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, 2004

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  X     No    

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:  66,682,958 shares as of August 9, 2004

TABLE OF CONTENTS

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

KINETIC CONCEPTS, INC.

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION		5
	Item 1.	Financial Statements	5
		Condensed Consolidated Balance Sheets	5
		Condensed Consolidated Statements of Earnings	6
		Condensed Consolidated Statements of Cash Flows	7
		Notes to Condensed Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
	Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION		47
	Item 1.	Legal Proceedings	47
	Item 2.	Changes in Securities and Use of Proceeds	47
	Item 6.	Exhibits and Reports on Form 8-K	47
	SIGNATURES		49

FORWARD-LOOKING STATEMENTS

      This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the "safe harbor" created by those sections. The forward-looking statements are based on our current expectations and projections about future events. Discussions containing such forward-looking statements may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this document. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "predicts," "projects," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates,&qu ot; or the negative of these terms and other comparable terminology, including, but not limited to, the following:

   - any projections of revenues, earnings, cash balances or cash flow, synergies or other financial items;
   - any statements of the plans, strategies and objectives of management for future operations;
   - any statements regarding future economic conditions or performance;
   - implementing our business strategy;
   - attracting and retaining customers;
   - obtaining and expanding market acceptance of the products and services we offer;
   - competition in our market;
   - statements regarding the outcome of pending litigation;
   - trends in the mix of rental and sales product mix and from lower-therapy products to capital purchases;
   - future demand for V.A.C. systems;
   - expenditures with respect to our therapeutic surfaces business and demand for our bariatric products;
   - changes in patient demographics; and
   - any statements of assumptions underlying any of the foregoing.

      These forward-looking statements are only predictions, not historical facts. These forward-looking statements involve certain risks and uncertainties, as well as assumptions. Actual results, levels of activity, performance, achievements and events could differ materially from those stated, anticipated or implied by such forward-looking statements. The factors that could contribute to such differences include those discussed under the caption "Risk Factors" in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein, as well as those discussed in our Form 10-K and other filings with the Securities and Exchange Commission. These risks include the fluctuations in our operating results and the possible inability to meet our expectations or those of our analysts in future periods; intense and growing competition we face; our dependence on our intellectual property; our de pendence on new technology; the clinical efficacy of the V.A.C. relative to alternate devices or therapies; and third party reimbursement policies and collections. You should also consider the risks factors and uncertainties under the caption "Risk Factors" among other things, in evaluating KCI's prospects and future financial performance. The occurrence of the events described in the risk factors could harm the business, results of operations and financial condition of KCI. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. KCI disclaims any obligation to update or alter these forward-looking statements, whether as a result of new information, future events or otherwise.

In this report, unless the context requires otherwise, the words "we," "our," "us," and "KCI" refer to Kinetic Concepts, Inc.

TRADEMARKS

      The following terms used in this report are our trademarks: AirMaxxis™, AtmosAir™, BariAir®, BariKare®, BariMaxx® II, BariMaxx®, DynaPulse®, FirstStep®, FirstStep® Advantage™, FirstStep® Plus, FirstStep Select®, FirstStep Select® Heavy Duty, FluidAir Elite®, FluidAir™ II, KCI®, KinAir™ III, KinAir™ IV, KinAir™ MedSurg™, Kinetic Concepts®, Kinetic Therapy™, Maxxis® 300, Maxxis® 400, MiniV.A.C.™, PediDyne™, PlexiPulse®, PlexiPulse® AC, Pulse IC™, Pulse SC™, RIK®, RotoProne®, Roto Rest®, Roto Rest® Delta, T.R.A.C.™, The Clinical Advantage®, TheraPulse®, TheraPulse® II, TheraRest®, TriaDyne® II, TriaDyne® Proventa™, TriCell®, V.A.C.®, V.A.C.^ATS®™, V.A.C.® Freedom™, V.A.C.& reg; Therapy™, The V.A.C.® System™, Vacuum Assisted Closure® and V.A.C.® Instill™. All other trademarks appearing in this report are the property of their holders.

PART I - FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
	June 30,	December 31,
	2004	2003
	(unaudited)
Assets:
Current assets:
Cash and cash equivalents	$   75,493	$ 156,064
Accounts receivable, net	214,556	199,938
Inventories, net	30,823	32,253
Deferred income taxes	24,095	22,749
Derivative financial instruments	1,282	-
Prepaid expenses and other current assets	15,793	11,811
	_______	_______
Total current assets	362,042	422,815
	_______	_______
Net property, plant and equipment	162,913	145,208
Loan and preferred stock issuance costs, less accumulated amortization
of $3,248 in 2004 and $1,014 in 2003	13,273	19,779
Goodwill	48,791	48,797
Other assets, less accumulated amortization of $8,530 in 2004 and
$8,190 in 2003	29,214	28,497
	_______	_______
	$  616,233	$ 665,096
	_______	_______
Liabilities and Shareholders' Deficit:
Current liabilities:
Accounts payable	$    33,594	$   34,386
Accrued expenses	122,275	112,652
Current installments of long-term debt	4,166	4,800
Current installments of capital lease obligations	1,504	1,576
Derivative financial instruments	-	2,402
Income taxes payable	-	39,403
	_______	_______
Total current liabilities	161,539	195,219
	_______	_______
Long-term debt, net of current installments	492,682	678,100
Capital lease obligations, net of current installments	1,298	1,351
Deferred income taxes, net	29,248	26,566
Deferred gain, sale of headquarters facility	8,647	9,183
Other non-current liabilities	213	212
	_______	_______
	693,627	910,631
Series A convertible preferred stock, 0 issued and outstanding
at June 30, 2004 and 264 at December 31, 2003	-	261,719
Shareholders' equity (deficit):
Common stock; authorized 225,000 at June 30, 2004 and
150,000 at December 31, 2003; issued and outstanding 66,664
at June 30, 2004 and 41,270 at December 31, 2003	67	41
Additional paid-in capital	468,479	1,157
Deferred compensation	(1,515)	185
Retained deficit	(555,066)	(518,955)
Accumulated other comprehensive income	10,641	10,318
	_______	_______
Shareholders' deficit	(77,394)	(507,254)
	_______	_______
	$  616,233	$ 665,096
	_______	_______
See accompaning 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,
	2004	2003	2004	2003
Revenue:
Rental	$ 175,579	$ 140,854	$ 341,487	$ 270,296
Sales	61,406	42,023	120,332	79,584
	_______	_______	_______	_______
Total revenue	236,985	182,877	461,819	349,880
	_______	_______	_______	_______
Rental expenses	109,572	87,911	214,978	167,290
Cost of goods sold	16,560	14,713	33,328	28,358
	_______	_______	_______	_______
Gross profit	110,853	80,253	213,513	154,232
Selling, general and administrative expenses	52,898	40,050	101,440	76,531
Research and development expenses	7,188	4,439	14,307	8,864
Initial public offering expenses	302	-	19,836	-
Secondary offering expenses	2,219	-	2,219	-
	_______	_______	_______	_______
Operating earnings	48,246	35,764	75,711	68,837
Interest income	158	347	529	747
Interest expense	(11,050)	(8,050)	(29,894)	(16,228)
Foreign currency gain (loss)	201	2,368	(263)	4,156
	_______	_______	_______	_______
Earnings before income taxes	37,555	30,429	46,083	57,512
Income taxes	13,520	11,411	16,590	21,567
	_______	_______	_______	_______
Net earnings	$   24,035	$   19,018	$   29,493	$   35,945
Series A convertible preferred stock dividends	-	-	(65,604)	-
	_______	_______	_______	_______
Net earnings (loss) available to common shareholders	$   24,035	$   19,018	$ (36,111)	$   35,945
	_______	_______	_______	_______
Net earnings (loss) per share available to common shareholders:
Basic	$       0.37	$       0.27	$     (0.63)	$       0.51
	_______	_______	_______	_______
Diluted	$       0.34	$       0.25	$     (0.63)	$       0.47
	_______	_______	_______	_______
Weighted average shares outstanding:
Basic	65,087	71,070	57,709	71,032
	_______	_______	_______	_______
Diluted	71,303	77,236	57,709	76,904
	_______	_______	_______	_______
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,
	2004	2003
Cash flows from operating activities:
Net earnings	$    29,493	$   35,945
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	27,763	21,991
Provision for uncollectible accounts receivable	6,053	3,527
Amortization of deferred gain on sale of headquarters facility	(535)	(521)
Write-off of deferred loan issuance costs	4,534	-
Non-cash amortization of stock award to directors	114	-
Tax benefit related to exercise of stock options	30,177	-
Change in assets and liabilities:
Increase in accounts receivable, net	(20,741)	(10,342)
Decrease (increase) in other accounts receivable	(784)	175,000
Decrease in current deferred income taxes	(1,346)	(66,838)
Decrease in inventories	1,406	4,148
Increase in prepaid expenses and other current assets	(3,981)	(1,979)
Increase (decrease) in accounts payable	(800)	1,218
Increase in accrued expenses	15,945	18,100
Increase (decrease) in income taxes payable	(39,403)	20,282
Increase (decrease) in deferred income taxes, net	1,580	(1,826)
Net cash provided by operating activities	49,475	198,705
	_______	_______
Cash flows from investing activities:
Additions to property, plant and equipment	(42,376)	(34,381)
Increase in inventory to be converted into equipment for short-term rental	(4,800)	(1,300)
Dispositions of property, plant and equipment	1,293	634
Business acquisitions, net of cash acquired	-	(2,224)
Increase in other assets	(264)	(425)
Net cash used by investing activities	(46,147)	(37,696)
	_______	_______
Cash flows from financing activities:
Repayment of notes payable, long term, capital lease and other obligations	(186,177)	(114,856)
Initial public offering of common stock:
Proceeds from issuance of common stock	105,000	-
Stock issuance costs	(10,604)	-
Proceeds from exercise of stock options	8,214	846
	_______	_______
Net cash used by financing activities	(83,567)	(114,010)
	_______	_______
Effect of exchange rate changes on cash and cash equivalents	(332)	1,489
Net increase (decrease) in cash and cash equivalents	(80,571)	48,488
Cash and cash equivalents, beginning of period	156,064	54,485
Cash and cash equivalents, end of period	$    75,493	$  102,973
	_______	_______
Cash paid during the six months for:
Interest (1)	$    25,431	$    14,903
Income taxes	$    28,283	$    69,392
Non-cash activity:
Non-cash consideration for exercise of stock options	$      6,354	$             -

        1) 2004 amount includes purchase premiums of $7.7 million related to the prepayments on our 7 3/8% Senior Subordinated Notes due 2013.

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 unaudited condensed consolidated 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 period s are not necessarily indicative of results that may be expected for the fiscal year as a whole. The consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, 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 2004 presentation.

(b)     Stock-Based Compensation

      We use the intrinsic value method to account for our stock compensation plans. If the compensation cost for our stock-based employee compensation plans 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 (loss) to common shareholders and earnings (loss) per share would have been adjusted 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 (loss) per share information):

	Three months ended		Six months ended
	June 30,		June 30,
	2004	2003	2004	2003
Net earnings (loss) available to common shareholders
as reported	$  24,035	$  19,018	$ (36,111)	$  35,945
	______	______	______	______
Pro forma net earnings available to common shareholders:
Net earnings (loss) available to common
shareholders as reported	$  24,035	$  19,018	$ (36,111)	$  35,945
Compensation expense under intrinsic method	46	988	73	1,646
Compensation expense under fair value method	(905)	(401)	(1,206)	(775)
	______	______	______	______
Pro forma net earnings (loss) available to common shareholders	$  23,176	$  19,605	$ (37,244)	$  36,816
	______	______	______	______
Net earnings (loss) per share available to common shareholders as reported:
Basic net earnings (loss) per common share	$      0.37	$      0.27	$    (0.63)	$      0.51
Diluted net earnings (loss) per common share	$      0.34	$      0.25	$    (0.63)	$      0.47
Pro forma net earnings (loss) per share available to common shareholders:
Basic net earnings per common share	$      0.36	$      0.28	$    (0.65)	$      0.52
Diluted net earnings per common share	$      0.33	$      0.25	$    (0.65)	$      0.48

      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 compensation expense.

      During the three and six-month periods ended June 30, 2004, we issued approximately 1.9 million and 2.7 million shares of common stock, respectively, under our stock-based compensation plans primarily through option exercises.

      During the three-month period ended June 30 2004, we granted approximatley 900,000 options to purchase shares of common stock under our stock compensation plans.

(c)     Other Significant Accounting Policies

      For further information on our significant accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements included in KCI's Annual Report on Form 10-K for the year ended December 31, 2003.

(2)      RECENT PUBLIC STOCK OFFERINGS

      On February 27, 2004, we completed an initial public offering ("IPO") of our common stock, through which we sold 3.5 million newly-issued shares and selling shareholders sold an aggregate of 17.2 million existing shares at a price of $30.00 per share. Net proceeds from the IPO to KCI were $94.4 million. The net proceeds, along with cash on hand, were used to redeem $71.75 million principal amount of our 7³/₈% Senior Subordinated Notes due 2013, together with a bond call premium of $5.3 million in connection with the redemption, to prepay $50.0 million of debt under our senior credit facility, and to pay management bonuses, payroll taxes and other expenses related to the IPO of $19.8 million. In March 2004, we wrote off $3.3 million in loan issuance costs associated with the retirement of our debt, which was included in interest expense.

      As part of the IPO, the holders of our then-outstanding Series A convertible preferred stock received cumulative preferred dividends paid-in-kind through December 31, 2005 of $65.6 million, and immediately thereafter, all of the then-outstanding shares of preferred stock were automatically converted into 19,199,520 shares of common stock.

      On June 16, 2004, we completed a secondary offering of our common stock, through which selling shareholders sold an aggregate of 16.1 million existing shares at a price of $47.50 per share. KCI did not sell any shares or receive any proceeds in the offering. We incurred $2.2 million of expenses related to the secondary offering.

(3)      SUPPLEMENTAL BALANCE SHEET DATA

      Accounts receivable consist of the following (dollars in thousands):

	June 30,	December 31,
	2004	2003
Trade accounts receivable:
Medical facilities	$ 129,367	$ 123,016
Third-party payers:
Medicare / Medicaid	39,549	36,392
Managed care, insurance and other	88,514	75,059
	_______	_______
	257,430	234,467
Medicare V.A.C. receivables prior to October 1, 2000	13,445	13,445
Employee and other receivables	1,492	1,724
	_______	_______
	272,367	249,636
Less:  Allowance for doubtful accounts	(44,366)	(36,253)
Allowance for Medicare V.A.C. receivables
prior to October 1, 2000	(13,445)	(13,445)
	_______	_______
	$ 214,556	$ 199,938
	_______	_______

      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,
	2004	2003
Finished goods	$ 12,331	$ 12,137
Work in process	3,277	2,847
Raw materials, supplies and parts	31,895	28,689
	______	______
	47,503	43,673
Less: Amounts expected to be converted
into equipment for short-term rental	(13,800)	(9,000)
Reserve for excess and obsolete
inventory	(2,880)	(2,420)
	______	______
	$ 30,823	$ 32,253
	______	______

(4)      LONG-TERM OBLIGATIONS AND DERIVATIVE FINANCIAL INSTRUMENTS

Senior Credit Facility

      On June 1, 2004, we made an optional prepayment of $30.0 million on our senior credit facility and our remaining outstanding balance as of June 30, 2004 was $397.6 million.

