10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003

Commission file number 001-09913

KINETIC CONCEPTS, INC.

(Exact name of registrant as specified in its charter)

Texas	74-1891727
(State of Incorporation)	(I.R.S. Employer Identification No.)

8023 Vantage Drive
San Antonio, Texas 78230
Telephone Number: (210) 524-9000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock:   71,122,556 shares as of July 21, 2003

TABLE OF CONTENTS

KINETIC CONCEPTS, INC.

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION		4
	Item 1.	Financial Statements	4
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Earnings	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
		Parent Company Balance Sheet, June 30, 2003	15
		Parent Company Balance Sheet, December 31, 2002	16
		Parent Company Statement of Earnings, three months ended June 30, 2003	17
		Parent Company Statement of Earnings, three months ended June 30, 2002	18
		Parent Company Statement of Earnings, six months ended June 30, 2003	19
		Parent Company Statement of Earnings, six months ended June 30, 2002	20
		Parent Company Statement of Cash Flows, six months ended June 30, 2003	21
		Parent Company Statement of Cash Flows, six months ended June 30, 2002	22
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
	Item 4.	Controls and Procedures	49
PART II.	OTHER INFORMATION		50
	Item 1.	Legal Proceedings	50
	Item 4.	Submission of Matters to a Vote of Security Holders	50
	Item 5.	Other Information	50
	Item 6.	Exhibits and Reports on Form 8-K	51
	SIGNATURES		52

PART I - FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
	June 30,	December 31,
	2003	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.

KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (in thousands, except per share data) (unaudited)
	Three months ended			Six months ended
	June 30,			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.

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.

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 indicat ive 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.

(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.

(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,	December 31,
	2003	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
	_____	_____

(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,	December 31,
	2003	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,	December 31,
	2003	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
9 5/8% 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 $10.9 million. The resulting availability under the revolving credit facility was $39.1 million at the end of the quarter.

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):

		Nominal	Fixed
Accounting Method	Effective Dates	Amount	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.)

(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.

(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 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		Six months ended
	June 30,		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.

(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 5/8% 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.

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Balance Sheet
June 30, 2003
(in thousands)
(unaudited)
	Kinetic
	Concepts,			Reclassi-	Kinetic
	Inc.		Non-	fications	Concepts,
	Parent	Guarantor	Guarantor	and	Inc.
	Company	Sub-	Sub-	Elimi-	and Sub-
	Borrower	sidiaries	sidiaries	nations	sidiaries
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 SHARE-
HOLDERS 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
	_____	_____	_____	______	_____

Condensed Consolidating Guarantor, Non-Guarantor And Parent Company Balance Sheet December 31, 2002 (in thousands)
	Kinetic
	Concepts,			Reclassi-	Kinetic
	Inc.		Non-	fications	Concepts,
	Parent	Guarantor	Guarantor	and	Inc.
	Company	Sub-	Sub-	Elimi-	and Sub-
	Borrower	sidiaries	sidiaries	nations	sidiaries
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 SHARE-
HOLDERS' 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
	______	______	______	______	______

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the three months ended June 30, 2003
(in thousands)
(unaudited)
	Kinetic				Historical
	Concepts,			Reclassi-	Kinetic
	Inc.		Non-	fications	Concepts,
	Parent	Guarantor	Guarantor	and	Inc.
	Company	Sub-	Sub-	Elimi-	and Sub-
	Borrower	sidiaries	sidiaries	nations	sidiaries
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
	____	_____	_____	_____	_____

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the three months ended June 30, 2002
(in thousands)
(unaudited)
	Kinetic				Historical
	Concepts,			Reclassi-	Kinetic
	Inc.		Non-	fications	Concepts,
	Parent	Guarantor	Guarantor	and	Inc.
	Company	Sub-	Sub-	Elimi-	and Sub-
	Borrower	sidiaries	sidiaries	nations	sidiaries
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
	_____	_____	_____	_____	_____

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the six months ended June 30, 2003
(in thousands)
(unaudited)
	Kinetic				Historical
	Concepts,			Reclassi-	Kinetic
	Inc.		Non-	fications	Concepts,
	Parent	Guarantor	Guarantor	and	Inc.
	Company	Sub-	Sub-	Elimi-	and Sub-
	Borrower	sidiaries	sidiaries	nations	sidiaries
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
	_____	_____	_____	_____	_____

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the six months ended June 30, 2002
(in thousands)
(unaudited)
	Kinetic				Historical
	Concepts,			Reclassi-	Kinetic
	Inc.		Non-	fications	Concepts,
	Parent	Guarantor	Guarantor	and	Inc.
	Company	Sub-	Sub-	Elimi-	and Sub-
	Borrower	sidiaries	sidiaries	nations	sidiaries
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
	_____	_____	_____	_____	_____

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,			Reclassi-	Kinetic
	Inc.		Non-	fications	Concepts,
	Parent	Guarantor	Guarantor	and	Inc.
	Company	Sub-	Sub-	Elimi-	and Sub-
	Borrower	sidiaries	sidiaries	nations	sidiaries
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
	_____	_____	_____	_____	_____

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,			Reclassi-	Kinetic
	Inc.		Non-	fications	Concepts,
	Parent	Guarantor	Guarantor	and	Inc.
	Company	Sub-	Sub-	Elimi-	and Sub-
	Borrower	sidiaries	sidiaries	nations	sidiaries
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
	_____	_____	_____	_____	_____

FORWARD LOOKING STATEMENTS

      This quarterly report on Form 10-Q contains forward-looking statements. When used in this report, 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 report are based on estimates and assumptions made by the management of Kinetic Concepts, Inc. ("KCI," "we," "our" or "us"). These estimates and assumptions reflect our best judgment based on currently known market conditions 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 report 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:

          - foreign and domestic economic and business conditions;          - demographic changes;          - government regulations and changes in, or our failure to comply with, government
               regulations;          - changes in the healthcare reimbursement policies of Medicare Part B or other governmental
               or private payers;          - competition;          - the loss of any significant customers;          - our significant indebtedness;
          - our ability to effectively protect our intellectual property and not infringe on the intellectual
               property of others;
          - loss of any significant suppliers, especially sole-source suppliers;          - 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 S.E.C.

ITEM 2.     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 (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.

      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% 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 approxima tely 63% and V.A.C. revenue from the home care setting grew approximately 56% as compared to the twelve month period ended June 30, 2002. The home care market accounted for approximately 44% of V.A.C. business and approximately 26% 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.

Results of Operations

Second Quarter of 2003 Compared to Second Quarter of 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 second quarter of the prior year (dollars in thousands):

	Three Months Ended June 30,
	Revenue Relationship				Variance
	2003		2002		Dollars	Percent
Revenue:
Rental and service	77	%	78	%	$  33,259	30.9	%
Sales and other	23		22		12,098	41.0
	____		____		_______
Total revenue	100		100		45,357	33.1
Rental expenses	48		49		20,874	31.3
Cost of goods sold	8		8		2,949	25.1
	____		____		_______
Gross profit	44		43		21,534	36.7
Selling, general and administrative
expenses	24		24		11,918	36.6
	____		____		_______
Operating earnings	20		19		9,616	36.8
Interest income	-		-		248	nm
Interest expense	(4)		(8)		2,334	22.5
Foreign currency gain (loss)	1		2		(624)	(20.9)
	____		____		_______
Earnings before income taxes	17		13		11,574	61.4
Income taxes	7		5		4,152	57.2
	____		____		_______
Net earnings	10	%	8	%	$   7,422	64.0	%
	___		___		_____

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):

	Three months ended June 30,
				Variance
		2003	2002	Dollars	Percent
USA
V.A.C.
Rental		$     74,555	$    49,572	$    24,983	50.4	%
Sales		19,855	11,709	8,146	69.6
		_______	_______	_______
Total V.A.C.		94,410	61,281	33,129	54.1
Therapeutic surfaces/other
Rental		36,373	37,358	(985)	(2.6)
Sales		6,848	7,383	(535)	(7.2)
		_______	_______	_______
Total therapeutic surfaces/other		43,221	44,741	(1,520)	(3.4)
Total USA rental		110,928	86,930	23,998	27.6
Total USA sales		26,703	19,092	7,611	39.9
		_______	_______	_______
Subtotal - USA		$ 137,631	$   106,022	$  31,609	29.8	%
		_______	_______	_______
International
V.A.C.
Rental		$      9,842	$      4,618	$     5,224	113.1	%
Sales		9,181	5,336	3,845	72.1
		_______	_______	_______
Total V.A.C.		19,023	9,954	9,069	91.1
Therapeutic surfaces/other
Rental		20,084	16,047	4,037	25.2
Sales		5,727	5,085	642	12.6
		_______	_______	_______
Total therapeutic surfaces/other		25,811	21,132	4,679	22.1
Total International rental		29,926	20,665	9,261	44.8
Total International sales		14,908	10,421	4,487	43.1
		_______	_______	_______
Subtotal - International		$   44,834	$   31,086	$  13,748	44.2	%
		_______	_______	_______
Total revenue		$ 182,465	$ 137,108	$  45,357	33.1	%
		______	______	______

      Total revenue in the second quarter of 2003 increased $45.4 million, or 33.1%, from the prior-year period due primarily to increased demand for V.A.C. systems and related disposables. Rental revenue increased $33.3 million, or 30.9%, from the second quarter of 2002 while sales revenue increased $12.1 million, or 41.0%, compared to the prior-year period. Revenue growth in the second quarter 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 second quarter of 2003 increased $31.6 million, or 29.8%, from the prior-year quarter due to increased usage of V.A.C. systems and related disposables. Domestic rental revenue in the second quarter of 2003 increased $24.0 million, or 27.6%, from the prior-year period and domestic sales revenue in the second quarter of 2003 increased $7.6 million, or 39.9%, from a year ago. 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, partially offset by a

24.4% decrease in sales of vascular products and a 13.7% decrease in rentals in the extended care market. For the second quarter of 2003, average V.A.C. units out on rent increased 13.2% as compared to the first quarter of 2003 and increased 50.0% from the second quarter of 2002. Average rental price for the second quarter of 2003 was comparable with the first quarter of 2003 and also with the second quarter of 2002.

