant to clause (2), (3), (5), (6), (7), (8), (9), (10), (11), (13), (14) or, with respect to the Previously Existing Notes and Indebtedness under the Previously Existing Credit Agreement, clause (4), of subsection (a) of such covenant), in each case that does not:

(1)

result in an increase in the aggregate principal amount of Indebtedness of such Person as of the date of such proposed Refinancing (other than increases from capitalized interest, any premium required to be paid under the terms of the instrument governing such Indebtedness or the amount of any premium reasonably determined to be necessary to accomplish such refinancing and the amount of reasonable expenses incurred by KCI and any Restricted Subsidiary in connection with such Refinancing, all of which are included in the term "Refinancing Indebtedness"), or



(2)

create Indebtedness with



(A)

a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or



(B)

a final maturity earlier than the final maturity of the Indebtedness being Refinanced;provided that



(i)

if such Indebtedness being Refinanced is Indebtedness solely of KCI or any Restricted Subsidiary or is Indebtedness solely of KCI and any Restricted Subsidiary or Restricted Subsidiaries, then such Refinancing Indebtedness shall be Indebtedness solely of KCI or such Restricted Subsidiary or KCI and such Restricted Subsidiary or Restricted Subsidiaries, as the case may be, and



(ii)

if such Indebtedness being Refinanced is subordinate or junior to the Notes, then such Refinancing Indebtedness shall be subordinate to the Notes at least to the same extent and in the same manner as the Indebtedness being Refinanced.

"Representative" means the indenture trustee or other trustee, agent or representative in respect of any Designated Senior Debt;provided that (1) if, and for so long as, any Designated Senior Debt lacks such a representative, then the Representative for such Designated Senior Debt shall at all times constitute the holders of a majority in outstanding principal amount of such Designated Senior Debt in respect of any Designated Senior Debt and (2) the administrative agent (or any successor thereto) shall be a Representative of the lenders under the Credit Agreement.

"Restricted Subsidiary" of any Person means any Subsidiary of such Person which at the time of determination is not an Unrestricted Subsidiary.

"Sale and Leaseback Transaction" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to KCI or a Restricted Subsidiary of any property, whether owned by KCI or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by KCI or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such Property.

"SEC" means the Securities and Exchange Commission.

"Securitization Entity" means a Wholly Owned Restricted Subsidiary of KCI (or another Person in which KCI or any Subsidiary of KCI makes an Investment and to which KCI or any Subsidiary of KCI transfers accounts receivable or equipment and related assets) which engages in no activities other than

142

in connection with the financing of accounts receivable or equipment and which is designated by the Board of Directors of KCI (as provided below) as a Securitization Entity

(1)

no portion of the Indebtedness or any other Obligations (contingent or otherwise) of which



(A)

is guaranteed by KCI or any Subsidiary of KCI (excluding guarantees of Obligations (other than the principal of, and interest on, Indebtedness) pursuant to Standard Securitization Undertakings),



(B)

is recourse to or obligates KCI or any Subsidiary of KCI in any way other than pursuant to Standard Securitization Undertakings or



(C)

subjects any property or asset of KCI or any Subsidiary of KCI, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to Standard Securitization Undertakings,



(2)

with which neither KCI nor any Subsidiary of KCI has any material contract, agreement, arrangement or understanding other than on terms no less favorable to KCI or such Subsidiary than those that might be obtained at the time from Persons that are not Affiliates of KCI, other than fees payable in the ordinary course of business in connection with servicing receivables of such entity, and



(3)

to which neither KCI nor any Subsidiary of KCI has any obligation to maintain or preserve such entity's financial condition or cause such entity to achieve certain levels of operating results. Any such designation by the Board of Directors of KCI shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors of KCI giving effect to such designation and an officer's certificate certifying that such designation complied with the foregoing conditions.

"Senior Debt" means the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy or the commencement of any bankruptcy, insolvency, reorganization, receivership or other similar proceeding at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) and fees and expenses (including costs of collection), indemnity obligations on, and all other amounts and obligations owing in respect of, any Indebtedness (other than the Previously Existing Notes) of KCI, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes. Without limiting the generality of the foregoing, "Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy or the commencement of any bankruptcy, insolvency, reorganization, receivership or other similar proceeding at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing in respect of,

(1)

all monetary obligations of every nature of KCI under the Credit Agreement, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, guaranteed obligations, fees, commissions, expenses and indemnities,



(2)

all Interest Swap Obligations and



(3)

all obligations under Currency Agreements,

in each case whether outstanding on the Issue Date or thereafter incurred.

        Notwithstanding the foregoing, "Senior Debt" shall not include

143

(1)

any Indebtedness of KCI to a Subsidiary of KCI or any Affiliate of KCI or any of such Affiliate's Subsidiaries,



(2)

Indebtedness of KCI to, or guaranteed by KCI on behalf of, any shareholder, director, officer or employee of KCI or any Subsidiary of KCI (including, without limitation, amounts owed for compensation),



(3)

Indebtedness to trade creditors and other trade payables incurred in connection with obtaining goods, materials or services,



(4)

Indebtedness represented by Disqualified Capital Stock,



(5)

any liability for federal, state, local or other taxes owed or owing by KCI,



(6)

Indebtedness incurred in violation of the Indenture provisions set forth under "Covenants—Limitation on Incurrence of Additional Indebtedness" (but, as to any such obligation, no such violation shall be deemed to exist for purposes of this clause (6) if the holder(s) of such Indebtedness or their representative and the Trustee shall have received an officers' certificate of KCI to the effect that the incurrence of such Indebtedness does not (or, in the case of revolving credit Indebtedness or other Indebtedness available to be borrowed under the Credit Agreement after the date of the initial borrowing thereunder, that the incurrence of the entire committed amount thereof at the date on which the initial borrowing thereunder is made would not) violate such provisions of the Indenture),



(7)

Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to KCI and



(8)

any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of KCI.

"Significant Subsidiary" shall mean a Restricted Subsidiary or a group of Restricted Subsidiaries that would be considered a "significant subsidiary" of KCI pursuant to Rule 1.02(w) of Regulation S-X under the Securities Act, as in effect on the Issue Date.

"Standard Securitization Undertakings" means representations, warranties, covenants and indemnities entered into by KCI or any Subsidiary of KCI which are reasonably customary in an accounts receivable or equipment securitization transaction.

"Stated Maturity" means, (1) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (2) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable.

"Strategic Joint Venture" means a corporation, partnership or other entity engaged in a business which is related to that of KCI or any of its Restricted Subsidiaries or which provides services, products or intellectual property to KCI or any of its Restricted Subsidiaries or uses the products, services or intellectual property of KCI or any of its Restricted Subsidiaries.

"Subsidiary," with respect to any Person, means (1) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (2) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person.

"Transaction Expenses" means the expenses relating to the offering of the Notes, execution and initial borrowings under the Credit Agreement, the redemption of the Previously Existing Notes, the

144

sale of the Preferred Stock the net proceeds of which are used in connection with the Distribution, the Distribution and the interest expense on the Previously Existing Notes after the Issue Date.

"Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semiannual yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.

"U.S. Government Obligations" means securities that are (1) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (2) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof at any time prior to the Stated Maturity of the Notes and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt;provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt.

"Unrestricted Subsidiary" of any Person means:

(1)

any Subsidiary of such Person that at the time of determination shall be or continue to be designated an Unrestricted Subsidiary by the Board of Directors of such Person in the manner provided below and



(2)

any Subsidiary of an Unrestricted Subsidiary.

        The Board of Directors may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, KCI or any Restricted Subsidiary of KCI that is not a Subsidiary of the Subsidiary to be so designated;provided that

(1)

KCI certifies to the Trustee that such designation complies with the"Limitation on Restricted Payments" covenant and



(2)

each Subsidiary to be so designated and each of its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender has recourse to any of the assets of KCI or any of its Restricted Subsidiaries (other than the assets of such Restricted Subsidiary to be designated an Unrestricted Subsidiary and its Subsidiaries).

        In the event that any Restricted Subsidiary is designated an Unrestricted Subsidiary in accordance with the above provisions, the Guarantee of such Subsidiary will be released.

        The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if:

(1)

immediately after giving effect to such designation, KCI is able to incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of clause (a) of the"Limitation on Incurrence of Additional Indebtedness" covenant, unless such designated Subsidiary shall, at the time of designation, have no Indebtedness outstanding other than Indebtedness pursuant to

145

the second paragraph of clause (a) of the"Limitation on Incurrence of Additional Indebtedness" covenant, and

(2)

immediately before and immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing provisions.

        Notwithstanding the foregoing, to the extent Federal Express Trust No. 1991-B and Federal Express Trust No. 1991-A are Subsidiaries of KCI, each such entity will be an Unrestricted Subsidiary of KCI unless and until the Board of Directors of KCI designates it to be a Restricted Subsidiary in accordance with the foregoing provisions.

"Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (1) the then outstanding aggregate principal amount of such Indebtedness into (2) the sum of the total of the products obtained by multiplying (A) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (B) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment;provided that the final maturity for purposes of any security which is puttable to the issuer by the holder thereof upon a date certain without need for the occurrence of a contingent event (e.g., a change of control) shall be the next such put date.

"Wholly Owned Restricted Subsidiary" of any Person means any Restricted Subsidiary of such Person of which all the outstanding voting securities (other than, in the case of a foreign Restricted Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Restricted Subsidiary of such Person.

146

DESCRIPTION OF THE NEW SENIOR CREDIT FACILITY

        Concurrent with the issuance of the old notes, we entered into a new senior credit facility consisting of a $100.0 million revolving credit facility and a $480.0 million term loan facility. Our obligations under the new senior credit facility are guaranteed by each of our direct and indirect wholly-owned subsidiaries (other than any entity that is a controlled foreign corporation (a "CFC") within the definition of Section 957 of the Internal Revenue Code or a holding company whose only assets are investments in a CFC).

        At closing under the new senior credit facility on August 11, 2003, we drew $480.0 million under the new term loan facility and had $88.7 million available under the new revolving credit facility.

        Morgan Stanley Senior Funding, Inc. or one of its affiliates is acting as administrative agent and collateral agent under the new senior credit facility, Credit Suisse First Boston, acting through its Cayman Islands Branch, is acting as syndication agent and Morgan Stanley Senior Funding, Inc. and Credit Suisse First Boston, acting through its Cayman Islands Branch, are acting as joint lead arrangers for the new senior credit facility.

        Loans.    The new senior credit facility consists of $480.0 million under the new term loan facility and $100.0 million under the new revolving credit line. Up to $30.0 million of the new revolving credit facility is available for letters of credit. As of August 11, 2003, $480 million was drawn under the new term loan facility, and $11.3 million was drawn under the new revolving credit line in the form of letters of credit.

        Interest.    The new senior credit facility provides for an interest rate equal to the base rate (defined as the higher of Citibank, N.A.'s prime rate or¹/2 of 1% in excess of the federal funds rate) or the Eurodollar rate (the reserve-adjusted LIBOR rate), in each case plus an applicable margin. The applicable margin is equal to (i) with respect to the new revolving credit facility, 2.50% in the case of loans based on the Eurodollar rate and 1.50% in the case of loans based on the base rate and (ii) with respect to the new term loan facility, (x) at any time that the leverage ratio is greater than 3.00 to 1.00, 2.75% in the case of loans based on the Eurodollar rate and 1.75% in the case of loans based on the base rate and (y) at any other time, 2.50% in the case of loans based on the Eurodollar rate and 1.50% in the case of loans based on the base rate.

        We may choose base rate or Eurodollar pricing and may elect interest periods of 1, 2, 3 or 6 months for the Eurodollar borrowings. Interest on base rate borrowings are payable quarterly in arrears. Interest on Eurodollar borrowings will be at the end of each applicable interest period or every three months in the case of interest periods in excess of three months. Interest on all past due amounts will accrue at 2.00% over the applicable rate. The new senior credit facility requires that we fix the base-borrowing rate applicable to at least 50% of the outstanding amount of the term loan under the new senior credit facility for a minimum of two years.

        Collateral.    The new senior credit facility is secured by a first priority lien and security interest in (i) substantially all shares of capital stock and intercompany debt of each of our present and future subsidiaries (limited in the case of certain foreign subsidiaries to 65% of the voting stock of such entity), (ii) substantially all of our present and future real property (with a value in excess of $5 million individually) and assets and the present and future personal property and assets of our subsidiaries that will be guarantors under the senior credit facility and (iii) all proceeds and products of the property and assets described in (i) and (ii) above. The security interest is subject to certain exceptions and permitted liens.

        Repayments.    Borrowings under the new revolving credit facility are available for borrowing and re-borrowing until maturity. No amounts repaid under the new term loan facility may be reborrowed.

147

        Maturity.    The new term loan facility provides for a final maturity on the seventh anniversary of the closing date. The new revolving credit facility provides for a final maturity on the sixth anniversary of the closing date.

        Prepayments.    We may prepay, in full or in part, borrowings under the new senior credit facility without premium or penalty, subject to minimum prepayment amount and increment limitations. We are required to prepay borrowings under the senior credit facility from certain asset dispositions, debt issuances and equity issuances and a percentage of excess cash flow, subject to customary exceptions.

        Covenants.    The new senior credit facility contains affirmative and negative covenants customary for similar facilities and transactions, including, but not limited to, quarterly and annual financial reporting and limitations on other debt, other liens or guaranties, mergers or consolidations, asset sales, certain investments, distributions to shareholders or share repurchases, early retirement of subordinated debt, capital expenditures, changes in the nature of the business, changes in organizational documents and documents evidencing or related to indebtedness that are materially adverse to the interests of the lenders under the new senior credit facilities and changes in accounting policies or reporting practices.

        In addition, the new senior credit facility contains financial covenants requiring us to meet certain leverage and interest coverage ratios and maintain minimum levels of EBITDA. Specifically, we are obligated not to permit:

•

for any period of four consecutive quarters ending at the end of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, the ratio of EBITDA, as defined in the new senior credit facility, to consolidated cash interest expense to be less than certain specified ratios ranging from 4.30 to 1.00 for the fiscal quarter ending December 31, 2003 to 5.50 to 1.00 for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter;



•

as of the last day of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, the leverage ratio to be greater than certain specified leverage ratios ranging from 4.30 to 1.00 for the fiscal quarter ending December 31, 2003 to 2.50 to 1.00 for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter; or



•

for any period of four consecutive fiscal quarters ending at the end of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, EBITDA to be less than certain amounts ranging from $156.4 million for the fiscal quarter ending December 31, 2003 to $240.0 million for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter.

        Events of Default.    The new senior credit facility contains events of default including, but not limited to, failure to pay principal or interest, breaches of representations and warranties, violations of affirmative or negative covenants, cross-defaults to other indebtedness, a bankruptcy or similar proceeding being instituted by or against us, rendering of certain monetary judgments against us, impairments of loan documentation or security, changes of ownership or operating control and defaults with respect to certain ERISA obligations.

148

MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS

        The following is a summary of the anticipated material United States federal income tax consequences to a holder of old notes relating to the exchange of old notes for new notes. This summary is based upon existing United States federal income tax law, which is subject to change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, such as notes held by investors subject to special tax rules (e.g., financial institutions, insurance companies, broker-dealers and foreign or domestic tax-exempt organizations (including private foundations)), or to persons that hold the old notes as part of a straddle, hedge, conversion, constructive sale or other integrated security transaction for United States federal income tax purposes or that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not address any state, local or non-United States tax considerations. Each prospective investor is urged to consult his tax advisor regarding the United States federal, state, local and non-United States income and other tax considerations of the acquisition, ownership and disposition of the new notes.

Exchange of Old Notes for New Notes

        An exchange of old notes for new notes pursuant to the exchange offer will be ignored for United States federal income tax purposes. Consequently, a holder of old notes will not recognize gain or loss, for United Stated federal income tax purposes, as a result of exchanging old notes for new notes pursuant to the exchange offer. The holding period of the new notes will be the same as the holding period of the old notes and the tax basis in the new notes will be the same as the adjusted tax basis in the old notes as determined immediately before the exchange.

149

PLAN OF DISTRIBUTION

        Each broker-dealer that receives new notes for its own account in the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of these new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where the old notes were acquired as a result of market-making activities or other trading activities. We have agreed that, for a period of 180 days after the expiration of the exchange offer, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any resale.

        We will not receive any proceeds from any sale of new notes by broker-dealers. New notes received by broker-dealers for their own account in the exchange offer may be sold from time to time in one or more transactions:

•

in the over-the-counter market;



•

in negotiated transactions;



•

through the writing of options on the new notes; or



•

a combination of methods of resale, at market prices prevailing at the time of resale, at prices related to the prevailing market prices or at negotiated prices.

        Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any broker-dealer or the purchasers of any new notes. Any broker-dealer that resells new notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of new notes may be considered an underwriter within the meaning of the Securities Act and any profit of any resale of new notes and any commissions or concessions received by any person may be deemed to be underwriting compensation under the Securities Act. Any broker-dealer that resells new notes that were received by it for its own account in the exchange offer and any broker-dealer that participates in a distribution of those new notes may be considered an underwriter within the meaning of the Securities Act and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, including the delivery of a prospectus that contains information with respect to any selling holder required by the Securities Act in connection with any resale of the new notes. The letter of transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act.

        Furthermore, any broker-dealer that acquired any of the old notes directly from us:

•

may not rely on the applicable interpretation of the staff of the SEC's position contained in Exxon Capital Holdings Corp., SEC no-action letter (April 13, 1988), Morgan, Stanley Co. Inc., SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1993); and



•

must also be named as a selling noteholder in connection with the registration and be subject to the prospectus delivery requirements of the Securities Act relating to any resale transaction.

        For a period of 180 days after the expiration of the exchange offer, we will send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests them. We have agreed to pay all expenses incident to the exchange offer other than commissions or concessions of any broker-dealer and will indemnify the holders of the old notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act.

150

LEGAL MATTERS

        Certain legal matters regarding the new notes and the guarantees will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California and Cox & Smith Incorporated, San Antonio, Texas.

INDEPENDENT AUDITORS

        The consolidated financial statements of Kinetic Concepts, Inc. and subsidiaries at December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002 appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

        This prospectus is part of a registration statement on Form S-4 that we have filed with the SEC under the Securities Act. This prospectus does not contain all of the information set forth in the registration statement. For further information about us and the new notes, you should refer to the registration statement. This prospectus summarizes material provisions of contracts and other documents to which we refer you. Since this prospectus may not contain all of the information that you may find important, you should review the full text of these documents. We have filed these documents as exhibits to our registration statement.

        We are not currently subject to the periodic reporting and other informational requirements of the Exchange Act. The indenture governing the notes requires that we file reports under the Exchange Act with the SEC and furnish information to the trustee and holders of the notes. See "Description of the New Notes—Covenants—Reports to Holders." Information may be obtained by sending correspondence to 8023 Vantage Drive, San Antonio, Texas 78230, Attention: Chief Financial Officer. To ensure timely delivery, please make your request as soon as practicable and, in any event, no later than five business days prior to the expiration of the exchange offer.

        Upon the effectiveness of the registration statement, we will become subject to the information and periodic reporting requirements of the Exchange Act and, accordingly, will file periodic reports and other information with the SEC. Such periodic reports and other information will be available for inspection and copying at the SEC's public reference room and through the SEC's Internet site at http://www.sec.gov.

        You may read and copy any document we file with the SEC at the following SEC public reference room: Public Reference Room, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.

151

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Consolidated Financial Statements of Kinetic Concepts, Inc. and Subsidiaries:
	Report of Ernst & Young LLP, Independent Auditors
	Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001
	Consolidated Statements of Earnings for the Years Ended December 31, 2002, December 31, 2001 and December 31, 2000
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, December 31, 2001 and December 31, 2000
	Consolidated Statements of Shareholders' Deficit for the Three Years Ended December 31, 2002
	Notes to Consolidated Financial Statements
	Schedule II—Valuation and Qualifying Accounts for the Three Years Ended December 31, 2002
Unaudited Condensed Consolidated Financial Statements of Kinetic Concepts, Inc. and Subsidiaries:
	Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002
	Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2003 and June 30, 2002
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and June 30, 2002
	Notes to Condensed Consolidated Financial Statements

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Kinetic Concepts, Inc.