7³/₈% Senior Subordinated Notes due 2013

      During the second quarter of 2004, we purchased $34.3 million principal amount of our 7³/₈% Senior Subordinated Notes due 2013 at an aggregate market price of $36.7 million plus approximately $926,000 in accrued

but unpaid interest. In connection with these purchases, we wrote off $692,000 in loan issuance costs. As of June 30, 2004, $98.9 million of the notes remained outstanding. Wemay purchase additional amounts of our 7³/₈% Senior Subordinated Notes due 2013 in the open market and/or in privately negotiated transactions from time to time, subject to limitations in our senior credit facility.

(5)      EARNINGS (LOSS) PER SHARE

      The following table sets forth the reconciliation from basic to diluted weighted average common shares and the calculations of net earnings (loss) per common share for the periods presented. Net earnings (loss) per share was calculated using the weighted average number of common shares outstanding. Common stock equivalents, which consist of stock options and convertible preferred stock, were excluded from the computation of the weighted average number of common shares outstanding for the six-month period ended June 30, 2004 because their effect was antidilutive. Net earnings (loss) for basic and dilutedcalculations do not differ (in thousands, except per share data): (See Note 1 (b).)

	Three months ended		Six months ended
	June 30,		June 30,
	2004	2003	2004	2003
Net earnings	$ 24,035	$   19,018	$   29,493	$   35,945
Series A convertible preferred stock dividends	-	-	(65,604)	-
	______	______	______	______
Net earnings (loss) available to common shareholders	$ 24,035	$   19,018	$  (36,111)	$   35,945
	______	______	______	______
Weighted average shares outstanding:
Basic	65,087	71,070	57,709	71,032
Dilutive potential common shares from stock options (1)	6,216	6,166	-	5,872
Dilutive potential common shares from preferred stock conversion (1)	-	-	-	-
	______	______	______	______
Diluted	71,303	77,236	57,709	76,904
	______	______	______	______
Basic net earnings (loss) per common share available to
common shareholders	$      0.37	$       0.27	$      (0.63)	$      0.51
	______	______	______	______
Diluted net earnings (loss) per common share available to
common shareholders	$      0.34	$       0.25	$      (0.63)	$      0.47
	______	______	______	______

    (1) Due to their antidilutive effect, 6,128 dilutive potential common shares from stock options and 6,013 dilutive potential
          common shares from preferred stock conversion have been excluded from the diluted weighted average shares
          calculation for the six-month period ended June 30, 2004.

(6)      OTHER COMPREHENSIVE INCOME

      The Company follows Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," in accounting for comprehensive income and its components. Comprehensive income for the six months ended June 30, 2004 and 2003 were $29.8 million and $40.6 million, respectively, and for the three months ended June 30, 2004 and 2003 were $26.4 million and $22.6 million, respectively. The most significant adjustment to net earnings to arrive at comprehensive income consisted of a foreign currency translation adjustment.

(7)      COMMITMENTS AND CONTINGENCIES

      We are party to a number of legal proceedings for which provisions have been made, where necessary, in our financial statements to cover estimated costs. For a description of ongoing legal proceedings, please see our Annual Report on Form 10-K under the caption "Part I. Item 3. Legal Proceedings." For a description of recent developments in our legal proceedings for the second quarter of 2004, please see "Part II. Item 1. Legal Proceedings," within this report. Other than commitments for new product inventory, including disposable "for sale" products of $25.5 million, we have no material long-term capital commitments.

(8)      SEGMENT AND GEOGRAPHIC INFORMATION

      We are principally engaged in the rental and sale of therapeutic systems and surfaces throughout the United States and in 16 primary countries internationally. Revenues are attributed to individual countries based on the location of the customer.

      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 have two primary product lines including V.A.C. and Therapeutic Surfaces/Other. Revenues for each of our product lines are disclosed for our operating segments. No discrete financial information is available for our product lines other than revenue. Our product lines are marketed and serviced by the same infrastructure and, as a result, we do not manage our business by product line but rather by geographical segments. We use operating earnings to measure segment profit. We define operating earnings 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. Prior years have been made to conform with the current 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,
	2004	2003	2004	2003
Revenue:
USA
V.A.C.	$ 136,049	$   94,410	$ 257,638	$ 176,790
Therapeutic surfaces/other	43,599	43,633	91,951	88,881
	_______	_______	_______	_______
Subtotal - USA	179,648	138,043	349,589	265,671
International
V.A.C.	30,432	19,023	57,153	34,847
Therapeutic surfaces/other	26,905	25,811	55,077	49,362
	_______	_______	_______	_______
Subtotal - International	57,337	44,834	112,230	84,209
	_______	_______	_______	_______
	$ 236,985	$ 182,877	$ 461,819	$ 349,880
	_______	_______	_______	_______
Operating earnings:
USA	$   67,017	$   47,213	$ 127,180	$   91,735
International	6,913	6,657	13,652	11,104
Initial public offering expenses	(302)	-	(19,836)	-
Secondary offering expenses	(2,219)	-	(2,219)	-
Other (1):
Executive	(4,058)	(5,316)	(8,654)	(9,339)
Finance	(6,845)	(5,051)	(12,716)	(9,924)
Manufacturing/Engineering	(2,072)	(1,102)	(3,663)	(2,259)
Administration	(10,188)	(6,637)	(18,033)	(12,480)
	_______	_______	_______	_______
Total other	(23,163)	(18,106)	(43,066)	(34,002)
	_______	_______	_______	_______
	$   48,246	$   35,764	$   75,711	$   68,837
	_______	_______	_______	_______

      (1) 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.

(9)      GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

      On August 11, 2003, we issued and sold an aggregate of $205.0 million principal amount of 7³/₈% Senior Subordinated Notes due 2013. Of this amount, $98.9 million of the notes remain outstanding.

      The notes are fully and unconditionally guaranteed, jointly and severally, by each of KCI's direct and indirect 100% owned subsidiaries, other than any entity that is a controlled foreign corporation within the definition of Section 957 of the Internal Revenue code or a holding company whose only assets are investments in a controlled foreign corporation. Each of these subsidiaries is a restricted subsidiary, as defined in the indenture governing the notes. (See Note 4.) 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.

      The following tables present the condensed consolidating balance sheets of KCI as a parent company, our guarantor subsidiaries and our non-guarantor subsidiaries as of June 30, 2004 and December 31, 2003 and the related condensed consolidating statements of earnings for the three and six-month periods ended June 30, 2004 and 2003, and the condensed consolidating statements of cash flows for the six-month periods ended June 30, 2004 and 2003, respectively.

Table of Contents

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Balance Sheet
June 30, 2004
(dollars 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	$              -	$    42,885	$    32,608	$             -	$    75,493
Accounts receivable, net	-	162,184	56,177	(3,805)	214,556
Inventories, net	-	15,265	15,558	-	30,823
Deferred income taxes		24,095	-	-	24,095
Derivative financial instruments		1,282	-	-	1,282
Prepaid expenses and other current assets	-	10,222	5,571	-	15,793
	_______	_______	_______	_______	_______
Total current assets	-	255,933	109,914	(3,805)	362,042
	_______	_______	_______	_______	_______
Net property, plant and equipment	-	114,091	58,916	(10,094)	162,913
Loan and preferred stock issuance costs, net	-	13,273	-	-	13,273
Goodwill	-	39,779	9,012	-	48,791
Other assets, net	-	31,414	15,355	(17,555)	29,214
Intercompany investments and advances	(77,380)	524,910	6,723	(454,253)	-
	_______	_________	_______	_______	_______
	$  (77,380)	$ 979,400	$ 199,920	$ (485,707)	$  616,233
	_______	_________	_______	_______	_______
Liabilities and Shareholders' Equity (Deficit):
Current liabilities:
Accounts payable	$             -	$    24,919	$     8,675	$             -	$    33,594
Accrued expenses	14	94,503	27,758	-	122,275
Current installments of long-term debt	-	4,166	-	-	4,166
Current installments of capital lease obligations	-	3	1,501	-	1,504
Intercompany payables	-	11,558	-	(11,558)	-
	_______	_______	_______	_______	_______
Total current liabilities	14	135,149	37,934	(11,558)	161,539
	_______	_______	_______	_______	_______
Long-term debt, net of current installments	-	492,682	-	-	492,682
Capital lease obligations, net of current installments	-	-	1,298	-	1,298
Intercompany payables, noncurrent	-	(25,937)	25,937	-	-
Deferred income taxes, net	-	31,840	-	(2,592)	29,248
Deferred gain, sale of headquarters facility	-	8,647	-	-	8,647
Other noncurrent liabilities	-	15,175	-	(14,962)	213
	_______	_______	_______	_______	_______
	14	657,556	65,169	(29,112)	693,627
Shareholders' equity (deficit)	(77,394)	321,844	134,751	(456,595)	(77,394)
	_______	_________	_______	_______	_______
	$  (77,380)	$ 979,400	$ 199,920	$ (485,707)	$  616,233
	_______	_________	_______	_______	_______
See accompanying notes to condensed consolidated financial statements.

Condensed Consolidating Guarantor, Non-Guarantor And Parent Company Balance Sheet December 31, 2003 (dollars 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	$             -	$   129,695	$   26,369	$              -	$  156,064
Accounts receivable, net	-	153,199	49,903	(3,164)	199,938
Inventories, net	-	17,114	15,139	-	32,253
Deferred income taxes	-	22,749	-	-	22,749
Prepaid expenses and other current assets	-	9,594	3,926	(1,709)	11,811
	_______	________	_______	_______	_______
Total current assets	-	332,351	95,337	(4,873)	422,815
	_______	________	_______	_______	_______
Net property, plant and equipment	-	103,555	55,924	(14,271)	145,208
Loan and preferred stock issuance costs, net	-	19,779	-	-	19,779
Goodwill	-	39,785	9,012	-	48,797
Other assets, net	-	28,049	17,683	(17,235)	28,497
Intercompany investments and advances	(245,401)	642,737	15,333	(412,669)	-
	________	________	_______	_______	_______
	$ (245,401)	$1,166,256	$ 193,289	$ (449,048)	$ 665,096
	________	________	_______	_______	_______
Liabilities and Shareholders' Equity (Deficit):
Current liabilities:
Accounts payable	$             -	$    24,690	$     9,696	$              -	$   34,386
Accrued expenses	134	89,268	23,250	-	112,652
Current installments of long-term debt	-	4,800	-	-	4,800
Current installments of capital lease obligations	-	75	1,501	-	1,576
Derivative financial instruments	-	2,402	-	-	2,402
Intercompany payables	-	22,136	-	(22,136)	-
Income taxes payable	-	36,803	2,600	-	39,403
	_______	________	_______	_______	_______
Total current liabilities	134	180,174	37,047	(22,136)	195,219
	_______	________	_______	_______	_______
Long-term debt, net of current installments	-	678,100	-	-	678,100
Capital lease obligations, net of current installments	-	-	1,351	-	1,351
Intercompany payables, noncurrent	-	(21,500)	21,500	-	-
Deferred income taxes, net	-	28,838	-	(2,272)	26,566
Deferred gain, sale of headquarters facility	-	9,183	-	-	9,183
Other noncurrent liabilities	-	15,175	-	(14,963)	212
	_______	________	_______	_______	_______
	134	889,970	59,898	(39,371)	910,631
Series A convertible preferred stock	261,719	-	-	-	261,719
Shareholders' equity (deficit)	(507,254)	276,286	133,391	(409,677)	(507,254)
	_______	________	_______	_______	_______
	$ (245,401)	$1,166,256	$ 193,289	$ (449,048)	$ 665,096
	________	________	_______	_______	_______
See accompanying notes to condensed consolidated financial statements.

Parent Company Statement of Earnings
For the three months ended June 30, 2004
(dollars 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	$           -	$ 138,371	$   37,208	$             -	$ 175,579
Sales	-	48,172	20,733	(7,499)	61,406
	______	_______	______	______	_______
Total revenue	-	186,543	57,941	(7,499)	236,985
	______	_______	______	______	_______
Rental expenses	-	71,943	37,629	-	109,572
Cost of goods sold	-	13,840	5,389	(2,669)	16,560
	______	_______	______	______	_______
Gross profit	-	100,760	14,923	(4,830)	110,853
Selling, general and administrative
expenses	-	46,859	8,981	(2,942)	52,898
Research and development expenses	-	6,285	903	-	7,188
Initial public offering expenses	154	148	-	-	302
Secondary offering expenses	2,219	-	-	-	2,219
	______	_______	______	______	_______
Operating earnings (loss)	(2,373)	47,468	5,039	(1,888)	48,246
Interest income	-	120	38	-	158
Interest expense	-	(11,050)	(664)	664	(11,050)
Foreign currency gain (loss)	-	928	(727)	-	201
	______	_______	______	______	_______
Earnings (loss) before income
taxes (benefit) and equity in
earnings of subsidiaries	(2,373)	37,466	3,686	(1,224)	37,555
Income taxes (benefit)	(1,254)	14,433	782	(441)	13,520
	______	_______	______	______	_______
Earnings (loss) before equity
in earnings of subsidiaries	(1,119)	23,033	2,904	(783)	24,035
Equity in earnings of subsidiaries	25,154	2,905	-	(28,059)	-
	______	_______	______	______	_______
Net earnings	$   24,035	$   25,938	$    2,904	$  (28,842)	$   24,035
	______	_______	______	______	_______
See accompanying notes to condensed consolidated financial statements.

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the three months ended June 30, 2003
(dollars 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	$           -	$  110,928	$   29,926	$           -	$ 140,854
Sales	-	33,406	14,890	(6,273)	42,023
	______	_______	______	______	_______
Total revenue	-	144,334	44,816	(6,273)	182,877
	______	_______	______	______	_______
Rental expenses	-	60,306	27,605	-	87,911
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	-	35,946	4,104	-	40,050
Research and development expenses	-	4,420	19	-	4,439
	______	_______	______	______	_______
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
	_____	______	_____	______	_______
See accompanying notes to condensed consolidated financial statements.