      Domestic V.A.C. revenue increased in the second quarter of 2003 by $33.1 million, or 54.1%, from the prior-year quarter due to an increase of both rental and sales revenue. V.A.C. rentals increased $25.0 million, or 50.4%, from the prior-year quarter. The increased rental revenue resulted from an increase in average units on rent per month of 50.0% for the the second quarter 2003 as compared to the second quarter 2002. 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 ex perienced, and expect to continue experiencing, a shift in revenue between the rental classification and the sales classification. V.A.C. sales increased in the second quarter of 2003 by $8.1 million, or 69.6%, from the prior-year quarter 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 $43.2 million for the second quarter of 2003 decreased $1.5 million, or 3.4%, from the prior-year quarter. Rental revenue from therapeutic surfaces/other declined approximately $1.0 million, or 2.6%, compared to the prior-year quarter as higher blended unit pricing of 3.1% in the acute, extended and home care markets was offset by a 7.7% lower unit volume in the combined extended and home care markets. Sales of vascular devices and dressings were down approximately $590,000, or 22.4%. The following table sets forth, for the periods indicated, the amount of revenue derived from each of our domestic care settings (dollars in thousands):

	Three months ended June 30,
			Variance
Domestic therapeutic surfaces	2003	2002	Dollars	Percent
/other revenue
Acute/extended	$  38,698	$  39,773	$  (1,075)	(2.7)%
Home	2,563	2,456	107	4.4
Vascular-compression therapy	1,960	2,512	(552)	(22.0)
	_____	_____	___
Total	$  43,221	$  44,741	$  (1,520)	(3.4)%
	____	____	___

      The majority of our therapeutic surface 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 slightly due primarily to product mix changes. Our acute care revenue is fueled by growth in our bariatric line. Extended care rental units decreased 17.3% due to lower overall Medicare Part A reimbursement in nursing homes and continued local and regional competition. Home care therapeutic surface revenue increased 4.4% 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 second quarter of 2003 declined 5.7% as compared to the prior period, but this decline was offset by a 3.1% price increase resulting from changes in our product mix.

      Revenue from our international operating unit for the second quarter of 2003, including the favorable effects of foreign currency exchange rate fluctuations, increased $13.7 million, or 44.2%, over the prior-year period. The majority of our international revenue is generated in the acute care setting. International rental revenue increased $9.3 million, or 44.8%, from the prior-year period and sales revenue was up $4.5 million, or 43.1%, compared to the prior-year quarter. Favorable foreign currency exchange movements accounted for $6.6 million of the total international revenue increase when compared to the prior-year quarter. On a constant exchange basis, total international revenue increased $7.2 million, or 21.9%, from the prior-year period, rental revenue increased $4.8 million, or 22.2%, and sales revenue increased $2.3 million, or 21.4%. The rental revenue increase reflects a 57.5% increase in V.A.C. systems out on rent along with a 3.1% incr ease in therapeutic surface rental units in use, primarily in overlays. We also experienced improved rental pricing for our V.A.C. systems and therapeutic surfaces for the three months ended June 30, 2003 as compared to the same period of 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 $87.5 million for the second quarter of 2003 increased $20.9 million, or 31.3%, from $66.6 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 $20.9 million variance in rental expenses for the second quarter of 2003, approximately $4.4 million resulted from foreign currency exchange movements. Field expenses for the second quarter of 2003 represented 62.1% of total rental revenue compared to 61.9% in the prior-year quarter.

Cost of Goods Sold:  Cost of goods sold of $14.7 million in the second quarter of 2003 increased $2.9 million, or 25.1%, from $11.8 million in the prior-year period due to increased sales of V.A.C. disposables. Sales margins increased to 64.6% in the second quarter of 2003 as compared to 60.1% 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 second quarter of 2003 increased approximately $21.5 million, or 36.7%, to $80.3 million from $58.7 million in the prior-year comparable quarter due primarily to the quarter-to-quarter increase in revenue resulting from increased demand for V.A.C. systems and related disposables. Gross profit margin in the second quarter of 2003 was44.0%, up from 42.8% in the prior-year quarter due primarily to the increase in revenue discussed above.

Selling, General and Administrative Expenses:  Selling, general and administrative expenses increased $11.9 million, or 36.6%, to $44.5 million in the second quarter of 2003 from $32.6 million in the prior-year quarter. 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 $1.6 million. As a percentage of total revenue, selling, general and administrative expenses increased to 24.4% in the second quarter of 2003 as compared to 23.8% in the prior-year quarter.

Operating Earnings:  Operating earnings for the second quarter of 2003 increased $9.6 million, or 36.8%, to $35.8 million compared to the same period in 2002. The increase in operating earnings was directly attributable to the increase in revenue for the period, partially offset by higher operating costs and expenses. Operating margins for the second quarter of 2003, were 19.6%, up from 19.1% in the prior-year quarter, 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 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 accounting principles generally accepted in the United States ("GAAP") for the quarters ended June 30, 2003 and 2002 (dollars in thousands):

	Three months ended
	June 30,
	2003	2002
Net earnings	$  19,018	$  11,596
Interest expense	8,050	10,384
Depreciation and amortization (1)	10,747	8,072
Income taxes	11,411	7,259
	______	______
EBITDA	$ 49,226	$ 37,311
	_____	_____

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

EBITDA for the second quarter of 2003 increased $11.9 million, or 31.9%, from the prior-year period due substantially to the change in operating earnings discussed above.

Interest Expense:  Interest expense in the second quarter of 2003 was $8.1 million compared to $10.4 million in the prior-year quarter. 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 of Notes to Condensed Consolidated Financial Statements.)

Net Earnings:  Net earnings of $19.0 million for the second quarter of 2003 increased $7.4 million, or 64.0%, from the prior-year period due to the increase in operating earnings discussed above. Effective tax rates for the second quarter of 2003 and 2002 were 37.5% and 38.5%, respectively.

Results of Operations

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

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
	2003		2002	Dollars	Percent
USA
V.A.C.
Rental	$    139,843		$    94,209	$    45,634	48.4	%
Sales	36,947		21,702	15,245	70.2
	_______		_______	_______
Total V.A.C.	176,790		115,911	60,879	52.5
Therapeutic surfaces/other
Rental	74,235		75,618	(1,383)	(1.8)
Sales	13,815		13,848	(33)	(0.2)
	_______		_______	_______
Total therapeutic surfaces/other	88,050		89,466	(1,416)	(1.6)
Total USA rental	214,078		169,827	44,251	26.1
Total USA sales	50,762		35,550	15,212	42.8
	_______		_______	_______
Subtotal - USA	$ 264,840		$  205,377	$  59,463	29.0	%
	_______		_______	_______
International
V.A.C.
Rental	$     17,660		$      8,207	$     9,453	115.2	%
Sales	17,187		9,611	7,576	78.8
	_______		_______	_______
Total V.A.C.	34,847		17,818	17,029	95.6
Therapeutic surfaces/other
Rental	38,558		30,976	7,582	24.5
Sales	10,804		10,078	726	7.2
	_______		_______	_______
Total therapeutic surfaces/other	49,362		41,054	8,308	20.2
Total International rental	56,218		39,183	17,035	43.5
Total International sales	27,991		19,689	8,302	42.2
	_______		_______	_______
Subtotal - International	$  84,209		$   58,872	$  25,337	43.0	%
	_______		_______	_______
Total revenue	$ 349,049		$ 264,249	$  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 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
Domestic therapeutic surfaces	2003	2002	Dollars	Percent
/other revenue
Acute/extended	$  79,186	$  79,539	$     (353)	(0.4) %
Home	5,014	4,759	255	5.4
Vascular-compression therapy	3,850	5,168	(1,318)	(25.5)
	_____	_____	___
Total	$  88,050	$  89,466	$  (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 de clined 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 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 surfaceproducts 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 was44.2%, 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 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,
	2003	2002
Net earnings	$  35,945	$  20,029
Interest expense	16,228	20,692
Depreciation and amortization (1)	20,833	16,505
Income taxes	21,567	12,538
	______	______
EBITDA	$ 94,573	$ 69,764
	_____	_____

      (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 of Notes to Condensed Consolidated Financial Statements.)

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.

Liquidity and Capital Resources

General

      We require capital principally for capital expenditures, systems infrastructure, debt service and working capital, including the need for workspace 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 on hand, (1) cash flows from operating activities and (2) availability under the revolving credit facility. Based upon the current level of operations, we believe that these sources of capital will be adequate to meet our anticipated cash requirements for debt repayments, working capital and capital expenditures.

      On July 11, 2003, we announced our intent to refinance our existing senior credit facility and our Senior Subordinated Notes Due 2007. This recapitalization would reduce near-term amortization requirements and provide additional liquidity. We cannot give any assurance that we will be successful in raising additional capital. (See Note 11 of Notes to Condensed Consolidated Financial Statements and Part II, Item 5. Other Information-Recent Developments.)

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

      (1) Includes receipt of $130 million, net of taxes paid, related to antitrust lawsuit settlement.

      (2) Includes paydown of $107 million of indebtedness on the senior credit facility utilizing
            funds received related to antitrust lawsuit settlement.

      At June 30, 2003, cash and cash equivalents of $103.0 million were available for general corporate purposes. Availability under the revolving portion of our existing senior credit facility was $39.1 million. 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 earnings for the period of $15.9 million and improved working capital management.

      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 o perations 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

      In August of this year, we anticipate entering into a new senior credit facility consisting 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 this new credit facility as part of a recapitalization of KCI which is expected to result in the redemption of all of our 9 5/8% Senior Subordinated Notes Due 2007 and the repayment of outstanding indebtedness under our existing credit facility. (See "Part II, Item 5. Other Information-Recent Developments and the discussion of FASB Interpretation No. 46 in "--New Accounting Pronouncements.")

      As of June 30, 2003, scheduled principal payments under the existing senior credit facility for the remainder of the year were $12.8 million. Required principal payments for the years 2004 and 2005 are $58.2 million and $76.4 million, respectively. Based upon the current level of operations, we anticipate that cash on hand, cash flow from operations and the anticipated $75 million remaining to be paid under the antitrust litigation settlement will be adequate to meet our anticipated cash requirements for debt repayments, working capital and capital expenditures.

Existing Senior Credit Facility

      Our existing senior credit facility consists of five term loans and a 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 June 30, 2003 (dollars in thousands):

			Amounts
	Effective		Available for
	Interest	Amounts	Additional
Senior Credit Facility	Rate (1)	Outstanding	Borrowing
Revolving credit facility, due 2003	-	$            -	$   39,083 (2)
Tranche A term loan due 2003	3.67%	11,742	-
Tranche B term loan due 2004	4.63%	57,068	-
Tranche C term loan due 2005	4.96%	57,068	-
Tranche D term loan due 2006	4.80%	62,470	-
Tranche E term loan due 2005	4.96%	19,878	-
		_______	______
Total		$  208,226	$   39,083
		______	_____

      (1) Effective interest rates take into account existing interest rate hedging arrangements
      and fees related to letters of credit and unused commitments.