        We have audited the accompanying consolidated balance sheets of Kinetic Concepts, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of earnings, cash flows, and shareholders' deficit for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15(a). These consolidated financial statements and schedule are the responsibility of KCI's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kinetic Concepts, Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As discussed in Note 5 to the consolidated financial statements, in 2002, KCI adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

/s/  ERNST & YOUNG LLP      Ernst & Young LLP

San Antonio, Texas
February 7, 2003

F-2

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

			December 31,
			2002			2001
ASSETS:
Current assets:
	Cash and cash equivalents		$	54,485		$	199
	Accounts receivable, net			152,896			121,364
	Accounts receivable—other (Note 16)			175,000			—
	Inventories, net			37,934			40,166
	Prepaid expenses and other current assets			9,760			9,337
		Total current assets		430,075			171,066
Net property, plant and equipment				105,549			89,981
Loan issuance cost, less accumulated amortization of $11,949 in 2002 and $9,634 in 2001				6,287			8,602
Goodwill				46,357			43,035
Other assets, less accumulated amortization of $6,840 in 2002 and $5,562 in 2001				29,791			30,509
			$	618,059		$	343,193
LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current liabilities:
	Accounts payable		$	11,156		$	8,429
	Accrued expenses			61,556			48,108
	Current installments of long-term obligations			30,550			2,750
	Current installments of capital lease obligations			157			171
	Derivative financial instruments			1,341			2,512
	Income taxes payable			14,615			8,761
	Current deferred income taxes (Note 16)			66,838			—
		Total current liabilities		186,213			70,731
Long-term obligations, net of current installments				491,300			503,875
Capital lease obligations, net of current installments				95			232
Deferred income taxes, net				9,501			4,363
Deferred gain, sale of headquarters facility				10,023			—
Other noncurrent deferred, net				1,363			317
				698,495			579,518
Shareholders' deficit:
	Common stock; issued and outstanding 70,928 in 2002 and 70,925 in 2001			71			71
	Retained deficit			(76,216	)		(226,381	)
	Accumulated other comprehensive loss			(4,291	)		(10,015	)
				(80,436	)		(236,325	)
			$	618,059		$	343,193

See accompanying notes to consolidated financial statements.

F-3

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share data)

			Year Ended December 31,
			2002			2001			2000
Revenue:
	Rental and service		$	453,060		$	361,634		$	274,331
	Sales and other			125,902			94,313			77,701
		Total revenue		578,962			455,947			352,032
Rental expenses				276,125			220,485			176,392
Cost of goods sold				51,824			32,952			29,645
		Gross profit		251,013			202,510			145,995
Selling, general and administrative expenses				141,594			114,828			80,294
Unusual item-litigation settlement				(173,250	)		—			—
		Operating earnings		282,669			87,682			65,701
Interest income				496			280			897
Interest expense				(40,943	)		(45,116	)		(48,635	)
Foreign currency income (loss)				3,935			(1,638	)		(2,358	)
		Earnings before income taxes		246,157			41,208			15,605
Income taxes				96,001			17,307			6,476
		Net earnings	$	150,156		$	23,901		$	9,129
		Basic earnings per common share	$	2.12		$	0.34		$	0.13
		Diluted earnings per common share	$	1.93		$	0.32		$	0.12
		Average common shares:
		Basic (weighted average outstanding shares)		70,927			70,917			70,915
		Diluted (weighted average outstanding shares)		77,662			73,996			73,219

See accompanying notes to consolidated financial statements.

F-4

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

				Year Ended December 31,
				2002			2001			2000
Cash flows from operating activities:
	Net earnings			$	150,156		$	23,901		$	9,129
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation			33,404			29,530			28,277
		Amortization			3,594			7,685			6,505
		Provision for uncollectible accounts receivable			7,623			8,932			6,466
		Amortization of deferred loss on interest rate swap			—			843			—
		Amortization of deferred gain on sale/leaseback of headquarters facility			(426	)		—			—
		Noncash gain on litigation settlement			(173,250	)		—			—
	Change in assets and liabilities net of effects from purchase of subsidiaries and unusual items:
		Increase in accounts receivable, net			(38,217	)		(39,571	)		(18,488	)
		Decrease (increase) in inventories			2,612			(16,664	)		(2,021	)
		Decrease (increase) in prepaid expenses and other current assets			(423	)		681			124
		Increase in accounts payable			2,568			2,069			3,368
		Increase in accrued expenses			11,864			6,835			5,994
		Increase in income taxes payable			5,732			4,467			1,864
		Increase in current deferred income taxes			66,838			—			—
		Increase (decrease) in deferred income taxes, net			4,179			1,187			(1,067	)
			Net cash provided by operating activities		76,254			29,895			40,151
Cash flows from investing activities:
		Additions to property, plant and equipment			(54,546	)		(43,997	)		(31,718	)
		Increase in inventory to be converted into equipment for short-term rental			(300	)		(2,700	)		(300	)
		Dispositions of property, plant and equipment			1,703			2,744			1,737
		Proceeds from sale of headquarters facility			18,232			—			—
		Business acquisitions, net of cash acquired			(3,596	)		(80	)		(427	)
		Increase in other assets			(520	)		(4,292	)		(1,304	)
			Net cash used by investing activities		(39,027	)		(48,325	)		(32,012	)
Cash flows from financing activities:
		Proceeds from (repayments of) notes payable, long-term, capital lease and other obligations			16,091			16,805			(12,715	)
		Proceeds from the exercise of stock options			9			24			—
			Net cash provided (used) by financing activities		16,100			16,829			(12,715	)
Effect of exchange rate changes on cash and cash equivalents					959			(339	)		(647	)
Net increase (decrease) in cash and cash equivalents					54,286			(1,940	)		(5,223	)
Cash and cash equivalents, beginning of year					199			2,139			7,362
Cash and cash equivalents, end of year				$	54,485		$	199		$	2,139

See accompanying notes to consolidated financial statements.

F-5

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

Three Years Ended December 31, 2002

(in thousands)

	Common Stock		Retained Earnings Deficit			Accumulated Other Comprehensive Loss			Total Shareholders' Deficit
Balances at December 31, 1999	$	71	$	(259,435	)	$	(5,371	)	$	(264,735	)
Net earnings		—		9,129			—			9,129
Foreign currency translation adjustment		—		—			(2,347	)		(2,347	)
Total comprehensive income										6,782
Balances at December 31, 2000	$	71	$	(250,306	)	$	(7,718	)	$	(257,953	)
Net earnings		—		23,901			—			23,901
Foreign currency translation adjustment		—		—			(1,213	)		(1,213	)
Net derivative loss, net of taxes of $1,592		—		—			(2,956	)		(2,956	)
Reclassification adjustment for losses included in income, net of taxes of $713		—		—			1,323			1,323
Reclassification adjustment for loss recognized on termination of interest rate swap, net of taxes of $372		—		—			691			691
Reclassification adjustment for amortization of loss recognized on termination of interest rate swap, net of tax benefit of $76		—		—			(142	)		(142	)
Total comprehensive income										21,604
Exercise of stock options		—		24			—			24
Balances at December 31, 2001	$	71	$	(226,381	)	$	(10,015	)	$	(236,325	)
Net earnings		—		150,156			—			150,156
Foreign currency translation adjustment		—		—			5,511			5,511
Net derivative loss, net of taxes of $562		—		—			(1,045	)		(1,045	)
Reclassification adjustment for losses included in income, net of taxes of $972		—		—			1,807			1,807
Reclassification adjustment for loss recognized on termination of interest rate swap, net of tax benefit of $305		—		—			(549	)		(549	)
Total comprehensive income										155,880
Exercise of stock options		—		9			—			9
Balances at December 31, 2002	$	71	$	(76,216	)	$	(4,291	)	$	(80,436	)

See accompanying notes to consolidated financial statements.

F-6

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    Summary of Significant Accounting Policies

(a) Principles of Consolidation

        The consolidated financial statements include the accounts of Kinetic Concepts, Inc., together with our consolidated subsidiaries, ("KCI"). All significant inter-company balances and transactions have been eliminated in consolidation. Certain reclassifications of amounts related to prior years have been made to conform with the 2002 presentation. Due to improvements in financial systems and processes, we began reporting international results on a current-month basis effective December 2000. Prior to 2000, we had presented international results using a one-month delay. As a result of this change, the 2000 fiscal year included a 13th monthly period for the international segment (the "international 13th month") which increased reported revenue and operating earnings by approximately $8.0 million and $1.1 million, respectively. Unless otherwise noted, the results reported herein include the international 13th month for fiscal 2000.

(b) Nature of Operations and Customer Concentration

        We design, manufacture, market and distribute therapeutic products, primarily medical devices that promote wound healing and therapeutic systems including specialty hospital beds and mattress overlays that treat and prevent the complications of immobility. The principal markets for our products are domestic and international health care providers, predominantly hospitals and extended care facilities throughout the United States, Canada and Europe and home care patients in the U.S. Receivables from these customers are unsecured.

        We contract with both proprietary hospital groups and voluntary group purchasing organizations ("GPOs"). Proprietary hospital groups own all of the hospitals which they represent and, as a result, can ensure complete compliance with an executed national agreement. Voluntary GPOs negotiate contracts on behalf of member hospital organizations but cannot ensure that their members will comply with the terms of an executed national agreement. Approximately 36% of our revenue during 2002 was generated under national agreements with GPOs.

        We have experienced dramatic growth in V.A.C. device and related disposables revenue since October 2000 when the Medicare Part B program initiated payments for V.A.C. home placements. V.A.C. platforms and related disposable revenue in 2002 of $313.4 million increased 65.0% from the prior year and now accounts for approximately 54.1% of total revenue.

        During 2002, KCI International had direct operations in 15 foreign countries including Germany, Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland, Australia, Italy, Denmark, Sweden, Ireland, Belgium, South Africa and Spain. (See Note 13.)

(c) Revenue Recognition

        We recognize revenue in accordance with Staff Accounting Bulletin No. 101 when each of the following four criteria are met:

1)

A contract or sales arrangement exists.



2)

Products have been shipped and title has transferred or services have been rendered.



3)

The price of the products or services is fixed or determinable.



4)

Collectibility is reasonably assured.

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        Rental and service revenue are recognized as services are rendered. Sales and other revenue are recognized when products are shipped.

(d) Cash and Cash Equivalents

        We consider all highly liquid investments with an original maturity of ninety days or less to be cash equivalents.

(e) Fair Value of Financial Instruments

        The carrying amount reported in the balance sheet for cash, accounts receivable, long-term securities, accounts payable and long-term obligations approximates their fair value. We estimate the fair value of long-term obligations by discounting the future cash flows of the respective instrument, using our incremental rate of borrowing for a similar instrument.

(f) Accounts Receivable

        Accounts receivable consist of amounts due directly from facilities (hospitals, extended care facilities, etc.), third-party payers (both governmental and non-governmental) and patient pay accounts.

        Significant concentrations of accounts receivable include:

	2002		2001
Facilities / dealers	63	%	61	%
TPP—Managed care and commercial	26	%	26	%
TPP—Governmental	9	%	11	%
Other	2	%	2	%

        The third-party payer reimbursement process requires extensive documentation which has had the short-term effect of slowing both the billing and cash collection cycles relative to the rest of the business, and therefore, increasing total accounts receivable.

        We evaluate the collectibility of accounts receivable based on a combination of factors. For unbilled receivables, items that remain unbilled for more than 90 days, or beyond an established billing window, are reversed out of revenue and receivables. For billed receivables, we generally recognize reserves for bad debt based on the length of time that the receivables are past due. The reserves range in value from 0% for current amounts to 100% for amounts over 180 days for certain payer groups. The reserve rates vary by payer group and historical experience on a weighted average basis. In addition, we have recorded specific reserves for bad debt when we become aware of a customer's inability to satisfy its debt obligations, for example bankruptcy filings. If circumstances change, such as higher than expected denials, payment defaults or an unexpected material adverse change in a major customer's or payer's ability to meet its obligations, our estimates of the realizability of amounts due from trade receivables could be reduced by a material amount.

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(g) Inventories

        Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Costs include material, labor and manufacturing overhead costs. Inventory expected to be converted into equipment for short-term rental has been reclassified to property, plant and equipment.

        We have a three-year contract effective October 1, 2002 with one supplier to supply the majority of our inventory generating V.A.C. sales revenue.

(h) Property, Plant and Equipment

        Property, plant and equipment are stated at cost. Betterments, which extend the useful life of the equipment, are capitalized.

(i) Depreciation

        Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful lives (thirty to forty years for buildings and between two and five years for most of our other property and equipment) of the assets.

(j) Goodwill and Business Combinations

        Goodwill represents the excess purchase price over the fair value of net assets acquired. Prior to 2002, goodwill was amortized over three to twenty-five years from the date of acquisition using the straight-line method. Effective January 1, 2002, we have applied the provisions of Statement of Financial Accounting Standards No. 142, ("SFAS 142"),Goodwill and Other Intangible Assets in our accounting for goodwill. SFAS 142 requires that goodwill and other intangible assets that have indefinite lives not be amortized but instead be tested at least annually for impairment, or more frequently when event or changes in circumstances indicate that the asset might be impaired. For indefinite lived intangible assets, impairment is tested by comparing the carrying value of the asset to the fair value of the reporting unit to which they are assigned.

        Goodwill has been tested for impairment during the first and fourth quarters of 2002 and will be tested for impairment at least annually, in the fourth quarter, using a two-step process. The first step is a comparison of an estimation of the fair value of a reporting unit with the reporting unit's carrying value. We have determined that our reporting units are our two operating segments—USA and International. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired, and as a result, the second step of the impairment test is not required. If required, the second step compares the fair value of reporting unit goodwill with the carrying amount of that goodwill. If we determine that reporting unit goodwill is impaired, the fair value of reporting unit goodwill would be measured by comparing the discounted expected future cash flows of the reporting unit with the carrying value of reporting unit goodwill. Any excess in the carrying value of reporting unit goodwill to the estimated fair value would be recognized as an expense at the time of the measurement. We recorded no impairments to our reporting units as a result of the implementation of SFAS 142 during 2002.

        The goodwill of a reporting unit will be tested annually or if an event occurs or circumstances change that would likely reduce the fair value of a reporting unit below its carrying amount. Examples

F-9

of such events or circumstances include, but are not limited to: a significant adverse change in legal factors or business climate, an adverse regulatory action or unanticipated competition.

(k) Other Assets

        Other assets consist principally of patents, trademarks, long-term investments and the estimated residual value of assets subject to leveraged leases. Patents and trademarks are amortized over the estimated useful life of the respective asset using the straight-line method.

(l) Income Taxes

        We recognize certain transactions in different time periods for financial reporting and income tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The provision for deferred income taxes represents the change in deferred income tax accounts during the year.

(m) Earnings Per Share

        Basic earnings per share ("EPS") is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings.

(n) Licensing Fees

        We pay licensing fees for the right to market our V.A.C. devices. Licensing fee expenses are based on V.A.C. revenue and recognized in the period that the related revenue is earned.

(o) Use of Estimates

        The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(p) Insurance Programs

        We established the KCI Employee Benefits Trust (the "Trust") as a self-insurer for certain risks related to our U.S. employee health plan and certain other benefits. We fund the Trust based on the value of expected future payments, including claims incurred but not reported. We have also purchased insurance, which limits the Trust's liability under the benefit plans.

(q) Foreign Currency Translation

        The functional currency for the majority of our foreign operations is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet

F-10

accounts using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period.

(r) Stock Options

        We use the intrinsic value method in accounting for our stock option plans. In 2002, compensation costs of approximately $800,000, net of estimated taxes, have been recognized in the financial statements related to these plans. No compensation costs were recognized in 2001 and 2000 related to these plans. Had compensation cost for our stock-based employee compensation plans been determined based upon a fair value method consistent with SFAS No. 123, our net earnings and earnings per share would have been decreased to the pro forma amounts indicated below.

        For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information follows (dollars in thousands, except for earnings per share information):

		2002		2001		2000
Net earnings as reported		$	150,156	$	23,901	$	9,129
Pro forma net earnings		$	148,751	$	22,526	$	7,023
Earnings per share as reported
	Basic earnings per common share	$	2.12	$	0.34	$	0.13
	Diluted earnings per common share	$	1.93	$	0.32	$	0.12
Pro forma earnings per share
	Basic earnings per common share	$	2.10	$	0.32	$	0.10
	Diluted earnings per common share	$	1.92	$	0.30	$	0.10

        We are not required to apply the method of accounting prescribed by Statement 123 to stock options granted prior to January 1, 1995. Moreover, the pro forma compensation cost reflected above may not be representative of future results.

(s) Research and Development

        The focus of our research and development program has been to develop new products and make technological improvements to existing products. Expenditures for research and development are expensed as incurred and represented approximately 3%, 3% and 2% of our total operating expenditures in each of the years ended December 31, 2002, 2001 and 2000, respectively.

(t) Interest Rate Protection Agreements

        Periodically, we enter into interest rate protection agreements to modify the interest characteristics of our outstanding debt. Each interest rate swap is designated with all or a portion of the principal balance and term of a specific debt obligation. These agreements involve the exchange of amounts based on variable interest rates for amounts based on fixed interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received, as interest rates change, is accrued and recognized as an adjustment to interest expense related to the debt. (See Notes 4 and 14.)

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(u) Shipping and Handling

        We include shipping and handling costs in rental expense. Shipping and handling cost recovered from customers is also included in rental expense. The amount of shipping and handling costs and costs recovered are less than 2% of our total revenue for all periods presented.

(v) Advertising Expenses

        Advertising costs are expensed as incurred. Advertising expense was less than 1% of our total revenue in each of the years ended December 31, 2002, 2001 and 2000.

(w) Other Pending Pronouncements

        In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. This Standard addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Standard requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and to adjust its present value in each subsequent period. In addition, we must capitalize an amount equal to the adjustment by increasing the carrying amount of the related long-lived asset, which is depreciated over the remaining useful life of the related asset. We will adopt SFAS No. 143 during the first quarter of fiscal year 2003 and have not yet determined what effect this statement will have on our earnings or financial position. We believe the adoption of this statement will not have a significant effect on our financial position or results of operations.

        In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, we must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We have adopted FIN 45 and have determined that it will not have a material impact on our financial position or results of operations.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternate methods of transition for an entity that changes to the fair-value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require expanded and more prominent disclosure of the effects of an entity's accounting policy in the summary of significant accounting policies section with respect to stock-based employee compensation. The amendment of the annual disclosure requirements of SFAS No. 123 is effective for fiscal years ending after December 15, 2002. We have included the amended disclosure requirement of SFAS No. 148 in the above discussion of "Stock Options."

F-12

NOTE 2.    Acquisitions and Dispositions

        In 1996, we acquired a 26% interest in the capital stock of Polymedics N.V., ("Polymedics"), a Belgium manufacturer of foam used in certain V.A.C. dressings which was accounted for on a cost basis. During the first quarter of 2002, we acquired the remaining 74% of Polymedics stock for approximately $3.6 million in cash at which time the financial position and results of operations were reflected on a consolidated basis. Polymedics' operating results did not have a material impact on our results of operations for 2002, 2001 or 2000.

        In August 2002, we sold our corporate headquarters facility and adjacent land and buildings under a 10-year sale/leaseback arrangement. The properties were sold for $17.9 million, net of selling costs, resulting in a deferred gain of approximately $10.4 million. The deferred gain is being amortized over the term of the lease. Approximately $425,000 of amortization was recognized in income in 2002. The initial lease term is 10 years and requires minimum annual lease payments ranging from $3.2 million to $3.8 million. We have two options to renew the lease for a term of three or five years each. Rental expense of $1.5 million was recognized in 2002.