Parent Company Statement of Earnings
For the six months ended June 30, 2004
(dollars 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	$            -	$ 267,644	$   73,843	$             -	$ 341,487
Sales	-	94,585	39,643	(13,896)	120,332
	______	_______	______	______	_______
Total revenue	-	362,229	113,486	(13,896)	461,819
	______	_______	______	______	_______
Rental expenses	-	140,479	74,499	-	214,978
Cost of goods sold	-	29,036	10,158	(5,866)	33,328
	______	_______	______	______	_______
Gross profit	-	192,714	28,829	(8,030)	213,513
Selling, general and administrative
expenses	-	90,181	14,201	(2,942)	101,440
Research and development expenses	-	12,546	1,761	-	14,307
Initial public offering expenses	19,584	252	-	-	19,836
Secondary offering expenses	2,219	-	-	-	2,219
	______	_______	______	______	_______
Operating earnings (loss)	(21,803)	89,735	12,867	(5,088)	75,711
Interest income	-	444	85	-	529
Interest expense	-	(29,894)	(708)	708	(29,894)
Foreign currency loss	-	-	(263)	-	(263)
	______	_______	______	______	_______
Earnings (loss) before income
taxes (benefit) and equity in
earnings of subsidiaries	(21,803)	60,285	11,981	(4,380)	46,083
Income taxes (benefit)	(8,540)	23,792	2,915	(1,577)	16,590
	______	_______	______	______	_______
Earnings (loss) before equity
in earnings of subsidiaries	(13,263)	36,493	9,066	(2,803)	29,493
Equity in earnings of subsidiaries	42,756	9,066	-	(51,822)	-
	______	_______	______	______	_______
Net earnings	$   29,493	$   45,559	$    9,066	$  (54,625)	$   29,493
Series A convertible preferred stock dividends	(65,604)	-	-	-	(65,604)
	______	_______	______	______	_______
Net earnings (loss) available to common
shareholders	$ (36,111)	$   45,559	$    9,066	$  (54,625)	$  (36,111)
	______	_______	______	______	_______
See accompanying notes to condensed consolidated financial statements.

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the six months ended June 30, 2003
(dollars 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	$           -	$  214,078	$   56,218	$            -	$   270,296
Sales	-	65,142	27,941	(13,499)	79,584
	________	_________	________	________	________
Total revenue	-	279,220	84,159	(13,499)	349,880
	________	_________	________	________	________
Rental expenses	-	114,982	52,308	-	167,290
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	-	68,222	8,309	-	76,531
Research and development expenses	-	8,399	465	-	8,864
	________	_________	________	________	________
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
	______	_______	_____	_____	______
See accompanying notes to condensed consolidated financial statements.

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For the six months ended June 30, 2004
(dollars 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	$    29,493	$  45,559	$   9,066	$ (54,625)	$  29,493
Adjustments to reconcile net earnings to net
cash provided by operating activities	(12,584)	(19,090)	1,416	50,240	19,982
	_______	_______	______	______	_______
Net cash provided by operating activities	16,909	26,469	10,482	(4,385)	49,475
	_______	_______	______	______	_______
Cash flows from investing activities:
Additions to property, plant and equipment	-	(28,010)	(10,382)	(3,984)	(42,376)
Increase in inventory to be converted into
equipment for short-term rental	-	(4,800)	-	-	(4,800)
Dispositions of property, plant and
Equipment	-	976	317	-	1,293
Increase in other assets	-	(2,912)	2,328	320	(264)
	_______	_______	______	______	_______
Net cash used by investing activities	-	(34,746)	(7,737)	(3,664)	(46,147)
	_______	_______	______	______	_______
Cash flows from financing activities:
Repayments of notes payable, long-term,
capital lease and other obligations	-	(186,124)	(53)	-	(186,177)
Initial public offering of common stock:
Proceeds from issuance of common stock	105,000	-	-	-	105,000
Stock issuance costs	(10,604)	-	-	-	(10,604)
Proceeds from exercise of stock options	8,214	-	-	-	8,214
Proceeds (payments) on intercompany
investments and advances	(118,328)	104,938	13,047	343	-
Other	(1,191)	2,653	(9,500)	8,038	-
	_______	_______	______	______	_______
Net cash provided (used) by financing activities	(16,909)	(78,533)	3,494	8,381	(83,567)
	_______	_______	______	______	_______
Effect of exchange rate changes on
cash and cash equivalents	-	-	-	(332)	(332)
	_______	_______	______	______	_______
Net increase (decrease) in cash and
cash equivalents	-	(86,810)	6,239	-	(80,571)
Cash and cash equivalents,
beginning of period	-	129,695	26,369	-	156,064
	_______	_______	______	______	_______
Cash and cash equivalents, end
of period	$             -	$  42,885	$   32,608	$             -	$  75,493
	_______	_______	______	______	_______
See accompanying notes to condensed consolidated financial statements.

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For the six months ended June 30, 2003
(dollars 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 (payments) on 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
	_______	_______	______	______	_______
See accompanying notes to condensed consolidated financial statements.

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the consolidated condensed financial statements and the accompanying notes to this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under "Risk Factors."

General

      Kinetic Concepts, Inc. is a global medical technology company with leadership positions in advanced wound care and therapeutic surfaces. We design, manufacture, market and service a wide range of proprietary products that can significantly improve clinical outcomes while reducing the overall cost of patient care by accelerating the healing process or preventing complications. We derive our revenue from the rental and sale of products in two primary categories: Advanced Wound Care and Therapeutic Surfaces. Our advanced wound care systems incorporate our proprietary V.A.C. technology, which has been clinically demonstrated to promote wound healing and to reduce the cost of treating patients with difficult-to-treat wounds. Our therapeutic surfaces, including specialty hospital beds, mattress replacement systems and overlays, are designed to address complications associated with immobility and obesity, such as pressure sores and pneumonia.

      We have direct operations in the United States, Canada, Western Europe, Australia, Singapore and South Africa, and we conduct additional business through distributors in Latin America, the Middle East, Eastern Europe and Asia. We manage our business in two geographical segments, USA and International. In the United States, which accounted for 75.7% of our revenue for the six months ended June 30, 2004, we have a substantial presence in all care type settings. In the U.S. acute and extended care settings, which accounted for more than half of our U.S. revenue, we directly bill our customers, such as hospitals and extended care facilities. In the U.S. home care setting, where our revenue comes predominantly from V.A.C. systems, we provide products and services directly to patients and we directly bill third-party payers, such as Medicare and private insurance. Internationally, substantially all of our revenue is generated from the acute care setting, and therefore only a small portion of international V.A.C. revenue comes from home care. However, if we are able to gain home care reimbursement for V.A.C. therapy with third-party payers in Europe and other international locations, we believe revenue from the home care market could substantially increase.

      Since the fourth quarter of 2000, our growth has been driven primarily by increased revenue from V.A.C. system rentals and sales, which accounted for approximately 68.2% of total revenue for the six months ended June 30, 2004, up from 60.5% for the same period in 2003. We expect V.A.C. revenue 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.

      For the six months ended June 30, 2004, worldwide V.A.C. revenue from the combined acute and extended care settings grew 49.7%, and V.A.C. revenue from the home care setting grew 47.5% as compared to the six months ended June 30, 2003, respectively. For the six months ended June 30, 2004, the home care market accounted for 43.6% of V.A.C. revenue and 29.7% of our total revenue. V.A.C. systems used in the home are reimbursed by government insurance (Medicare and Medicaid), private insurance and managed care organizations.

      We believe that the key factors underlying V.A.C. growth over the past year have been:

   - Improving V.A.C.'s acceptance among customers and physicians, both in terms of the number of users and the
       extent of use by each customer or physician.

   - Encouraging market expansion by adding new wound type indications for V.A.C. use and increasing the
      percentage of wounds that are considered good candidates for V.A.C. therapy. Recent examples of
      advances include the use of V.A.C. in open abdominal wounds, sternotomies and highly-infected wounds.

   - Expanding our contractual relationships with third-party payers. We have increased the number of reported
       lives that we have under contract with private insurance and managed care organizations from fewer than 20
       million in mid-2000 to over 200 million as of June 30, 2004.

      Over the last three years, we have focused our marketing and selling efforts on increasing physician awareness of the benefits of V.A.C. therapy. These efforts are targeted at physician specialties that provide care to the majority of patients with wounds in our target categories. Within these specialties, we focus on those clinicians who serve the largest number of wound care patients. Over time, we have added new specialties as awareness in our initial priority groups begin to approach appropriate levels.

      Continuous enhancements in product portfolio and positioning are also important to our continued growth and market penetration. In 2003 and the first six months of 2004, we benefited from the continuing rollout of the new V.A.C.^ATS and the V.A.C. Freedom, which began in late 2002. These advanced technology systems have significantly increased customer acceptance and value perception. We also benefited from the introduction of three new dressing systems designed to improve ease-of-use and effectiveness in treating pressure ulcers and serious abdominal wounds.

      At the same time, ongoing clinical experience and studies have increased the market acceptance of V.A.C. and expanded the range of wounds considered to be good candidates for V.A.C. therapy. We believe this growing base of data and clinical experience is driving the trend toward use of the V.A.C. on a routine basis for appropriate wounds.

      Our other major product category, therapeutic surfaces, has been a stable revenue generating line of business for the last three years. Therapeutic surfaces/other revenue accounted for approximately $147.0 million in revenue in the first six months of 2004, up from $138.2 million in the prior-year period.

Recent Developments

      On February 27, 2004, we completed an initial public offering ("IPO") of our common stock, through which we sold 3.5 million newly-issued shares and selling shareholders sold an aggregate of 17.2 million existing shares at a price of $30.00 per share. Net proceeds from the IPO to KCI totaled $94.4 million. The net proceeds, along with cash on hand, were used to redeem $71.75 million of our 7³/₈% Senior Subordinated Notes due 2013, together with a bond call premium of $5.3 million in connection with the redemption, to prepay $50.0 million of debt under our senior credit facility, and to pay management bonuses, payroll taxes and other expenses related to the IPO of $19.8 million. In March 2004, we wrote off $3.3 million in loan issuance costs associated with the retirement of our debt, which is included in interest expense.

      As part of the IPO, the holders of our then-outstanding Series A convertible preferred stock received cumulative preferred dividends paid-in-kind through December 31, 2005 of $65.6 million, and immediately thereafter, all of the then-outstanding shares of preferred stock were automatically converted into 19.2 million shares of common stock.

      On June 1, 2004, we made an optional prepayment of $30.0 million on our senior credit facility. During the second quarter of 2004, we also purchased $34.3 million principal amount of our 7³/₈% Senior Subordinated Notes due 2013 at an aggregate market price of $36.7 million plus approximately $926,000 in accrued but unpaid interest. In connection with these purchases, we wrote off $692,000 in loan issuance costs associated with theprepayment of these notes. As of June 30, 2004, $98.9 million of the notes remained outstanding. Wemay purchase additional amounts of our 7³/₈% Senior Subordinated Notes due 2013 in the open market and/or in privately negotiated transactions from time to time, subject to limitations in our senior credit facility.

      On June 16, 2004, we completed a secondary offering of our common stock, through which selling shareholders sold an aggregate of 16.1 million existing shares at a price of $47.50 per share. KCI did not sell any shares or receive any proceeds in the secondary offering. We incurred $2.2 million of expenses related to the secondary offering.

Results of Operations

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

	Revenue Relationship
	Three months ended June 30,			Six months ended June 30,
			%				%
	2004	2003	Change		2004	2003	Change
Revenue:
Rental	74 %	77 %	24.7 %		74 %	77 %	26.3 %
Sales	26	23	46.1		26	23	51.2
	___	___			___	___
Total revenue	100 %	100 %	29.6 %		100 %	100 %	32.0 %
Rental expenses	46	48	24.6		47	48	28.5
Cost of goods sold	7	8	12.6		7	8	17.5
	___	___			___	___
Gross profit	47	44	38.1		46	44	38.4
Selling, general and administrative expenses	22	22	32.1		22	22	32.5
Research and development expenses	3	2	61.9		3	2	61.4
Initial public offering expenses	-	-	-		4	-	-
Secondary offering expenses	1	-	-		1	-	-
	___	___			___	___
Operating earnings	21	20	34.9		16	20	10.0
Interest income	-	-	(54.5)		-	-	(29.2)
Interest expense	(5)	(4)	(37.3)		(6)	(5)	(84.2)
Foreign currency gain (loss)	-	1	(91.5)		-	1	(106.3)
	___	___			___	___
Earnings before income taxes	16	17	23.4		10	16	(19.9)
Income taxes	6	7	18.5		4	6	23.1
	___	___			___	___
Net earnings	10 %	10 %	26.4 %		6 %	10 %	(17.9) %
	___	___			___	___

The following table sets forth, for the periods indicated, the amount of revenue derived from each of our geographical segments, USA and International (dollars in thousands):

	Three months ended June 30,			Six months ended June 30,
			%				%
	2004	2003	Change		2004	2003	Change
USA
V.A.C.
Rental	$ 101,447	$  74,555	36.1 %		$ 191,354	$ 139,843	36.8 %
Sales	34,602	19,855	74.3		66,284	36,947	79.4
	_______	_______			_______	_______
Total V.A.C.	136,049	94,410	44.1		257,638	176,790	45.7
Therapeutic surfaces/other
Rental	37,406	36,373	2.8		77,207	74,235	4.0
Sales	6,193	7,260	(14.7)		14,744	14,646	0.7
	_______	_______			_______	_______
Total therapeutic surfaces/other	43,599	43,633	(0.1)		91,951	88,881	3.5
Total USA rental	138,853	110,928	25.2		268,561	214,078	25.5
Total USA sales	40,795	27,115	50.5		81,028	51,593	57.1
	_______	_______			_______	_______
Subtotal - USA	$ 179,648	$ 138,043	30.1		$ 349,589	$ 265,671	31.6
	_______	_______			_______	_______
International
V.A.C.
Rental	$   15,413	$    9,842	56.6		$  28,787	$   17,660	63.0
Sales	15,019	9,181	63.6		28,366	17,187	65.0
	_______	_______			_______	_______
Total V.A.C.	30,432	19,023	60.0		57,153	34,847	64.0
Therapeutic surfaces/other
Rental	21,313	20,084	6.1		44,139	38,558	14.5
Sales	5,592	5,727	(2.4)		10,938	10,804	1.2
	_______	_______			_______	_______
Total therapeutic surfaces/other	26,905	25,811	4.2		55,077	49,362	11.6
Total International rental	36,726	29,926	22.7		72,926	56,218	29.7
Total International sales	20,611	14,908	38.3		39,304	27,991	40.4
	_______	_______			_______	_______
Subtotal - International	$   57,337	$   44,834	27.9		$ 112,230	$   84,209	33.3
	_______	_______			_______	_______
Total revenue	$ 236,985	$ 182,877	29.6%		$ 461,819	$ 349,880	32.0%
	_______	_______			_______	_______

Comparison of Three Months ended June 30, 2004 and 2003

Total Revenue. Total revenue in the second quarter of 2004 was $237.0 million, an increase of $54.1 million, or 29.6%, from the prior-year period. Foreign currency exchange movements favorably impacted revenue for the second quarter by 1.9%. The remaining growth in total revenue over the prior period was primarily due to the increased rental and sales volumes for V.A.C. wound healing devices and related disposables. The growth in V.A.C. was enhanced by the worldwide availability of the V.A.C.^ATS and V.A.C. Freedom, increased physician awareness of the benefits of V.A.C. therapy and increased product adoption across wound types.

Domestic Revenue. Total domestic revenue for the second quarter of 2004 was $179.6 million, an increase of $41.6 million, or 30.1%, from the prior-year period, due to increased rental and sales volumes for V.A.C. wound healing devices and related disposables.  