      (2) This amount reflects a reduction from $50.0 million to the extent of the principal amount of
      the outstanding letters of credit issued on our behalf. As of June 30, 2003 approximately
      $10.9 million in letters of credit had been issued.

      The term loans, other than Tranches D and E, are subject to quarterly amortization payments. The Tranche D term loan amortizes at 1% per year through December 31, 2005 with a final payment of $60.9 million (less any future prepayments made through that date) due March 31, 2006. The

Tranche E term loan amortizes at 1% per year with a final payment of $19.4 million (less any future prepayments made through that date) 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 June 30, 2003, we had no revolving loans outstanding. However, we had outstanding five letters of credit in the aggregate amount of $10.9 million. The resulting availability under the revolving credit facility was $39.1 million at the end of the quarter.

      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).

      Our existing senior credit agreement requires us to meet certain financial tests, including minimum levels of EBITDA (as defined in the credit agreement), 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 June 30, 2003, we were in compliance with all applicable covenants.

      Our existing 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. We expect that the new senior credit facility, which we expect to enter into in August 2003, will have covenants and restrictions similar to those under the existing senior credit facility. (See "Part II, Item 5. Other Information-Recent Developments.")

Senior Subordinated Notes

      In 1997, we issued $200.0 million of 9 5/8% 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. As of June 30, 2003, the entire $200.0 million of our notes were issued and outstanding. As part of the planned recapitalization, we expect to redeem all of the outstanding notes. (See "Part II, Item 5. Other Information-Recent Developments.")

      The notes are not entitled to the benefit of any mandatory sinking fund. They are redeemable, at our option, in whole at any time or in part from time to time, 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%

      Under the existing senior subordinated indenture agreement, we may at any time, or from time to time, 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 the redemption not more than 120 days after the consummation of any such equity offering.

      Under the indenture governing the outstanding notes, we are subject to customary covenants, which, among other things, restrict our ability to:

          - incur additional indebtedness;
          - incur liens;
          - announce or pay dividends or make certain other restricted payments;
          - consummate certain asset sales;
          - enter into certain transactions with affiliates;
          - incur indebtedness that is subordinate in right of payment to any senior debt and senior in
              right of payment to the notes;
          - merge or consolidate with any other person; or
          - sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the KCI
              assets.

      The indenture governing our notes contains customary events of default, including nonpayment of principal or interest, violations of covenants, inaccuracy of representations or warranties in any material respect, cross default and cross acceleration to certain other indebtedness, bankruptcy, material judgments and liabilities, change of control and any material adverse change in our financial condition.

Interest Rate Protection

      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.

      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.

Long Term Commitments

      We are committed to making cash payments in the future on long term debt, capital leases, operating leases and purchase commitments. We have not guaranteed the debt of any other party. The table below sets forth our contractual obligations and future liquidity demands as of June 30, 2003 (dollars in thousands):

	Payments Due
	Total	< 1 year	1-2 years	3-4 years	5+ years
Long term debt amortization	$ 408,676	$  13,939	$ 194,737	$ 200,000	$            -
Capital lease payments	170	151	19	-	-
Operating lease payments (1)	75,901	16,805	25,323	17,423	16,350
Purchase commitments	16,931	16,931	-	-	-
	_______	______	_______	_______	______
Totals	$ 501,678	$  47,826	$ 220,079	$ 217,423	$    16,350
	______	_____	______	______	_____

      (1) There have been no material changes outside the ordinary course of business in long term
      commitments for operating lease payments from the information provided in KCI's Annual
      Report on Form 10-K for the year ended December 31, 2002.

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 mos t subject to important estimates or assumptions include those described below. (See Note 1 of Notes to Condensed Consolidated Financial Statements.)

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 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 su ch 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.

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 forimpairment 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 expecte d 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 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 (thirty to forty 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. I f 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 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. 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. (See Notes 1 and 11 of Notes to Condensed Consolidated Financial Statements.)

RISK FACTORS

Risk Related to our Business

We face significant competition, and if we are unable to compete effectively, we may lose market share or be required to reduce prices.

      The competition for our V.A.C. systems in wound healing and tissue repair is composed 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. Our primary competitor in the therapeutic surface business is Hill-Rom Company, whose financial and other resources substantially exceed those available 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.

If a product similar to the V.A.C. system is introduced into the market by a competitor and we are unable to use our patent rights to enjoin the sale of such a product, we could experience decreased demand or we could be required to reduce prices, either of which could materially harm our results of operations.

      Any of the foregoing could impair our ability to compete effectively, which could have a material adverse effect on our business, financial condition or results of operations.

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 infringeme nt 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 wall be able to stop such unauthorized use if it occurs. We also have agreements with third parties that pro vide 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.

Third parties may claim we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling our products.

      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. While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may not be aware of intellectual property rights of others that relate to our products, services or technologies. From time to time, we have received notices from third parties a lleging 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 cannot provide assurance that we will 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.

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 our customers
             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
       -  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 revenue from V.A.C. products will continue to be the predominant source of our revenue for the foreseeable future. If revenue from V.A.C. sales and rentals does not grow as we anticipate, our results of operations and financial condition could suffer.

If we are unable to provide the significant education and training required for the health care market to accept our products, our business will suffer.

      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 products require education of health care professionals regarding the benefits and the required departures from customary practices. We have expended and will continue to expend significant resources on marketing and educational efforts to create general awareness of our products and to encourage acceptance and adoption of our products. The timing of our competitors' introduction of products and the market acceptance of their products may also make this educational process more difficult. We cannot be sure that any products we develop wil l gain any significant market acceptance and market share among physicians, patients and health care payers even if required regulatory approvals are obtained.

Health care reform could negatively impact demand for our products.

      There are widespread legislative efforts to control health care costs in the United States and abroad, which likely 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. However, such resulting legislation could have a material adverse effect on our results of operations and financial condition.

Changes to third party reimbursement policies could negatively impact 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 patty 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 be negatively impacted, which could have a material adverse affect on our financial condition and results of operations. 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 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, there can be no assurance of the outcome of future coverage or payment decisions with respect to V.A.C. systems or any of our other products by governmental or private payers. If providers, suppliers and

other users of our products and services are unable to obtain sufficient reimbursement for the provision of our products, a material adverse impact on our business, financial condition or results of operations could result.

Our results of operations are dependent on our ability to timely collect reimbursement payments.

      Our financial condition and results of operations have been and will continue to be affected by our ability to collect reimbursement payments from governmental and private payers for rentals and sales of our devices and services. 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. We expect demand for V.A.C. systems and related disposables to continue to increase in the near future, which could have the effect of increasing accounts receivables due to extended payment cycles for third party payers. We have adopted a number of policies and procedures to improve our collections. However, these policies and procedures may not be effective. If we are unable to timely collect our reimbursement payments, our results would suffer.

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 co nducted 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. We have submitted additional documentation for each of the denied claims in rebuttal of these findings. If we are unsuccessful in reversing the denial, we would be obligated to reimburse the federal government for such payments (plus interest). We would then have opportunities to appeal the denial. As with this DMERC Region A claims audit, other DMERCs can periodically audit our patient claims records and, if alleged overpayments are identified, could demand significant refunds or recoupments of amounts paid by the government for claims which are determined by the DMERCs to be inadequately support ed by the required documentation or for other reasons. Such actions could have a material adverse effect on our business and financial performance.

      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. Such actions could have a material adverse effect on our business and financial performance.

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. We believe that we may be able to obtain alternative sources for such components when necessary, although the need to change suppliers or to alternate between suppliers might cause material delays in delivery or significantly increase costs. Disruptions or loss of any of our limited or sole-source manufacturing for disposables, components or subassemblies, could adversely affect our business and financial results and could result in damage to customer relationships.

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 to a significant extent 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, 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. If we fail to reduce staffing levels when necessary, our costs would be excessive and our business and operating results could be adversely affected.

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, which could have a material adverse effect on our business. 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. There can be no assurance that current or future regulatory initiatives, either domestically or internationally, will not have a material adverse effect on our business, financial condition or results of operations.

      In October, 2002, an PDA 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, there can be no assurance that the PDA will not 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 have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will not incur significant costs to comply with laws and regulations in the future or that laws and regulations will not have a material adverse effect upon our business, financial condition or results of operations.

      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, 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 h ave a material adverse effect on our business, financial condition or results of operations.

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. Although we have not experienced any material losses due to product liability claims and currently maintain umbrella liability insurance coverage, there can be no assurance that the amount or scope of the coverage maintained by us will be adequate to protect us in the event a significant product liability claim is successfully asserted against us.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      There have been no material changes from the information provided in KCI's Annual Report on Form 10-K for the year ended December 31, 2002 in regard to market risk.

ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

      As of the end of the fiscal quarter covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the evaluation date. During the fiscal quarter covered by this report, there have been no material changes in our disclosure controls and procedures or in other factors, which could significantly affect such controls and procedures.

Changes in Internal Control

      During the fiscal quarter covered by this report, there have been no significant changes in KCI's internal control (as such term is defined in rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) or in other factors which could significantly affect internal control.

PART II - OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

      There have been no material changes from the information provided in KCI's Annual Report on Form 10-K for the year ended December 31, 2002 in regard to legal proceedings.

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

      As permitted by the Texas Business Corporation Act and Article VII, Clause II of KCI's Amended and Restated Articles of Incorporation, the shareholders of KCI took action by written consent in lieu of a special meeting to elect new members to the board of directors and to re-elect existing members of the board until their respective successors are elected and qualified. The names of the directors so elected and re-elected are as follows:

1. Ronald W. Dollens	7. Dennert O. Ware
2. James T. Farrell	8. C. Thomas Smith
3. Robert Jaunich II	9. John P. Byrnes
4. James R. Leininger, M.D.	10. Harry R. Jacobson, M.D.
5. N. Colin Lind	11. David J. Simpson
6. Donald E. Steen

In addition, the shareholders further took action by written consent in lieu of a special meeting to amend the Bylaws of KCI to increase the maximum number of directors permitted to serve on the board of directors from ten to twelve. These actions took place through two written consents which became effective on May 28, 2003 and July 1, 2003, respectively. Mr. Simpson was elected to office with 66,730,525 votes cast for his election and no votes withheld. Each other director was elected to office with 66,792,935 votes cast for their election and no votes withheld. The amendment of the Bylaws was approved with 66,730,525 votes cast in favor of amending the Bylaws and no votes cast against.