        The following table indicates the estimated future cash lease payments, inclusive of executory costs, for the years set forth below (dollars in thousands):

Year Ended December 31,	Estimated Cash Lease Payments
2003	$	3,232
2004		3,311
2005		3,390
2006		3,470
2007		3,549
2008 and thereafter		17,075
	$	34,027

F-13

NOTE 3.    Supplemental Balance Sheet Data

        Accounts receivable consist of the following (dollars in thousands):

			December 31, 2002			December 31, 2001
Trade accounts receivable:
	Facilities/dealers		$	92,359		$	73,088
	Third-party payers:
		Medicare/Medicaid		31,118			22,006
		Managed care commercial and other		53,229			40,375
				176,706			135,469
Medicare V.A.C. receivables prior to October 1, 2000				14,351			14,351
Employee and other receivables				2,410			2,075
				193,467			151,895
Less: Allowance for doubtful accounts				(26,220	)		(16,180	)
	Allowance for Medicare V.A.C. receivables prior to October 1, 2000			(14,351	)		(14,351	)
			$	152,896		$	121,364

        Inventories consist of the following (dollars in thousands):

		December 31, 2002			December 31, 2001
Finished goods		$	16,411		$	11,244
Work in process			2,411			3,540
Raw materials, supplies and parts			31,825			37,081
			50,647			51,865
Less: Amounts expected to be converted into equipment for short-term rental			(11,100	)		(10,800	)
	Reserve for excess and obsolete inventory		(1,613	)		(899	)
		$	37,934		$	40,166

F-14

        Net property, plant and equipment consist of the following (dollars in thousands):

	December 31, 2002			December 31, 2001
Land	$	549		$	1,439
Buildings		10,528			18,732
Equipment for short-term rental		178,022			149,347
Machinery, equipment and furniture		89,742			74,442
Leasehold improvements		3,209			1,804
Inventory to be converted to equipment		11,100			10,800
		293,150			256,564
Less accumulated depreciation		(187,601	)		(166,583	)
	$	105,549		$	89,981

        Accrued expenses consist of the following (dollars in thousands):

	December 31, 2002		December 31, 2001
Payroll, commissions and related taxes	$	26,363	$	19,484
Interest expense		4,017		4,307
Insurance accruals		2,758		1,987
Other accrued expenses		28,418		22,330
	$	61,556	$	48,108

F-15

NOTE 4.    Long-Term Obligations

        Long-term obligations consist of the following (dollars in thousands):

			December 31, 2002			December 31, 2001
Senior Credit Facility:
	Revolving bank credit facility		$			$	11,800
	Term loans:
		Tranche A due 2003		27,500			27,500
		Tranche B due 2004		85,500			86,400
		Tranche C due 2005		85,500			86,400
		Tranche D due 2006		93,575			94,525
		Tranche E due 2005		29,775			—
				321,850			306,625
95/8% Senior Subordinated Notes Due 2007				200,000			200,000
				521,850			506,625
Less current installments				(30,550	)		(2,750	)
			$	491,300		$	503,875

        The senior credit facility originally totaled $400.0 million and consisted of (i) a $50.0 million six-year revolving credit facility, (ii) a $50.0 million six-year Acquisition Facility, (iii) a $120.0 million six-year amortizing Term Loan A, (iv) a $90.0 million seven-year amortizing Term Loan B and (v) a $90.0 million eight-year amortizing Term Loan C (collectively, the "Term Loans"). On February 17, 2000, we, entered into a third amendment to our $400.0 million senior credit agreement (the "Amendment"). The Amendment established revised financial covenant levels for Interest Coverage, Leverage Ratio and Minimum EBITDA. On June 15, 2001, we entered into an Amended and Restated Credit and Guarantee Agreement, which funded a $95 million Tranche D Term Loan as part of a refinancing of our senior secured credit facility. Proceeds from the Tranche D Term Loan were used to pay down existing indebtedness, including $60 million outstanding under the Tranche A Term Loan, approximately $8 million outstanding under the acquisition facility and $26 million under the revolving credit facility with the remaining proceeds used to pay fees and expenses associated with this transaction. On April 4, 2002, we entered into a Second Amended and Restated Credit and Guarantee Agreement (the "Amended Credit Agreement"). The Amended Credit Agreement funded a $30 million Tranche E Term Loan as part of a refinancing of our senior secured credit facility. Proceeds from the Tranche E Term Loan were used to pay down existing indebtedness of $29.6 million under the revolving credit facility with the remaining proceeds used to pay fees and expenses associated with the transaction. As of December 31, 2002, we had no revolving loans outstanding. However, we had four letters of credit in the amount of $8.7 million outstanding and the aggregate availability under the revolving credit facility of $41.3 million.

Senior Credit Facility

        As of December 31, 2002, indebtedness under the senior credit facility, including the revolving credit facility (other than certain loans under the revolving credit facility designated in foreign

F-16

currency) and the term loans, bears interest at rates determined under either of the following alternative methods, at our option:

Method 1

        The base rate, which is the higher of:

—

the rate of interest publicly announced by Bank of America as its "referenced rate"; or

—

the federal funds effective rate from time to time plus 0.50%;

PLUS

The percentage set forth below for the applicable loan/facility:

—

0.75% in respect of Tranche A term loans and loans under our revolving credit facility;

—

1.50% in respect of Tranche B term loans;

—

1.75% in respect of Tranche C and Tranche E term loans; and

—

1.625% in respect of Tranche D term loans, or

Method 2

        The Eurodollar Rate (as defined in our senior credit facility agreement) for one, two, three or six months;

PLUS

The percentage set forth below for the applicable loan/facility:

—

1.75% in respect of Tranche A term loans and loans under our revolving credit facility;

—

2.50% in respect of Tranche B term loans;

—

2.75% in respect of Tranche C and Tranche E term loans; and

—

2.625% in respect to Tranche D term loans.

        Revolving loans designated in foreign currency bear interest at a rate based upon the cost of funds for such loans plus 1.75%.

        The term loans, other than Tranches D and E, are subject to quarterly amortization payments, which began on March 31, 1998. The Tranche D term loan amortizes at 1% per year beginning September 30, 2001 through December 31, 2005 with a final payment of $90.7 million due March 31, 2006. The Tranche E term loan amortizes at 1% per year beginning September 30, 2002 with a final payment of $29.0 million due December 31, 2005. We may borrow additional funds under the revolving credit facility at any time up to the borrowing limits thereunder. As of December 31, 2002, we had no revolving loans outstanding under the revolving credit facility, however, we had four letters of credit in the amount of $8.7 million and the aggregate availability under the revolving credit facility was $41.3 million.

        Our indebtedness under the senior credit facility is guaranteed by certain of our subsidiaries and is secured by (i) a first priority security interest in all of our tangible and intangible assets and those of

F-17

our domestic subsidiaries (subject to certain customary exceptions), including, without limitation, intellectual property and real estate owned by us and our subsidiaries, (ii) a first priority perfected pledge of all our capital stock and the capital stock of our domestic subsidiaries and (iii) a first priority perfected pledge of up to 65% of the capital stock of foreign subsidiaries owned directly by us or our domestic subsidiaries.

        Our senior credit agreement requires us to meet certain financial tests, including minimum levels of EBITDA, minimum interest coverage, maximum leverage ratio and capital expenditures. The senior credit agreement also contains covenants which, among other things, limit our ability to: incur additional indebtedness, make investments, announce or pay dividends, make loans and advances, make capital expenditures, enter into transactions with affiliates, dispose of our assets, enter into acquisitions, mergers or consolidation transactions, make prepayments on other indebtedness, create or permit to be created any liens on any of our properties, or undertake certain other matters customarily restricted in such agreements. As of December 31, 2002, we were in compliance with all applicable covenants.

        Our senior credit agreement also contains customary events of default, including payment defaults, any breach of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, failures under ERISA plans, judgment defaults, any change in our company's control and failure of any guaranty, security document, security interest or subordination provision under the senior credit agreement. In addition, the senior credit agreement provides for mandatory repayments, subject to certain exceptions, of the term loans and the revolving credit facility based on certain net asset sales outside the ordinary course of our business and our subsidiaries' business, the net proceeds of certain debt and equity issuances and excess cash flows.

Interest Rate Protection

        The following chart summarizes interest rate hedge transactions effective during 2002 (dollars in thousands):

Accounting Method	Effective Dates	Nominal Amount		Fixed Interest Rate		Status
Hypothetical(1)	10/01/01-12/31/02	$	150,000	3.570	%	Matured 12/31/02
Shortcut	10/01/01-12/31/02	$	100,000	2.990	%	Matured 12/31/02
Shortcut(2)	12/31/02-12/31/03	$	100,000	1.745	%	Outstanding
Shortcut(2)	12/31/02-12/31/04	$	100,000	2.375	%	Outstanding

(1)

On October 1, 2001, we entered into a $150 million interest rate swap agreement to take advantage of lower interest rates. Although no cash was exchanged, the $150.0 million swap did not qualify for the shortcut method because the fair value of the swap was not zero at inception (it had a negative value). We elected to use the "hypothetical derivative" method to measure effectiveness, which allowed us to use the change in the fair value of a "hypothetical derivative" (one which had no fair value at inception with terms mirroring the actual derivative that would be assumed to be perfectly effective) as a proxy for the change in the expected fair value of the hedged transactions. As of December 31, 2002, the $150 million swap agreement had matured. Hedge ineffectiveness, of approximately $27,000, in 2002 was immaterial and recognized as an increase of interest expense.

F-18

(2)

As of December 31, 2002, these two $100 million interest rate swap agreements effectively fix the base-borrowing rate on 62% of our variable rate debt. The fair value of these swaps at inception was zero. However, due to subsequent movements in interest rates, as of December 31, 2002, the fair value of the one-year, 1.7450% swap and the two-year, 2.3750% swap agreements were in an unfavorable position and were adjusted to a liability of approximately $330,000 and $1.0 million, respectively.

        We have designated our interest rate protection agreements as cash flow hedge instruments. As a result of these agreements during 2002 and 2001, we recorded additional interest expense of approximately $2.8 million and $2.1 million, respectively. Interest expense for 2001 includes a write-off of $1.1 million, the fair value of a prior $150 million swap upon termination. (See Notes 10, 14 and 17.)

Senior Subordinated Notes

        In November 1997, we issued $200.0 million of 9⁵/8% Senior Subordinated Notes due 2007. The notes are unsecured obligations, ranking subordinate in right of payment to all of our senior debt and will mature on November 1, 2007. Interest on the notes accrues at the rate of 9⁵/8% per annum and is payable semiannually in cash on each May 1 and November 1, commencing on May 1, 1998, to the persons who are registered Holders at the close of business on April 15 and October 15, respectively, immediately preceding the applicable interest payment date. Interest on the notes accrues from and includes the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance. As of December 31, 2002, the entire $200.0 million of our Notes were issued and outstanding.

        Our notes are not entitled to the benefit of any mandatory sinking fund. The notes are redeemable, at our option, in whole at any time or in part from time to time, on and after November 1, 2002, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on November 1 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption.

Year	Percentage
2002	104.813	%
2003	103.208	%
2004	101.604	%
2005 and thereafter	100.000	%

        At any time, or from time to time, we may acquire a portion of the notes through open-market purchases. In order to affect the foregoing redemption with the proceeds of any equity offering, we would make such redemption not more than 120 days after the consummation of any such equity offering.

Interest and Future Maturities

        Interest paid during 2002, 2001 and 2000 was approximately $39.0 million, $42.9 million and $45.6 million, respectively.

F-19

        As a result of the senior credit refinancing, future maturities of long-term debt at December 31, 2002 are as follows (dollars in thousands):

Year	Amount
2003	$	30,550
2004	$	86,750
2005	$	113,825
2006	$	90,725
2007	$	200,000

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NOTE 5.    Accounting for Goodwill and Other Noncurrent Assets

        Goodwill represents the excess purchase price over the fair value of net assets acquired. Prior to 2002, goodwill was amortized over three to twenty-five years from the date of acquisition using the straight-line method. Effective January 1, 2002, we have applied the provisions of Statement of Financial Accounting Standards No. 142, ("SFAS 142"),Goodwill and Other Intangible Assets in our accounting for goodwill. Under SFAS 142, goodwill and intangible assets that have indefinite useful lives are no longer subject to amortization over their estimated useful life. Rather, goodwill and intangible assets that have indefinite useful lives are and will be tested at least annually for impairment. SFAS 142 provides specific guidance for testing goodwill for impairment. Intangible assets with finite useful lives will continue to be amortized over their useful lives. Goodwill has been tested for impairment during the first and fourth quarters of 2002 and will be tested for impairment at least annually.

        Goodwill was $46.4 million at December 31, 2002, compared to $43.0 million at December 31, 2001. This increase relates to our acquisition of Polymedics in the first quarter of 2002. (See Note 2.) Goodwill represented 7.5% and 12.5% of total assets at December 31, 2002 and December 31, 2001, respectively.

        The following table shows the effect of the adoption of SFAS 142 on our net income as if the adoption had occurred on January 1, 2000 (dollars in thousands, except per share data):

	Pro Forma Year Ended December 31,
	2001		2000
Net earnings—as reported	$	23,901	$	9,129
Amortization adjustment		3,372		3,494
Adjusted net earnings	$	27,273	$	12,623
Basic earnings per common share—as reported	$	0.34	$	0.13
Amortization adjustment		0.04		0.05
Adjusted basic earnings per common share	$	0.38	$	0.18
Dilutive earnings per common share—as reported	$	0.32	$	0.12
Amortization adjustment		0.05		0.05
Adjusted dilutive earnings per common share	$	0.37	$	0.17

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        We have recorded amortizable intangible assets, which are included in Other Assets on our consolidated balance sheets. Other assets include the following (dollars in thousands):

	December 31, 2002			December 31, 2001
Patents, trademarks and other	$	10,868		$	10,083
Accumulated amortization		(6,840	)		(5,562	)
		4,028			4,521
Investment in assets subject to leveraged leases		16,445			16,445
Deposits and other		9,318			9,543
Other tangible, noncurrent assets, net		25,763			25,988
Total other assets, net	$	29,791		$	30,509

        We acquired beneficial ownership of two Grantor Trusts in December 1996 and December 1994. The assets held by each Trust consist of a McDonnell Douglas DC-10 aircraft and three engines. In connection with the acquisitions, KCI paid cash equity of $7.2 million and $7.6 million, respectively, and assumed non-recourse debt of $48.4 million and $51.8 million, respectively. The DC-10 aircraft are leased to the Federal Express Corporation through June 2012 and January 2012, respectively. Federal Express pays monthly rent to a third party who, in turn, pays the entire amount to the holders of the non-recourse indebtedness, which is secured by the aircraft. The holder's recourse in the event of a default is limited to the Trust assets.

        Amortization expense, related to finite-lived intangibles, was approximately $1.3 million, $1.9 million, and $573,000 for 2002, 2001, and 2000, respectively. We amortize these intangible assets over 5 to 17 years, depending on the estimated economic life of the individual asset. The following table shows the estimated amortization expense, in total for all finite-lived intangible assets, to be incurred over the next five years (dollars in thousands):

Year Ended December 31,	Estimated Amortization Expense
2003	$	488
2004	$	434
2005	$	385
2006	$	265
2007	$	225

NOTE 6.    Leasing Obligations

        We are obligated for equipment under various capital leases, which expire at various dates during the next two years. At December 31, 2002, the gross amount of equipment under capital leases totaled approximately $900,000 and related accumulated depreciation was approximately $800,000.

        We lease our headquarters facility, computer and telecommunications equipment, service vehicles, office space, various storage spaces and manufacturing facilities under non-cancelable operating leases, which expire at various dates over the next ten years. Total rental expense for operating leases was

F-22

$17.7 million, $13.0 million and $13.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.

        Future minimum lease payments under capital and non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2002 are as follows (dollars in thousands):

	Capital Leases		Operating Leases
2003	$	196	$	16,805
2004		95		13,850
2005		—		11,473
2006		—		9,790
2007		—		7,633
Later years		—		16,350
Total minimum lease payments		291	$	75,901
Less amount representing interest		39
Present value of net minimum capital lease payments		252
Less current portion		157
Obligations under capital leases, excluding current installments	$	95

NOTE 7.    Income Taxes

        Earnings before income taxes consists of the following (dollars in thousands):

	Year Ended December 31,
	2002		2001		2000
Domestic	$	229,270	$	28,824	$	133
Foreign		16,887		12,384		15,472
	$	246,157	$	41,208	$	15,605

        Income tax expense attributable to income from continuing operations consists of the following (dollars in thousands):

	Year Ended December 31, 2002
	Current		Deferred			Total
Federal	$	15,195	$	68,256		$	83,451
State		1,318		4,204			5,522
International		7,922		(894	)		7,028
	$	24,435	$	71,566		$	96,001

F-23

	Year Ended December 31, 2001
	Current		Deferred			Total
Federal	$	9,371	$	1,818		$	11,189
State		2,283		(433	)		1,850
International		4,467		(199	)		4,268
	$	16,121	$	1,186		$	17,307

	Year Ended December 31, 2000
	Current		Deferred			Total
Federal	$	1,070	$	99		$	1,169
State		435		(343	)		92
International		6,038		(823	)		5,215
	$	7,543	$	(1,067	)	$	6,476

        Income tax expense attributable to earnings before income taxes differed from the amounts computed by applying the statutory tax rate of 35 percent to pre-tax earnings from continuing operations as a result of the following (dollars in thousands):

	Year Ended December 31,
	2002			2001			2000
Computed "expected" tax expense	$	86,155		$	14,423		$	5,462
Goodwill		—			324			509
State income taxes, net of federal benefit		3,590			1,202			60
Tax-exempt interest from municipal bonds		(32	)		—			—
Foreign income taxed at other than U.S. rates		(441	)		(419	)		(657	)
Utilization of foreign net operating loss		(47	)		(48	)		—
Non-consolidated foreign net operating loss		1,606			401			457
Foreign, other		3,817			1,693			—
Other, net		1,353			(269	)		645
	$	96,001		$	17,307		$	6,476

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        The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are presented below (dollars in thousands):

	2002			2001
Deferred Tax Assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	7,553		$	10,851
Intangible assets, deducted for book purposes but capitalized and amortized for tax purposes		1,099			1,616
Foreign net operating loss carry forwards		1,606			663
Inventories, principally due to additional costs capitalized for tax purposes pursuant to the Tax Reform Act of 1986		981			356
Deferred gain on sale of headquarters facility		3,401			—
Derivative tax adjustments		469			879
Accrued liabilities		1,948			1,956
Deferred foreign tax asset		1,453			559
Other		5,561			6,181
Total gross deferred tax assets		24,071			23,061
Less: valuation allowance		(1,606	)		(663	)
Net deferred tax assets		22,465			22,398
Deferred Tax Liabilities:
Plant and equipment, principally due to differences in depreciation and basis		(29,360	)		(25,243	)
Deferred Revenue		(61,250	)		—
Deferred state tax liability		(4,737	)		(534	)
Intangible assets, deducted for book purposes over a longer life than for tax purposes		(1,956	)		(984	)
Other		(1,501	)		—
Total gross deferred tax liabilities		(98,804	)		(26,761	)
Net deferred tax liability		(76,339	)		(4,363	)
Less: current portion		66,838			—
	$	(9,501	)	$	(4,363	)

        At December 31, 2002, we had $1.6 million of foreign operating loss carryforwards available to reduce future taxable income. These loss carryforwards must be utilized within the applicable carryforward periods. A valuation allowance has been provided for the deferred tax assets related the foreign loss carryforwards. Carryforwards of approximately $1.2 million can be used indefinitely and the remainder expire from 2007 through 2021.

        We anticipate that the reversal of existing taxable temporary differences and future income will provide sufficient taxable income to realize the tax benefit of the remaining deferred tax assets.

        Income taxes paid during 2002, 2001 and 2000 were $24.6 million, $12.0 million and $7.2 million, respectively.

F-25

NOTE 8.    Shareholders' Equity and Employee Benefit Plans

Common Stock:

        We are authorized to issue 100.0 million shares of Common Stock, $0.001 par value (the "Common Stock"). The number of shares of Common Stock issued and outstanding at the end of 2002 and 2001 was 70,928,040 and 70,925,000, respectively.

Preferred Stock:

        We are authorized to issue up to 20.0 million shares of Preferred Stock, par value $0.001 per share, in one or more series. As of December 31, 2002 and December 31, 2001, none were issued.

Investment Plan:

        We have an Investment Plan intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code of 1986. The Investment Plan is available to all domestic employees and we match employee contributions up to a specified limit. In 2002, 2001 and 2000, we made matching contributions and charged to expense approximately $2.0 million, $1.4 million and $1.2 million, respectively.

NOTE 9.    Stock Option Plans

        In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 123, "Accounting and Disclosure of Stock-Based Compensation." While the accounting standard encouraged the adoption of a new fair-value method for expense recognition, Statement 123 allows companies to continue accounting for stock options and other stock-based awards as provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). We have elected to follow the provisions of APB 25 and related interpretations in accounting for our stock options plans because, as discussed below, the alternative fair-value method prescribed by FASB Statement No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of our employee stock options generally equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

        In December 1997, our Board of Directors approved the 1997 Management Equity Plan. The maximum aggregate number of shares of Common Stock that may be issued in connection with grants under the Management Equity Plan, as amended, is approximately 13.9 million shares, subject to adjustment as provided for in the plan. The Management Equity Plan is administered, and grants determined, by a committee of the Board of Directors. The exercise price and term of options granted under the Management Equity Plan shall be determined by the committee, however, in no event shall the term of any option granted under the Management Equity Plan exceed ten (10) years. The Management Equity Plan supersedes all other stock option plans. During the 1997 recapitalization transaction, 60 employees rolled stock options covering an additional 5.5 million shares of our common stock into the 1997 Management Equity Plan.

        Pro forma information regarding net income and earnings per share is required by Statement 123 and has been calculated based on the assumption that we had accounted for our employee stock options under the fair-value method of that statement. The fair value for options granted during the three fiscal years ended December 31, 2002, 2001 and 2000, respectively, was estimated using a Black-

F-26

Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 4.2%, 4.5% and 4.7%, dividend yields of 0.4%, 0.4% and 0.7%, volatility factors of the expected market price of our common stock of .22, .24 and .33 and a weighted-average expected option life of 6.2 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Other option valuation models also require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the underlying assumptions can materially affect the fair value estimate, in management's opinion, Black-Scholes and other models do not necessarily provide a reliable measure of the fair value of our employee stock options.