      Total domestic V.A.C. revenue was $136.0 million, an increase of $41.6 million, or 44.1%, from the prior-year period. Domestic V.A.C. rental revenue of $101.4 million increased by $26.9 million, or 36.1%, due to a 42.4% increase in average units on rent for the quarter as compared to the prior-year quarter. This increase was partially due to continued market acceptance of the V.A.C.^ATS and V.A.C Freedom systems introduced in late 2002, which have now been fully implemented in the United States, as well as increased awareness of the benefits of V.A.C. therapy. This increase was partially offset by decreased average V.A.C. rental pricing period over period due primarily to the continued shift away from all-inclusive pricing for managed care organizations, which resulted in revenue movement from the rental classification to the sales classification. Domestic V.A.C. sales revenue of $34.6 million increased in the second quarter of 20 04 by $14.7 million, or 74.3%, from the prior-year period, due to higher sales volumes for V.A.C. disposables, improved price realization from increased sales of our higher therapy V.A.C.^ATS and V.A.C. Freedom disposables and a shift in pricing methodology for managed care organizations away from all-inclusive pricing.

      Domestic therapeutic surfaces/other revenue of $43.6 million in the second quarter of 2004 was substantially unchanged from the prior-year period. Domestic therapeutic surfaces rental revenue for the second quarter of 2004 of $37.3 million increased $1.1 million, or 3.0%, primarily due to a 4.8% price increase resulting from favorable product mix, partially offset by a 1.7% decrease in the average number of units on rent as compared to the prior-year period. The change in our domestic therapeutic surface rental product mix resulted from increased demand for our bariatric products, and our other higher therapeutic products, where fewer competitive alternatives exist.

International Revenue. Total international revenue for the second quarter of 2004 of approximately $57.3 million increased $12.5 million, or 27.9%, from the prior-year period as a result of increased V.A.C. demand and favorable foreign currency exchange movements. Favorable foreign currency exchange movements contributed 7.6% to the variance.

      Total international V.A.C. revenue in the second quarter of 2004 was $30.4 million, an increase of $11.4 million, or 60.0%, from the prior-year period. Foreign currency exchange movements favorably impacted international V.A.C. revenue by 10.5% over the prior year period. International V.A.C. rental revenue of $15.4 million increased in the second quarter of 2004 by $5.6 million, or 56.6%, due to a 37.8% increase in average units on rent per month, together with a 6.8% increase in average rental price due to favorable product mix changes. International V.A.C. sales revenue of $15.0 million increased in the second quarter of 2004 by $5.8 million, or 63.6%, from the prior-year period, due to increased sales volumes for V.A.C. disposables associated with increased V.A.C. system rentals along with increased price realization from the sale of higher therapy disposables associated with the V.A.C.^ATS .

      International therapeutic surfaces/other revenue of $26.9 million for the second quarter of 2004 increased $1.1 million, or 4.2%, from the prior-year period. Favorable foreign currency exchange movements accounted for the majority of this variance as higher rental and sales volumes were offset by lower price realization due to competitive pressures.

Rental Expenses. Rental, or "field," expenses of $109.6 million for the second quarter of 2004 increased $21.7 million, or 24.6%, including the effect of foreign currency exchange rate fluctuations, from $87.9 million in the prior-year period. Field expenses are generally semi-variable and fluctuate with revenue. Field expenses, as a percentage of total rental revenue, were flat period-to-period. We are realizing efficiencies in our service model. However, these efficiencies were offset by our increasing investment in marketing, the impact of the revenue movement between the rental classification to the sales classification as a result of our all-inclusive pricing discussed above and the impact of foreign currency exchange movements on our international business.

Cost of Goods Sold. Cost of goods sold of $16.6 million in the second quarter of 2004 increased approximately $1.8 million, or 12.6%, from $14.7 million in the prior-year period due to increased sales of V.A.C. disposables. Sales margins increased to 73.0% in the second quarter of 2004 compared to 65.0% in the prior-year period due to the shift away from all-inclusive pricing arrangements with managed care organizations, favorable product mix changes and continued cost reductions resulting from our global supply contract for V.A.C. disposables.

Gross Profit. Gross profit of $110.9 million in the second quarter of 2004 increased $30.6 million, or 38.1%, from $80.3 million in the prior-year period due primarily to the period-to-period increase in revenue. Gross profit margin in the second quarter of 2004 was 46.8%, up from 43.9% in the prior-year period. Sales productivity gains and improved service efficiency combined with favorable product mix changes contributed to the margin expansion.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $12.8 million, or 32.1%, to $52.9 million in the second quarter of 2004 from $40.1 million in the prior-year period. As a percentage of total revenue, selling, general and administrative expenses increased to 22.3% in the second quarter of 2004 as compared to 21.9% in the prior-year period. The increase in selling, general and administrative expenses for the second quarter as a percentage of revenue relates to increased employer payroll taxes of $1.1 million associated with stock option exercises.

Research and Development Expenses. Research and development expenses, including clinical studies, increased approximately $2.7 million, or 61.9%, to $7.2 million for the current quarter compared to $4.4 million in the prior-year period due to our commitment to invest in research and development and clinical studies. As a percentage of total revenue, research and development expenses increased to 3.0% in the second quarter of 2004 as compared to 2.4% in the prior-year period.

Operating Earnings. Operating earnings for the second quarter of 2004, including expenses related to our stock offerings, increased approximately $12.5 million, or 34.9%, to $48.2 million compared to $35.8 million in the prior-year period. Operating margins for the second quarter of 2004, including expenses related to our stock offerings, increased from 19.6% in the prior-year quarter to 20.4%. Operating margins were unfavorably impacted by the expenses related to our stock offerings. Improvements in operating margins are due primarily to gross profit margin expansion driven by sales productivity gains, improved service efficiency and a change in our sales product mix to the higher therapeutic disposables associated with the V.A.C.^ATS and V.A.C. Freedom.

Interest Expense. Interest expense in the second quarter of 2004 was $11.1 million compared to $8.1 million in the prior-year period. This increase is due to the payment of bond purchase premiums of $2.4 million and the write-off of $692,000 of loan issuance costs associated with the redemption of a portion of our outstanding 7³/₈% Senior Subordinated Notes due 2013. While our average outstanding total debt during the second quarter was higher than the prior year comparable quarter, our effective interest rate was lower totally offsetting the increase arising from our increased leverage. (See Notes 2 and 4 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.)

Net Earnings. Net earnings for the second quarter of 2004, including after tax expenses of $3.6 million related to our stock offerings and debt repayments, were $24.0 million, an increase of $5.0 million, or 26.4% from the prior-year period. The effective tax rate for the second quarter of 2004 was 36.0% compared to 37.5% for the same period a year ago. The income tax reduction is primarily attributable to a higher proportion of taxable income in lower tax jurisdictions.

Earnings per Share. Including after-tax expenses of $3.6 million related to our offerings and debt prepayments, we reported net earnings per diluted share of $0.34 for the first quarter compared to $0.25 in the prior year.

Comparison of Six Months ended June 30, 2004 and 2003

Total Revenue. Total revenue in the first six months of 2004 was $461.8 million, an increase of $111.9 million, or 32.0%, from the prior-year period. Foreign currency exchange movements favorably impacted revenue for the first six months of 2004 by 3.0%. The remaining increase over the prior year related primarily to increased rental and sales volumes for V.A.C. wound healing devices and related disposables. The growth in V.A.C. was enhanced by the worldwide availability of the V.A.C.^ATS and V.A.C. Freedom in the first six months of 2004, increased physician awareness of the benefits of V.A.C. therapy, and increased product adoption across wound types.

Domestic Revenue. Total domestic revenue for the first six months of 2004 was $349.6 million, an increase of $83.9 million, or 31.6%, from the prior-year period primarily due to increased rental and sales volumes for V.A.C. wound healing devices and related disposables.

      Total domestic V.A.C. revenue was $257.6 million, an increase of $80.8 million, or 45.7%, from the prior-year period. Domestic V.A.C. rental revenue of $191.4 million increased by $51.5 million, or 36.8%, due to a 45.6% increase in average units on rent per month for the six months as compared to the prior-year period. Average V.A.C. rental pricing decreased 6.5% period over period, due primarily to the continued shift away from all-inclusive pricing for managed care organizations, which resulted in a revenue movement from the rental classification to the sales classification. Domestic V.A.C. sales revenue of approximately $66.3 million increased in the first six months of 2004 by $29.3 million, or 79.4%, from the prior-year period due to higher sales volume for V.A.C. disposables associated with V.A.C. system rentals, improved price realization from increased sales of our higher therapy disposables associated with the V.A.C.^ATS a nd V.A.C Freedom and a shift in pricing methodology for managed care organizations.

      Domestic therapeutic surfaces/other revenue of $92.0 million increased in the first six months of 2004 by $3.1 million, or 3.5%, from the prior-year period. Therapeutic surfaces rental revenue for the first six months of 2004 of $77.0 million increased $3.1 million, or 4.2%, over the prior year primarily due to a 5.7% price increase resulting from changes in our product mix towards higher-therapy products, partially offset by a 1.9% decrease in the average number of units on rent per month as compared to the prior-year period.

International Revenue. Total international revenue for the first six months of 2004 of $112.2 million increased $28.0 million, or 33.3%, from the prior-year period as a result of increased V.A.C. demand, higher therapeutic surface rental revenue and favorable foreign currency exchange movements. Foreign currency exchange movements favorably impacted total international revenue by 12.7% over the prior year period.

      Total international V.A.C. revenue in the first six months of 2004 was $57.2 million, an increase of $22.3 million, or 64.0%, from the prior-year period. Favorable foreign currency exchange movements impacted international V.A.C. revenue by 15.5%. International V.A.C. rental revenue of $28.8 million increased in the first six months of 2004 by $11.1 million, or 63.0%, due to a 39.7% increase in average units on rent per month, together with a 5.6% increase in average rental price due to favorable product mix changes. Foreign currency exchange movements impacted international V.A.C. rental revenue favorably by 15.5%. International V.A.C. sales revenue of $28.4 million increased in the first six months of 2004 by $11.2 million, or 65.0%, from the prior-year period due to increased sales volume for V.A.C. disposables associated with increased V.A.C. system rentals along with increased price realization from the sale of higher th erapy disposables associated with the V.A.C.^ATS Foreign currency exchange movements impacted international V.A.C. sales revenue favorably by 15.9%.

      International therapeutic surfaces/other revenue of $55.1 million for the first six months of 2004 increased $5.7 million, or 11.6%, from the prior-year period. Favorable foreign currency exchange movements contributed 10.7% to the variance. The remaining variance over the prior year relates to a 15.6% increase in the average number of therapeutic surface rental units on rent, partially offset by a 10.7% decline in average rental pricing during the period. The decline in average rental price resulted primarily from competitive pressures and changes in product mix.

Rental Expenses. Rental, or "field," expenses of $215.0 million for the first six months of 2004 increased $47.7 million, or 28.5%, including the effect of foreign currency exchange rate movements, from $167.3 million in the prior-year period. Field expenses are generally semi-variable and fluctuate with revenue. Field expenses for the first six months of 2004 represented 63.0% of total rental revenue compared to 61.9% in the prior-year period. We are realizing efficiencies in our service model. However, these efficiencies were entirely offset by our increasing investment in marketing and the impact of foreign currency exchange movements on our international business. Also contributing to this variance was the impact of the shift from all-inclusive pricing, which had the effect of moving revenue from the rental classification to the sales classification.

Cost of Goods Sold. Cost of goods sold of $33.3 million in the first six months of 2004 increased approximately $5.0 million, or 17.5%, from $28.4 million in the prior-year period due to increased sales of V.A.C. disposables and foreign currency exchange rate variances. Sales margins increased to 72.3% in the first six months of 2004 compared to 64.4% in the prior-year period due to the shift away from all-inclusive pricing arrangements discussed above, favorable product mix changes along with continued cost reductions resulting from our global supply contract for V.A.C. disposables.

Gross Profit. Gross profit in the first six months of 2004 increased $59.3 million, or 38.4%, to $213.5 million from $154.2 million in the prior-year period. Gross profit margin in the first six months of 2004 was 46.2%, up from 44.1% in the prior-year period. Sales productivity gains and improved service efficiency combined with favorable product mix changes contributed to the margin expansion.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $24.9 million, or 32.5%, to $101.4 million in the first six months of 2004 from $76.5 million in the prior-year period. As a percentage of total revenue, selling, general and administrative expenses increased slightly to 22.0% in the first six months of 2004 as compared to 21.9% in the prior-year period. The increase in selling, general and administrative expenses as a percentage of total revenue relates primarily to the impact of foreign currency exchange rate variances partially offset by increased administration efficiencies realized throughout the organization.

Research and Development Expenses. Research and development expenses, including clincal studies, increased $5.4 million, or 61.4%, to $14.3 million for the first six months of 2004 compared to $8.9 million, in the prior-year period due to our commitment to invest in research and development and clinical studies. As a percentage of total revenue, research and development expenses increased to 3.1% in the first six months of 2004 as compared to 2.5% in the prior-year period.

Initial Public Offering Expenses. We paid bonuses totaling $19.3 million, including related payroll taxes, and incurred approximately $562,000 of professional fees and other miscellaneous expenses in connection with our initial public offering. (See Note 2 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.)

Operating Earnings. Operating earnings for the first six months of 2004, including expenses related to our stock offerings, increased $6.9 million, or 10.0%, to $75.7 million compared to $68.8 million in the prior-year period. Operating margins for the six months ended June 30, 2004, including expenses related to our stock offerings, declined from the prior year due to the expenses incurred in connection with our stock offerings. Excluding costs related to our stock offerings, our operating margins increased. (See Non-GAAP Financial Information.) Operating profit margin expansion, excluding stock offering costs, was driven by sales productivity gains, improved service efficiency and a change in our sales product mix to the higher therapeutic disposables associated with the V.A.C.^ATS and V.A.C. Freedom.

Interest Expense. Interest expense in the first six months of 2004 was $29.9 million compared to $16.2 million in the prior-year period. This increase is due primarily to the payment of the bond call and purchase premiums of $7.7 million associated with the redemption of a portion of our outstanding 7³/₈% Senior Subordinated Notes due 2013, the write-off of $4.0 million of loan issuance costs on debt retired during the period and an increase in our average outstanding debt due to the recapitalization completed by KCI in the third quarter of 2003. (See Notes 2 and 4 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.)

Net Earnings. Net earnings for the first six months of 2004 were $29.5 million before preferred stock dividends, a decrease of $6.5 million, or 17.9% from the prior-year period due to after-tax expenses of $21.6 million related to our stock offerings and debt prepayments. After recognition of preferred stock dividends, KCI reported a net loss available to common shareholders of $36.1 million in the first six months of 2004. The effective tax rate for the first six months of 2004 was 36.0% compared to 37.5% for the same period a year ago. The income tax reduction is primarily attributable to a higher proportion of taxable income in lower tax jurisdictions.