ITEM 5.     OTHER INFORMATION

Recent Developments

      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 5/8% 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.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

             (a)   Exhibits

        A list of all exhibits filed or included as part of this quarterly report on form 10-Q is as follows:

Exhibits	Description
3.1	Restatement of Articles of Incorporation (filed as Exhibit 3.2 to our Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference).
*3.2	Second Amended and Restated By-Laws of KCI
**10.1	2003 Non-Employee Directors Stock Plan
*31.1	Certification of Chief Executive Officer
*31.2	Certification of Chief Financial Officer
	*Exhibit filed herewith.
	**Management compensatory plan or agreement. Exhibit filed herewith.

       (b)   Reports on Form 8-K

             1.   Current Report on Form 8-K dated May 13, 2003. Regulation FD
                   disclosure including a press release detailing first quarter results for 2003.

SIGNATURES

       Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                                                                 KINETIC CONCEPTS, INC
                                                                 (REGISTRANT)

                                                                 By:   /s/ DENNERT O. WARE

Date: July 22, 2003                                  ______________________________
                                                                 Dennert O. Ware
                                                                 President and Chief Executive Officer

                                                                 By:   /s/ MARTIN J. LANDON

Date: July 22, 2003                                  ______________________________
                                                                 Martin J. Landon
                                                                 Vice President and Chief Financial Officer (Acting)

Exhibit 31.1

CERTIFICATIONS

CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER

I, Dennert O. Ware, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Kinetic Concepts, Inc.;

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

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

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

   a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   b)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   c)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:

   a)   All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

   b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

Date: July 22, 2003

                                                              ___/s/ Dennert O. Ware____________
                                                              Dennert O. Ware
                                                              President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER

I, Martin J. Landon, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Kinetic Concepts, Inc.;

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

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

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

   a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   b)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   c)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:

   a)   All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

   b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

Date: July 22, 2003

                                                          __/s/ Martin J. Landon________
                                                          Martin J. Landon
                                                          Vice President and Chief Financial Officer (Acting)

EX-3

EXHIBIT 3.2

SECOND AMENDED AND RESTATED
BY-LAWS
OF
KINETIC CONCEPTS, INC.

EFFECTIVE JULY 1, 2003

ARTICLE I
OFFICES

      Section 1.   Principal Office. The principal office of the Corporation shall be in the City of San Antonio, Texas.

      Section 2.   Other Offices. The Corporation may also have offices at such other places both within and without the State of Texas as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE II
SHAREHOLDERS

      Section 1.   Time and Place of Meeting. All meetings of the shareholders shall be held such a place within or without the State of Texas as shall be determined by the Board of Directors.

      Section 2.   Annual Meetings. The annual meeting of shareholders of the Corporation for the election of directors of the Corporation, and for the transaction of such other business as may properly come before such meeting, shall be held at such place, date and time as shall be fixed by the Board and designated in the notice or waiver of notice of such annual meeting.

      Section 3.   Special Meetings. Special meetings of the shareholders may be called at any time by the President or the Board of Directors, and shall be called by the President or Secretary at the request in writing of the holders of not less than fifty percent (50%) of all the shares issued, outstanding and entitled to vote at the meeting. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting.

      Section 4.   Notice. Written or printed notice stating the place, day and hour of any shareholders' meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the President, Secretary, or the officer or person calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, to the shareholder at his address as it appears on the stock transfer books of the Corporation.

      Section 5.   Record Date. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such record date to be not less than ten (10) nor more than sixty (60) days prior to such meeting, or the Board of Directors may close the stock transfer books for such purpose for a period of not less than ten (10) nor more than sixty (60) days prior to such meeting. In the absence of any action by the Board of Directors, the date upon which the notice of the meeting is mailed shall be the record date.

      Section 6.   List of Shareholders. The officer or agent of the Corporation having charge of the share transfer records for shares of the Corporation shall make, at least ten (10) days before each meeting of the shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjuournment thereof, arranged in alphabetical order, with the address of and the number of voting shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any such shareholder at any time during the usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share transfer records shall be prima facie evidence as to who are the shareholders entitled t o examine such list or transfer books or to vote at any meetings of shareholders.

      Section 7.   Quorum. Except as otherwise provided by law or the Articles of Incorporation, the holders of a majority of the issued and outstanding shares and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by the Texas Business Corporation Act (herein called the "Act"). If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote, present in person or presented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally not ified. Once a quorum is constituted, the shareholders present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of shareholders as to leave less than a quorum.

      Section 8.   Voting. When a quorum is present at any meeting, the vote of the holders of a majority of the shares present or represented by proxy at such meeting and entitled to vote shall be the act of the shareholders, unless the vote of a different number is required by the Act, the Articles of Incorporation or these By-Laws.

      Section 9.   Proxy. Each shareholder shall at every meeting of the shareholders be entitled to one vote in person or by proxy for each share having voting power held by such shareholder. Every proxy must be executed in writing by the shareholder or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Corporation prior to or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law.

      Section 10.   Action by Written Consent. Any action required or permitted to be taken at any meeting of the shareholders may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of shareholders.

      Section 11.   Meetings by Conference Telephone. Shareholders may participate in and hold meetings of shareholders by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transactions of any business on the ground that the meeting in not lawfully called or convened.

ARTICLE III
DIRECTORS

      Section 1.   Numbers of Directors. The Corporation shall have no less than one and no more than twelve directors as may be provided from time to time by a resolution of the Board of Directors or by a vote of the holders of a majority of shares then entitled to vote in the election of Directors, but no decrease shall have the effect of reducing the term of any incumbent Director. Directors shall be elected at the annual meeting of the shareholders, except as provided in Section 2 of this Article, and each director shall hold office until his successor is elected and qualified. Directors need not be shareholders of the Corporation or residents of the State of Texas. Except as otherwise provided by any agreement between the Corporation and its shareholders, any or all of the Directors may be removed, with or without cause, by the shareholders, at any time, by a vote of the holders of a majority of the shares th en entitled to vote in the election of Directors, provided that notice of the meeting states that one of the purposes of the meeting is the removal of a director or directors.

      Section 2.   Vacancies. Except as otherwise provided by any agreement between the Corporation and its shareholders, the affirmative vote of the holders of a majority of the shares then entitled to vote in the election of Directors may fill any vacancy occurring in the Board of Directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors shall be filled by a vote of the holders of a majority of the shares then entitled to vote in the election of Directors at an annual meeting or at a special meeting of shareholders called for that purpose. Except as otherwise provided by any agreement between the Corporation and its shareholders, at any annual meeting shareholders, or any special meeting called for such purpose, any director may be removed from office, with or without cause, though his term ma y not have expired.

      Section 3.   General Powers. The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all powers of the Corporation and do all such lawful acts and things as are not by the Act, the Articles of Incorporation or by these By-Laws directed or required to be exercised or done by the shareholders.

      Section 4.   Place of Meetings. The directors of the Corporation may hold their meetings, both regular and special, either within or without the State of Texas.

      Section 5.   Annual Meetings. The first meeting of each newly elected Board of Directors shall be held without further notice immediately following the annual meeting of the shareholders, and at the same place, unless by unanimous consent of the directors then elected and serving such time or place shall be changed.

      Section 6.   Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board of Directors.

      Section 7.   Special Meetings. Special meetings of the Board of Directors may be called by the President on two days' notice to each director, either personally or by mail or by telegram. Special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of any two directors.

      Section 8.   Quorum. At all meetings of the Board of Directors, the presence of a majority of the number of directors fixed by Section 1 of this Article shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by the Act, the Articles of Incorporation or these By-Laws. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time without notice than announcement at the meeting, until a quorum shall be present.

      Section 9.   Executive Committee. The Board of Directors may, by resolution passed by a majority of the whole Board, designate an Executive Committee, to consist of two or more directors, one of whom shall be designed as chairman, who shall preside at all meetings of such Committee. To the extent provided in the resolution of the Board of Directors, the Executive Committee shall have and may exercise all of the authority of the Board of Directors in the management of the business and affairs of the Corporation, except where action of the Board of Directors is required by the Act or by the Articles of Incorporation, and shall have the power to authorize the seal of the Corporation to be affixed to all papers which may require it. The Executive Committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. Any member of the Executive Committee may be removed, for or without cau se, by the affirmative vote of a majority of the whole Board of Directors. If any vacancy or vacancies occur in the Executive Committee, such vacancy or vacancies shall be filled by the affirmative vote of a majority of the whole Board of Directors.

      Section 10.   Other Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate other committees, each committee to consist of two or more directors, which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Board of Directors and shall keep regular minutes of their proceedings and report the same to the Board of Directors when required.

      Section 11.   Compensation of Directors. Directors, as such, shall not receive any stated salary for their services, but, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors; provided that nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor. Members of the Executive Committee may, by resolution of the Board of Directors, be allowed like compensation for attending Executive Committee meetings.

      Section 12.   Action by Written Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee designated by the Board of Directors may be taken without a meeting if a written consent, setting forth the action so taken, is signed by all the members of the Board of Directors or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting.

      Section 13.   Meetings by Conference Telephone. Members of the Board of Directors or members of any committee designated by the Board of Directors may participate in and hold a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transactions of any business on the ground that the meeting is not lawfully called or convened.

ARTICLE IV
NOTICES

      Section 1.   Form of Notice. Whenever under the provisions of the Act, the Articles or Incorporation or these By-Laws, notice is required to be given to any director or shareholder, and no provision is made as to how such notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given in writing, by mail, postage prepaid, addressed to such director or shareholder at such address as appears on the books of the Corporation. Any notice required or permitted to be given by mail shall be deemed to be given at the time when the same be thus deposited, postage prepaid, in the United States mail as aforesaid.

      Section 2.   Waiver. Whenever any notice is required to be given to any director or shareholder of the Corporation, under the provisions of the Act, the Articles of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be deemed equivalent to the giving of such notice.

ARTICLE V
OFFICERS

      Section 1.   In General. The officers of the Corporation shall be elected by the Board of Directors and shall be a President, a Secretary and a Treasurer. The Board of Directors may also, if it chooses to do so, elect a Chairman of the Board, additional Vice Presidents, one or more Assistant Secretaries and one or more Assistant Treasurers, all of whom shall also be officers. Two or more offices may be held by the same person.