        For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information follows (dollars in thousands, except for earnings per share information):

		2002		2001		2000
Net earnings as reported		$	150,156	$	23,901	$	9,129
Pro forma net earnings		$	148,751	$	22,526	$	7,023
Earnings per share as reported
	Basic earnings per common share	$	2.12	$	0.34	$	0.13
	Diluted earnings per common share	$	1.93	$	0.32	$	0.12
Pro forma earnings per share
	Basic earnings per common share	$	2.10	$	0.32	$	0.10
	Diluted earnings per common share	$	1.92	$	0.30	$	0.10

        We are not required to apply the method of accounting prescribed by Statement 123 to stock options granted prior to January 1, 1995. Moreover, the pro forma compensation cost reflected above may not be representative of future results.

        The following table summarizes information about stock options outstanding at December 31, 2002 (options in thousands):

Range of Exercise Prices	Options Outstanding at 12/31/02	Weighted Average Remaining Contract Life (years)	Weighted Average Exercise Price		Options Exercisable at 12/31/02	Weighted Average Exercise Price
$0.91 to $1.13	1,175	1.6	$	1.07	1,175	$	1.07
$1.25 to $2.28	513	1.9	$	1.72	513	$	1.72
$2.78 to $4.81	14,854	4.1	$	4.58	9,855	$	4.46
$4.82 to $7.00	503	7.6	$	7.00	32	$	7.00
	17,045	3.9	$	4.32	11,575	$	4.00

F-27

        A summary of our stock option activity, and related information, for years ended December 31, 2002, 2001 and 2000 follows (options in thousands):

	2002				2001				2000
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Options outstanding—beginning of year	17,542		$	4.28	16,985		$	4.18	9,617		$	3.65
Granted	293		$	7.00	1,677		$	5.09	7,921		$	4.81
Exercised	(121	)	$	3.69	(734	)	$	3.67	(319	)	$	3.10
Forfeited	(669	)	$	4.42	(386	)	$	4.81	(234	)	$	4.81
Options outstanding—end of year	17,045		$	4.32	17,542		$	4.28	16,985		$	4.18
Exercisable at end of year	11,575		$	4.00	9,540		$	3.78	8,113		$	3.50
Weighted average fair value of options granted during the year			$	2.15			$	1.84			$	1.83

NOTE 10.    Other Comprehensive Income

        Our other comprehensive income is comprised of net earnings, foreign currency translation adjustment and adjustments to derivative financial instruments.

        The earnings associated with certain of our foreign affiliates are considered to be permanently invested and no provision for U.S. Federal and State income taxes on these earnings or translation adjustments has been made.

        As of December 31, 2002, derivative financial instruments valued at a liability of approximately $1.3 million were recorded as a result of our adoption of FASB Statement No. 133,"Accounting for Derivative Instruments and Hedging Activities." This liability is based upon the valuation of our interest rate protection agreements associated with our Senior Credit Facilities. (See Notes 4, 14 and 17.)

NOTE 11.    Earnings Per Share

        The following table sets forth the reconciliation from basic to diluted average common shares and the calculations of net earnings per common share. Net earnings for basic and diluted calculations do not differ (dollars in thousands, except per share):

		2002		2001		2000
Net earnings		$	150,156	$	23,901	$	9,129
Average common shares:
	Basic (weighted-average outstanding shares)		70,927		70,917		70,915
	Dilutive potential common shares from stock options		6,735		3,079		2,304
	Diluted (weighted-average outstanding shares)		77,662		73,996		73,219
Basic earnings per common share		$	2.12	$	0.34	$	0.13
Diluted earnings per common share		$	1.93	$	0.32	$	0.12

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NOTE 12.    Commitments and Contingencies

        On August 16, 1995, we filed a civil antitrust lawsuit against Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-Rom Company (together "Hillenbrand"). On September 27, 2002, a jury found in KCI's favor. The jury found that Hillenbrand had wrongfully attempted to monopolize the specialty hospital bed market. The jury awarded us $173.6 million, which was subject to trebling under the federal antitrust laws, pending an anticipated appeal. On December 31, 2002, we settled our antitrust lawsuit with Hillenbrand. Under the settlement, Hillenbrand agreed to pay KCI $250 million. The parties released each other from all claims relating to the litigation and all claims between the parties as of the settlement date. On January 2, 2003, the United States District Court for the Western District of Texas, San Antonio Division approved the settlement and dismissed the case. Upon dismissal of the lawsuit, Hillenbrand paid KCI $175 million. Pursuant to the terms of the settlement, Hillenbrand will pay to KCI an additional $75 million in January 2004, subject to certain conditions.

        On February 21, 1992, Novamedix Limited ("Novamedix") filed a lawsuit against us in the United States District Court for the Western District of Texas. Novamedix manufactures the principal product which directly competes with the PlexiPulse products. The suit alleges that the PlexiPulse products infringe several patents held by Novamedix, that we breached a confidential relationship with Novamedix and a variety of ancillary claims. Novamedix seeks injunctive relief and monetary damages. A judicial stay which has been in effect with respect to all patent claims in this case has been lifted. Although it is not possible to reliably predict the outcome of this litigation or the damages, which could be awarded, we believe that our defenses to these claims are meritorious and that the litigation will not have a material adverse effect on our business, financial condition or results of operations.

        On January 7, 1998, Mondomed N.V. filed an opposition in the European Patent Office (the "Opposition") to a European patent owned by Wake Forest University and licensed by KCI for our V.A.C. They were joined in this Opposition by Paul Hartmann A.G. on December 16, 1998. On February 13, 2002, the Opposition Division of the European Patent Office issued a non-binding Preliminary Opinion in favor of KCI. The opposing parties will have additional opportunities to assert their arguments in relation to an oral hearing that will be held prior to the issuance of a Final Opinion. A final date for the oral hearing has not been set. Although it is not possible to reliably predict the outcome of the Opposition, we believe that the patent will be upheld.

        We are a party to several lawsuits arising in the ordinary course of our business. Provisions have been made in our financial statements for estimated exposures related to these lawsuits. In the opinion of management, the disposition of these matters will not have a material adverse effect on our business, financial condition or results of operations.

        The manufacturing and marketing of medical products necessarily entails an inherent risk of product liability claims. We currently have certain product liability claims pending for which provision has been made in our financial statements. Management believes that resolution of these claims will not have a material adverse effect on our business, financial condition or results of operations. We have not experienced any significant losses due to product liability claims and management believes that we currently maintain adequate liability insurance coverage.

        Other than commitments for new product inventory, including disposable "for sale" products of $12.5 million, we have no material long-term capital commitments and can adjust our level of capital expenditures as circumstances dictate.

        See discussion of our self-insurance program at Note 1 and leases at Note 6.

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NOTE 13.    Segment and Geographic Information

        We are principally engaged in the rental and sale of innovative therapeutic devices and systems throughout the United States and in 15 primary countries internationally.

        We define our business segments based on geographic management responsibility. We have two reportable segments: USA, which includes operations in the United States, and International, which includes operations for all international units. We measure segment profit as operating earnings, which is defined as income before interest income or expense, foreign currency gains and losses, income taxes and minority interest. All intercompany transactions are eliminated in computing revenues, operating earnings and assets. Prior years have been made to conform with the 2002 presentation. Information on segments and a reconciliation of consolidated totals are as follows (dollars in thousands):

				Year Ended December 31,
				2002			2001			2000
Revenue:
	USA			$	446,786		$	354,123		$	256,582
	International				132,176			101,824			95,450
				$	578,962		$	455,947		$	352,032
Operating earnings:
	USA			$	145,541		$	109,471		$	82,114
	International				18,348			19,124			19,450
	Other(1):
		Executive			(12,272	)		(13,060	)		(9,496	)
		Finance			(17,175	)		(13,040	)		(14,060	)
		Manufacturing/engineering			(6,695	)		(4,394	)		(2,921	)
		Administration			(18,328	)		(10,419	)		(9,386	)
	Unusual item-litigation settlement				173,250			—			—
			Total other		118,780			(40,913	)		(35,863	)
				$	282,669		$	87,682		$	65,701
Depreciation and amortization:
	USA			$	18,865		$	19,902		$	19,464
	International				9,302			8,296			7,945
	Other(1):
		Executive			484			2,123			1,357
		Finance			3,553			2,780			2,333
		Manufacturing/engineering			1,983			1,632			1,478
		Administration			2,811			2,482			2,205
			Total other		8,831			9,017			7,373
				$	36,998		$	37,215		$	34,782

F-30

Total Assets:
	USA			$	280,870	$	222,433	$	182,442
	International				114,192		74,015		64,667
	Other:
		Executive			8,834		14,869		14,750
		Finance			12,270		7,234		5,000
		Manufacturing/engineering			13,605		13,046		11,470
		Administration			188,288		11,596		9,762
			Total other		222,997		46,745		40,982
				$	618,059	$	343,193	$	288,091
Gross capital expenditures:
	USA			$	24,263	$	24,771	$	13,948
	International				15,703		8,097		7,205
	Other:
		Executive			—		—		—
		Finance			13,477		10,901		8,131
		Manufacturing/engineering			1,403		2,928		2,734
		Administration			—		—		—
			Total other		14,880		13,829		10,865
				$	54,846	$	46,697	$	32,018

(1)

Other includes general headquarter expenses which are not allocated to the individual segments and are included in selling, general and administrative expenses within our Consolidated Statements of Earnings.

        The following is other selected geographic financial information of KCI (dollars in thousands):

			Year Ended December 31,
			2002		2001		2000
Geographic location of long-lived assets:
	Domestic		$	150,133	$	149,689	$	141,281
	Foreign			37,851		22,438		19,994
		Total long-lived assets	$	187,984	$	172,127	$	161,275

NOTE 14.    Derivative Financial Instruments

        We adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," and its amendments, Statements 137 and 138, on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. In accordance with the transition provisions of SFAS 133, no cumulative effect of an

F-31

accounting change was necessary. We have designated our interest rate swap agreements as cash flow hedge instruments. The swap agreements are used to manage exposure to interest rate movement by effectively changing the variable interest rate to a fixed rate. Changes in the effective portion of the fair value of the interest rate swap agreement will be recognized in other comprehensive income, net of tax effects, until the hedged item is recognized into earnings, whereas the ineffective portion is recognized into income as incurred. To qualify for the shortcut method of accounting, the critical terms of the interest rate swap agreements and the interest-bearing debt associated with the swap agreements must be the same.

        The following chart summarizes the cash flow hedge transactions for the period of 2002 and 2001 (dollars in thousands):

Accounting Method	Effective Dates	Nominal		Fixed Interest Rate		Status
Shortcut	01/05/01-12/31/01	$	150,000	5.360	%	Terminated 10/01/01
Hypothetical(1)	10/01/01-12/31/02		150,000	3.570		Matured 12/31/02
Shortcut	10/01/01-12/31/02		100,000	2.990		Matured 12/31/02
Shortcut(2)	12/31/02-12/31/03		100,000	1.745		Outstanding
Shortcut(2)	12/31/02-12/31/04		100,000	2.375		Outstanding

(1)

On October 1, 2001, we terminated our $150.0 million, 5.36% interest rate swap and entered into an agreement to take advantage of lower interest rates. The amount included in other comprehensive income as of September 30, 2001 continued to be recognized over the original date through which interest payments were hedged, December 31, 2002, because the hedged item (interest payments) continued to exist. In addition, accumulated other comprehensive loss was reduced by approximately $550,000 as a loss on termination of interest rate swap during 2001 and increased by approximately $550,000 during 2002.

Although no cash was exchanged, the $150.0 million swap did not qualify for the shortcut method because the fair value of the swap was not zero at inception (it had a negative value). We elected to use the "hypothetical derivative" method to measure effectiveness, which allowed us to use the change in the fair value of a "hypothetical derivative" (one which had no fair value at inception with terms mirroring the actual derivative that would be assumed to be perfectly effective) as a proxy for the change in the expected fair value of the hedged transactions. As of December 31, 2002, the $150 million swap agreement had matured. Hedge ineffectiveness, of approximately $27,000, in 2002 was immaterial and recognized as an increase of interest expense.

(2)

As of December 31, 2002 these agreements effectively fix the base-borrowing rate on 62% of our variable rate debt. The fair value of these swaps at inception was zero. However, due to subsequent movements in interest rates, as of December 31, 2002 the fair value of the one-year, 1.7450% swap and two-year, 2.3750% swap agreements were in an unfavorable position and were adjusted to a liability of approximately $330,000 and $1.0 million, respectively.

As a result of interest rate protection agreements during 2002 and 2001, we recorded additional interest expense of approximately $2.8 million and $2.1 million, respectively. The expense for 2001 includes a fourth quarter write-off of $1.1 million, the fair value of the old $150 million swap upon termination. (See Consolidated Statement of Shareholders' Deficit and Notes 4, 10 and 17.)

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NOTE 15.    Quarterly Financial Data (unaudited)

        The unaudited consolidated results of operations by quarter are summarized below (dollars in thousands, except per share data):

		Year Ended December 31, 2002
		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Revenue		$	127,141	$	137,108	$	150,488	$	164,225
Unusual item-litigation settlement			—		—		—	$	173,250
Operating earnings		$	24,554	$	26,148	$	26,398	$	205,569
Net earnings		$	8,433	$	11,596	$	9,103	$	121,024
Per share:
	Basic earnings per common share	$	0.12	$	0.16	$	0.13	$	1.71
	Dilutive earnings per common share	$	0.11	$	0.15	$	0.12	$	1.56
Average common shares:
	Basic (weighted average outstanding shares)		70,925		70,926		70,928		70,928
	Diluted (weighted average outstanding shares)		77,721		77,683		77,664		77,643

		Year Ended December 31, 2001
		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Revenue		$	103,237	$	108,623	$	117,435	$	126,652
Operating earnings		$	20,257	$	20,755	$	23,527	$	23,143
Net earnings		$	4,314	$	5,350	$	6,817	$	7,420
Per share:
	Basic earnings per common share	$	0.06	$	0.08	$	0.10	$	0.10
	Dilutive earnings per common share	$	0.06	$	0.07	$	0.09	$	0.10
Average common shares:
	Basic (weighted average outstanding shares)		70,915		70,915		70,917		70,920
	Diluted (weighted average outstanding shares)		73,077		73,056		74,255		75,130

        Earnings per share for the full year may differ from the total of the quarterly earnings per share due to rounding differences.

NOTE 16.    Unusual Item—Litigation Settlement

        During the fourth quarter of 2002, we recorded a gain from the settlement of an antitrust lawsuit with Hillenbrand Industries, Inc. and Hill-Rom Company, Inc., a wholly-owned subsidiary of Hillenbrand (together, "Hillenbrand"). On December 31, 2002, under the settlement, Hillenbrand agreed to pay KCI $250.0 million. The initial payment was $175.0 million, payable upon dismissal of the lawsuit by the court. Net of legal fees and expenses, this transaction added $173.3 million of pretax income and $106.4 million of net income to the 2002 results. We recorded a $66.8 million current deferred tax liability related to this gain. This settlement also provides that Hillenbrand will pay to KCI an additional $75.0 million in January 2004, subject to certain conditions, such as the occurrence of a bankruptcy or change in control. No accrual has been made related to this payment. We received the initial payment of $175.0 million on January 2, 2003. (See Note 12 of Notes to Consolidated Financial Statements.)

F-33

NOTE 17.    Subsequent Events (unaudited)

        On January 2, 2003, we received $175 million pursuant to the settlement of the antitrust lawsuit with Hillenbrand upon dismissal of the lawsuit by the court. The cash received was used to pay down $107 million of indebtedness on the senior credit facility. In addition, a current deferred tax payable of $66.8 million was recorded for estimated tax liabilities related to the gain. After the paydown, our long-term obligations were (dollars in thousands):

			December 31, 2002			Paydown			Subsequent to Paydown
Senior credit facilities
	Term loans:
		Tranche A due 2003	$	27,500		$	9,867		$	17,633
		Tranche B due 2004		85,500			28,217			57,283
		Tranche C due 2005		85,500			28,217			57,283
		Tranche D due 2006		93,575			30,876			62,699
		Tranche E due 2007		29,775			9,823			19,952
				321,850			107,000			214,850
95/8% Senior Subordinated Notes due 2007				200,000			—			200,000
				521,850			107,000			414,850
Less current installments				(30,550	)		(11,382	)		(19,168	)
			$	491,300		$	95,618		$	395,682

        After giving effect to the paydown of the senior credit facility, future maturities of long-term debt as of December 31, 2002 are as follows (dollars in thousands):

	December 31, 2002		Paydown		Subsequent to Paydown
2003	$	30,550	$	11,382	$	19,168
2004		86,750		28,475		58,275
2005		113,825		37,363		76,462
2006		90,725		29,780		60,945
2007		200,000		—		200,000
	$	521,850	$	107,000	$	414,850

        On January 31, 2003, we sold $20 million of our $100 million, 1.7450% interest rate swap to be effective March 31, 2003 resulting in an expense of $73,500 which will be recorded in the first quarter of 2003. Subsequent to the paydown of $107.0 million of debt, the remaining interest rate swap agreements effectively fix the base-borrowing rate on 83.8% of our variable rate debt. (See Notes 4, 10 and 14.)

NOTE 18.    Guarantor Condensed Consolidating Financial Statements

        Kinetic Concepts, Inc. issued $200 million in subordinated debt securities to finance a tender offer to purchase certain of our common shares outstanding. In connection with the issuance of these securities, certain of our wholly owned subsidiaries (the "guarantor subsidiaries") act as guarantors. Certain other subsidiaries (the "non-guarantor subsidiaries") do not guarantee such debt. The

F-34

guarantor subsidiaries are wholly owned by KCI and the guarantees are full, unconditional, and joint and several. We have not presented separate financial statements and other disclosures concerning the Subsidiary Guarantors because management has determined that such information is not material to investors.

        Our indebtedness under the senior credit agreement is guaranteed by certain of the subsidiaries of KCI and is secured by (i) a first priority security interest in all, subject to certain customary exceptions, of the tangible and intangible assets of KCI and our domestic subsidiaries, including, without limitation, intellectual property and real estate owned by KCI and our subsidiaries, (ii) a first priority perfected pledge of all capital stock of KCI's domestic subsidiaries and (iii) a first priority perfected pledge of up to 65% of the capital stock of foreign subsidiaries owned directly by KCI or our domestic subsidiaries. The senior credit agreement contains covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, loans and advances, capital expenditures, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. The net assets of the guarantor subsidiaries are detailed on the following tables.

        The following tables present the condensed consolidating balance sheets of Kinetic Concepts, Inc. as a parent company, our guarantor subsidiaries and our non-guarantor subsidiaries as of December 31, 2002 and 2001 and the related condensed consolidating statements of earnings and cash flows for each year in the three-year period ended December 31, 2002.