Earnings per Share. Including after-tax expenses of $21.6 million and in-kind preferred stock dividends of $65.6 million associated with our stock offerings and debt prepayments, we reported a loss per diluted share, after dividends, of $0.63 for the first six months of 2004 compared to earnings per diluted share of $0.47 in the prior year.

Non-GAAP Financial Information

      On February 27, 2004, KCI completed an initial public offering ("IPO") of common stock. A total of 20.7 million shares of KCI common stock were sold in the IPO, including 3.5 million newly-issued shares. Upon the closing of the IPO, the Company accelerated recognition of in-kind preferred stock dividends and converted all outstanding shares of preferred stock into 19.2 million shares of common stock. On June 16, 2004, KCI completed a follow-on secondary stock offering of 16.1 million previously-issued common shares.

      On June 1, 2004, we made an optional prepayment of $30.0 million on our senior credit facility. During the second quarter of 2004, we also purchased $34.3 million principal amount of our 7³/₈% Senior Subordinated Notes due 2013 at an aggregate market price of $36.7 million plus approximately $926,000 in accrued but unpaid interest. In connection with these purchases, we wrote off $692,000 in loan issuance costs associated with theprepayment of these notes. As of June 30, 2004, $98.9 million of the notes remained outstanding and $397.6 million was outstanding under the senior credit facility.

      Supplementally, we have presented income statement items on a non-GAAP basis to exclude the impact of expenses and the acceleration of the in-kind preferred stock dividends incurred as result of our initial public offering, our secondary offering and debt prepayments. These non-GAAP financial measures do not replace the presentation of our GAAP financial results. We have provided this supplemental non-GAAP information because it provides meaningful information regarding our results on a basis that better facilitates comparisons between the periods presented. Management uses this non-GAAP financial information, along with other GAAP information, for reviewing the operating results of its business segments and for analyzing potential future business trends. In addition, we believe investors may use the information in a similar fashion. A reconciliation of our GAAP income statement for the periods presented to the non-GAAP financial information provi ded is included below.

Three months ended June 2004

      Excluding expenses related to our stock offerings, operating earnings for the quarter ended June 30, 2004 increased $15.0 million, or 42.0%, over the prior-year period to $50.8 million. Operating margins for the second quarter of 2004, excluding expenses related to our stock offerings, were 21.4%, up from 19.6% in the prior year. Excluding expenses related to the debt repayments of $64.3 million during the second quarter, interest expense would have been essentially unchanged from the prior-year period. Our stock offerings and debt prepayments had the effect of reducing net earnings for the second quarter by $3.6 million, or $0.05 per diluted share. Excluding expenses associated with the stock offerings and debt prepayments, net earnings for the 2004 second quarter of $27.6 million, were up 45.1% from the same period a year ago. Earnings per diluted share, excluding expenses associated with the stock offerings and debt prepayments, were $0.39 in the quarter compared to $0.25 in 2003, a 56.0% improvement over the prior year.

Six months ended June 2004

      Excluding expenses related to our stock offerings, operating earnings for the six months ended June 30, 2004 increased $28.9 million, or 42.0%, over the prior-year period to $97.8 million. Operating margins for the first six months of 2004, excluding expenses related to our stock offerings, were 21.2%, up from 19.7% in the prior year. Excluding the bond call and purchase premiums and write-off of loan issuance costs associated with our debt prepayments, interest expense of $18.2 million increased $2.0 million, or 12.2%, from the prior-year period due to the increase in average debt outstanding during the period resulting from the leveraged recapitalization completed in August 2003. Net earnings for the first half of 2004, excluding expenses and preferred stock dividends associated with the stock offerings and debt prepayments, were $51.1 million, up 42.1% from net earnings of $35.9 million for the same period a year ago. Net earnings per di luted share, excluding expenses and dividends associated with the KCI stock offerings and debt prepayments, were $0.73 in the first six months of 2004 compared to $0.47, an increase of 55.3% from the prior year.

      The following tables set forth, for the periods indicated, a reconciliation of our offerings and debt prepayment-related adjustments to the GAAP condensed consolidated statement of earnings:

Reconciliation of Condensed Consolidated Statement of Earnings (1)
For the Three Months ended June 30,
(in thousands, except per share data)
(unaudited)
	2004
			Excluding
		Costs and	Costs and
		Expenses Related	Expenses Related
		to Offerings and	to Offerings and
		Debt Prepayments	Debt Prepayments	GAAP	%
	GAAP	(non-GAAP)	(non-GAAP)	2003	Change (2)
Revenue:
Rental	$ 175,579	$           -	$ 175,579	$ 140,854	24.7 %
Sales	61,406	-	61,406	42,023	46.1
	_______	_______	_______	_______
Total revenue	236,985	-	236,985	182,877	29.6
	_______	_______	_______	_______
Rental expenses	109,572	-	109,572	87,911	24.6
Cost of goods sold	16,560	-	16,560	14,713	12.6
	_______	_______	_______	_______
Gross profit	110,853	-	110,853	80,253	38.1
Percent of total revenue	46.8%	-	46.8%	43.9%
Selling, general and administrative expenses	52,898	-	52,898	40,050	32.1
Research and development expenses	7,188	-	7,188	4,439	61.9
Initial public offering expenses	302	(302)	-	-	-
Secondary offering expenses	2,219	(2,219)	-	-	-
	_______	_______	_______	_______
Operating earnings	48,246	2,521	50,767	35,764	42.0
Percent of total revenue	20.4%	1.0%	21.4%	19.6%
Interest income	158	-	158	347	(54.5)
Interest expense	(11,050)	3,055	(7,995)	(8,050)	0.7
Foreign currency gain	201	-	201	2,368	(91.5)
	_______	_______	_______	_______
Earnings before income taxes	37,555	5,576	43,131	30,429	41.7
Income taxes	13,520	2,008	15,528	11,411	36.1
	_______	_______	_______	_______
Net earnings	$   24,035	$    3,568	$  27,603	$  19,018	45.1 %
Percent of total revenue	10.1%	1.5%	11.6%	10.4%
	_______	_______	_______	_______
Net earnings per share:
Basic	$       0.37		$      0.42	$      0.27	55.6 %
	_______		_______	_______
Diluted	$       0.34		$      0.39	$      0.25	56.0 %
	_______		_______	_______
Weighted average shares outstanding:
Basic	65,087		65,087	71,070
	_______		_______	_______
Diluted	71,303		71,303	77,236
	_______		_______	_______

(1) These adjusted non-GAAP financial measures do not replace the presentation of our GAAP financial results.
(2) Percentage change reflects the percentage variance between the 2004 (non-GAAP) results, excluding offering and debt prepayment
      related costs and expenses, and the 2003 GAAP results.

Reconciliation of Condensed Consolidated Statement of Earnings (1)
For the Six Months ended June 30,
(in thousands, except per share data)
	2004
			Excluding
		Costs and	Costs and
		Expenses Related	Expenses Related
		to Offerings and	to Offerings and
		Debt Prepayments	Debt Prepayments	GAAP	%
	GAAP	(non-GAAP)	(non-GAAP)	2003	Change (2)
Revenue:
Rental	$ 341,487	$             -	$ 341,487	$ 270,296	26.3 %
Sales	120,332	-	120,332	79,584	51.2
	_______	_______	_______	_______
Total revenue	461,819	-	461,819	349,880	32.0
	_______	_______	_______	_______
Rental expenses	214,978	-	214,978	167,290	28.5
Cost of goods sold	33,328	-	33,328	28,358	17.5
	_______	_______	_______	_______
Gross profit	213,513	-	213,513	154,232	38.4
Percent of total revenue	46.2%	-	46.2%	44.1%
Selling, general and administrative expenses	101,440	-	101,440	76,531	32.5
Research and development expenses	14,307	-	14,307	8,864	61.4
Initial public offering expenses	19,836	(19,836)	-	-	-
Secondary offering expenses	2,219	(2,219)	-	-	-
	_______	_______	_______	_______
Operating earnings	75,711	22,055	97,766	68,837	42.0
Percent of total revenue	16.4%	4.8%	21.2%	19.7%
Interest income	529	-	529	747	(29.2)
Interest expense	(29,894)	11,689	(18,205)	(16,228)	(12.2)
Foreign currency gain (loss)	(263)	-	(263)	4,156	(106.3)
	_______	_______	_______	_______
Earnings before income taxes	46,083	33,744	79,827	57,512	38.8
Income taxes	16,590	12,148	28,738	21,567	33.2
	_______	_______	_______	_______
Net earnings	$   29,493	$   21,596	$  51,089	$   35,945	42.1 %
Percent of total revenue	6.4%	4.7%	11.1%	10.3%
Series A convertible preferred stock dividends	(65,604)	65,604	-	-	-
	_______	_______	_______	_______
Net earnings (loss) available to
common shareholders	$  (36,111)	$   87,200	$  51,089	$   35,945	42.1 %
Percent of total revenue	(7.8)%	18.9%	11.1%	10.3%
	_______	_______	_______	_______
Net earnings (loss) per share available
to common shareholders:
Basic	$      (0.63)		$      0.89	$       0.51	74.5 %
	_______		_______	_______
Diluted	$      (0.63)		$      0.73	$       0.47	55.3 %
	_______		_______	_______
Weighted average shares outstanding:
Basic	57,709		57,709	71,032
	_______		_______	_______
Diluted	57,709	(3)	69,850	76,904
	_______		_______	_______

(1) These adjusted non-GAAP financial measures do not replace the presentation of our GAAP financial results.
(2) Percentage change reflects the percentage variance between the 2004 (non-GAAP) results, excluding offering and debt
       prepayment related costs and expenses, and the 2003 GAAP results.
(3) Due to their antidilutive effect, 6,128 dilutive potential common shares from stock options and 6,013 dilutive potential
       common shares from preferred stock conversion have been excluded from the diluted weighted average shares calculation
       for the six months ended June 30, 2004.

Liquidity and Capital Resources

General

      We require capital principally for capital expenditures, systems infrastructure, debt service, interest payments and working capital. Our capital expenditures consist primarily of manufactured rental assets, computer hardware and software and expenditures related to the need for additional office space for our expanding workforce. 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

      Based upon the current level of operations, we believe our existing cash resources as well as cash flows from operating activities and availability under our revolving credit facility will be adequate to meet our anticipated cash requirements for the next twelve months. During the first six months of 2004, our primary sources of capital were cash from operations and proceeds from our IPO. The following table summarizes the net cash provided and used by operating activities, investing activities and financing activities for the six months ended June 30, 2004 and 2003 (dollars in thousands):

	Six Months ended June 30,
	2004		2003
Net cash provided by operating activities	$   49,475	(1)	$ 198,705	(2)
Net cash used by investing activities	(46,147)		(37,696)
Net cash used by financing activities	(83,567)	(3)	(114,010)	(4)
Effect of exchange rates changes on cash and cash equivalents	(332)		1,489
	______		_______
Net increase (decrease) in cash and cash equivalents	$  (80,571)		$   48,488
	______		_______

      (1)  Cash flow from operations includes of $21.6 million of after-tax expenses associated with our stock offerings and debt
            prepayments. Working capital changes include a tax payment of $21.5 million primarily related to an anti-trust
            litigation settlement we reached in 2002. In addition, the current income tax payable reflects tax benefits of
            $10.4 million associated with our stock offerings and debt prepayments, which will be realized throughout 2004.
      (2) Includes receipt of $175.0 million related to anti-trust lawsuit settlement offset by tax payments on that settlement of
            $45.0 million. Excluding the impact of the antitrust lawsuit proceeds and related tax payment, net cash flow provided
            by operating activities was $68.7 million for the six month period ended June 30, 2003.
      (3) Includes receipt of $94.4 million in proceeds from the IPO, net of expenses of $10.6 million, prepayment of
            $80.0 million on our senior credit facility and purchase of $106.1 million of our 7³/₈% Senior Subordinated Notes
            due 2013.
      (4) Includes payment of $107.0 million of indebtedness on the previously-existing senior credit facility utilizing funds
             received related to anti-trust lawsuit settlement.

      At June 30, 2004, cash and cash equivalents of $75.5 million were available for general corporate purposes. In addition, availability under the revolving portion of our senior credit facility was $86.2 million, net of $13.8 million in letters of credit.

Working Capital

      At June 30, 2004, we had current assets of $362.0 million and current liabilities of $161.5 million resulting in a working capital surplus of $200.5 million, compared to a surplus of $227.6 million at December 31, 2003. The reduction in our working capital balance of $27.1 million was related primarily to the prepayment of $186.1 million in long-term debt using the net proceeds received in the IPO and cash on hand.

      Net cash flow from operating activities for the first six months of 2004 was $49.5 million as compared to $198.7 million for the prior-year period. Net cash flow for the first six months of 2004 includes reductions related to our stock offerings and debt prepayments of $53.5 million as described above. Net cash flow from operating activities for the first six months of 2003 includes the receipt of $175.0 million as the first installment of a two-part antitrust settlement partially offset by associated tax payments of $45.0 million. Excluding the impact of our stock offerings and debt prepayments and our anti-trust settlement on net earnings and working capital, net cash flow from operations for the six month periods ended June 30, 2004 and 2003 was $103.0 million and $68.7 million, respectively, an increase of $34.3 million, or 49.9%. On a recurring basis, the increase in net cash flow from operations for the six months ended June 30, 2004 over t he prior year comparable period relates to higher earnings and better working capital management.

      We expect rental and sales volumes for V.A.C. systems and related disposables to continue to increase. We believe that a significant portion of this increase will occur in the homecare market, which could have the effect of increasing accounts receivable due to the extended payment cycles we experience with most 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. As of June 30, 2004, we had $214.6 million of receivables outstanding, net of reserves of $44.4 million for doubtful accounts and $13.4 million for Medicare V.A.C. receivables prior to October 1, 2000. At June 30, 2004, our receivables, exclusive of related reserves and our Medicare receivables prior to October 1, 2000, were outstanding for an average of 82 days which decreased from 85 days as of December 31, 2003.

Capital Expenditures

      During the first six months of 2004 and 2003, we made capital expenditures of $42.4 million and $34.4 million, respectively. The period-to-period increase is due primarily to purchases of materials for V.A.C. systems and other high demand rental products. As of June 30, 2004, we have commitments to purchase new product inventory of $25.5 million over the next twelve months. Other than commitments for new product inventory, we have no material long-term purchase commitments as of the end of the period.

Debt Service

      As of June 30, 2004, scheduled principal payments under our senior credit facility for the years 2004, 2005 and 2006 are $2.0 million, $4.0 million and $4.0 million, respectively. To the extent that we have excess cash, we may use it to reduce our outstanding debt.

Senior Credit Facility

      Our senior credit facility consists of a seven-year term loan facility and a $100.0 million six-year revolving credit facility. During the second quarter of 2004, we made a $30.0 million prepayment on our senior credit facility. The following table sets forth the amounts outstanding under the 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, 2004 (dollars in thousands):

			Amount Available
		Amounts	For Additional
Senior Credit Facility	Effective Interest Rate	Outstanding	Borrowing
Revolving credit facility	-	$             -	$ 86,176 (2)
Term loan facility	4.38% (1)	397,600	-
		______	______
Total		$ 397,600	$ 86,176
		______	______

(1) The effective interest rate includes the effect of interest rate hedging arrangements. Excluding the interest rate hedging
       arrangements, our nominal interest rate as of June 30, 2004 was 3.59%.
(2) At June 30, 2004, amounts available under the revolving portion of our credit facility reflected a reduction of
       $13.8 million for letters of credit issued on our behalf, none of which have been drawn upon by the beneficiaries
       thereunder.