      Section 2.   Election. The Board of Directors at its first meeting after such annual meeting of the shareholders shall elect a President and, if it so chooses, may elect a Chairman of the Board, both of whom shall be members of the Board, but the other officers need not be members of the Board. The Board of Directors may appoint such other officers and agents as it shall deem necessary and may determine the salaries of all officers and agents from time to time. The officers shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed, for or without cause, at any time by a majority vote of the whole Board. Election or appointment of an officer or agent shall not of itself create contract rights.

      Section 3.   Chairman. The Chairman of the Board of Directors, if there be a Chairman, shall preside at all meetings of the shareholders and the Board of Directors and shall have such other powers as may from time to time be assigned by the Board of Directors.

      Section 4.   President. The President shall preside at all meetings of the shareholders and the Board of Directors, if a Chairman of the Board has not been elected, and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall execute all contracts requiring a seal and shall also execute mortgages, conveyances or other legal instruments in the name of and on behalf of the Corporation, but this provision shall not prohibit the delegation of such powers by the Board of Directors to some other officer, agent or attorney-in-fact of the Corporation.

      Section 5.   Vice Presidents. The Vice President or, if there be more than one, the Vice Presidents in the order of their seniority or in any other order determined by the Board of Directors, shall, in the absence or disability of the Senior Vice President, perform the duties and exercise the powers of the Senior Vice President, and shall generally assist the President and Senior Vice Presidents and perform such other duties as the Board of Directors shall prescribe.

      Section 6.   Secretary. The Secretary shall attend all sessions of the Board of Directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose, and shall perform like duties for any other committees of the Board when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. He shall keep in safe custody the seal of the Corporation.

      Section 7.   Assistant Secretaries. Any Assistant Secretary shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as may be prescribed by Board Directors or the President.

      Section 8.   Treasurer. The Treasurer shall have the custody of all corporate funds and securities, and shall keep full and accurate accounts of receipts and disbursements of the Corporation, and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and directors at the regular meetings of the Board or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation, and shall perform such other duties as may be prescribed by the Board of Directors or the President.

      Section 9.   Assistant Treasurers. Any Assistant Treasurer shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as may be prescribed by the Board of Directors or the President.

ARTICLE VI
CERTIFICATES OF REPRESENTING SHARES

      Section 1.   Form of Certificates. The Corporation shall deliver certificates representing shares to which shareholders are entitled. Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors and shall be numbered consecutively and entered in the books of the Corporation as they are issued. Each certificate shall state on the face thereof the holder's name, the number, class of shares, and the par value of the shares or a statement that the shares are without par value. They shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary, and may be sealed with the seal of the Corporation or a facsimile thereof if the Corporation shall then have a seal. If any certificate is countersigned by a transfer agent or registered by a registrar, either of which is other than the Corporation or an employee of the Corpora tion, the signatures of the Corporation's officers may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on such certificate or certificates, shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the Corporation or its agents, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed the certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the Corporation.

      Section 2.   Lost Certificates. The Board of Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing the issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may require the owner of the lost or destroyed, certificate, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form, in such sum, and with such surety or sureties as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed.

      Section 3.   Transfer of Shares. Shares of stock shall be transferable only on the books of the Corporation by the holder thereof in person or by his duly authorized attorney and, upon surrender to the Corporation or to the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation or the transfer agent of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

      Section 4.   Registered Shareholders. The Corporation shall be entitled to recognize the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law.

ARTICLE VII
GENERAL PROVISIONS

      Section 1.   Dividends. Dividends upon the outstanding shares of the Corporation, subject to the provisions of the Act and of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting. Dividends may be declared and paid in cash, in property, or in shares of the Corporation, provided that all such declarations and payments of dividends shall be in strict compliance with all applicable laws and the Articles of Incorporation. The Board of Directors may fix in advance a record date for the purposes of determining shareholders entitled to receive payment of any dividend, such record date to be not more than sixty (60) days prior to the payment of such dividend, or the Board of Directors may close the stock transfer books for such purpose for a period of not more than fifty (50) days prior to the payment date of such dividend. In the absence of any action by the Board of Directors, the date upon which the Board of Directors adopts the resolution declaring such dividend shall be the record date.

      Section 2.   Reserves. There may be created by resolution of the Board of Directors out of the earned surplus of the Corporation such reserve or reserves as the Board of Directors from time to time, in its discretion, deems proper to provide for contingencies or to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the Board shall deem beneficial to the Corporation, and the Board may modify or abolish any reserve in the same manner in which it was created.

      Section 3.   Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.

      Section 4.   Annual Statement. The Board of Directors shall present at each annual meeting and when called for by vote of the shareholders at any special meeting of the shareholders, a full and clear statement of the business and condition of the Corporation.

      Section 5.   Disallowed Payments. Any payment made to an officer of the Corporation such as a salary, commission, bonus, interest, or rent, or entertainment expense incurred by him, which shall be disallowed in whole or in part as a deductible expense by the Internal Revenue Service, shall be reimbursed by such officer to the Corporation to the full extent of such disallowance. It shall be the duty of the Directors, as a Board, to enforce payment by the officer, subject to the determination of the Directors, proportionate amounts may be withheld from his future compensation payments until the amount owed to the Corporation has been recovered.

ARTICLE VIII
INDEMNIFICATION OF OFFICERS AND DIRECTORS

      Section 1.   As utilized in the Article, the following terms shall have the meanings indicated:

            (a)  The term "corporation" includes any domestic or foreign predecessor entity of the corporation in a merger, consolidation or other action in which the liabilities of the predecessor are transferred to the corporation by operation of law and in any other transaction in which the corporation assumes the liabilities of the predecessor, but does not specifically exclude liabilities that are the subject matter of this Article.

            (b)  The term "director" means any person who is or was a director of the corporation and any person who, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise.

            (c)  The term "expenses" includes court costs and attorneys' fees.

            (d)  The term "official capacity" means: (i) when used with respect to a director, the office of director in the corporation, and (ii) when used with respect to a person other than a director, the elective or appointive office in the corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation, but (iii) in both (i) and (ii) above does not include service for any other foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise.

            (e)  The term "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding.

      Section 2.   The corporation shall indemnify a person who was, is or is threatened to be made a name defendant or respondent in a proceeding because the person is or was a director only if it is determined, in accordance with Section 6 of this Article that the person (a) conducted himself or herself in good faith; (b) reasonably believed: (1) in the case of conduct in the official capacity as a director of the corporation, that the conduct was in the corporation's best interests, and (ii) in all other cases, that the conduct was at least not opposed to the corporation's best interests; and (iii) in the case of any criminal proceeding, had no reasonable cause to believe the conduct was unlawful.

      Section 3.   A director shall not be indemnified by the corporation as provided in Section 2 of this Article for obligations resulting from a proceeding (a) in which the director is found liable on the basis that a personal benefit was improperly received by the director, whether or not the benefit resulted from an action taken in the person's official capacity, or (b) in which the person is found liable to the corporation, except to the extent permitted in Section 5 of this Article.

      Section 4.   The termination of a proceeding by judgment, order, settlement or conviction or on a plea of nolo contendere or its equivalent is not of itself determinative that the person did not meet the requirements set forth in Section 2 of this Article. A person shall be deemed to have been found liable in respect of any claim, issue or matter only after the person shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom.

      Section 5.   A person may be indemnified by the corporation as provided in Section 2 of this Article against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by the person in connection with the proceeding; but if the person is found liable to the corporation or is found liable on the basis that a personal benefit was improperly received by the person, the indemnification (a) shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding, and (b) shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of the person's duty to the corporation.

      Section 6.   A determination of indemnification under Section 2 of this Article shall be made (a) by a majority vote of a quorum consisting of directors who at the time of the vote are not named defendants or respondents in the proceeding; (b) if such a quorum cannot be obtained, by a majority vote of a committee of the board of directors, designated to act in the matter by a majority vote of all directors, consisting solely of two (2) or more directors who at the time of the vote are not named defendants or respondents in the proceeding (c) by special legal counsel selected by the board of directors or a committee thereof by a vote as set forth in subsection (a) or (b) of this Section 6, or, if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors; or (d) by the shareholders in a vote that excludes the shares held by directors who are named defendants or respondents in the proceed ing.

      Section 7.   Authorization of indemnification and determination as to reasonableness of expenses shall be made in the same manner as the determination that the indemnification is permissible, except that if the determination that indemnification is permissible is made by special legal counsel, authorization of indemnification and determination as to reasonableness of expenses shall be made in the manner specified by subsection (c) of Section 6 of this Article for the selection of special legal counsel. A provision contained in the articles of incorporation, the bylaw, a resolution of shareholders or directors, or an agreement that makes mandatory the indemnification described in Section 2 of this Article shall be deemed to constitute authorization of indemnification in the manner required herein, even though such provision may not have been adopted or authorized in the same manner as the determination that indemnification is permissible.

      Section 8.   The corporation shall indemnify a director against reasonable expenses incurred by the director in connection with a proceeding in which the director is a named defendant or respondent because the person is or was a director if the director has been wholly successful, on the merits or otherwise, in the defense of the proceeding.

      Section 9.   If upon application of a director, a court of competent jurisdiction determines, after giving any notice the court considers necessary, that the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director has met the requirements set forth in Section 2 of this Article or has been found liable in the circumstances described in Section 3 of this Article, the corporation shall indemnify the director to such further extent as the court shall determine; but if the person is found liable to the corporation or is found liable on the basis that personal benefit was improperly received by the person, the indemnification shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding.

      Section10.   Reasonable expenses incurred by a director who was, is or is threatened to be made a named defendant or respondent in a proceeding may be paid or reimbursed by the corporation in advance of the final disposition of the proceeding and without the defemination specified in Section 6 of this Article or the authorization or determination specified in Section 7 of this Article, after the corporation receives a written affirmation by the director of a good faith belief that the standard of conduct necessary for indemnification under this Article has been met and a written undertaking by or on behalf of the director to repay the amount paid or reimbursed if it is ultimately determined the he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is prohibited by Section 5 of this Article. A provision contained in the article s of incorporation, these bylaws, a resolution of the shareholders or directors, or an agreement that makes mandatory the payment or reimbursement permitted under this Section shall be deemed to constitute authorization of that payment or reimbursement.

      Section 11.   The written undertaking required by Section 10 of this Article shall be an unlimited general obligation of the director, but need not be secured. It may be accepted without reference to financial ability to make repayment.

      Section 12.   Notwithstanding any other provision of this Article, the corporation may pay or reimburse expenses incurred by a director in connection with an appearance as a witness or other participation in a proceeding at a time when he is not a named defendant or respondent in the proceeding.