F-35

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET

December 31, 2002
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
ASSETS:
Current assets:
	Cash and cash equivalents		$	—		$	41,185		$	13,300	$	—		$	54,485
	Accounts receivable, net			—			125,106			35,612		(7,822	)		152,896
	Accounts receivable—other			175,000			—			—		—			175,000
	Inventories, net			—			20,113			17,821		—			37,934
	Prepaid expenses and other current assets			—			6,377			3,383		—			9,760
		Total current assets		175,000			192,781			70,116		(7,822	)		430,075
	Net property, plant and equipment			—			96,458			23,516		(14,425	)		105,549
	Loan issuance cost, net			—			6,287			—		—			6,287
	Goodwill, net			—			38,724			7,633		—			46,357
	Other assets, net			—			31,044			20,247		(21,500	)		29,791
	Intercompany investments and advances			(187,076	)		508,045			23,447		(344,416	)		—
			$	(12,076	)	$	873,339		$	144,959	$	(388,163	)	$	618,059
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Accounts payable			$	—		$	4,632		$	6,524	$	—		$	11,156
Accrued expenses				1,522			46,058			13,976		—			61,556
Current installments of long-term obligations				—			30,550			—		—			30,550
Current installments of capital lease obligations				—			157			—		—			157
Intercompany payables				—			22,497			—		(22,497	)		—
Derivative financial instruments				—			1,341			—		—			1,341
Income taxes payable				—			8,615			6,000		—			14,615
Current deferred income taxes				66,838			—			—		—			66,838
		Total current liabilities		68,360	��		113,850			26,500		(22,497	)		186,213
Long-term obligations, net of current installments				—			491,300			—		—			491,300
Capital lease obligations, net of current installments				—			75			20		—			95
Intercompany payables, noncurrent				—			(21,500	)		21,500		—			—
Deferred income taxes, net				—			9,251			—		250			9,501
Deferred gain, sale of headquarters facility				—			10,023			—		—			10,023
Other noncurrent deferred, net				—			22,863			—		(21,500	)		1,363
				68,360			625,862			48,020		(43,747	)		698,495
Shareholders' equity (deficit)				(80,436	)		247,477			96,939		(344,416	)		(80,436	)
			$	(12,076	)	$	873,339		$	144,959	$	(388,163	)	$	618,059

F-36

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET

December 31, 2001
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
ASSETS:
Current assets:
	Cash and cash equivalents		$	—		$	—		$	5,301	$	(5,102	)	$	199
	Accounts receivable, net			—			115,368			25,092		(19,096	)		121,364
	Inventories, net			—			22,432			17,734		—			40,166
	Prepaid expenses and other current assets			—			4,550			4,787		—			9,337
		Total current assets		—			142,350			52,914		(24,198	)		171,066
Net property, plant and equipment				—			93,893			9,184		(13,096	)		89,981
Loan issuance cost, net				—			8,602			—		—			8,602
Goodwill, net				—			39,381			3,654		—			43,035
Other assets, net				—			29,227			22,782		(21,500	)		30,509
Intercompany investments and advances				(236,325	)		500,348			24,291		(288,314	)		—
			$	(236,325	)	$	813,801		$	112,825	$	(347,108	)	$	343,193
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Accounts payable			$	—		$	10,213		$	3,318	$	(5,102	)	$	8,429
Accrued expenses				—			35,471			12,637		—			48,108
Current installments of long-term obligations				—			2,750			—		—			2,750
Current installments of capital lease obligations				—			171			—		—			171
Intercompany payables				—			39,584			—		(39,584	)		—
Derivative financial instruments				—			2,512			—		—			2,512
Income taxes payable				—			7,227			1,534		—			8,761
		Total current liabilities		—			97,928			17,489		(44,686	)		70,731
Long-term obligations, net of current installments				—			503,875			—		—			503,875
Capital lease obligations, net of current installments				—			232			—		—			232
Intercompany payables, noncurrent				—			(21,500	)		21,500		—			—
Deferred income taxes, net				—			15,186			—		(10,823	)		4,363
Other noncurrent deferred, net				—			21,817			—		(21,500	)		317
				—			617,538			38,989		(77,009	)		579,518
Shareholders' equity (deficit)				(236,325	)		196,263			73,836		(270,099	)		(236,325	)
			$	(236,325	)	$	813,801		$	112,825	$	(347,108	)	$	343,193

F-37

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the year ended December 31, 2002
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—		$	365,781		$	87,279	$	—		$	453,060
	Sales and other			—			105,695			44,828		(24,621	)		125,902
		Total revenue		—			471,476			132,107		(24,621	)		578,962
Rental expenses				—			198,477			77,648		—			276,125
Cost of goods sold				—			49,387			16,514		(14,077	)		51,824
		Gross profit		—			223,612			37,945		(10,544	)		251,013
Selling, general and administrative expenses				—			128,411			13,183		—			141,594
Unusual item—litigation settlement				(173,250	)		—			—		—			(173,250	)
		Operating earnings		173,250			95,201			24,762		(10,544	)		282,669
Interest income				—			294			202		—			496
Interest expense				—			(40,943	)		1,702		(1,702	)		(40,943	)
Foreign currency income				—			3,555			380		—			3,935
		Earnings before income taxes and equity in earnings of subsidiaries		173,250			58,107			27,046		(12,246	)		246,157
Income taxes				66,838			22,682			11,257		(4,776	)		96,001
		Earnings before equity in earnings of subsidiaries		106,412			35,425			15,789		(7,470	)		150,156
Equity in earnings of subsidiaries				43,744			15,790			—		(59,534	)		—
		Net earnings	$	150,156		$	51,215		$	15,789	$	(67,004	)	$	150,156

F-38

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the year ended December 31, 2001
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	291,145		$	70,489		$	—		$	361,634
	Sales and other			—		74,564			27,608			(7,859	)		94,313
		Total revenue		—		365,709			98,097			(7,859	)		455,947
Rental expenses				—		165,618			54,867			—			220,485
Cost of goods sold				—		31,859			8,202			(7,109	)		32,952
		Gross profit		—		168,232			35,028			(750	)		202,510
Selling, general and administrative expenses				—		105,460			9,368			—			114,828
		Operating earnings		—		62,772			25,660			(750	)		87,682
Interest income				—		174			106			—			280
Interest expense				—		(45,116	)		—			—			(45,116	)
Foreign currency loss				—		(1,322	)		(316	)		—			(1,638	)
		Earnings before income taxes and equity in earnings of subsidiaries		—		16,508			25,450			(750	)		41,208
Income taxes				—		8,852			8,770			(315	)		17,307
		Earnings before equity in earnings of subsidiaries		—		7,656			16,680			(435	)		23,901
Equity in earnings of subsidiaries				23,901		16,680			—			(40,581	)		—
		Net earnings	$	23,901	$	24,336		$	16,680		$	(41,016	)	$	23,901

F-39

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the year ended December 31, 2000
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	209,210		$	65,121		$	—		$	274,331
	Sales and other			—		62,225			27,173			(11,697	)		77,701
		Total revenue		—		271,435			92,294			(11,697	)		352,032
Rental expenses				—		124,685			51,707			—			176,392
Cost of goods sold				—		27,469			10,454			(8,278	)		29,645
		Gross profit		—		119,281			30,133			(3,419	)		145,995
Selling, general and administrative expenses				—		74,391			5,903			—			80,294
		Operating earnings		—		44,890			24,230			(3,419	)		65,701
Interest income				—		621			276			—			897
Interest expense				—		(48,635	)		—			—			(48,635	)
Foreign currency loss				—		(1,788	)		(570	)		—			(2,358	)
		Earnings (loss) before income taxes and equity in earnings of subsidiary		—		(4,912	)		23,936			(3,419	)		15,605
Income taxes				—		(174	)		8,069			(1,419	)		6,476
		Earnings (loss) before equity in earnings of subsidiaries		—		(4,738	)		15,867			(2,000	)		9,129
Equity in earnings of subsidiaries				9,129		15,867			—			(24,996	)		—
		Net earnings	$	9,129	$	11,129		$	15,867		$	(26,996	)	$	9,129

F-40

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS

For the year ended December 31, 2002
(in thousands)

	Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
Net earnings	$	150,156		$	51,215		$	15,789		$	(67,004	)	$	150,156
Noncash gain on litigation settlement		(173,250	)		—			—			—			(173,250	)
Adjustments to reconcile net earnings to net cash provided by operating activities		22,866			3,991			8,638			63,853			99,348
Net cash provided (used) by operating activities		(228	)		55,206			24,427			(3,151	)		76,254
Cash flows from investing activities:
Additions to property, plant and equipment		—			(31,957	)		(24,499	)		1,910			(54,546	)
Increase in inventory to be converted into equipment for short-term rental		—			(300	)		—			—			(300	)
Dispositions of property, plant and equipment		—			365			1,338			—			1,703
Proceeds from sale of headquarters facility		—			18,232			—			—			18,232
Business acquisitions, net of cash acquired		—			—			(3,596	)		—			(3,596	)
Decrease (increase) in other assets		—			(2,672	)		2,152			—			(520	)
Net cash used by investing activities		—			(16,332	)		(24,605	)		1,910			(39,027	)
Cash flows from financing activities:
Proceeds from notes payable, long-term, capital lease and other obligations		—			16,071			20			—			16,091
Proceeds from the exercise of stock options		9			—			—			—			9
Proceeds (payments) on intercompany investments and advances		(5,506	)		(8,994	)		872			13,628			—
Other		5,725			(4,766	)		7,285			(8,244	)		—
Net cash provided by financing activities:		228			2,311			8,177			5,384			16,100
Effect of exchange rate changes on cash and cash equivalents		—			—			—			959			959
Net increase in cash and cash equivalents		—			41,185			7,999			5,102			54,286
Cash and cash equivalents, beginning of year		—			—			5,301			(5,102	)		199
Cash and cash equivalents, end of year	$	—		$	41,185		$	13,300		$	—		$	54,485

F-41

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS

For the year ended December 31, 2001
(in thousands)

	Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
Net earnings	$	23,901		$	24,336		$	16,680		$	(41,016	)	$	23,901
Adjustments to reconcile net earnings to net cash provided by operating activities		(23,901	)		(18,699	)		(4,465	)		53,059			5,994
Net cash provided by operating activities		—			5,637			12,215			12,043			29,895
Cash flows from investing activities:
Additions to property, plant and equipment		—			(39,651	)		(6,424	)		2,078			(43,997	)
Increase in inventory to be converted into equipment for short-term rental		—			(2,700	)		—			—			(2,700	)
Dispositions of property, plant and equipment		—			1,392			1,352			—			2,744
Business acquisitions, net of cash acquired		—			—			(80	)		—			(80	)
Increase in other assets		—			(4,069	)		(223	)		—			(4,292	)
Net cash used by investing activities		—			(45,028	)		(5,375	)		2,078			(48,325	)
Cash flows from financing activities:
Proceeds from notes payable, long-term, capital lease and other obligations		—			16,805			—			—			16,805
Proceeds from the exercise of stock options		24			—			—			—			24
Proceeds (payments) on intercompany investments and advances		275			22,626			(2,319	)		(20,582	)		—
Other		(299	)		(40	)		(5,376	)		5,715			—
Net cash provided (used) by financing activities		—			39,391			(7,695	)		(14,867	)		16,829
Effect of exchange rate changes on cash and cash equivalents		—			—			—			(339	)		(339	)
Net decrease in cash and cash equivalents		—			—			(855	)		(1,085	)		(1,940	)
Cash and cash equivalents, beginning of year		—			—			6,156			(4,017	)		2,139
Cash and cash equivalents, end of year	$	—		$	—		$	5,301		$	(5,102	)	$	199

F-42

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS

For the year ended December 31, 2000
(in thousands)

	Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
Net earnings	$	9,129		$	11,129		$	15,867		$	(26,996	)	$	9,129
Adjustments to reconcile net earnings to net cash provided by operating activities		(9,129	)		17,172			5,441			17,538			31,022
Net cash provided by operating activities		—			28,301			21,308			(9,458	)		40,151
Cash flows from investing activities:
Additions to property, plant and equipment		—			(29,592	)		(8,342	)		6,216			(31,718	)
Increase in inventory to be converted into equipment for short-term rental		—			(300	)		—			—			(300	)
Dispositions of property, plant and equipment		—			487			1,250			—			1,737
Business acquisitions, net of cash acquired		—			(1	)		(426	)		—			(427	)
Increase in other assets		—			(1,002	)		(302	)		—			(1,304	)
Net cash used by investing activities		—			(30,408	)		(7,820	)		6,216			(32,012	)
Cash flows from financing activities:
Repayments of notes payable, long-term, capital lease and other obligations		—			(12,714	)		(1	)		—			(12,715	)
Proceeds (payments) on intercompany investments and advances		350			15,118			(17,027	)		1,559			—
Other		(350	)		(297	)		(183	)		830			—
Net cash provided (used) by financing activities		—			2,107			(17,211	)		2,389			(12,715	)
Effect of exchange rate changes on cash and cash equivalents		—			—			—			(647	)		(647	)
Net decrease in cash and cash equivalents		—			—			(3,723	)		(1,500	)		(5,223	)
Cash and cash equivalents, beginning of year		—			—			9,879			(2,517	)		7,362
Cash and cash equivalents, end of year	$	—		$	—		$	6,156		$	(4,017	)	$	2,139

F-43

Schedule II

KINETIC CONCEPTS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS

(in thousands)
Three years ended December 31, 2002

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts		Deductions		12/31/00 Balance at End of Period
Allowance for doubtful accounts	$	21,284	$	6,466	$	23	$	7,048	$	20,725
Inventory reserve	$	1,528	$	542	$	—	$	1,306	$	764
Deferred tax asset valuation allowance	$	842	$	—	$	354	$	520	$	676

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts		Deductions		12/31/01 Balance at End of Period
Allowance for doubtful accounts	$	20,725	$	8,932	$	5,031	$	4,157	$	30,531
Inventory reserve	$	764	$	1,612	$	—	$	1,477	$	899
Deferred tax asset valuation allowance	$	676	$	—	$	401	$	414	$	663

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts		Deductions		12/31/02 Balance at End of Period
Allowance for doubtful accounts	$	30,531	$	7,623	$	11,677	$	9,260	$	40,571
Inventory reserve	$	899	$	2,150	$	—	$	1,436	$	1,613
Deferred tax asset valuation allowance	$	663	$	—	$	990	$	47	$	1,606

F-44

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

			June 30, 2003			December 31, 2002
			(unaudited)
ASSETS:
Current assets:
	Cash and cash equivalents		$	102,973		$	54,485
	Accounts receivable, net			159,695			152,896
	Accounts receivable—other			—			175,000
	Inventories, net			33,771			37,934
	Prepaid expenses and other current assets			11,745			9,760
		Total current assets		308,184			430,075
Net property, plant and equipment				123,995			105,549
Loan issuance cost, less accumulated amortization of $13,107 in 2003 and $11,949 in 2002				4,753			5,911
Goodwill				48,796			46,357
Other assets, less accumulated amortization of $7,145 in 2003 and $6,840 in 2002				30,287			30,167
			$	516,015		$	618,059
LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current liabilities:
	Accounts payable		$	12,377		$	11,156
	Accrued expenses			79,732			61,556
	Current installments of long-term obligations			13,939			30,550
	Current installments of capital lease obligations			151			157
	Derivative financial instruments			1,914			1,341
	Income taxes payable			34,897			14,615
	Current deferred income taxes			—			66,838
		Total current liabilities		143,010			186,213
Long-term obligations, net of current installments				394,737			491,300
Capital lease obligations, net of current installments				19			95
Deferred income taxes, net				7,475			9,501
Deferred gain, sale of headquarters facility				9,503			10,023
Other noncurrent liabilities				213			1,363
				554,957			698,495
Shareholders' deficit:
	Common stock; issued and outstanding 71,123 in 2003 and 70,928 in 2002			71			71
	Retained deficit			(39,425	)		(76,216	)
	Accumulated other comprehensive income (loss)			412			(4,291	)
				(38,942	)		(80,436	)
			$	516,015		$	618,059

See accompanying notes to condensed consolidated financial statements.

F-45

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)

				Three Months Ended June 30,						Six Months Ended June 30,
				2003			2002			2003			2002
Revenue:
	Rental and service			$	140,854		$	107,595		$	270,296		$	209,010
	Sales and other				41,611			29,513			78,753			55,239
		Total revenue			182,465			137,108			349,049			264,249
Rental expenses					87,499			66,625			166,459			128,415
Cost of goods sold					14,713			11,764			28,358			21,369
		Gross profit			80,253			58,719			154,232			114,465
Selling, general and administrative expenses					44,489			32,571			85,395			63,763
		Operating earnings			35,764			26,148			68,837			50,702
Interest income					347			99			747			109
Interest expense					(8,050	)		(10,384	)		(16,228	)		(20,692	)
Foreign currency gain					2,368			2,992			4,156			2,448
		Earnings before income taxes			30,429			18,855			57,512			32,567
Income taxes					11,411			7,259			21,567			12,538
		Net earnings		$	19,018		$	11,596		$	35,945		$	20,029
		Basic earnings per common share		$	0.27		$	0.16		$	0.51		$	0.28
		Diluted earnings per common share		$	0.25		$	0.15		$	0.47		$	0.26
		Average common shares:
			Basic (weighted average outstanding shares)		71,070			70,926			71,032			70,926
			Diluted (weighted average outstanding shares)		77,236			77,683			76,904			77,688

See accompanying notes to condensed consolidated financial statements.

F-46

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

				Six Months Ended June 30,
				2003			2002
Cash flows from operating activities:
	Net earnings			$	35,945		$	20,029
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation			20,529			15,486
		Amortization			1,462			2,177
		Provision for uncollectible accounts receivable			3,527			4,861
		Amortization of deferred gain on sale/leaseback of headquarters facility			(521	)		—
	Change in assets and liabilities net of effects from purchase of subsidiaries and unusual items:
		Increase in accounts receivable, net			(10,342	)		(20,580	)
		Decrease in other accounts receivable			175,000			—
		Decrease (increase) in inventories			4,148			(498	)
		Increase in prepaid expenses and other current assets			(1,979	)		(851	)
		Increase in accounts payable			1,218			1,039
		Increase (decrease) in accrued expenses			18,100			(4,331	)
		Increase in income taxes payable			20,282			7,952
		Decrease in current deferred income taxes			(66,838	)		—
		Decrease in deferred income taxes, net			(1,826	)		(1,357	)
			Net cash provided by operating activities		198,705			23,927
Cash flows from investing activities:
	Additions to property, plant and equipment				(34,381	)		(30,500	)
	Decrease (increase) in inventory to be converted into equipment for short-term rental				(1,300	)		1,100
	Dispositions of property, plant and equipment				634			1,799
	Business acquisitions, net of cash acquired				(2,224	)		(3,596	)
	Increase in other assets				(425	)		(1,172	)
			Net cash used by investing activities		(37,696	)		(32,369	)
Cash flows from financing activities:
	Proceeds from (repayment of) notes payable, long term capital lease and other obligations				(114,856	)		17,088
	Proceeds from exercise of stock options				846			8
		Net cash provided (used) by financing activities			(114,010	)		17,096
Effect of exchange rate changes on cash and cash equivalents					1,489			515
Net increase in cash and cash equivalents					48,488			9,169
Cash and cash equivalents, beginning of period					54,485			199
Cash and cash equivalents, end of period				$	102,973		$	9,368
Supplemental disclosure of cash flow information:
	Cash paid during the first six months for:
		Interest		$	14,903		$	19,526
		Income taxes		$	69,392		$	9,756

See accompanying notes to condensed consolidated financial statements.

F-47

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

        The financial statements presented herein include the accounts of Kinetic Concepts, Inc., together with our consolidated subsidiaries ("KCI"). The unaudited condensed consolidated financial statements appearing in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in KCI's latest annual report on Form 10-K. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, financial position and cash flows in conformity with accounting principles generally accepted in the United States. Operating results from interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In our opinion, the consolidated financial statements reflect all adjustments considered necessary for a fair presentation of our results for the periods presented. Certain reclassifications of amounts related to the prior year have been made to conform with the 2003 presentation.

(b) Stock Options

        We use the intrinsic value method in accounting for our stock option plan. In the first six months of 2003 and 2002, compensation costs of approximately $1.7 million and $340,000, respectively, net of estimated taxes, have been recognized in the financial statements related to this plan. If the compensation cost for our stock-based employee compensation plan had been determined based upon a fair value method consistent with Statement of Financial Accounting Standards No. 123 ("SFAS 123"),"Accounting for Stock-Based Compensation," our net earnings and earnings per share would have been decreased to the pro forma amounts indicated below. For purposes of pro forma disclosures, the estimated fair value of the options is recognized as an expense over the options' respective vesting periods. Our pro forma calculations are as follows (dollars in thousands, except for earnings per share information):

		Three Months Ended June 30,				Six Months Ended June 30,
		2003		2002		2003		2002
Net earnings as reported		$	19,018	$	11,596	$	35,945	$	20,029
Pro forma net earnings		$	18,617	$	11,225	$	35,170	$	19,295
Earnings per share as reported
	Basic earnings per common share	$	0.27	$	0.16	$	0.51	$	0.28
	Diluted earnings per common share	$	0.25	$	0.15	$	0.47	$	0.26
Pro forma earnings per share
	Basic earnings per common share	$	0.26	$	0.16	$	0.50	$	0.27
	Diluted earnings per common share	$	0.24	$	0.14	$	0.46	$	0.25

        We are not required to apply, and have not applied, the method of accounting prescribed by SFAS 123 to stock options granted prior to January 1, 1995. Moreover, the pro forma compensation cost reflected above may not be representative of future expense.

F-48

(c) Other New Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board, or ("FASB") issued SFAS 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. This standard addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and to adjust its present value in each subsequent period. In addition, we must capitalize an amount equal to the adjustment by increasing the carrying amount of the related long-lived asset, which is depreciated over the remaining useful life of the related asset. We adopted SFAS 143 during the first quarter of 2003 and it did not have a significant effect on our financial position or results of operations.