7³/₈% Senior Subordinated Notes due 2013

      On August 11, 2003, we issued and sold an aggregate of $205.0 million principal amount of our 7³/₈% Senior Subordinated Notes due 2013. On March 29, 2004, we redeemed $71.75 million principal amount of the notes at a price equal to 107.375% of the principal amount plus accrued but unpaid interest to the redemption date. On April 7, 2004, we completed an exchange offer to all holders of the notes, pursuant to which all holders exchanged their notes for a new issue of registered notes. The exchange notes are identical in all material respects to the notes that were exchanged, except that the exchange notes do not contain terms restricting their transfer or any terms related to registration rights. The exchange notes bear interest from the most recent date on which interest has been paid on the original notes.

      During the second quarter of 2004, we repurchased $34.3 million principal amount of our 7³/₈% Senior Subordinated Notes due 2013 at an aggregate market price of $36.7 million plus approximately $926,000 in accrued but unpaid interest. In connection with these repurchases, we wrote off $692,000 in loan issuance costs associated with the prepayment of these notes. As of June 30, 2004, $98.9 million of the notes remained outstanding. We may purchase additional amounts of our 7³/₈% Senior Subordinated Notes due 2013 in the open market and/or in privately negotiated transactions from time to time, subject to limitations in our senior credit facility.

Interest Rate Protection

      At December 31, 2003 the fair values of our interest rate swap agreements were negative and were adjusted to reflect a liability of approximately $2.4 million. Due to subsequent movements in interest rates, as of June 30, 2004, the fair values of our swap agreements were positive in the aggregate and were recorded as an asset of approximately $1.3 million. During the first six months of 2004 and 2003, we recorded interest expense of approximately $2.4 million and $770,000, respectively, as a result of interest rate protection agreements.

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 entered into a sole-source agreement with Avail Medical Products, Inc. for V.A.C. disposables. This supply agreement has a three-year term, beginning October 2002, with an automatic extension for an additional twelve months if neither party gives notice of termination. The agreement does not contain any firm purchase commitments for inventory in excess of our current purchase orders.

Critical Accounting Estimates

      For a description of our critical accounting estimates, please see our Annual Report on Form 10-K for the year ended December 31, 2003 under the heading "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates."

RISK FACTORS

Risks Related to Our Business

      We face significant competition in our V.A.C. business from companies offering alternative wound therapies and from Hill-Rom Company in our therapeutic surfaces business, which competition may result in lower growth rates if other companies commercialize competing products before or more successfully than us.

      The competition for our V.A.C. systems in wound healing and tissue repair consists mainly of wound-healing modalities which do not operate in a manner similar to V.A.C. systems, including traditional wound care dressings, other advanced wound care dressings, skin substitutes, products containing growth factors and other medical devices used for wound care. As the market for, and revenues generated by, the V.A.C. expands, we believe additional competitors may introduce products designed to mimic the V.A.C. BlueSky Medical Corporation and several have filed suit against BlueSky and related parties seeking to prohibit their continued marketing and sales of the devices, which we believe infringe our patent rights. We have also taken legal action in Europe to defend the V.A.C. from inappropriate competition. If a product similar to any V.A.C. system is introduced into the market by a legitimate competitor and protections afforded us under applicable law a re not adequate to prevent the rental or sale of the product, we could lose market share or experience downward pricing pressure.

      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 surfaces competition from Huntleigh Healthcare and Pegasus Limited.

      In medical technology, two types of competitive actions pose particularly important risks for potential market share loss. Significant technological innovations can result in substantial swings in market share if we are not able to launch comparably innovative products within months of a competitor's innovation. Similarly, significant changes in market share may also occur if competitors obtain sole-source contracts with a substantial proportion of GPOs, large health care providers or third-party payers, effectively limiting our market access. Although we are unaware of any current material competitive developments, future competitive initiatives by our competitors could result in the loss of market share, leading to lower growth rates and ultimately to reduced profitability.

      Our intellectual property is very important to our competitive position, especially for our V.A.C. products. If we are unsuccessful in protecting our intellectual property, particularly our rights to the Wake Forest patents that we rely on in our V.A.C. business, our competitive position would be harmed.

      We place considerable importance on obtaining and maintaining patent protection for our products, particularly, our rights to the Wake Forest patents that we rely on in our V.A.C. business. 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, the patents we own, or in which we have rights, may not be sufficiently broad to protect our technology position against competitors. Issued patents owned by us, or licensed to us, may be challenged, invalidated or circumvented, or the rights granted under issued patents may not provide us with competitive advantages. We would incur substantial costs and diversion of management resources if we have to assert or defend our patent rights against others. Third parties may claim that we are infringing their intellectual property rights, and we may be found to infringe those intellectual property rig hts. Any unfavorable outcome in intellectual property disputes or litigation could cause us to lose our intellectual property rights in technology that is material to our products. In addition, we may not be able to detect infringement by third parties, and could lose our competitive position if we fail to do so.

      For example, the primary European V.A.C. patent, which we rely upon for patent protection in Europe, was recently subject to an opposition proceeding before the Opposition Division of the European Patent Office. Pursuant to a recent ruling, the patent was upheld, but was corrected to expand the range of pressures covered by the patent from 0.10-0.99 atmospheres to 0.01-0.99 atmospheres and was modified to provide that the "screen means" covered by our patent is polymer foam and, under European patent law, its equivalents. The screen means in the patent, among other things, helps to remove fluid from within and around the wound, distributes negative pressure within the wound, enhances the growth of granulation tissue and prevents wound overgrowth. In our V.A.C. systems, the foam dressing placed in the wound serves as the screen means. We use two different types of polymer foams as the screen means in our V.A.C. systems. KCI and the two companies who initiated the opposition proceeding have filed notices of appeal. We believe it will take two to three years to complete the appeal process and we may not be successful in the appeal. During the pendency of the appeal, the original patents will remain in place. The restriction on the type of screen means covered by the patent may lead competitors to believe that they can enter the market with products using screen means other than polymer foam. Although we do not believe that a product using another type of screen means would be as effective as the V.A.C., direct competition would result in significantly increased pricing pressure and could result in a loss of some of our existing customer base. Revenue for the V.A.C. product lines in Europe was $45.3 million for the six months ended June 30, 2004.

      We have agreements with third parties, including our exclusive license of the V.A.C. patents from Wake Forest, that provide for licensing of their 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.

      If we are unable to develop new generations of V.A.C. and therapeutic surface products and enhancements to existing products, we may lose market share as our existing patent rights begin to expire over time.

      Our success is dependent upon the successful development, introduction and commercialization of new generations of products and enhancements to existing products. Innovation in developing new product lines and in developing enhancements to our existing V.A.C. and surfaces products is required for us to grow and compete effectively. Over time, our existing foreign and domestic patent protection in both the V.A.C. and surfaces businesses will begin to expire, which could allow competitors to adopt our older unprotected technology into competing product lines. If we are unable to continue developing proprietary product enhancements to V.A.C. systems and surfaces products that effectively make older products obsolete, we may lose market share in our existing lines of business. In addition, if we fail to develop new lines of products, we will not be able to penetrate new markets. Innovation in enhancements and new products requires significant capital commitm ents and investments on our part, which we may be unable to recover.

      Failure of any of our randomized and controlled studies or a third-party study or assessment to demonstrate V.A.C. therapy's clinical efficacy may reduce physician usage of V.A.C. and cause our V.A.C. revenue to suffer.

      If any of our V.A.C. systems fail to demonstrate statistically significant clinical efficacy in any of our ongoing clinical studies when compared to traditional therapies, our ability to further penetrate the advanced wound care market may be negatively impacted as physicians may choose not to use V.A.C. therapy as a wound treatment. Furthermore, adverse clinical results from these trials would hinder the ability of V.A.C. to achieve standard-of-care designation, which could slow the adoption of V.A.C. across all targeted wound types. As a result, usage of V.A.C. may decline and cause our revenue to suffer.

      The Agency for Healthcare Research and Quality ("AHRQ") has assigned a technology assessment on negative pressure therapies for wound healing to the Blue Cross Blue Shield Association Technology Evaluation Center. We have provided AHRQ with an extensive set of clinical documentation on our negative pressure wound therapies and systems and we expect that the technology assessment will be issued in mid-2005. Although the technology assessment will not have any legal or binding effect, any technology assessment which is negative, in whole or part, could cause usage of our V.A.C. systems to decline.

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

      Our products are rented and sold to hospitals and skilled nursing facilities that receive reimbursement for the products and services they provide from various public and private third-party payers, including Medicare, Medicaid and private insurance programs. We also act as a durable medical equipment, or DME, supplier and, as such, we furnish our products directly to customers and subsequently 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 pr oducts could decrease. In addition, in the event any public or private third-party payers challenge our billing, documentation or other practices as inconsistent with their reimbursement policies, we could experience significant delays, reductions or denials in obtaining reimbursement. In light of increased controls on health care spending, especially on Medicare and Medicaid spending, the outcome of future coverage or payment decisions for any of our products by governmental or private payers remain uncertain.

      In 2003, the Centers for Medicare and Medicaid Services issued new regulations on inherent reasonableness of such charges and while these regulations do not impact us currently, future coverage or payment decisions could impact our V.A.C. systems or any of our other products. If providers, suppliers and other users of our products and services are unable to obtain sufficient reimbursement for the provision of our products, demand for our products will decrease. In addition, under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, a number of changes were made to the Medicare payment methodology for items of DME, including certain payment freezes, a competitive bidding program and clinical and quality standards.

      Also, in December 2002, we submitted a written request to the medical directors of the four Durable Medical Equipment Regional Carriers, or DMERCs, in which we requested clarification of a number of issues with respect to the DMERCs' "Negative Pressure Wound Therapy Policy." That policy establishes Medicare Part B reimbursement criteria for our V.A.C. products. In June 2003, we received a response from the medical directors and, in some instances, their interpretation of the policy differed from our interpretation. In September 2003, we learned that one of the DMERCs published in its regional newsletter an interpretation of the policy consistent with its June response. The other three DMERCs later published the same interpretation. Also in September 2003, we began to experience an increase in Medicare Part B denials for V.A.C. placements. We provided the medical directors with responses to their interpretation and have spoken to one o f the DMERC medical directors to support our interpretation of the policy. On December 5, 2003, the DMERC medical directors responded to our letter. In their response, the medical directors reiterated their interpretation. In essence, the medical directors provided: (1) that the Negative Pressure Wound Therapy policy generally does not cover wounds of less than 0.5 cm in depth, use of Negative Pressure Wound Therapy for

more than four months, or wounds where there has not been any wound healing progress due to an intervening spell of illness; (2) that only measurements of width, length and depth may be used to demonstrate wound healing progress (which is required to justify continuing medical necessity for additional cycles of use); and (3) technical responses to issues concerning the delivery of the V.A.C. pump and ordering of disposables. We have responded to the most recent letter from the medical directors in an effort to clarify the policy while at the same time maintaining coverage for all Medicare Part B beneficiaries for whom V.A.C. treatment is medically necessary. We are continuing a dialogue with the DMERC medical directors on these issues and the tone of the discussions has been constructive and positive. In the event that the medical directors do not agree to revise their interpretations on these issues, the rate of V.A.C. revenue growth would be impa cted. Although difficult to predict, we believe the reimbursement issues addressed by the medical directors relate to approximately 20% of our annual V.A.C. Medicare revenue or about 2.2% of our overall annual revenue.

      If we are not able to timely collect reimbursement payments, our financial condition may suffer.

      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. If the average number of days our receivables are outstanding increases, our cash flows could be negatively impacted.

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

      Because we depend upon a limited group of suppliers and, in some cases, sole-source suppliers, we may incur significant product development costs and experience material delivery delays if we lose any significant supplier.

      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. for V.A.C. disposables. This supply agreement has a three-year term, beginning in October 2002, with an automatic extension for an additional twelve months if neither party gives notice of termination. V.A.C. disposables represented 20% of our revenue for the six months ending June 30, 2004. V.A.C. therapy cannot be administered without the appropriate use of our V.A.C. rental unit in conjunction with the related V.A.C. disposables. Any shortage of V.A.C. disposables could lead to lost revenues from decreased V.A.C. rentals. We maintain an inventory of disposables sufficient to support our business for six weeks in the United States and eight weeks in Europe. If we lose any supplier (including any sole-source supplier), we would be requ ired to obtain one or more replacement suppliers and may be required to conduct a significant level of product development to incorporate new parts into our products. The need to change suppliers or to alternate between suppliers might cause material delays in delivery or significantly increase costs.

      If we are unable to successfully implement our new management information systems or are otherwise unable to manage rapid changes, our business may be harmed.

      In the last three years we have grown rapidly, and we believe we will continue to grow at a rapid pace. We are currently implementing new management information systems to assist us in managing our rapid growth. If the implementation of these new systems is significantly delayed, or if our expectations for the efficiencies to be obtained through the new systems are not met, our business could be harmed. For example, if we experience problems with our new systems for procurement and billing, we could experience product shortages or an increase in accounts receivable. Any failure by us to properly implement our new information systems, or to otherwise 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 are subject to numerous laws and regulations governing the healthcare industry, and non-compliance with such laws, as well as changes in such laws or future interpretations of such laws, could reduce demand for and limit our ability to distribute our products and could cause us to incur significant compliance costs.

      There are widespread legislative efforts to control health care costs in the United States and abroad, which we expect will continue in the future. For example, the recent enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 eliminated annual payment increases on the V.A.C. system for the foreseeable future and initiated a competitive bidding program. At this time, we are unable to determine whether and to what extent these changes would be applied to our products and our business but this or similar legislative efforts in the future could negatively impact demand for our products.

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

      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 have launched an enforcement initiative which specifically targets the long-term care, home health and DME industries. Sanctions for violating these laws include criminal penalties and civil sanctions, including fines and penalties, and possible exclusion from the Medicare, Medicaid and other federal health care programs. Although we believe our business arrangements comply with federal and state fraud and abuse laws, our practices may be challenged under these laws in the future.

      Current or future litigation could expose us to significant costs associated with adverse judgments.

      The manufacturing and marketing of medical products necessarily entail an inherent risk of product liability claims and the company carries product liability insurance to mitigate such risks. In addition, we are currently defendants in several other legal actions, including two patent infringement suits. In the event of an adverse judgment in any of these cases, we could be responsible for a large litigation damage award.

Risks Related to Our Capital Structure

      Our substantial indebtedness could adversely affect our financial condition.