      Section 13.   An officer of the corporation shall be indemnified by the corporation as and to the same extent provided by Sections 7, 8 and 9 of this Article for a director and is entitled to seek indemnification under those sections to the same extent as a director. The corporation may indemnify and advance expenses to an officer, employee or agent of the corporation to the same extent that it may indemnify and advance expenses to directors under this Article.

      Section 14.   The corporation may indemnify and advance expenses to persons who are not or were not officers, employees or agents of the corporation but who are or were serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, to the same extent that is may indemnify and advance expenses to directors under this Article.

      Section 15.   The corporation may indemnify and advance expenses to an officer, employer, agent or person identified in Section 14 of this Article and who is not a director to such further extent, consistent with law, as may be provided by the articles of incorporation, these bylaws, general or specific action of the board of directors or contract or as permitted or required by common law.

      Section 16.   The corporation may purchase and maintain insurance or another arrangement 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, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against any liability asserted against such person and incurred by such person in such a capacity or arising out of the status as such a person, whether or not the corporation would have the power to indemnify such person against that liability under this Article. If the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the corporation would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the corporation. Without limiting the power of the corporation to procure or maintain any kind of insurance or other arrangement, the corporation may, for the benefit of persons indemnified by the corporation (a) create a trust fund, (b) establish any form of self-insurance, (c) secure its indemnity obligations by grant of a security interest or other lien on the assets of the corporation, or (d) establish a letter of credit, guaranty or surety arrangement. The insurance or other arrangement may be procured, maintained or established within the corporation or with any insurer or other person deemed appropriate by the board of directors, regardless of whether all or part of the stock or other securities of the insurer or other person are owned in whole or part by the corporation. In the absence of fraud, the ju dgment of the board of directors as to the terms and conditions of the insurance or other arrangement and the identity of the

insurer or other person participating in an arrangement shall be conclusive and the insurance or arrangement shall not be voidable and shall not subject the directors approving the insurance or arrangement to liability, on any ground, regardless of whether directors participating in the approval are beneficiaries of the insurance or arrangement.

      Section 17.   Any indemnification of or advance of expenses to a director in accordance with this Article shall be reported in writing to the shareholders with or before the notice or waiver of notice of the next meeting of shareholders or with or before the next submission to shareholders of a consent to action without a meeting and, in any case, within the twelve (12) month period immediately following the date of the indemnification or advance.

      Section 18.   For purposes of this Article, the corporation is deemed to have requested a director to serve an employee benefit plan whenever the performance by the director of director's duties to the corporation also imposes duties on, or otherwise involves services by, the director to the plan or participants or beneficiaries of the plan. Excise taxes assessed on a director with the respect to an employee benefit plan pursuant to applicable law shall be deemed to be fines. Action taken or omitted by the director with respect to an employee benefit plan in the performance of the director's duties or for a purpose reasonably believed by the director to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation.

ARTICLE IX
BY-LAWS

      Section 1.   Amendments. These By-Laws may be altered, amended or repealed and new By-Laws may be adopted by the shareholders in accordance with the Articles of Incorporation.

      Section 2.   When By-Laws Silent. It is expressly recognized that when the By-Laws are silent as to the manner of performing any corporate function, the provisions of the Act shall control.

EX-10

EXHIBIT 10.1

KINETIC CONCEPTS, INC.

2003 NON-EMPLOYEE DIRECTORS STOCK PLAN

May 28, 2003

____________________________________

ARTICLE I
DEFINITIONS

      1.1   Affiliate. A corporate parent, corporate subsidiary, limited liability company, partnership or other business entity that is wholly-owned, controlled by, or controls the Company through the beneficial ownership of greater than 50% of the outstanding capital stock of the Company, as determined in accordance with Rule 13d-3 under the Exchange Act.

      1.2   Affiliated Participant. A Participant who is (i) receiving a management fee from the Company, or (ii) a principal of, or a non-employee Board member appointed by, a shareholder of the Company which is receiving a management fee from the Company.

      1.3   Agreement. A written agreement (including any amendment or supplement thereto) between the Company or an Affiliate of the Company and a Participant specifying the terms and conditions of an Option or a Restricted Stock Award, as the case may be, granted to such Participant.

      1.4   Board. The board of directors of the Company.

      1.5   Code. The Internal Revenue Code of 1986, as amended.

      1.6   Committee. A committee that is designated by the Board to serve as the administrator of the Plan. The Committee shall be composed of at least two individuals who are members of the Board and are not employees of the Company or an Affiliate, and who are designated by the Board as the "compensation committee" or are otherwise designated to administer the Plan. In the absence of a designation of a Committee by the Board, the Board shall be the Committee.

      1.7   Company. Kinetic Concepts, Inc. and its successors.

      1.8   Date of Exercise. The date that the Participant tenders the exercise price of an Option.

      1.9   Effective Date. May 28, 2003.

      1.10   Exchange Act. The Securities Exchange Act of 1934, as amended.

      1.11   Fair Market Value. On any given date, Fair Market Value shall be determined by the applicable method described below:

            (a)  If the Stock is traded on a trading exchange (e.g., the New York Stock Exchange) or is reported on the NASDAQ National Market System or another NASDAQ automated quotation system or the OTC Bulletin Board System, Fair Market Value shall be the closing selling price of the Stock on such exchange or system with respect to the date for which Fair Market Value is being determined. If there is no closing selling price for the Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such a quotation exists.

            (b)  If the Stock is not traded on a recognized exchange or automated trading system, Fair Market Value shall be the value determined in good faith by the Committee.

      1.12   Grant Date. The date set forth herein in Article IV as the date of grant for an Option or Stock Award, notwithstanding that an Agreement with respect thereto may be executed or delivered thereafter.

      1.13.   Non-Affiliated Participant. A Participant who is not an Affiliated Participant.

      1.14   Option. The right that is granted hereunder to a Participant to purchase from the Company a stated number of shares of Stock at the price set forth in an Agreement.

      1.15   Participant. A member of the Board who is not employed by the Company or an Affiliate of the Company.

      1.16   Plan. The Kinetic Concepts, Inc. 2003 Non-Employee Directors Stock Plan.

      1.17   Restricted Stock Award. An award of shares of Stock granted under the Plan and subject to the restrictions set forth herein and in the Agreement executed in connection therewith.

      1.18   Restriction Period. The period of time during which restrictions apply to a Restricted Stock Award.

      1.19   Stock. The common stock, par value $0.001 per share, of the Company or any successor security.

      1.20   Stock Award. A Restricted Stock Award or an Unrestricted Stock Award granted under the Plan, as applicable.

      1.21   Underwriting Agreement. The agreement between the Company and the underwriter or underwriters managing the initial public offering of the Stock.

      1.22   Underwriting Date. The date on which the Underwriting Agreement is executed and priced in connection with the initial public offering of the Common Stock.

      1.23   Unrestricted Stock Award. An award of shares of Stock granted under the Plan which is not subject to vesting requirements or transferability restrictions (other than those required under Article IX, applicable law and any Company policy restricting the trading of shares of Stock by directors and officers).

ARTICLE II
PURPOSE OF PLAN

      The purpose of the Plan is to provide an incentive to enable the Company to attract and retain experienced and highly-qualified individuals to serve as directors of the Company, and to encourage stock ownership by such directors so that their interests are aligned with the interests of the Company and its shareholders. It is intended that Participants may acquire and maintain equity interests in the Company to align their interests with the Company's shareholders.

ARTICLE III
ADMINISTRATION

      3.1    Administration of Plan. The Plan shall be administered by the Committee. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. Any decision made or action taken by the Committee to administer the Plan shall be final and conclusive. No member of the Committee shall be liable for any act done in good faith with respect to this Plan or any Agreement, Option or Stock Award. The Company shall bear all expenses of Plan administration. In addition to all other authority vested in the Committee under the Plan, the Committee shall have complete authority to:

            (a)  Interpret all provisions of the Plan;

            (b)  Prescribe the form of any Agreement and notice and manner for executing or giving the same;

            (c)  Make amendments to all Agreements;

            (d)  Adopt, amend and rescind rules for Plan administration;

            (e)  Make all determinations it deems advisable for the administration of the Plan;

            (f)  Amend the terms of outstanding Options and impose terms and conditions on the shares of Stock issued pursuant to Stock Awards or upon the exercise of Options;

            (g)  Either at the time an Option or Stock Award is granted, or by subsequent action, to impose such restrictions, conditions, or limitations as it determines appropriate as to the timing and manner of any resales including, but not limited to restrictions under an insider trading policy, restrictions designed to delay and/or coordinate the timing and manner of sales by Participants, and restrictions as to the use of specific brokerage firms for any resales or transfers. Notwithstanding the foregoing, an amendment, restriction, condition or limitation that would have a material adverse effect on the rights of a Participant under an outstanding Option or Stock Award shall not be valid with respect to such Option or Stock Award without the Participant's consent;

            (h)  Waive conditions to and/or accelerate the exercisability or vesting of an Option or Stock Award, either automatically or upon the occurrence of specified events or otherwise in its discretion; and

            (i)  Determine the extent to which a leave of absence for military or government service, illness, temporary or permanent disability, or other reasons shall be treated as a termination, disability or interruption of service as a member of the Board.

      3.2   Section 16(b). Notwithstanding anything in the Plan to the contrary, the Committee, in its absolute discretion, may restrict, limit or condition the use of any provision of the Plan in order to ensure compliance with Section 16(b) of the Exchange Act and the rules promulgated thereunder.

ARTICLE IV
ELIGIBILITY AND LIMITATIONS ON GRANTS

      4.1   Option Grants. Options shall be granted automatically as follows:

            (a)  Number. Each Participant shall automatically be granted an Option on a yearly basis to purchase a number of shares of Stock equal to $50,000 divided by the Fair Market Value of the Stock as of the Grant Date. The initial Grant Date for each Non-Affiliated Participant shall be on the earlier to occur of (i) the Effective Date, if the Participant is serving as a Board member on such date, or (ii) the first date after the Effective Date that such Participant is elected by the shareholders of the Company to serve as a Board member. The initial Grant Date for each Affiliated Participant shall be on the earlier of occur of (x): the Underwriting Date, or (y) the date on which the agreement pursuant to which a management fee is required to be paid, paid by the Company to the Affiliated Participant or the Affiliated Participant's employer shall be terminated. Each year thereafter, each Participant shal l 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 on the anniversary of the initial Grant Date, provided that he or she is serving as a Board member on each such date.