        In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," effective for fiscal years or interim periods beginning after June 15, 2003. FIN 46 addresses accounting for, and disclosure of, variable interest entities. FIN 46 requires the disclosure of the nature, purpose and exposure of any loss related to our involvement with variable interest entities. We adopted the provisions of FIN 46 for post January 31, 2003 variable interest entities during the first quarter of 2003 and it did not have a significant effect on our financial position or results of operations. We continue to evaluate the potential effects of the consolidation provisions of FIN 46 that will be adopted during the quarter ended September 30, 2003.

        Specifically, we are evaluating the beneficial ownership of two Grantor Trusts which we acquired in December 1996 and December 1994. The assets held by each Trust consist of a McDonnell Douglas DC-10 aircraft and three engines. In connection with the acquisitions, KCI paid cash of $7.2 million and $7.6 million, respectively. The Trusts held debt of $48.4 million and $51.8 million, respectively, which is non-recourse to KCI. The DC-10 aircraft are leased to the Federal Express Corporation through June 2012 and January 2012, respectively. Federal Express pays monthly rent to a third party who, in turn, pays the entire amount to the holders of the non-recourse indebtedness, which is secured by the aircraft. The holder's recourse in event of a default is limited to the Trusts assets.

        In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends SFAS 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. We do not expect the adoption of SFAS 149, which will be effective for contracts entered into or modified after June 30, 2003, to have a material effect on our financial condition or results of operations.

        On May 15, 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The statement established standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 must be applied immediately to instruments entered into or modified after May 31, 2003. We have adopted SFAS 150 and have determined it will not have a material impact on our financial position or results of operations.

F-49

(d) Other Significant Accounting Policies

        For further information, see Note 1 to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the year ended December 31, 2002.

(2)    ACQUISITIONS

        On May 23, 2003, we acquired all of the outstanding capital stock of MedClaim Inc., a North Carolina corporation, for approximately $2.2 million in cash, net of cash acquired, and other consideration of $450,000. MedClaim Inc. processed Medicare Part B insurance claims for us and continues to act in that capacity. The operating results of MedClaim Inc. did not have a material impact, and we do not anticipate that the acquisition will have a material impact, on KCI's results of operations.

(3)    ACCOUNTS RECEIVABLE COMPONENTS

        Accounts receivable consist of the following (dollars in thousands):

			June 30, 2003			December 31, 2002
Trade accounts receivable:
	Facilities/dealers		$	98,464		$	91,756
	Third party payers:
		Medicare/Medicaid		34,103			31,721
		Managed care, insurance and other		57,647			53,229
				190,214			176,706
Medicare V.A.C. receivables prior to October 1, 2000				14,191			14,351
Employee and other receivables				1,784			2,410
				206,189			193,467
Less: Allowance for doubtful accounts				(32,303	)		(26,220	)
	Allowance for Medicare V.A.C. receivables prior to October 1, 2000			(14,191	)		(14,351	)
			$	159,695		$	152,896

F-50

(4)    INVENTORY COMPONENTS

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

		June 30, 2003			December 31, 2002
Finished goods		$	14,400		$	16,411
Work in process			2,792			2,411
Raw materials, supplies and parts			31,598			31,825
			48,790			50,647
Less: Amounts expected to be converted into equipment for short-term rental			(12,400	)		(11,100	)
	Reserve for excess and obsolete inventory		(2,619	)		(1,613	)
		$	33,771		$	37,934

(5)    LONG-TERM OBLIGATIONS AND DERIVATIVE FINANCIAL INSTRUMENTS

        Long-term obligations consist of the following (dollars in thousands):

			June 30, 2003			December 31, 2002
Senior Credit Facility:
	Term loans:
		Tranche A due 2003	$	11,742		$	27,500
		Tranche B due 2004		57,068			85,500
		Tranche C due 2005		57,068			85,500
		Tranche D due 2006		62,470			93,575
		Tranche E due 2005		19,878			29,775
	Revolving bank credit facility			—			—
				208,226			321,850
95/8% Senior Subordinated Notes due 2007				200,000			200,000
MedClaims note payable				450			—
				408,676			521,850
Less current installments				(13,939	)		(30,550	)
			$	394,737		$	491,300

        In January 2003, we received $175 million pursuant to the settlement of our antitrust lawsuit with Hillenbrand Industries (see Note 9 for additional discussion). The cash received, net of approximately $66 million of income taxes and approximately $2 million of fees and expenses, was used to pay down $107 million of indebtedness on the senior credit facility.

        As of June 30, 2003, we had no revolving loans outstanding. However, we had outstanding five letters of credit in the aggregate amount of $11.3 million. The resulting availability under the revolving credit facility was $38.7 million at the end of the quarter.

F-51

Interest Rate Protection

        We follow SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments, SFAS 137 and 138, in accounting for our derivative instruments. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. We have designated our interest rate swap agreements as cash flow hedge instruments. The swap agreements are used to manage exposure to interest rate movement by effectively changing the variable interest rate to a fixed rate. The critical terms of the interest rate swap agreements and the interest-bearing debt associated with the swap agreements must be the same to qualify for the shortcut method of accounting. Changes in the effective portion of the fair value of the interest rate swap agreement will be recognized in other comprehensive income, net of tax effects, until the hedged item is recognized into earnings.

        The following chart summarizes interest rate hedge transactions effective during the first six months of 2003 (dollars in thousands):

Accounting Method	Effective Dates	Nominal Amount		Fixed Interest Rate		Status
Shortcut	12/31/02-12/31/03	$	80,000	1.745	%	Outstanding
Shortcut	12/31/02-12/31/04	$	100,000	2.375	%	Outstanding

        As of December 31, 2002, two $100 million interest rate swap agreements were in effect to take advantage of low interest rates. On January 31, 2003, we sold $20 million of our $100 million, 1.7450% interest rate swap effective March 31, 2003 which resulted in an expense of approximately $74,000 which was recorded in the first quarter of 2003. As of June 30, 2003, the current interest rate swap agreements effectively fix the base-borrowing rate on 86% of our variable rate debt. The fair value of these swaps at inception was zero. Due to subsequent movements in interest rates, as of June 30, 2003, the fair values of the $80 million and $100 million swap agreements were negative and were adjusted to reflect a liability of approximately $300,000 and $1.6 million, respectively. As a result of interest rate protection agreements in effect during the first six months of 2003 and 2002, we recorded interest expense of approximately $770,000 and $1.3 million, respectively. (See Note 8.)

F-52

(6)    EARNINGS PER SHARE

        The following table sets forth the reconciliation from basic to diluted average common shares and the calculations of net earnings per common share. Net earnings for basic and diluted calculations do not differ (dollars in thousands, except per share data): (See Note 1 (b).)

		Three Months Ended June 30,				Six Months Ended June 30,
		2003		2002		2003		2002
Net earnings		$	19,018	$	11,596	$	35,945	$	20,029
Average common shares:
	Basic (weighted-average outstanding shares)		71,070		70,926		71,032		70,926
	Dilutive potential common shares from stock options		6,166		6,757		5,872		6,762
	Diluted (weighted-average outstanding shares)		77,236		77,683		76,904		77,688
Basic earnings per common share		$	0.27	$	0.16	$	0.51	$	0.28
Diluted earnings per common share		$	0.25	$	0.15	$	0.47	$	0.26

(7)    STOCK PLANS

        In May 2003, our Board of Directors approved the 2003 Non-Employee Directors Stock Plan (the "Directors Stock Plan"). Grants under this plan shall be made to non-employee directors of the company. The maximum aggregate number of shares of Common Stock that may be issued in connection with grants under the Directors Stock Plan is 400,000 shares, subject to adjustment as provided for in the plan. The exercise price of options granted under this plan is determined as the fair market value, as determined by our Board of Directors, of the shares of the Company's common stock on the date that such option is granted. The options granted will vest and become exercisable incrementally over a period of three years. The right to exercise an option shall terminate seven years after the grant date, unless sooner as provided for in the plan. The Directors Stock Plan is administered by a committee of the Board of Directors.

F-53

(8)    OTHER COMPREHENSIVE INCOME

        The components of other comprehensive income are as follows (dollars in thousands):

	Three Months Ended June 30,
	2003			2002
Net earnings	$	19,018		$	11,596
Foreign currency translation adjustment		3,747			4,238
Net derivative loss, net of taxes of $206 in 2003 and $394 in 2002		(383	)		(732	)
Reclassification adjustment for losses included in income, net of taxes of $129 in 2003 and $206 in 2002		238			383
Reclassification adjustment for loss recognized on termination of interest rate swap, net of taxes of $70 in 2002		—			(130	)
Other comprehensive income	$	22,620		$	15,355
	Six Months Ended June 30,
	2003			2002
Net earnings	$	35,945		$	20,029
Foreign currency translation adjustment		5,076			3,492
Net derivative loss, net of taxes of $470 in 2003 and $194 in 2002		(874	)		(361	)
Reclassification adjustment for losses included in income, net of taxes of $270 in 2003 and $438 in 2002		501			813
Reclassification adjustment for loss recognized on termination of interest rate swap, net of taxes of $148 in 2002		—			(258	)
Other comprehensive income	$	40,648		$	23,715

        The earnings associated with certain of our foreign affiliates are considered to be permanently invested and no provision for U.S. federal and state income taxes on these earnings or translation adjustments has been made.

        As of June 30, 2003, derivative financial instruments valued at a liability of $1.9 million were recorded as a result of our adoption of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This liability is based upon the valuation of our interest rate protection agreements associated with our Senior Credit Facility. (See Note 5.)

(9)    COMMITMENTS AND CONTINGENCIES

        During the fourth quarter of 2002, we recorded a gain from the settlement of an antitrust lawsuit with Hillenbrand Industries, Inc. and Hill-Rom Company, Inc., a wholly-owned subsidiary of Hillenbrand (together, "Hillenbrand"). Under the settlement, Hillenbrand agreed to pay KCI $250 million in two payments. In January 2003, we received the first installment of $175 million pursuant to the settlement. Net of fees and expenses of $1.7 million, this transaction added $173.3 million of pretax income and $106.4 million of net income to the 2002 fourth quarter results. The cash received, net of approximately $66 million of income taxes and approximately $2 million in

F-54

fees and expenses, was used to pay down $107 million of indebtedness on the senior credit facility. Hillenbrand will pay to KCI an additional $75 million in January 2004, subject to certain conditions. No accrual has been made related to this payment.

        Other than commitments for new product inventory, including disposable "for sale" products of $16.9 million, we have no material long-term capital commitments.

(10)    SEGMENT AND GEOGRAPHIC INFORMATION

        We are principally engaged in the rental and sale of innovative therapeutic devices and systems throughout the United States and in 15 primary countries internationally.

        We define our business segments based on geographic management responsibility. We have two reportable segments: USA, which includes operations in the United States, and International, which includes operations for all international units. We measure segment profit as operating earnings, which is defined as income before interest income or expense, foreign currency gains and losses and income taxes. All intercompany transactions are eliminated in computing revenue, operating earnings and assets. The prior years have been made to conform with the 2003 presentation. Information on segments and a reconciliation of consolidated totals are as follows (dollars in thousands):

					Three Months Ended June 30,						Six Months Ended June 30,
					2003			2002			2003			2002
Revenue:
	USA				$	137,631		$	106,022		$	264,840		$	205,377
	International					44,834			31,086			84,209			58,872
		Revenue			$	182,465		$	137,108		$	349,049		$	264,249
Operating Earnings:
	USA				$	47,213		$	33,056		$	91,735		$	65,139
	International					6,657			4,572			11,104			8,648
	Other(1):
		Executive				(5,316	)		(3,151	)		(9,339	)		(4,958	)
		Finance				(5,051	)		(3,907	)		(9,924	)		(7,578	)
		Manufacturing/Engineering				(1,102	)		(1,570	)		(2,259	)		(3,659	)
		Administration				(6,637	)		(2,852	)		(12,480	)		(6,890	)
			Total Other			(18,106	)		(11,480	)		(34,002	)		(23,085	)
				Operating earnings	$	35,764		$	26,148		$	68,837		$	50,702

(1)

Other includes general headquarter expenses which are not allocated to the individual segments and are included in selling, general and administrative expenses within our Condensed Consolidated Statements of Earnings.

F-55

(11)    SUBSEQUENT EVENT

        On July 11, 2003, we announced that we entered into a commitment letter with Morgan Stanley Senior Funding, Inc. and Credit Suisse First Boston for a new senior secured credit facility. The new facility would be composed of a $480 million term loan and a $100 million revolving credit facility. We expect to borrow $480 million under the new term loan facility and to use the proceeds from the new credit facility as part of a recapitalization of KCI, which is expected to result in the redemption of all of our outstanding 9?% Senior Subordinated Notes Due 2007 and the repayment of outstanding indebtedness under our existing credit facility. The closing of the new credit facility is expected to occur in mid-August 2003, but is subject to a number of important conditions. There can be no assurance that these conditions will be satisfied or that the terms described above will not change.

(12)    GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

        In November of 1997, Kinetic Concepts, Inc. issued $200 million in subordinated debt securities to finance a tender offer to purchase certain of our common shares outstanding. In connection with the issuance of these securities, certain of our wholly owned subsidiaries (the "guarantor subsidiaries") act as guarantors. Certain other subsidiaries (the "non-guarantor subsidiaries") do not guarantee the debt. The guarantor subsidiaries are wholly owned by KCI and the guarantees are full, unconditional, joint and several. We have not presented separate financial statements and other disclosures concerning the Subsidiary Guarantors because management has determined that such information is not material to investors.

        Our indebtedness under the existing senior credit facility is guaranteed by certain of our subsidiaries and is secured by a first priority security interest in (1) all of our tangible and intangible assets and those of our domestic subsidiaries (subject to certain customary exceptions), including, without limitation, intellectual property and real estate owned by us and our subsidiaries, and (2) substantially all shares of capital stock and intercompany debt of each of our present and future subsidiaries (limited in the case of certain foreign subsidiaries to 65% of the voting stock of such entity). The senior credit facility contains covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, loans and advances, capital expenditures, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. The net assets of the guarantor subsidiaries are detailed on the following tables.

        The following tables present the condensed consolidating balance sheets of Kinetic Concepts, Inc. as a parent company, our guarantor subsidiaries and our non-guarantor subsidiaries as of June 30, 2003 and December 31, 2002 and the related condensed consolidating statements of earnings for the three-and six-month periods ended June 30, 2003 and 2002, and the condensed consolidating statements of cash flows for the six-month periods ended June 30, 2003 and 2002, respectively.

F-56

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
ASSETS:
Current assets:
	Cash and cash equivalents		$	—		$	81,676		$	21,297	$	—		$	102,973
	Accounts receivable, net			—			129,682			40,097		(10,084	)		159,695
	Inventories, net			—			16,813			16,958		—			33,771
	Prepaid expenses and other current assets			—			5,929			5,816		—			11,745
		Total current assets		—			234,100			84,168		(10,084	)		308,184
	Net property, plant and equipment			—			107,042			30,779		(13,826	)		123,995
	Loan issuance cost, net			—			4,753			—		—			4,753
	Goodwill			—			41,205			7,591		—			48,796
	Other assets, net			—			31,527			20,260		(21,500	)		30,287
	Intercompany investments and advances			(38,195	)		423,847			8,038		(393,690	)		—
			$	(38,195	)	$	842,474		$	150,836	$	(439,100	)	$	516,015
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT):
Current liabilities:
	Accounts payable		$	—		$	7,894		$	4,483	$	—		$	12,377
	Accrued expenses			747			63,092			15,893		—			79,732
	Current installments of long-term obligations			—			13,939			—		—			13,939
	Current installments of capital lease obligations			—			151			—		—			151
	Intercompany payables			—			23,788			—		(23,788	)		—
	Derivative financial instruments			—			1,914			—		—			1,914
	Income taxes payable			—			32,301			2,596		—			34,897
		Total current liabilities		747			143,079			22,972		(23,788	)		143,010
Long-term obligations, net of current installments				—			394,737			—		—			394,737
Capital lease obligations, net of current installments				—			3			16		—			19
Intercompany payables, non current				—			(21,500	)		21,500		—			—
Deferred income taxes, net				—			7,596			—		(121	)		7,475
Deferred gain, sale of headquarters facility				—			9,503			—		—			9,503
Other noncurrent liabilities				—			21,713			—		(21,500	)		213
				747			555,131			44,488		(45,409	)		554,957
Shareholders' equity (deficit)				(38,942	)		287,343			106,348		(393,691	)		(38,942	)
			$	(38,195	)	$	842,474		$	150,836	$	(439,100	)	$	516,015

F-57

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
ASSETS:
Current assets:
	Cash and cash equivalents		$	—		$	41,185		$	13,300	$	—		$	54,485
	Accounts receivable, net			—			125,106			35,612		(7,822	)		152,896
	Accounts receivable—other			175,000			—			—		—			175,000
	Inventories, net			—			20,113			17,821		—			37,934
	Prepaid expenses and other current assets			—			6,377			3,383		—			9,760
		Total current assets		175,000			192,781			70,116		(7,822	)		430,075
Net property, plant and equipment				—			96,458			23,516		(14,425	)		105,549
Loan issuance cost, net				—			5,911			—		—			5,911
Goodwill				—			38,724			7,633		—			46,357
Other assets, net				—			31,420			20,247		(21,500	)		30,167
Intercompany investments and advances				(187,076	)		508,045			23,447		(344,416	)		—
			$	(12,076	)	$	873,339		$	144,959	$	(388,163	)	$	618,059
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Current liabilities:
	Accounts payable		$	—		$	4,632		$	6,524	$	—		$	11,156
	Accrued expenses			1,522			46,058			13,976		—			61,556
	Current installments of long-term obligations			—			30,550			—		—			30,550
	Current installments of capital lease obligations			—			157			—		—			157
	Intercompany payables			—			22,497			—		(22,497	)		—
	Derivative financial instruments			—			1,341			—		—			1,341
	Income taxes payable			—			8,615			6,000		—			14,615
	Current deferred income taxes			66,838			—			—		—			66,838
		Total current liabilities		68,360			113,850			26,500		(22,497	)		186,213
Long-term obligations, net of current installments				—			491,300			—		—			491,300
Capital lease obligations, net of current installments				—			75			20		—			95
Intercompany payables, noncurrent				—			(21,500	)		21,500		—			—
Deferred income taxes, net				—			9,251			—		250			9,501
Deferred gain, sale of headquarters facility				—			10,023			—		—			10,023
Other noncurrent liabilities				—			22,863			—		(21,500	)		1,363
				68,360			625,862			48,020		(43,747	)		698,495
Shareholders' equity (deficit)				(80,436	)		247,477			96,939		(344,416	)		(80,436	)
			$	(12,076	)	$	873,339		$	144,959	$	(388,163	)	$	618,059

F-58

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the Three Months Ended June 30, 2003
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Historical Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	110,928		$	29,926	$	—		$	140,854
	Sales and other			—		32,994			14,890		(6,273	)		41,611
		Total revenue		—		143,922			44,816		(6,273	)		182,465
Rental expenses				—		59,894			27,605		—			87,499
Cost of goods sold				—		12,820			5,099		(3,206	)		14,713
		Gross profit		—		71,208			12,112		(3,067	)		80,253
Selling, general and administrative expenses				—		40,366			4,123		—			44,489
		Operating earnings		—		30,842			7,989		(3,067	)		35,764
Interest income				—		331			16		—			347
Interest expense				—		(8,050	)		—		—			(8,050	)
Foreign currency gain				—		2,022			346		—			2,368
	Earnings before income taxes and equity in earnings of subsidiaries			—		25,145			8,351		(3,067	)		30,429
Income taxes				—		10,312			2,248		(1,149	)		11,411
	Earnings before equity in earnings of subsidiaries			—		14,833			6,103		(1,918	)		19,018
	Equity in earnings of subsidiaries			19,018		6,102			—		(25,120	)		—
	Net earnings		$	19,018	$	20,935		$	6,103	$	(27,038	)	$	19,018

F-59

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the Three Months Ended June 30, 2002
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Historical Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	86,757		$	20,838		$	—		$	107,595
	Sales and other			—		25,068			10,456			(6,011	)		29,513
		Total revenue		—		111,825			31,294			(6,011	)		137,108
Rental expenses				—		47,810			18,815			—			66,625
Cost of goods sold				—		11,736			3,950			(3,922	)		11,764
		Gross profit		—		52,279			8,529			(2,089	)		58,719
Selling, general and administrative expenses				—		29,584			2,987			—			32,571
		Operating earnings		—		22,695			5,542			(2,089	)		26,148
Interest income				—		19			80			—			99
Interest expense				—		(10,384	)		—			—			(10,384	)
Foreign currency gain (loss)				—		3,024			(32	)		—			2,992
	Earnings before income taxes and equity in earnings of subsidiaries			—		15,354			5,590			(2,089	)		18,855
Income taxes				—		6,075			1,988			(804	)		7,259
	Earnings before equity in earnings of subsidiaries			—		9,279			3,602			(1,285	)		11,596
	Equity in earnings of subsidiaries			11,596		3,602			—			(15,198	)		—
	Net earnings		$	11,596	$	12,881		$	3,602		$	(16,483	)	$	11,596