      We have a significant amount of debt. As of June 30, 2004, we had $499.7 million of outstanding indebtedness (long-term debt and capital lease obligations) and a shareholders' deficit of $77.4 million. This level of indebtedness could have important consequences, including the following:

   - it may be difficult for us to satisfy our obligations under our senior credit facility and the 7³/₈% Senior
       Subordinated Notes due 2013;
   - if we default on our secured debt, these lenders may foreclose on our assets and we may not be able to continue
       as a going concern;
   - we may have to use a significant amount of our cash flow for scheduled debt service rather than for operations;
   - we may be less able to obtain other debt or equity financing in the future;
   - we could be less able to take advantage of significant business opportunities, including acquisitions or
      divestitures;
   - our vulnerability to general adverse economic and industry conditions could be increased; and
   - we could be at a competitive disadvantage compared to competitors with less debt.

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

      Due to the large amount of principal and interest payments due under our debt agreements, we may not generate enough cash from our operations to meet these obligations or to fund other liquidity needs. Our interest rate swap agreements effectively convert a portion of our variable-rate borrowings to a fixed rate basis through 2006, thus reducing the impact of changes on future interest expense. Approximately 88.0% of our outstanding variable-rate borrowings as of June 30, 2004 have been hedged through the designation of interest rate swap agreements classified as cash flow hedges. If market interest rates for similar borrowings had averaged 1% more than they did at June 30, 2004, our interest expense for the six months ended June 30, 2004, after considering the effects of our interest rate swaps, would have increased, and earnings before taxes would have decreased by approximately $480,000. Our ability to generate cash in the future is, to some extent, s ubject to risks and uncertainties that are beyond our control. If we are unable to meet our debt obligations, we may need to refinance all or a portion of our indebtedness, sell assets or raise funds in the capital markets. Our ability to refinance will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

      Restrictive covenants in our senior credit facility and the indenture governing the 7³/₈% Senior Subordinated Notes due 2013 may restrict our ability to pursue our business strategies.

      Our senior credit facility and the indenture governing the 7³/₈% Senior Subordinated Notes due 2013 limit our ability, among other things, to:

   - incur additional indebtedness or contingent obligations;
   - pay dividends or make distributions to our shareholders;
   - repurchase or redeem our stock;
   - make investments;
   - grant liens;
   - make capital expenditures;
   - enter into transactions with our shareholders and affiliates;
   - sell assets; and
   - acquire the assets of, or merge or consolidate with, other companies.

      Our senior credit facility contains financial covenants requiring us to meet certain leverage and interest coverage ratios. Specifically, we are obligated not to permit ratios to fall outside certain specified ranges and maintain minimum levels of EBITDA (as defined in our senior credit facility). Under our senior credit facility, EBITDA excludes charges associated with the recapitalization and the IPO. With regard to these financial covenants, it will be an event of default if we permit any of the following:

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

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

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

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

      If we default under our senior credit facility, we could be prohibited from making any payments on the 7³/₈% Senior Subordinated Notes due 2013. In addition, the lenders under our senior credit facility could require immediate repayment of the entire principal then outstanding. If those lenders require immediate repayment, we may not be able to repay them and also repay the 7³/₈% Senior Subordinated Notes due 2013 in full. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments under our senior credit facility, or if we are unable to maintain the financial ratios under our senior credit facility, we will be in default under our senior credit facility, which could, in turn, cause a default under the 7³/₈% Senior Subordinated Notes due 2013, the related indenture and any other debt obligations that we may incur from time to time.

      Our obligations under our senior credit facility are secured by substantially all of our assets.

      Our obligations under our senior credit facility are secured by liens on substantially all of our assets, and the guarantees of certain of our subsidiaries under our senior credit facility are secured by liens on substantially all of such subsidiaries' assets. If we become insolvent or are liquidated, or if payment under our senior credit facility or of other secured obligations are accelerated, the lenders under our senior credit facility or the obligees with respect to the other secured obligations will be entitled to exercise the remedies available to a secured lender under applicable law and the applicable agreements and instruments, including the right to foreclose on all of our assets. Accordingly, you could lose all or a part of your investment in our common stock.

      Our articles of incorporation, our by-laws and Texas law contain provisions that could discourage, delay or prevent a change in control or management of KCI.

      Our articles of incorporation and by-laws and Texas law contain provisions which could discourage, delay or prevent a third party from acquiring shares of our common stock or replacing members of our board of directors.

These provisions include:

   - authorization of the issuance of preferred stock, the terms of which may be determined at the sole discretion of
      the board of directors;
   - establishment of a classified board of directors with staggered, three-year terms;
   - provisions giving the board of directors sole power to set the number of directors;
   - limitations on the ability of shareholders to remove directors;
   - requirements for the approval of at least two thirds of our outstanding common and preferred shares (on an as-
      converted basis) to amend our articles of incorporation;
   - authorization for our board of directors to adopt, amend or repeal our by-laws (subject to the right of our
      shareholders to adopt, amend or repeal the amended and restated by-laws with the approval of at least
      two thirds of our outstanding common and preferred shares (on an as-converted basis));
   - limitations on the ability of shareholders to call special meetings of shareholders; and
   - establishment of advance notice requirements for presentation of new business and nominations for election to
      the board of directors at shareholder meetings.

In addition, under Texas law and our articles of incorporation and our by-laws, action may not be taken by less than unanimous written consent of our shareholders unless the board of directors has recommended that the shareholders approve such action.

      The limitation on the ability of shareholders to call a special meeting, to act by written consent and to remove directors may make it difficult for shareholders to remove or replace the board of directors should they desire to do so. Since management is appointed by the board of directors, any inability to effect a change in the board may result in the entrenchment of management.

      These provisions delay or prevent a third party from acquiring us. Any such delay or prevention could cause the market price of our common stock to decline.

      A significant portian of our voting stock is controlled by three principal shareholders whose interests may conflict with those of our other shareholders.

      As of June 30, 2004, Fremont Partners, L.P., Dr. James R. Leininger and Blum Capital Partners, L.P., and their respective affiliates collectively own 38.3% of our outstanding shares of voting stock. As a result of this ownership, Fremont Partners, Dr. Leininger and Blum Capital Partners maybe able to direct our affairs and to greatly influence any matter requiring the approval of our shareholders. Such matters include the election of directors, the adoption of amendments to our articles of incorporation and by-laws and approval of mergers or sales of substantially all our assets. The interests of our principal shareholders may conflict with the interests of our other shareholders.

      Our stock price may be volatile and your investment in our common stock could suffer a decline in value.

      The market price of our common stock may be highly volatile and may fluctuate substantially due to many factors, including:

   - actual or anticipated fluctuations in our operating results;

   - changes in health care, pricing or reimbursement policies;

   - our competitors' announcements of new products, significant contracts, acquisitions or strategic investments;

   - changes in our growth rates or our competitors' growth rates;

   - the timing or results of regulatory submissions or actions with respect to our products;

   - public concern as to the safety of our products;

   - our inability to raise additional capital;

   - conditions of the healthcare industry or in the financial markets or economic conditions in general; and

   - changes in stock market analyst recommendations regarding our common stock, other comparable companies
      or the healthcare industry generally.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

      We have variable interest rate debt and other financial instruments, which are subject to interest rate risk and could have a negative impact on our business if not managed properly. We have a risk management policy, which is designed to reduce the potential negative earnings effect arising from the impact of fluctuating interest rates. We manage our interest rate risk on our borrowings through interest rate swap agreements which effectively convert a portion of our variable-rate borrowings to a fixed rate basis through August 21, 2006, thus reducing the impact of changes in interest rates on future interest expenses. These contracts are initiated within the guidance of corporate risk management policies and are reviewed and approved by our senior financial management. We do not use financial instruments for speculative or trading purposes.

      Our senior credit facility requires that we fix the base-borrowing rate applicable to at least 50% of the outstanding amount of our term loan under our senior credit facility for a period of two years from the date of issuance. As of June 30, 2004, we have seven interest rate swap agreements pursuant to which we have fixed the rates on $350.0 million, or 88.0%, of our variable rate debt as follows:

   - 2.375% per annum on $100.0 million of our variable rate debt through December 31, 2004;
   - 2.150% per annum on $60.0 million of our variable rate debt through August 22, 2005;
   - 2.130% per annum on $20.0 million of our variable rate debt through August 22, 2005;
   - 2.135% per annum on $20.0 million of our variable rate debt through August 21, 2005;
   - 2.755% per annum on $50.0 million of our variable rate debt through August 21, 2006;
   - 2.778% per annum on $50.0 million of our variable rate debt through August 21, 2006; and
   - 2.788% per annum on $50.0 million of our variable rate debt through August 21, 2006.

      The tables below provide information about our long-term debt and interest rate swaps, both of which are sensitive to changes in interest rates as of June 30, 2004. For long-term debt, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date (dollars in thousands):

	Expected Maturity Date as of June 30, 2004
	2004	2005	2006	2007	2008	Thereafter	Total	Fair Value
Long-term debt
Fixed rate	$             -	$        150	$        150	$           -	$           -	$   98,948	$   99,248	$ 104,195
Average interest rate	-	7.000%	7.000%	-	-	7.375%	7.374%
Variable rate	$     2,008	$     4,016	$     4,016	$   4,016	$   4,016	$ 379,528	$ 397,600	$ 397,600
Average interest rate	3.59%	3.59%	3.59%	3.59%	3.59%	3.59%	3.59%
Interest rate swaps (1)
Variable to fixed	$ 100,000	$ 100,000	$ 150,000	$           -	$           -	$             -	$ 350,000	$     1,282
Average pay rate	2.375%	2.143%	2.774%	-	-	-	2.480%
Average receive rate	1.59 %	1.59 %	1.59 %	-	-	-	1.59 %

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

Foreign Currency and Market Risk

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

      We maintain no other derivative instruments to mitigate our exposure to translation and/or transaction risk. International operations reported operating profit of $13.7 million for the six months ended June 30, 2004. We estimate that a 10% fluctuation in the value of the dollar relative to these foreign currencies at June 30, 2004 would change our net income for the six months ended June 30, 2004 by approximately $670,000. Our analysis does not consider the implications that such fluctuations could have on the overall economic activity that could exist in such an environment in the U.S. or the foreign countries or on the results of operations of these foreign entities.

ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

      Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

Changes in Internal Control

      There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

      Set forth below is a description of recent developments in our legal proceedings. For a description of ongoing legal proceedings, please see our Annual Report on Form 10-K under the caption "Part I. Item 3. Legal Proceedings."

      On April 4, 2004, a federal Magistrate completed a review of our motion for summary judgment in the lawsuit filed by Novamedix Limited. In his Memorandum and Recommendation on the summary judgment motions in the case, the Magistrate recommended to the Federal District Court Judge that one of Novamedix's cause of action for false advertising be significantly limited and that one of Novamedix's patent infringement damage theories be denied for summary judgment purposes. The Magistrate recommended that (a) the remainder of KCI's motions for summary judgment be denied and (b) KCI's interpretation of an important phrase in certain of the Novamedix claims be rejected. We believe both KCI and Novamedix will appeal the Magistrate's recommendation.

ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS

Use of Proceeds from Sales of Registered Securities

      None.

Recent Sales of Unregistered Securities

      None

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	Amended and Restated Articles of Incorporation of KCI (filed as Exhibit 3.5 to Amendment No. 1 to our Registration Statement on Form S-1 filed on February 2, 2004, as thereafter amended).
3.2	Third Amended and Restated By-Laws of KCI (filed as Exhibit 3.6 to Amendment No. 1 to our Registration Statement on Form S-1 filed on February 2, 2004, as thereafter amended).
4.1	Indenture, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.1 to our Registration Statement of Form S-4 filed on September 29, 2003, as thereafter amended).
4.2	Form of Series B 73/8% Senior Subordinated Notes due 2013 (included in Exhibit 4.1) (filed as Exhibit 4.2 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended).

4.3	Registration Rights Agreement, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Scotia Capital (USA) Inc., and Wells Fargo Securities, LLC, as Placement Agents (filed as Exhibit 10.1 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended).
4.4	Investors' Rights Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors and the Director Investors (filed as Exhibit 10.6 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended).
4.5	Agreement Among Shareholders, dated as of November 5, 1997 (filed as Exhibit 10.8 to our Registration Statement on Form S-4 filed on December 19, 1997).
4.6	Joinder and Amendment Agreement, dated as of June 25, 2003 (filed as Exhibit 10.9 to Amendment No. 1 to our Registration Statement on Form S-4 filed on October 24, 2004, as thereafter amended).
4.7	Waiver and Consent, effective as of September 27, 2002 (filed as Exhibit 10.10 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended).
4.8	Amendment and Waiver, dated as of August 11, 2003 (filed as Exhibit 10.11 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended).
4.9	Amendment, Acknowledgement and Waiver (Agreement Among Shareholders) (filed as Exhibit 10.35 to Amendment No. 3 to our Registration Statement on Form S-1 filed on February 20, 2004).
10.1	Premier Purchasing Partners, L.P. V.A.C. Group Purchasing Agreement, effective April 1, 2004.
*31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2004.
*31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2004.
*32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 13, 2004.
	*Exhibit filed herewith.
	**Confidential treatment requested on certain portions of this exhibit. An unredacted version of this exhibit has been     filed separately with the Securities and Exchange Commission..

(b)   Reports on Form 8-K

             1.   Current Report on Form 8-K dated May 5, 2004. Regulation FD disclosure furnishing a press
                   release detailing financial results for the three months ended March 31, 2004 and certain other
                   information.

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)

Date: August 13, 2004                                                 By:   /s/ DENNERT O. WARE    
                                                                                      Dennert O. Ware
                                                                                      President and Chief Executive Officer
                                                                                      (Duly Authorized Officer)

Date: August 13, 2004                                                 By:   /s/ MARTIN J. LANDON   
                                                                                      Martin J. Landon
                                                                                      Vice President and Chief Financial Officer
                                                                                       (Principal Financial and Accouting Officer)

EX-10

Exhibit 10.1

PREMIER PURCHASING PARTNERS, L.P.
GROUP PURCHASING AGREEMENT-CAPITAL EQUIPMENT
CONTRACT NUMBER:

  1. The "Parties" to this Group Purchasing Agreement are:
          Premier Purchasing Partners, L.P. ("Purchasing Partners")
          12225 El Camino Real
          San Diego, CA 92130
          Attention: Vice President, Procurement
          858.481.2727 858.794.7959 (fax)
          Contract Mgr/Director: Chris Dismuke

          KCI USA, Inc.
          (Seller)
          8023 Vantage Drive
          San Antonio, TX 78230
          Attention: Scott Brooks, Vice President, Acute Care National Accounts
          800/275-7885 #2 (phone)     210-255-6983 (fax)

  2. Product Category:                 Vacuum Assisted Closure® Devices: Continuous and/or Intermittent
                                                    Negative Pressure Wound Therapy, Fluid Management System,
                                                    Control/Monitor Unit, Device Specific Dressings and Accessories.
  3. Effective Date:    04/01/04

  4. Expiration Date:  03/31/07

  5. Term of Agreement (months): 36 Months

  6. Purchasing Partners Administrative Fee: [*] (Section 10.1)

  7. Large Order Dollar Threshold:

  8. Administrative Fee Payment Frequency: Quarterly/Monthly*   *Effective October 1, 2004:
        Monthly (Section 10.2)

  9. Early Payment Discount: 0%

10. HIPAA CERTIFICATION. Seller to initial here if Seller is NOT a Business Associate within the meaning of
        45 C.F.R. ss 160.103, in which case the attached HIPAA Privacy Addendum is NOT applicable.