            (b)  Price. The exercise price of each share of Stock subject to an Option shall be the Fair Market Value of Stock on the Grant Date of such Option.

            (c)  Option Period. Each Option granted to a Participant will vest and become exercisable incrementally over a period of three years with one-twelfth (1/12) of the number of the shares of Stock subject to the Option vesting and becoming exercisable on the date which is three calendar months following the Grant Date, provided that the Participant remains a Board member on each such date. The right to exercise an Option shall terminate seven (7) years after the Grant Date, unless terminated sooner pursuant to any of the following:

                      (i)   If a Participant is terminated as a Board member on account of fraud, dishonesty or other acts detrimental to the interests of the Company, the Option, including any portion of the Option which has vested or is otherwise exercisable by the Participant, shall terminate as of the date of such termination.

                     (ii)   Upon the death or disability (as defined in Section 22(e)(3) of the Code) of a Participant, the Option shall fully vest on the date thereof and may be exercised within twelve (12) months after such death or disability. In the event a participant fails to be re-elected to serve as a Board member, the Option may be exercised, to the extent the Option had vested as of the Participant's last day of service as a member of the Board, within twelve (12) months of such an event. Thereafter, the Option shall terminate and no longer be exercisable.

                    (iii)  If a Participant is terminated as a Board member for any reason other than the circumstances described in subparagraphs (i) or (ii) above, the Option may be exercised, to the extent the Option had vested as of the date of termination of his directorship, within three (3) months after the effective date of such termination. Thereafter, the Option shall terminate and no longer be exercisable. Notwithstanding the foregoing, if the Participant becomes an employee of the Company or an Affiliate upon the termination of his directorship, the Option shall expire after the termination of his employment in a manner that is consistent with this subparagraph (iii).

            (d)  Rights of Participant. No Participant shall have any rights as a shareholder of the Company with respect to shares of Stock subject to Options prior to the date of exercise of such Option.

      4.2   Restricted Stock Awards. Restricted Stock Awards shall be granted automatically as follows:

            (a)  Number. Each Participant shall be automatically be granted a Restricted Stock Award with respect to a number of shares of Stock equal to $50,000 divided by the Fair Market Value of the Stock as of the Grant Date on a yearly basis. The initial Grant Date for each Non-Affiliated Participant shall be on the earlier to occur of (i) the Effective Date, if the Participant is serving as a Board member on such date, or (ii) the first date after the Effective Date that such Participant is elected by the shareholders of the Company to serve as a Board member. The initial Grant Date for each Affiliated Participant shall be in the earlier to occur of: (x) the Underwriting Date or (y) such earlier date on which the management fee paid to the Participant or the Participant's employer is terminated. Each year thereafter, each Participant shall automatically be granted an additional Restricted Stock Awar d with respect to a number of shares of Stock equal to $50,000 divided by the Fair Market Value of the Stock on the anniversary of the Grant Date initial Restricted Stock Award to such Participant, provided he or she is serving as a Board member on such date.

            (b)  Restrictions. The Restricted Stock Award shall be granted to a Participant only pursuant to an Agreement, which shall set forth such terms and conditions of the Restricted Stock Award as may be determined by the Committee to be consistent with the Plan, and which may include additional provisions and restrictions that are not inconsistent with the Plan. During the Restriction Period, a Participant may not sell, assign, transfer, pledge, or otherwise dispose of the shares of Stock subject to the Restricted Stock Award except in accordance with Article VI hereof. Except for any restrictions under applicable law or pursuant to any Company policy restricting the trading of shares of Stock by directors and officers, all restrictions imposed under the Restricted Stock Award shall lapse (i) upon the expiration of the Restriction Period, subject to the provisions of subparagraph (c) below or (ii) as pr ovided under Section 8.3.

            (c)  Restriction Period. The rights of a Participant in respect of a Restricted Stock Award shall be subject to a Restriction Period commencing on the Grant Date and ending on the third anniversary of the Grant Date provided that:

                      (i)   If during the Restriction Period, the Participant is terminated as a Board member by death or disability (as defined in Section 22(e)(3) of the Code), or in the event the Participant fails to be re-elected to serve as a Board member, then for each full year such Participant served as a Board member during the Restriction Period, one-third (1/3) of the shares of Stock subject to the applicable Restricted Stock Award shall be deemed fully vested, and the restrictions with respect such vested shares shall lapse on the date of termination. Upon any such termination, if any portion of the Restricted Stock Award remains unvested pursuant to this subparagraph (i), Participant shall immediately return the share certificates for the Stock granted under the Restricted Stock Award to the Company and the Company will re-issue share certificates to Participant representing the vested portion of the Restricted Stock Award.

                      (ii)  If during the Restriction Period, a Participant is terminated as a Board member for any reason other than the circumstances described in subparagraph (i) above, the Restricted Stock Award shall terminate and Participant shall immediately return the share certificates for the Stock granted under the Restricted Stock Award to the Company.

            (d)  Rights of Participant. The Participant shall be entitled to delivery of certificates representing the shares of Stock granted under the Restricted Stock Award. Upon the grant of a Restricted Stock Award, the Participant receiving the grant shall be entitled to vote the shares of Stock and to receive any dividends paid thereon.

            (e)  Stock Certificates. A stock certificate registered in the name of each Participant receiving a Restricted Stock Award (or in the name of a trustee for the benefit of each Participant) shall be issued in respect of the shares of Stock issuable pursuant to such Restricted Stock Award. Such certificate shall bear whatever appropriate legend referring to the terms, conditions, and restrictions applicable to such award as the Board or the Committee shall determine.

      4.3   Unrestricted Stock Awards. Unrestricted Stock Awards shall be granted automatically as follows:

            (a)  Number. Each Participant shall automatically be granted an Unrestricted Stock Award on a yearly basis 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 Grant Date. The initial Grant Date for each Non-Affiliated Participant shall be the earlier to occur of (i) the Effective Date, if the Participant is serving as a Board member on such date, or (ii) the first date after the Effective Date that such Participant is elected by the shareholders of the Company to serve as a Board member. The initial Grant Date for each Affiliated Participant shall be on the earlier to occur of: (x) the Underwriting Date, or (y) the date on which the agreement pursuant to which a management fee is required to be paid by the Company to the Affiliated Participant or the Affiliated Participant's employer shall be terminated. Each year thereafter, e ach Participant shall 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 the anniversary date of the initial Unrestricted Stock Award grant to such Participant, provided he or she is then serving as a Board member on such date.

            (b)  Rights of Participant. Ownership of shares under an Unrestricted Stock Award shall vest in the Participant immediately upon the Grant Date. The Participant shall be entitled to delivery of stock certificates representing the shares of Stock granted under the Unrestricted Stock Award. Upon the grant of an Unrestricted Stock Award, the Participant receiving the grant shall be entitled to all the rights of a shareholder of the Company.

ARTICLE V
STOCK SUBJECT TO PLAN

      5.1   Source of Shares. Upon the grant of a Stock Award or the exercise of an Option, the Company shall transfer to the Participant authorized but previously unissued shares of Stock or, if determined by the Board, shares of Stock that are held in treasury.

      5.2   Maximum Number of Shares. The maximum aggregate number of shares of Stock (including shares issuable upon exercise of all Options) that may be issued pursuant to this Plan is 400,000 shares, subject to increases and adjustments as provided in Article VIII. Should the exercise price of an Option under the Plan be paid with shares of Stock or should shares of Stock otherwise issuable under the Plan be withheld by the Company in satisfaction of the withholding taxes incurred in connection with the exercise of an Option or the grant of a Stock Award, then the number of shares of Stock issuable under the Plan shall be reduced by the gross number of shares of Stock for which the Option is exercised, and not by the net number of shares of Stock issued to the Participant. If, on any Grant Date, there are not sufficient shares of Stock that remain available pursuant to this Section 5.2 to provide the grant on such date, then the num ber of shares of Stock subject to the grant on that date shall be determined on a pro-rata basis, with fractional shares rounded down to the nearest number of whole shares. All references to numbers of shares of Stock subject to grants under Article IV are subject to adjustment in accordance with Article VIII.

      5.3   Forfeitures. If any Option or Restricted Stock Award granted hereunder is forfeited, expires or terminates for any reason, in part or whole, the shares of Stock subject thereto which are thus forfeited shall again be available for issuance under the Plan.

ARTICLE VI
TRANSFERABILITY OF OPTIONS AND
RESTRICTED STOCK AWARDS

      Any Option or Restricted Stock Award granted under this Plan shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the Participant only by the Participant; provided, however, that an Option or Restricted Stock Award may be transferable to the extent provided in an Agreement. No right or interest of a Participant in any Option or Restricted Stock Award shall subject to any lien, obligation or liability of such Participant.

ARTICLE VII
METHOD OF EXERCISE OF OPTIONS

      7.1   Exercise. An Option granted hereunder shall be deemed to have been exercised on the Date of Exercise. Subject to the provisions of Articles VI and IX, an Option may be exercised in whole or in compliance with such requirements as the Committee shall determine, but in no event sooner than six months from the date of grant.

      7.2   Payment. Except as otherwise provided by the Option Agreement, payment of the exercise price of an Option shall be made (i) in cash, (ii) where the Stock is publicly traded on a recognized exchange or automated trading system, in actual or constructive delivery of Stock that was acquired at least six months prior to the exercise of the Option, or such shorter or longer period, if any, as is required by the Company's accountants to avoid a charge to the Company's earnings for financial reporting purposes, (iii) where the Stock is publicly traded on a recognized exchange or automated trading system, through a special sale and remittance procedure pursuant to which a Participant shall concurrently provide irrevocable instructions to (a) a Company-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to c over the aggregate exercise price payable for the purchased shares plus all applicable income and employment taxes required to be withheld by the Company by reason of such exercise and (b) the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale, (iv) in other consideration acceptable to the Committee, or (v) in a combination thereof; provided, however, that a form of payment other than cash is only acceptable to the extent that the same is approved by the Committee. Payment of the exercise price must include payment of tax withholding, as described in Section 7.3, in cash unless the Company consents to alternative arrangements for withholding.

      7.3   Withholding Tax Requirements. Upon exercise of an Option, the Participant shall, upon notification of the amount due and prior to or concurrently with the delivery of the certificates representing the shares, pay to the Company amounts necessary to satisfy applicable federal, state and local withholding tax requirements or shall otherwise make arrangements satisfactory to the Company for such requirements, but only to the extent that the Company is required by law to withhold such amounts or that the Participant voluntarily elects for such withholding.