F-60

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the Six Months Ended June 30, 2003
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Historical Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	214,078		$	56,218	$	—		$	270,296
	Sales and other			—		64,311			27,941		(13,499	)		78,753
		Total revenue		—		278,389			84,159		(13,499	)		349,049
Rental expenses				—		114,151			52,308		—			166,459
Cost of goods sold				—		25,958			9,626		(7,226	)		28,358
		Gross profit		—		138,280			22,225		(6,273	)		154,232
Selling, general and administrative expenses				—		76,621			8,774		—			85,395
		Operating earnings		—		61,659			13,451		(6,273	)		68,837
Interest income				—		670			77		—			747
Interest expense				—		(16,228	)		—		—			(16,228	)
Foreign currency gain				—		3,544			612		—			4,156
	Earnings before income taxes and equity in earnings of subsidiaries			—		49,645			14,140		(6,273	)		57,512
Income taxes				—		20,106			3,813		(2,352	)		21,567
	Earnings before equity in earnings of subsidiaries			—		29,539			10,327		(3,921	)		35,945
	Equity in earnings of subsidiaries			35,945		10,326			—		(46,271	)		—
	Net earnings		$	35,945	$	39,865		$	10,327	$	(50,192	)	$	35,945

F-61

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the Six Months Ended June 30, 2002
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Historical Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	169,507		$	39,503		$	—		$	209,010
	Sales and other			—		46,687			19,738			(11,186	)		55,239
		Total revenue		—		216,194			59,241			(11,186	)		264,249
Rental expenses				—		92,983			35,432			—			128,415
Cost of goods sold				—		21,399			7,034			(7,064	)		21,369
		Gross profit		—		101,812			16,775			(4,122	)		114,465
Selling, general and administrative expenses				—		58,104			5,659			—			63,763
		Operating earnings		—		43,708			11,116			(4,122	)		50,702
Interest income				—		21			88			—			109
Interest expense				—		(20,692	)		—			—			(20,692	)
Foreign currency gain (loss)				—		2,559			(111	)		—			2,448
	Earnings before income taxes and equity in earnings of subsidiaries			—		25,596			11,093			(4,122	)		32,567
Income taxes				—		10,341			3,784			(1,587	)		12,538
	Earnings before equity in earnings of subsidiaries			—		15,255			7,309			(2,535	)		20,029
	Equity in earnings of subsidiaries			20,029		7,309			—			(27,338	)		—
	Net earnings		$	20,029	$	22,564		$	7,309		$	(29,873	)	$	20,029

F-62

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2003
(in thousands)
(unaudited)

	Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
Net earnings	$	35,945		$	39,865		$	10,327		$	(50,192	)	$	35,945
Adjustments to reconcile net earnings to net cash provided by operating activities		71,441			46,566			(3,122	)		47,875			162,760
Net cash provided by operating activities		107,386			86,431			7,205			(2,317	)		198,705
Cash flows from investing activities:
Additions to property, plant and equipment		—			(20,121	)		(13,949	)		(311	)		(34,381	)
Increase in inventory to be converted into equipment for short-term rental		—			(1,300	)		—			—			(1,300	)
Dispositions of property, plant and equipment		—			410			224			—			634
Businesses acquisitions, net of cash acquired		—			(2,224	)		—			—			(2,224	)
Increase in other assets		—			(454	)		29			—			(425	)
Net cash used by investing activities		—			(23,689	)		(13,696	)		(311	)		(37,696	)
Cash flows from financing activities:
Repayments of notes payable, long-term, capital lease and other obligations		—			(114,852	)		(4	)		—			(114,856	)
Proceeds from the exercise of stock options		846			—			—			—			846
Proceeds from (repayments of) intercompany investments and advances		(112,936	)		95,816			15,485			1,635			—
Other		4,704			(3,215	)		(993	)		(496	)		—
Net cash provided (used) by financing activities		(107,386	)		(22,251	)		14,488			1,139			(114,010	)
Effect of exchange rate changes on cash and cash equivalents		—			—			—			1,489			1,489
Net increase in cash and cash equivalents		—			40,491			7,997			—			48,488
Cash and cash equivalents, beginning of period		—			41,185			13,300			—			54,485
Cash and cash equivalents, end of period	$	—		$	81,676		$	21,297		$	—		$	102,973

F-63

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2002
(in thousands)
(unaudited)

	Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
Net earnings	$	20,029		$	22,564		$	7,309		$	(29,873	)	$	20,029
Adjustments to reconcile net earnings to net cash provided by operating activities		(20,029	)		6,961			(3,864	)		20,830			3,898
Net cash provided by operating activities		—			29,525			3,445			(9,043	)		23,927
Cash flows from investing activities:
Additions to property, plant and equipment		—			(19,694	)		(11,815	)		1,009			(30,500	)
Decrease in inventory to be converted into equipment for short-term rental		—			1,100			—			—			1,100
Dispositions of property, plant and equipment		—			1,130			669			—			1,799
Business acquisitions, net of cash acquired		—			—			(3,596	)		—			(3,596	)
Increase in other assets		—			(737	)		(435	)		—			(1,172	)
Net cash used by investing activities		—			(18,201	)		(15,177	)		1,009			(32,369	)
Cash flows from financing activities:
Proceeds from notes payable, long-term, capital lease and other obligations		—			17,076			—			12			17,088
Proceeds from exercise of stock options		8			—			12			(12	)		8
Proceeds (borrowings) on intercompany investments and advances		(5,691	)		(21,698	)		8,923			18,466			—
Other		5,683			(5,168	)		5,330			(5,845	)		—
Net cash provided (used) by financing activities		—			(9,790	)		14,265			12,621			17,096
Effect of exchange rate changes on cash and cash equivalents		—			—			—			515			515
Net increase in cash and cash equivalents		—			1,534			2,533			5,102			9,169
Cash and cash equivalents, beginning of period		—			—			5,301			(5,102	)		199
Cash and cash equivalents, end of period	$	—		$	1,534		$	7,834		$	—		$	9,368

F-64

PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 20. Indemnification of Directors and Officers and Limitation of Liability

Kinetic Concepts, Inc.

        Texas Law, our Restated Articles of Incorporation and our Second Amended and Restated By-Laws contain provisions for indemnification of our directors and officers.

        Article 2.02-1 of the Texas Business Corporation Act, or TBCA, provides generally that a person sued as a director, officer, employee or agent of a corporation, or while serving at the request of the corporation as a director, officer, partner, employee, agent, or similar functionary of another enterprise, may be indemnified by the corporation against judgments, penalties, fines, settlements and reasonable expenses if it is determined that such person has conducted himself in good faith and it is reasonably believed, in the case of conduct in his official capacity with the corporation, that his conduct was in the corporation's best interests, and in all other cases, that his conduct was at least not opposed to the corporation's best interests (and, in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful). Indemnification of a person found liable to the corporation or found liable on the basis that personal benefit was improperly received by him is limited to reasonable expenses actually incurred by the person in connection with the proceeding, and shall not be made if the person is found liable for willful or intentional misconduct in the performance of his duty to the corporation. Indemnification is mandatory, however, in the case of such person being wholly successful, on the merits or otherwise, in the defense of the proceeding.

        Article 2.02-1 also authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or who is or was serving at the request of the corporation as a director, officer, employee, agent or similar functionary of another entity or enterprise against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against that liability under Article 2.02-1.

        Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act provides that a corporation's articles of incorporation may limit or eliminate the directors' liability for monetary damages to the corporation or its shareholders for an act or omission in the director's capacity as a director, except that no limitation or elimination of liability is permitted to the extent the director is found liable for a breach of the duty of loyalty, an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law, a transaction involving an improper personal benefit to the director, or an act or omission for which liability is expressly provided by an applicable statute.

        Similarly, Article Eight paragraph (2) of our Amended and Restated Articles of Incorporation states that, to the extent permitted by the TBCA, a director of the Company shall not be personally liable to the Company or its shareholders for monetary damages for an act or omission in the director's capacity as a director, except for liability for (a) a breach of the director's duty of loyalty to the Company or its shareholders, (b) an act or omission not in good faith that constitutes a breach of duty of the director to the Company or an act or omission that involves intentional misconduct or a knowing violation of the law, (c) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, or (d) an act or omission for which the liability for the director is expressly provided for by statute.

        Article Twelve of our Amended and Restated Articles of Incorporation states that we shall indemnify our directors to the fullest extent provided by the TBCA.

        Article VIII, Section 2 of our Restated By-Laws provides that, subject to certain conditions, we shall indemnify a director who acted in good faith and in a manner which he reasonably believed to be

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in, or not opposed to, our best interests, and in the case of any criminal proceeding, had no reasonable cause to believe the conduct was unlawful. Indemnification would cover expenses reasonably incurred, including attorneys' fees, judgments, fines and amounts paid in settlement.

        Article VIII, Section 16 of our Restated By-Laws provides that our board of directors may cause us to purchase and maintain insurance on behalf of any present or past director, officer, employee or agent (including any such person who is serving, at the request of the Company, in a similar or related capacity for another entity), insuring against any liability asserted against such person incurred in the capacity of such position or arising out of such status, regardless of whether we would have the power to indemnify such person.

        We will indemnify each of Fremont Partners, James R. Leininger, M.D. and Blum Capital Partners and its respective directors, members, officers, employees, agents, representatives and affiliates for losses, damages, costs or expenses which such person may suffer arising out of such person's performance of services under the Management Services Agreement, provided that such person will not be indemnified for losses resulting primarily from such person's own gross negligence or willful misconduct.

        Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Guarantors

        The following summaries are qualified in their entirety by reference to the complete text of any statutes referred to below and the certificates of incorporation and the bylaws or similar organizational documents of each guarantor guaranteeing the Issuer's 7³/8% Senior Subordinated Notes due 2013 (collectively, the "Guarantors").

Delaware Corporate Guarantors

        KCI USA, Inc., KCI Licensing, Inc., KCI International, Inc. and KCI Holding Company, Inc. (collectively, the "Delaware Corporate Guarantors"), are organized under the laws of the state of Delaware

        Section 145 of the General Corporation Law of the State of Delaware (the "DGCL") grants corporations the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful.

        In the case of an action by or in the right of the corporation, Section 145 of the DGCL grants corporations the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a

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director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), actually and reasonably incurred by the person in connection with the defense or settlement of such action, or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

        Section 145 of the DGCL also empowers a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under Section 145 of the DGCL.

        The certificates of incorporation of each of the Delaware Corporate Guarantors contain provisions that provide for indemnification of their respective officers and directors to the fullest extent permitted by the DGCL. These provisions apply to persons who have ceased to be directors and officers and inure to the benefit of their heirs, executors and administrators.

        Section 102(b)(7) of the DGCL allows a corporation to eliminate or limit the personal liability of directors to a corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase or redemption in violation of Delaware corporate law or obtained an improper personal benefit.

        The certificates of incorporation of each of the Delaware Corporate Guarantors contain provisions eliminating a director's personal liability to the Delaware Corporate Guarantor or its stockholders for monetary damages for breaches of fiduciary duty as a director, except in circumstances involving a breach of a director's duty of loyalty to the Delaware Corporate Guarantor or its stockholders, acts or omissions not in good faith or which involve intentional misconduct or knowing violations of the law, the unlawful payment of dividends or repurchase of stock or self-dealing.

Delaware Limited Liability Company Guarantors

        KCI Real Holdings, L.L.C. and KCI USA Real Holdings, L.L.C. (collectively, the "Delaware LLC Guarantors") are limited liability companies organized under the laws of the state of Delaware.

        Section 18-108 of the Delaware Limited Liability Company Act provides that, subject to such standards and restrictions, if any, as are set forth in its limited liability company agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.

        Article 9.14 of the limited liability company agreements of each of the Delaware LLC Guarantors provide that no manager of the Delaware LLC Guarantor shall be personally liable for any debts, liabilities, or obligations of such Delaware LLC Guarantor, including under a judgment decree or order of court.

        Article 12.1 of the limited liability company agreements of each of the Delaware LLC Guarantors provide that the Delaware LLC Guarantor shall indemnify its managers and officers as fully as, and to

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the same extent a corporation may indemnify its directors and officers under the DGCL, as now in effect or hereafter amended. Such Article 12.1 provides further that each of the Delaware LLC Guarantors shall have the power to purchase and maintain liability insurance coverage for its managers and officers as, and to the fullest extent, permitted by the Delaware Limited Liability Company Act, as presently in effect and as may be hereafter amended.

North Carolina Corporate Guarantor

        Medclaim, Inc. ("Medclaim") is organized under the laws of the state of North Carolina.

        Section 55-8-51 of the North Carolina Business Corporation Act ("NCBCA") empowers a corporation to indemnify an individual made a party to a proceeding because he is or was a director against liability incurred in the proceeding if: (1) he conducted himself in good faith; (2) he reasonably believed, in the case of conduct in his official capacity with the corporation, that his conduct was in its best interests, and in all other cases, that his conduct was at least not opposed to its best interests; and (3) in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. Section 55-8-51 also provides that a company may indemnify a director's conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in and beneficiaries of the plan.

        Section 55-8-51 of the NCBCA further provides that a corporation may not indemnify a director for any of the following: (1) in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or (2) in connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him.

        Section 55-8-57 of the NCBCA provides that a corporation may in its articles of incorporation or bylaws or by contract or resolution indemnify or agree to indemnify any one or more of its directors, officers, employees or agents against liability and expenses in any proceeding (including without limitation a proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities; provided, however, that a corporation may not indemnify or agree to indemnify a person against liability or expenses he may incur on account of his activities which were at the time taken known or believed by him to be clearly in conflict with the best interests of the corporation.

        Section 8.1 of the bylaws of Medclaim provide that any person who at any time serves or has served as a director or officer of the corporation or, who, while serving as director of the corporation, serves or has served, at the request of the corporation, as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, or as a trustee or administrator under an employee benefit plan, shall have a right to be indemnified by the corporation to the fullest extent permitted by law against (a) reasonable expenses, including attorney's fees, incurred by him in connection with any threatened, pending or completed civil, criminal, administrative, investigative, or arbitrative action suit, or proceeding (and any appeal therein), whether or not brought by or on behalf of the corporation, seeking to hold him liable by reason of the fact that he is or was acting in such capacity, and (b) reasonable payments made by him in satisfaction of any judgment, money decree, fine (including an excise tax assessed with respect to an employee benefit plan), penalty, or settlement for which he may have become liable in any such action, suit or proceeding.

        Section 55-8-58 of the NCBCA also permits the purchase and maintenance of insurance on behalf of any individual who is or was a director, officer, employee or agent of the corporation, or who, while a director, officer, employee or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic

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corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against liability asserted against or incurred by him in that capacity.

        In addition, Section 55-8-52 of the NCBCA provides that unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he is or was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding. Further, Section 55-8-56 of the NCBCA provides that unless a corporation's articles of incorporation provide otherwise, an officer of the corporation is entitled to mandatory indemnification to the same extent as a director.

Texas Limited Partnership Guarantors

        KCI Real Property Limited and KCI Properties Limited are limited partnerships formed under the laws of the State of Texas.

        Section 3.03(a) of the Texas Revised Limited Partnership Act ("TRLPA") provides that except in the case of a limited partner who knowingly permits that limited partner's name to be used in the name of the limited partnership, such exception subject to certain qualifications, a limited partner is not liable for the obligations of a limited partnership unless the limited partner is also a general partner or, in addition to the exercise of the limited partner's rights and powers as a limited partner, the limited partner participates in the control of the business. However, if the limited partner does participate in the control of the business, the limited partner is liable only to persons who transact business with the limited partnership reasonably believing, based on the limited partner's conduct, that the limited partner is a general partner.

        Article 10.2 of the limited partnership agreements of KCI Real Property Limited and KCI Properties Limited provides that the liability of each limited partner shall be limited to (i) its share of the assets and undistributed profits of the partnership, (ii) for a period of one year following any such return, an amount equal to the amount of any capital contribution rightfully returned to the limited partner necessary to discharge partnership liabilities to all creditors who extended credit to the partnership during the period the capital contribution was held by the partnership, and (iii) any partnership funds or property wrongfully distributed or returned to such limited partner.

        Section 4.03(b) of the TRLPA provides that a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners to persons other than the partnership and the other partners, except under certain circumstances provided for under the TRLPA. A general partner of a limited partnership also has the liabilities of a partner in a partnership without limited partners to the partnership and to the other partners, except as provided for under the TRLPA.

        Section 11.02 of the TRLPA provides that if provided in a written partnership agreement, a limited partnership may indemnify a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a general partner if it is determined that the person: (1) acted in good faith; (2) reasonably believed: (A) in the case of conduct in the person's official capacity as a general partner of the limited partnership, that the person's conduct was in the limited partnership's best interests; and (B) in all other cases, that the person's conduct was at least not opposed to the limited partnership's best interests; and (3) in the case of a criminal proceeding, had no reasonable cause to believe that the person's conduct was unlawful. Such a determination that indemnification is permissible must be made: (1) by a majority vote of a quorum consisting of general partners who at the time of the vote are not named defendants or respondents in the proceeding; (2) by special legal counsel selected by the general partners by a majority vote of a quorum consisting of general partners who at the time of the vote are not named defendants or respondents in the proceeding or, if such a quorum cannot be obtained, by a majority vote of all general partners; or

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(3) by a majority in interest of the limited partners in a vote that excludes the interests held by general partners who are named defendants or respondents in the proceeding.

        Under Section 11.03 of the TRLPA, except as provided under certain circumstances, a general partner may not be indemnified with respect to a proceeding in which: (1) the person is found liable on the basis that the person improperly received personal benefit, whether or not the benefit resulted from an action taken in the person's official capacity; or (2) the person is found liable to the limited partnership or the limited partners.

        Section 11.08 of the TRLPA requires indemnification of a general partner against reasonable expenses incurred by the general partner in connection with a proceeding in which the general partner is a named defendant or respondent because the general partner is or was a general partner if the general partner has been wholly successful, on the merits or otherwise, in the defense of the proceeding.

        Section 11.2 of the partnership agreements of KCI Real Property Limited and KCI Properties Limited provide that each limited partner shall and does hereby agree to indemnify, defend and hold harmless the partnership, general partner and their representatives, agents and each other limited partner from and against any damages, claims, expenses, losses, or actions resulting from (i) a breach by such limited partner of any of the representations and warranties and covenants contained in the partnership agreement, or (ii) the untruth of any of the representations and warranties and covenants contained in the partnership agreement.

        Section 11.18 of the TRLPA permits the purchase and maintenance of insurance or another arrangement on behalf of any person who is or was a general partner, limited partner, employee, or agent of the limited partnership, or who is or was serving at the request of the limited partnership as a representative of another enterprise, against any liability asserted against the person and incurred by the person in that capacity or arising out of the person's status in that capacity, regardless of whether the limited partnership would have the power to indemnify the person against that liability.

        The directors and officers of each of the registrants are insured (subject to certain exceptions and deductions) against liabilities which they may incur in their capacity as such, including liabilities under the Securities Act and the Exchange Act.

Item 21. Exhibits and Financial Statement Schedules

(a)   Exhibits

Exhibit No.	Exhibit
*3.1	Restated Articles of Incorporation (with Amendments) of KCI.
*3.2	Articles of Amendment to the Amended and Restated Articles of Incorporation of KCI.
*3.3	Amended and Restated By-Laws of KCI.
3.4	Certificate of Incorporation of KCI Holding Company, Inc. (filed as Exhibit 3.7 to Registration Statement on Form S-4, filed on December 19, 1997).
3.5	By-laws of KCI Holding Company, Inc. (filed as Exhibit 3.8 to Registration Statement on Form S-4, filed on December 19, 1997).
*3.6	Certificate of Formation of KCI Real Holdings, L.L.C.
*3.7	Limited Liability Company Agreement of KCI Real Holdings, L.L.C.
**3.8	Certificate of Incorporation of KCI International, Inc.
**3.9	By-Laws of KCI International, Inc.
*3.10	Certificate of Incorporation of KCI Licensing, Inc.
*3.11	By-Laws of KCI Licensing, Inc.
*3.12	Certificate of Limited Partnership of KCI Properties Limited.
*3.13	Limited Partnership Agreement of KCI Properties Limited.