      7.4   Issuance and Delivery of Shares. Shares of Stock issued pursuant to the exercise of Options hereunder shall be delivered to Participants by the Company (or its transfer agent) as soon as administratively feasible after a Participant exercises an Option hereunder and executes any applicable shareholder agreement or agreement described in Section 9.2 that the Company requires at the time of exercise.

      7.5   Fractional Shares. Only whole shares of Stock may be issued pursuant to a Stock Award or upon exercise of an Option. Any fractional shares resulting from the calculations under Sections 4.1, 4.2 and 4.3 shall be rounded down to the nearest whole share. Any amounts tendered in the exercise of an Option remaining after the maximum number of whole shares of Stock have been purchased will be returned to the Participant in the form of cash.

ARTICLE VIII
ADJUSTMENT UPON CORPORATE CHANGES

      8.1   Adjustments to Shares. The maximum number of shares of Stock with respect to which Options or Stock Awards hereunder may be granted and which are the subject of outstanding Options or Stock Awards, and the exercise price of Options, shall only be adjusted as the Committee determines (in its sole discretion) to be appropriate, in the event that:

            (a)  the Company effects one or more Stock dividends, Stock splits, reverse Stock splits, subdivisions, consolidations or other similar events;

            (b)  the Company engages in a transaction which is described in section 424(a) of the Code; or

            (c)  there occurs any other event which in the judgment of the Committee necessitates such action; provided, however, that if an event described in paragraph (a) or (b) occurs, the Committee shall make adjustments to the limit on Options or Stock Awards specified in Section 5.2 that are proportionate to the modifications of the Stock that are on account of such corporate changes. Notwithstanding the foregoing, the Committee may not modify the Plan or the terms of any Options or Stock Awards then outstanding or to be granted hereunder to provide for the issuance under the Plan of a different class of stock or kind of securities. If an event described in paragraph (a), (b) or (c) occurs, the number of shares of Stock subject to each Option grant to be granted following such event pursuant to Section 4.1(a) shall not be adjusted to reflect such event unless the Board (in its sole discretion) determines otherwis e.

      8.2  Substitution of Options on Merger or Acquisition. The Committee may grant Options or Stock Awards in substitution for stock awards, stock options, stock appreciation rights or similar awards held by an individual who becomes a director of the Company in connection with a transaction to which section 424(a) of the Code applies. The terms of such substituted Options or Stock Awards shall be determined by the Committee in its sole discretion, subject only to the limitations of Article V.

      8.3  Effect of Certain Transactions. The provisions of this Section 8.3 shall apply to the extent that an Agreement does not otherwise expressly address the matters contained herein. If the Company experiences an event which results in a "Change in Control," as defined in Section 8.3(a), then, whether or not the vesting requirements set forth in any Agreement have been satisfied, (i) all Options that are outstanding at the time of the Change in Control shall become fully vested and exercisable immediately prior to the Change in Control event, and (ii) the Restriction Period on an outstanding Restricted Stock Award shall automatically expire and all restrictions imposed under such Restricted Stock Award shall immediately lapse.

            (a)  A Change in Control will be deemed to have occurred for purposes hereof if (1) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than an individual who is a shareholder on the date of the adoption of the Plan by the Board, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities (as defined below), or (2) the shareholders of the Company approve a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) more than 50% of th e total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (3) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of its assets. For purposes of this Section 8.3(a), "Voting Securities" of an entity shall mean any securities of the entity which vote generally in the election of its directors.

            (b)  In the event of a Change in Control, the Committee may provide, in its discretion and on such terms and conditions as it deems appropriate, either by the terms of the Agreement or by a resolution adopted prior to the occurrence of the Change in Control, that:

                      (i)  any outstanding Option shall be assumed by the surviving corporation or any successor corporation to the Company, or a parent or subsidiary thereof, or other corporation that is a party to the transaction resulting in the Change in Control, in which event, (1) the shares of the Stock subject to such Option shall be substituted with the number and class of securities of the successor, surviving or other corporation that would have been issued to the Participant in exchange for shares of the Stock pursuant to the Change in Control transaction had the Option been exercised prior to such transaction, (2) notwithstanding Section 8.3(b)(i)(1) hereof, the number of such securities of the successor, surviving or other corporation that is made subject to such Option shall be adjusted as necessary so that the aggregate value of such securities shall be eq ual to the aggregate value of the consideration that would have been paid or issued to the Participant in exchange for the shares of Stock pursuant to the Change in Control transaction had the Option been exercised immediately prior to such transaction, and (3) the exercise price payable per share of Stock subject to such Option shall be appropriately adjusted provided, however, that the aggregate exercise price for such Option shall remain the same;

                     (ii)  any outstanding Option shall be converted into a right to receive cash on or following the closing date or expiration date of the Change in Control transaction in an amount equal to the aggregate value of the consideration that would have been paid or issued to the Participant in exchange for shares of the Stock pursuant to the Change in Control transaction had the Option been exercised immediately prior to such transaction less the aggregate exercise price of such Option;

                    (iii)  any outstanding Option cannot be exercised after such a Change in Control; or

                    (iv)  any outstanding Option may be dealt with in any other manner determined in the discretion of the Committee.

            (c)  Notwithstanding the foregoing, a portion of the acceleration of vesting described in this Section shall not occur with respect to an Option to the extent such acceleration of vesting would cause the Participant or holder of such Option to realize less income, net of taxes, after deducting the amount of excise taxes that would be imposed pursuant to section 4999 of the Code, than if accelerated vesting of that portion of the Option did not occur. This limitation shall not apply (i) to the extent that the Company, an Affiliate or the acquirer are obligated to indemnify the Participant or holder for such excise tax liability under an enforceable "golden parachute" indemnification agreement, or (ii) the shareholder approval described in Q&A 7 of Prop. Treas. Reg. ss. 1.280G-1 issued under section 280G of the Code is obtained to permit the acceleration of vesting described in this Section (applied as if t he shareholder approval date was the date of the Change in Control).

            (d)  Notwithstanding anything to the contrary contained herein, a change in ownership that occurs as a result of a public offering of the Company's equity securities that is approved by the Board shall not constitute a Change in Control.

      8.4   No Adjustment upon Certain Transactions. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services rendered, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, outstanding Options or Stock Awards.

ARTICLE IX
COMPLIANCE WITH LAW AND REGULATORY APPROVAL

      9.1   General. No Option shall be exercisable, no shares of Stock shall be issued, no certificates for shares of Stock shall be delivered, and no payment shall be made under this Plan except in compliance with all federal, state and local laws and regulations including, without limitation, withholding tax requirements, federal and state securities laws and regulations and the rules and regulations of any government or regulatory agency or body and in compliance with the rules of all securities exchanges or self-regulatory organizations on which the Company's shares may be listed, which the Committee shall, in its discretion, determine to be necessary or applicable, in all respects. The Company shall have the right to rely on an opinion of its counsel as to such compliance. Any certificate issued to evidence shares of Stock for which an Option is exercised or a Stock Award is granted may bear such legends and st atements as the Committee upon advice of counsel may deem advisable to assure compliance with federal or state laws and regulations.

      9.2   Representations by Participants. As a condition to the exercise of an Option or issuance of a Stock Award, the Company may require a Participant to represent and warrant at the time of any such exercise or grant that the shares are being acquired only for investment and without any present intention to sell or distribute such shares, if, in the opinion of counsel for the Company, such representation is required by any relevant provision of the laws referred to in Section 9.1. At the option of the Company, a stop transfer order against any shares of Stock may be placed on the official stock books and records of the Company, and a legend indicating that the Stock may not be pledged, sold or otherwise transferred unless an opinion of counsel was provided (concurred in by counsel for the Company) and stating that such transfer is not in violation of any applicable law or regulation may be stamped on the stock certificate in order to assure exemption from registration. The Committee may also require such other action or agreement by the Participants as may from time to time be necessary to comply with federal or state securities laws. This provision shall not obligate the Company or any Affiliate to undertake registration of Options or Stock hereunder.

ARTICLE X
GENERAL PROVISIONS

      10.1   Unfunded Plan. The Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under this Plan. Any liability of the Company to any person with respect to any grant under this Plan shall be based solely upon contractual obligations that may be created hereunder. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company.

      10.2   Rules of Construction. Headings are given to the articles and sections of this Plan solely as a convenience to facilitate reference. The masculine gender when used herein refers to both masculine and feminine. The reference to any statute, regulation or other provision of law shall be construed to refer to any amendment to or successor of such provision of law.

      10.3   Governing Law. The internal laws of the State of Texas (without regard to choice of law) shall apply to all matters arising under this Plan, to the extent that federal law does not apply.

      10.4   Compliance with Section 16 of the Exchange Act. Transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 (or successor provisions) promulgated under the Exchange Act. To the extent any provision of this Plan or action by Committee fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee.

      10.5   Amendment. The Board may amend or terminate this Plan at any time; provided, however, an amendment that would have a material adverse effect on the rights of a Participant under an outstanding Option or Stock Award is not valid with respect thereto without the Participant's consent; and provided, further, that the shareholders of the Company must approve, in general meeting, any amendment that changes the number of shares in the aggregate which may be issued pursuant to Options or Stock Awards granted under the Plan. Such amendment must be approved coincident with or prior to the date Options or Stock Awards are granted with respect to such shares.

      10.6   Disputes and Dispute Resolution.

            (a)  Any and all claims arising out of or relating to the Plan, or the Committee's administration or interpretation of the Plan with respect to any Participant, shall be resolved by binding arbitration which shall be the sole and exclusive method of resolving such disputes or claims and shall be in lieu of any trial before a court of jury. The Committee, in offering an option grant under this Plan, and a Participant, in accepting any option grant under the Plan, expressly waive any and all rights to a trial before a court or jury regarding any disputes and claims which arise from or relate to the Plan, and any option grant made under the Plan.

            (b)  Arbitration shall be conducted within Bexar County, Texas before a single neutral arbitrator selected jointly by the Committee and the Participant in accordance with the rules of the American Arbitration Association ("AAA") rules and applicable law then in effect. However, the standard of review to be applied by the Arbitrator shall be whether the Committee's disputed act, omission or decision with respect to the Participant was contrary to any Plan provision or otherwise arbitrary and capricious.

            (c)  To the extent that any of the provisions of this Section 10.6 or the AAA Rules conflicts with applicable law for the arbitration of contract disputes, the provisions or procedures required by applicable law shall govern.

                                                                                    /s/ DENNERT O. WARE_          
                                                                                         Dennert O. Ware,
                                                                             Chief Executive Officer and President