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*3.14	Certificate of Limited Partnership of KCI Real Property Limited.
*3.15	Limited Partnership Agreement of KCI Real Property Limited.
3.16	Certificate of Incorporation of KCI USA, Inc., as successor to KCI Therapeutic Services, Inc. (filed as Exhibit 3.19 to Registration Statement on Form S-4, filed on December 19, 1997).
3.17	By-Laws of KCI USA, Inc. as successor to KCI Therapeutic Services, Inc. (filed as Exhibit 3.20 to Registration Statement on Form S-4, filed on December 19, 1997).
*3.18	Certificate of Formation of KCI USA Real Holdings, L.L.C.
*3.19	Limited Liability Company Agreement of KCI USA Real Holdings, L.L.C.
*3.20	Articles of Incorporation of Medclaim, Inc.
*3.21	By-Laws of Medclaim, Inc.
*4.1	Indenture, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and U.S. Bank National Association, as Trustee.
4.2	Form of Series B 73/8% Senior Subordinated Notes due 2013 (included in Exhibit 4.1).
*5.1	Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
*5.2	Opinion of Cox & Smith Incorporated with respect to the new notes.
*10.1	Registration Rights Agreement, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Scotia Capital (USA) Inc., and Wells Fargo Securities, LLC, as Placement Agents.
*10.2	Credit Agreement, dated as of August 11, 2003.
*10.3	Guarantee and Collateral Agreement, dated as of August 11, 2003.
*10.4	Security and Control Agreement, dated as of August 11, 2003, among KCI, U.S. Bank National Association, as Trustee, and U.S. Bank National Association, as Securities Intermediary.
*10.5	Series A Preferred Stock Purchase Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors and the Director Investors.
*10.6	Investors' Rights Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors and the Director Investors.
*10.7	Statement of Designations, Preferences and Rights of the Series A Convertible Participating Preferred Stock of Kinetic Concepts, Inc.
10.8	Agreement Among Shareholders, dated as of November 5, 1997 (filed as Exhibit 10.26 to Registration Statement on Form S-4, filed on December 19, 1997).
**10.9	Joinder and Amendment Agreement, dated as of June 25, 2003.
*10.10	Waiver and Consent, effective as of September 27, 2002.
*10.11	Amendment and Waiver, dated as of August 11, 2003.
10.12	KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1996).
10.13	Deferred Compensation Plan (filed as Exhibit 99.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1995).
10.14	Kinetic Concepts, Inc. Senior Executive Stock Option Plan (filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31, 1996).
10.15	Form of Option Instrument with respect to Senior Executive Stock Option Plan (filed as Exhibit 10.32 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.16	Kinetic Concepts Management Equity Plan effective October 2, 1997 (filed as Exhibit 10.33 to our Annual Report on Form 10-K for the year ended December 31, 1997).
10.17	Form of Option Instrument with Respect to the Kinetic Concepts, Inc. Management Equity Plan (filed as Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 31, 2000).

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10.18	Director Equity Agreement, dated May 12, 1998, between KCI and Charles N. Martin (filed as Exhibit 10.8 to our Annual Report on Form 10-K for the year ended December 31, 1998).
10.19	Kinetic Concepts, Inc. CEO Special Bonus Plan (filed as Exhibit 10.12 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.20	Kinetic Concepts, Inc. 2000 Special Bonus Plan (filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.21	Employee Benefits Trust Agreement, by and between the Company and Keith D. Thatcher, dated September 1, 1992 (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1994).
10.22	Letter, dated March 28, 2000, from KCI to Dennert O. Ware outlining the terms of his employment (filed as Exhibit 10.12 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
10.23	Letter, dated November 22, 1994, from KCI to Christopher M. Fashek outlining the terms of his employment (filed as Exhibit 10.23 to our Annual Report on Form 10-K/A, dated December 31, 1994).
10.24	Settlement Agreement, by and among the Company and certain of its subsidiaries and shareholders and Hillenbrand Industries, Inc. and certain of its subsidiaries and shareholders, dated December 31, 2002 (filed as Exhibit 10.16 to our Annual Report on Form 10-K for the year ended December 31, 2002).
**10.25	Purchasing Agreement, dated effective May 1, 2001 between Healthtrust Purchasing Group, L.P. and KCI Therapeutic Services, Inc., as amended by that certain Amendment to Purchasing Agreement, dated September 1, 2002 by and between Healthtrust Purchasing Group, L.P. and Kinetic Concepts, Inc.
10.26	Therapeutic Specialty Beds, Therapeutic Surfaces & Related Products Supplier Agreement, dated effective September 1, 2001 between Novation, LLC and KCI USA, Inc., as amended by that certain Amendment of Agreement (MS 10730), dated effective May 13, 2002 (filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
*10.27	Standard Office Building Lease Agreement, dated July 31, 2002 between CKW San Antonio, L.P. d/b/a San Antonio CKW, L.P. and Kinetic Concepts, Inc. for the lease of approximately 138,231 square feet of space in the building located at 8023 Vantage Drive, San Antonio, Bexar County, Texas 78230.
**10.28	Amended and Restated Manufacturing Agreement, by and between the Company and Avail Medical Products, Inc., dated December 18, 2002.
*10.29	First Amended and Restated Management Services Agreement, dated as of August 11, 2003, among KCI, Dr. James Leininger, Blum Capital Partners, L.P., Blum Strategic GP II, L.L.C., Fremont Partners, L.L.C. and Fremont Partners III, L.L.C.
***10.30	License Agreement, dated as of October 6, 1993, between Wake Forest University and Kinetic Concepts, Inc., as amended by that certain Amendment to License Agreement, dated as of July 1, 2000.
*12.1	Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
21.1	List of Subsidiaries (filed as Exhibit 21.1 to our Annual Report on Form 10-K for the year ended December 31, 2002).
23.1	Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).
23.2	Consent of Cox & Smith Incorporated (included in Exhibit 5.2).
*23.3	Consent of Ernst & Young LLP.
24.1	Power of Attorney (included in signature page).

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*25.1	Statement of Eligibility on Form T-1 of U.S. Bank National Association, as trustee under the Indenture, dated as of August 11, 2003, by and among KCI, as Issuer, the Guarantors and U.S. Bank National Association, as trustee.
*99.1	Form of Letter of Transmittal.
*99.2	Form of Notice of Guaranteed Delivery.
*99.3	Form of Letter to Clients.
*99.4	Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.

*

Exhibits filed with this registration statement.

**

To be filed by amendment.

***

To be filed by amendment together with a confidential treatment request.

Item 22. Undertakings

        The undersigned registrant hereby undertakes:

        (1)   To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement;

(a)

To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;



(b)

To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of a prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;



(c)

To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by these paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities and Exchange Act of 1934 that are incorporated by reference in the registration statement.

        (2)   That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fide offering thereof.

        (3)   To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

        (4)   If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information

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otherwise required by Section 10(a)(3) of the Act need not be furnished,provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements.

        The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference to the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

        Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

        The undersigned registrant hereby undertakes (i) to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means; and (ii) to arrange or provide for a facility in the U.S. for the purpose of responding to such requests. The undertaking in subparagraph (i) above includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.

        The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.

II-10

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

KINETIC CONCEPTS, INC.
By:	/s/  ROBERT JAUNICH II      Robert Jaunich II Chairman of the Board of Directors

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, and each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Name	Title	Date
/s/  ROBERT JAUNICH II      Robert Jaunich II	Chairman of the Board of Directors	September 29, 2003
/s/  DENNERT O. WARE      Dennert O. Ware	Director, President and Chief Executive Officer (Principal Executive Officer)	September 29, 2003
/s/  MARTIN J. LANDON      Martin J. Landon	Vice President and Chief Financial Officer—Acting (Principal Financial and Principal Accounting Officer)	September 29, 2003

II-11

/s/  JAMES R. LEININGER, M.D.      James R. Leininger	Director, Chairman Emeritus	September 29, 2003
/s/  JOHN P. BYRNES      John P. Byrnes	Director	September 29, 2003
/s/  RONALD W. DOLLENS      Ronald W. Dollens	Director	September 29, 2003
/s/  JAMES T. FARRELL      James T. Farrell	Director	September 29, 2003
/s/  HARRY R. JACOBSON, M.D.      Harry R. Jacobson	Director	September 29, 2003
N. Colin Lind	Director
/s/  DAVID J. SIMPSON      David J. Simpson	Director	September 29, 2003
/s/  C. THOMAS SMITH      C. Thomas Smith	Director	September 29, 2003
/s/  DONALD E. STEEN      Donald E. Steen	Director	September 29, 2003

II-12

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

KCI USA, INC.
By:	/s/  CHRISTOPHER M. FASHEK
Name:	Christopher M. Fashek
Title:	President & Chief Executive Officer

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  CHRISTOPHER M. FASHEK      Christopher M. Fashek	President & Chief Executive Officer (Principal Executive Officer)	September 29, 2003
/s/  KEITH R. JONES      Keith R. Jones	Vice President—Finance (Principal Financial Officer and Principal Accounting Officer)	September 29, 2003
/s/  DENNERT O. WARE      Dennert O. Ware	Director	September 29, 2003
/s/  DENNIS E. NOLL      Dennis E. Noll	Director	September 29, 2003

II-13

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

KCI HOLDING COMPANY, INC.
By:	/s/  DENNERT O. WARE
Name:	Dennert O. Ware
Title:	President

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  DENNERT O. WARE      Dennert O. Ware	Director and President (Principal Executive Officer)	September 29, 2003
/s/  MARTIN J. LANDON      Martin J. Landon	Vice President & Treasurer (Principal Financial Officer and Principal Accounting Officer)	September 29, 2003
/s/  DENNIS E. NOLL      Dennis E. Noll	Director	September 29, 2003

II-14

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

KCI LICENSING, INC.
By:	/s/  CHRISTOPHER M. FASHEK
Name:	Christopher M. Fashek
Title:	President

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  CHRISTOPHER M. FASHEK      Christopher M. Fashek	President (Principal Executive Officer)	September 29, 2003
/s/  MARTIN J. LANDON      Martin J. Landon	Treasurer (Principal Financial Officer and Principal Accounting Officer)	September 29, 2003
/s/  DENNERT O. WARE      Dennert O. Ware	Director	September 29, 2003
/s/  DENNIS E. NOLL      Dennis E. Noll	Director	September 29, 2003

II-15

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

KCI INTERNATIONAL, INC.
By:	/s/  JÖRG MENTEN
Name:	Jörg Menten
Title:	President

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  JÖRG MENTEN      Jörg Menten	President (Principal Executive Officer)	September 29, 2003
/s/  MARTIN J. LANDON      Martin J. Landon	Vice President & Treasurer (Principal Financial Officer and Principal Accounting Officer)	September 29, 2003
/s/  DENNERT O. WARE      Dennert O. Ware	Director	September 29, 2003
/s/  DENNIS E. NOLL      Dennis E. Noll	Director	September 29, 2003

II-16

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

KCI PROPERTIES LIMITED
By:	/s/  DENNERT O. WARE
Name:	Dennert O. Ware
Title:	President

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  DENNERT O. WARE      Dennert O. Ware	Manager and President (Principal Executive Officer)	September 29, 2003
/s/  MARTIN J. LANDON      Martin J. Landon	Vice President & Treasurer (Principal Financial Officer and Principal Accounting Officer)	September 29, 2003
/s/  DENNIS E. NOLL      Dennis E. Noll	Manager	September 29, 2003

II-17

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

KCI REAL PROPERTY LIMITED
By:	/s/  DENNERT O. WARE
Name:	Dennert O. Ware
Title:	President

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  DENNERT O. WARE      Dennert O. Ware	Manager and President (Principal Executive Officer)	September 29, 2003
/s/  MARTIN J. LANDON      Martin J. Landon	Vice President & Treasurer (Principal Financial Officer and Principal Accounting Officer)	September 29, 2003
/s/  DENNIS E. NOLL      Dennis E. Noll	Manager	September 29, 2003

II-18

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

KCI REAL HOLDINGS, L.L.C.
By:	/s/  DENNERT O. WARE
Name:	Dennert O. Ware
Title:	President

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  DENNERT O. WARE      Dennert O. Ware	Manager and President (Principal Executive Officer)	September 29, 2003
/s/  LULU OLSON      Lulu Olson	Vice President & Treasurer (Principal Financial Officer and Principal Accounting Officer)	September 29, 2003
/s/  DENNIS E. NOLL      Dennis E. Noll	Manager	September 29, 2003

II-19

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

KCI USA REAL HOLDINGS, L.L.C.
By:	/s/  DENNERT O. WARE
Name:	Dennert O. Ware
Title:	President

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  DENNERT O. WARE      Dennert O. Ware	Manager and President (Principal Executive Officer)	September 29, 2003
/s/  LULU OLSON      Lulu Olson	Vice President & Treasurer (Principal Financial Officer and Principal Accounting Officer)	September 29, 2003
/s/  DENNIS E. NOLL      Dennis E. Noll	Manager	September 29, 2003

II-20

SIGNATURES

        Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on September 29, 2003.

MEDCLAIM, INC.
By:	/s/  DENNERT O. WARE
Name:	Dennert O. Ware
Title:	President

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/  DENNERT O. WARE      Dennert O. Ware	Director and President (Principal Executive Officer)	September 29, 2003
/s/  MARTIN J. LANDON      Martin J. Landon	Executive Vice President & Treasurer (Principal Financial Officer and Principal Accounting Officer)	September 29, 2003
/s/  DENNIS E. NOLL      Dennis E. Noll	Director	September 29, 2003

II-21

Exhibit Index

Exhibit No.	Exhibit
*3.1	Restated Articles of Incorporation (with Amendments) of KCI.
*3.2	Articles of Amendment to the Amended and Restated Articles of Incorporation of KCI.
*3.3	Amended and Restated By-Laws of KCI.
3.4	Certificate of Incorporation of KCI Holding Company, Inc. (filed as Exhibit 3.7 to Registration Statement on Form S-4, filed on December 19, 1997).
3.5	By-laws of KCI Holding Company, Inc. (filed as Exhibit 3.8 to Registration Statement on Form S-4, filed on December 19, 1997).
*3.6	Certificate of Formation of KCI Real Holdings, L.L.C.
*3.7	Limited Liability Company Agreement of KCI Real Holdings, L.L.C.
**3.8	Certificate of Incorporation of KCI International, Inc.
**3.9	By-Laws of KCI International, Inc.
*3.10	Certificate of Incorporation of KCI Licensing, Inc.
*3.11	By-Laws of KCI Licensing, Inc.
*3.12	Certificate of Limited Partnership of KCI Properties Limited.
*3.13	Limited Partnership Agreement of KCI Properties Limited.
*3.14	Certificate of Limited Partnership of KCI Real Property Limited.
*3.15	Limited Partnership Agreement of KCI Real Property Limited.
3.16	Certificate of Incorporation of KCI USA, Inc., as successor to KCI Therapeutic Services, Inc. (filed as Exhibit 3.19 to Registration Statement on Form S-4, filed on December 19, 1997).
3.17	By-Laws of KCI USA, Inc. as successor to KCI Therapeutic Services, Inc. (filed as Exhibit 3.20 to Registration Statement on Form S-4, filed on December 19, 1997).
*3.18	Certificate of Formation of KCI USA Real Holdings, L.L.C.
*3.19	Limited Liability Company Agreement of KCI USA Real Holdings, L.L.C.
*3.20	Articles of Incorporation of Medclaim, Inc.
*3.21	By-Laws of Medclaim, Inc.
*4.1	Indenture, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and U.S. Bank National Association, as Trustee.
4.2	Form of Series B 73/8% Senior Subordinated Notes due 2013 (included in Exhibit 4.1).
*5.1	Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
*5.2	Opinion of Cox & Smith Incorporated with respect to the new notes.
*10.1	Registration Rights Agreement, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Scotia Capital (USA) Inc., and Wells Fargo Securities, LLC, as Placement Agents.
*10.2	Credit Agreement, dated as of August 11, 2003.
*10.3	Guarantee and Collateral Agreement, dated as of August 11, 2003.
*10.4	Security and Control Agreement, dated as of August 11, 2003, among KCI, U.S. Bank National Association, as Trustee, and U.S. Bank National Association, as Securities Intermediary.
*10.5	Series A Preferred Stock Purchase Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors and the Director Investors.
*10.6	Investors' Rights Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors and the Director Investors.
*10.7	Statement of Designations, Preferences and Rights of the Series A Convertible Participating Preferred Stock of Kinetic Concepts, Inc.
10.8	Agreement Among Shareholders, dated as of November 5, 1997 (filed as Exhibit 10.26 to Registration Statement on Form S-4, filed on December 19, 1997).

II-22

**10.9	Joinder and Amendment Agreement, dated as of June 25, 2003.
*10.10	Waiver and Consent, effective as of September 27, 2002.
*10.11	Amendment and Waiver, dated as of August 11, 2003.
10.12	KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1996).
10.13	Deferred Compensation Plan (filed as Exhibit 99.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1995).
10.14	Kinetic Concepts, Inc. Senior Executive Stock Option Plan (filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31, 1996).
10.15	Form of Option Instrument with respect to Senior Executive Stock Option Plan (filed as Exhibit 10.32 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.16	Kinetic Concepts Management Equity Plan effective October 2, 1997 (filed as Exhibit 10.33 to our Annual Report on Form 10-K for the year ended December 31, 1997).
10.17	Form of Option Instrument with Respect to the Kinetic Concepts, Inc. Management Equity Plan (filed as Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.18	Director Equity Agreement, dated May 12, 1998, between KCI and Charles N. Martin (filed as Exhibit 10.8 to our Annual Report on Form 10-K for the year ended December 31, 1998).
10.19	Kinetic Concepts, Inc. CEO Special Bonus Plan (filed as Exhibit 10.12 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.20	Kinetic Concepts, Inc. 2000 Special Bonus Plan (filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.21	Employee Benefits Trust Agreement, by and between the Company and Keith D. Thatcher, dated September 1, 1992 (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1994).
10.22	Letter, dated March 28, 2000, from KCI to Dennert O. Ware outlining the terms of his employment (filed as Exhibit 10.12 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
10.23	Letter, dated November 22, 1994, from KCI to Christopher M. Fashek outlining the terms of his employment (filed as Exhibit 10.23 to our Annual Report on Form 10-K/A, dated December 31, 1994).
10.24	Settlement Agreement, by and among the Company and certain of its subsidiaries and shareholders and Hillenbrand Industries, Inc. and certain of its subsidiaries and shareholders, dated December 31, 2002 (filed as Exhibit 10.16 to our Annual Report on Form 10-K for the year ended December 31, 2002).
**10.25	Purchasing Agreement, dated effective May 1, 2001 between Healthtrust Purchasing Group, L.P. and KCI Therapeutic Services, Inc., as amended by that certain Amendment to Purchasing Agreement, dated September 1, 2002 by and between Healthtrust Purchasing Group, L.P. and Kinetic Concepts, Inc.
10.26	Therapeutic Specialty Beds, Therapeutic Surfaces & Related Products Supplier Agreement, dated effective September 1, 2001 between Novation, LLC and KCI USA, Inc., as amended by that certain Amendment of Agreement (MS 10730), dated effective May 13, 2002 (filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
*10.27	Standard Office Building Lease Agreement, dated July 31, 2002 between CKW San Antonio, L.P. d/b/a San Antonio CKW, L.P. and Kinetic Concepts, Inc. for the lease of approximately 138,231 square feet of space in the building located at 8023 Vantage Drive, San Antonio, Bexar County, Texas 78230.

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**10.28	Amended and Restated Manufacturing Agreement, by and between the Company and Avail Medical Products, Inc., dated December 18, 2002.
*10.29	First Amended and Restated Management Services Agreement, dated as of August 11, 2003, among KCI, Dr. James Leininger, Blum Capital Partners, L.P., Blum Strategic GP II, L.L.C., Fremont Partners, L.L.C. and Fremont Partners III, L.L.C.
***10.30	License Agreement, dated as of October 6, 1993, between Wake Forest University and Kinetic Concepts, Inc., as amended by that certain Amendment to License Agreement, dated as of July 1, 2000.
*12.1	Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
21.1	List of Subsidiaries (filed as Exhibit 21.1 to our Annual Report on Form 10-K for the year ended December 31, 2002).
23.1	Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).
23.2	Consent of Cox & Smith Incorporated (included in Exhibit 5.2).
*23.3	Consent of Ernst & Young LLP.
24.1	Power of Attorney (included in signature page).
*25.1	Statement of Eligibility on Form T-1 of U.S. Bank National Association, as trustee under the Indenture, dated as of August 11, 2003, by and among KCI, as Issuer, the Guarantors and U.S. Bank National Association, as trustee.
*99.1	Form of Letter of Transmittal.
*99.2	Form of Notice of Guaranteed Delivery.
*99.3	Form of Letter to Clients.
*99.4	Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.

*

Exhibits filed with this registration statement.

**

To be filed by amendment.

***

To be filed by amendment together with a confidential treatment request.

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