This Group Purchasing Agreement (the "Agreement") is comprised of the following documents and is entered into by the Parties as of the effective Date set forth in Item 3 above:

               i. This Cover Sheet;
              ii. The attached Purchasing Partners Standard Terms and Conditions;
             iii. The attached Additional Terms and Conditions (if any);
             iv. The attached HIPAA Privacy Addendum (if applicable); and
              v. The following attached exhibits:
                         Exhibit A: Products and Services
                         Exhibit B: Membership Roster Access Instructions
                         Exhibit C: Authorized Distributors
                         Exhibit D: Reporting Formats Access Instructions
                         Exhibit E: Payment Instructions
                         Exhibit F: Minority, Woman-Owned and Small Businesses Policy
                         Exhibit G: Seller Information Sheet
                         Exhibit H: Product Specifications
                         Exhibit I: Additional Warranties
                         Exhibit J: Service, Maintenance and License Agreements
                         Exhibit K: Seller's Returned Goods Policy
                         Exhibit L: Ordering Instructions

PREMIER PURCHASING PARTNERS, L.P.
By: PREMIER PLANS, L.L.C., Its General Partner
        By: /s/ Robert L. Hamon        
        Printed Name: Robert L. Hamon
        Title: Sr. VP Group Purchasing Services

        By: /s/ Michael Georgulis      
        Printed Name: Michael Georgulis
        Title: VP Nursing Products and Services

SELLER: KCI USA, Inc.
      By: /s/ Chris Fashek           
      Printed Name: Chris Fashek
      Title: President, KCI USA

      WHEREAS, Purchasing Partners is an affiliate of Premier, Inc. ("Premier"), and an alliance of hospitals and health care organizations;

      WHEREAS, Premier's core objective is to improve the health of communities;

      WHEREAS, such core objective as well as the objective of helping to assure that patients receive safe and efficacious care can be accomplished, in part, by achieving economies of scale and innovations through group strategies and shared resources;

      WHEREAS, group purchasing is a fundamental way hospitals and health systems cooperate to reduce the costs of providing health services;

      WHEREAS, Premier's capital equipment group purchasing program is operated by Purchasing Partners;

      WHEREAS, Seller is a manufacturer and supplier of capital equipment;

      WHEREAS, Seller has offered to provide Products and services to the Premier membership consistent with the terms of this Agreement;

      WHEREAS, Purchasing Partners has committed to comply with the Best Ethical Practices for the Group Purchasing Industry, prepared by Professor Kirk O. Hanson and released on October 23, 2002 (the "Best Ethical Practices"), the requirements of the Health Industry Group Purchasing Association Code of Conduct, adopted on July 24, 2002 (the "HIGPA Code"), and the additional commitments made by Purchasing Partners to Senator Herb Kohl and Senator Mike DeWine of the Subcommittee on Antitrust, Competition and Business and Consumer Rights in a letter dated August 5, 2002, (the "Additional Commitments"). The Best Ethical Practices, HIGPA Code and Additional Commitments are referred to collectively herein as the "Premier Ethical Standards".

      WHEREAS, by entering into this Agreement with Seller it is Purchasing Partners' expectation that Seller, in its dealings with Purchasing Partners under this Agreement, will respect Purchasing Partners' commitment to comply with the Premier Ethical Standards.

      NOW THEREFORE, in consideration of the mutual promises contained herein and other good and sufficient consideration, the receipt and adequacy of which is hereby acknowledged, the Parties hereto agree as follows:

1.0 TERM OF AGREEMENT. This Agreement will remain in effect for the period of time set forth in Item 5 of the Cover Sheet.

2.0 PRODUCTS COVERED. Seller hereby agrees to provide the products and services described in Exhibit A hereto (referred to herein as "Products" and "Services") pursuant to the terms of this Agreement. Upon Purchasing Partners' request, Seller shall provide Purchasing Partners with written notice of any Products in Exhibit A which are not manufactured by Seller (i.e., those Products which are manufactured by a third party), setting forth the Product name and the name of the actual manufacturer. Any additions or deletions of Products from Exhibit A shall not be effective unless evidenced by an amendment signed by both Parties.

      If during the term of this Agreement, Seller releases an upgraded or enhanced version of a Product that obsoletes the predecessor Product (referred to herein as an "Improved Product"), Seller shall offer such Improved Product to "Affected Participating Members" at the pricing set forth in Exhibit A. "Affected Participating Members" mean those Participating Members who purchased the predecessor Product during the 12-month period preceding the release of the Improved Product. [*] For the pricing [*] to apply to the purchase of the Improved Product, the purchase must be made during the 12-month period following the purchase of the predecessor Product.

3.0 PARTICIPATING MEMBERS. Set forth in Exhibit B of this Agreement are instructions for accessing and downloading the list of Premier members ("Participating Members"), who shall have the right to rent or purchase Products and Services in accordance with this Agreement. The list of Participating Members (the "Membership Roster") may be amended by Purchasing Partners from time to time and Purchasing Partners reserves the right to provide the Membership Roster in other suitable forms. The Parties hereto acknowledge that Participating Members are acute care and extended care entities/facilities accessing the benefits of this Agreement solely for their own facility-based Product placements. The Parties hereto acknowledge that Participating Members may include acute care and extended care entities/facilities which may access the benefits of this Agreement through participation in the group purchasing programs operated by Purchasing Partners' affiliate, Provider Select , Inc. ("Provider Select") rather than Purchasing Partners itself Such entities/facilities shall nonetheless be deemed Participating Members under this Agreement. Seller shall be responsible for routinely maintaining the current Membership Roster. New Participating Members added to the Membership Roster shall be eligible to participate under this Agreement upon the relevant date set forth in the Membership Roster. Seller shall stop providing the pricing set forth herein to entities removed from the Membership Roster within thirty (30) days following the applicable date of removal set forth in the Membership Roster. Only Participating Members which are either acute care or extended care facilities or institutions shall have the right to rent or purchase Products and Services in accordance with this Agreement.

      On a quarterly basis, Seller shall provide Purchasing Partners with written notice of any Participating Members which are also members of group purchasing organizations other than Purchasing Partners (such notice is referred to as the "Dual Membership Notice"). Seller shall have no right to challenge or contest its obligation to pay Purchasing Partners administrative fees in accordance with Section 10.1 with respect to any Participating Members which are not listed in the Dual Membership Notice for the applicable quarter.

      The form of any agreement between Seller and a Participating Member and any amendments thereto shall be approved in advance by Purchasing Partners.

4.0 PARTICIPATION REQUIREMENTS. In order to be entitled to the pricing terms (described in Exhibit A hereto), Participating Members shall comply with the participation requirements set forth in Exhibit A.

5.0 TERMINATION OF EXISTING CONTRACTS. Any Participating Member desiring to avail itself of the benefits of this Agreement may, at its option and without liability, terminate any existing contract(s) or other arrangement(s) with Seller for the purpose of participating in the group purchasing arrangement set forth in this Agreement.

6.0 ORDERING; SHIPPING; DELIVERY.

         6.1 Authorized Distributors. All Products rented or purchased pursuant to this Agreement by Participating Members which are not purchased directly from Seller, where applicable, may be purchased from and through one of Seller's authorized distributors ("Authorized Distributors"). A list of all current Authorized Distributors is set forth in Exhibit C. Seller warrants that it shall not make any change or take any action with respect to Authorized Distributors which, if implemented, would materially increase the ultimate delivered price paid by the Participating Member.

         6.2 Payment Terms. For Product(s) requiring installation by Seller, eighty percent (80%) of the rental or purchase price must be paid within forty-five (45) days following delivery of applicable Product(s) or receipt of invoice,

whichever date is later and the balance of the purchase price must be paid within thirty (30) days of "acceptance" of such Product(s) as defined in Section 6.8 below. For Product(s) not requiring installation by Seller, one hundred percent (100%) of the purchase price must be paid within thirty (30) days. Any early payment discount is set forth in Item 9 of the cover sheet.

         6.3 Ordering; Shipping Terms. Orders directly from Seller shall be placed by telephone, telecopier in accordance with the ordering instructions set forth hereto as Exhibit L. Shipping terms for rental items: All shipments for rental direct from Seller shall be Net F.O.B. destination, with all costs of transportation and insurance being paid by Seller, with the exception of special delivery and/or air shipments requested by Participating Members. Such special delivery and/or air shipment charges shall be prepaid by Seller and invoiced to the requesting Participating Member for such member's payment pursuant to the payment terms set forth in Section 6.2 of this Agreement. Shipping terms for Product purchases: All shipments direct from Seller shall be Net F.O.B. destination, with all costs of transportation and insurance prepaid and added to invoice. Title and risk of loss for Products purchased by Participating Me mber shall transfer to Participating Members upon delivery.

         6.4 Minimum Order. Seller shall have no minimum purchase order requirement applicable to any or all Participating Members. For Products purchased from an Authorized Distributor, any minimum order purchase requirement will be negotiated between each Participating Member and the Authorized Distributor.

         6.5 Guarantee of Delivery. If Seller fails to deliver any Product(s) within the agreed-upon time periods set forth in Exhibit A hereto, the Participating Member in its sole discretion terminate without penalty the obligations of such member under this Agreement and any other agreement related to the Product(s), including without limitation any purchase order for the Product(s), and Seller shall immediately refund to such member all funds paid for the Product(s) and any related materials. Upon the request of any Participating Member, Seller will assist any such Participating Member in finding alternative acceptable sources for any Product(s) which Seller cannot deliver according to agreed-upon time periods.

Seller guarantees that all rental Products ordered by any Participating Member shall be delivered within 24 hours (or the next business day as appropriate) from the time the order is placed and required documentation processed. Seller guarantees that all Products purchased by any Participating Member shall be delivered to Participating Member on the mutually agreed upon date of delivery.

      For orders placed with an Authorized Distributor, guarantee of delivery provisions will be negotiated between each Participating Member and the Authorized Distributor. If the Authorized Distributor fails to deliver any Product(s) within the foregoing negotiated time period because Seller has failed to provide the Product(s) to the Authorized Distributor, the Participating Member may purchase any substitute product(s) from another source(s), and Seller shall reimburse such member for the difference between such member's actual F.O.B. destination acquisition cost for such product(s) and the price(s) such member would have paid for Seller's Product(s) under this Agreement, provided that Seller is notified by the Participating Member of such failure to deliver and cannot provide an alternative Product acceptable to the Participating Member at the same price. Upon the request of any Participating Member, Seller will assist any such Participating Member in finding alternative acceptable sources for any Product(s) which an Authorized Distributor cannot deliver according to the guaranteed delivery time specified above.

         6.6 Guarantee of Delivery under Emergency Conditions. In the event of a natural disaster or industry wide shortage of Products ("Emergency Condition"), Seller agrees to give priority to orders placed by Premier Members for Products during the duration of the Emergency Condition. Seller will use best efforts to set aside an adequate quantity of Products for the exclusive purchase by Participating Members for the duration of the Emergency Condition however, in no instance shall Seller be required to deny the use of a Product to a customer in need or to otherwise place itself in material breach of purchasing contracts in effect as of the date of this Agreement.

         6.7 Installation. Included in the price of the Product(s), Seller will be fully responsible for performing all tasks necessary to install the Product(s), including without limitation, uncrating, unpacking, removal of packing material, field assembly, interconnection, calibration and testing to ensure that the Product(s) conform(s) to the product specifications set forth in Exhibit H ("Specifications") and is completely ready to perform all procedures for which it is designed and marketed by Seller.

         6.8 Acceptance. "Acceptance" of Products by Participating Members shall be deemed to have occurred when Seller and the applicable Participating Member in good faith mutually agree in writing that the Product(s) is/are (a) operating according to Specifications and (b) completely ready for clinical use. In addition, each Participating Member shall have the option, at its own expense, to test the Product(s) to confirm the safety, reliability and performance of the Product(s) and to perform corollary or parallel testing to verify the accuracy of the Product(s)' performance. Unless otherwise agreed by Seller, Participating Members shall accept or reject Purchased Products within forty-five (45) days or Rental Products within twenty-four (24) hours (or the next business day as appropriate) after the date of installation (or delivery, in the case of Products not requiring installation).

      Seller shall make available for use by Participating Members at no additional charge all necessary test equipment. Further, Participating Members shall have the right to purchase test equipment from Seller at Seller's most favorable current price offered to any of its other customers. Seller shall provide Participating Members at no additional charge any available quality assurance and performance testing procedure materials and forms.

         6.9 Rejection of Products. Participating Members shall have the right to reject any Product(s) purchased within forty-five (45) days or any Product(s) rented within twenty-four (24) hours after the date of installation (or delivery, in the case of Products not requiring installation), based on any of the following reasons (referred to herein as "Rejection Events"): (a) visible defects in the Product(s) or visible damage to packaging, (b) any failure of the Product(s) to operate in accordance with Specifications, (c) any failure of the Product(s) to operate in accordance with the Participating Member's reasonable quality standards. Seller will, upon written notice from such Participating Member of any Rejection Event, cause the removal of the Product(s) and immediately refund to the Participating Member all funds paid for the Product(s) and any related materials. In the event Product(s) are rejected by Parti cipating Members due to the Rejection Events described in (a), (b) or (c) above, all expenses related to the removal of the applicable Product(s) shall be borne by Seller. Further, in the event Product(s) are rejected by Participating Members due to the Rejection Events described in (b) or (c) above, the Participating Member in its sole discretion may also: (i) rent or purchase any substitute product(s) from another source or sources and Seller shall promptly reimburse such member for the difference between such member's actual F.O.B. destination acquisition cost for such product(s) and the price(s) such member would have paid for Seller's Product(s) under this Agreement; and/or (ii) terminate without penalty the obligations of such member under this Agreement and any other agreement related to the Product(s), including without limitation any purchase order or rental agreement for the Product(s). In the case of Rejection Events (b) and (c) above, all expenses related to necessary modifications to Participa ting Members' facilities required in order to substitute other products shall also be borne by Seller. All expenses related to the removal of Product(s) as a result of the Rejection Event described in (d) above shall be borne by the applicable Participating Member.

         6.10 Return of Products; Restocking Fee. Notwithstanding anything to the contrary herein, Participating Members shall not have the right to return Products which are considered disposable or consumable if such Products' useful shelf-life has expired (as identified on the product label). All such disposable/consumable Product(s) must be returned in original packages, cases, or cartons. Seller's return goods policy, if any, is set forth in Exhibit K.

7.0 PRICING TERMS.

         7.1 Pricing; Discounts; Trade-Ins.

         7.1.1 Exhibit A. Product pricing is set forth in Exhibit A hereto. Unless otherwise agreed by the parties, all discounts provided for in this Agreement (including without limitation large order discounts) shall be calculated off list price.

         7.1.2 [*]. [*] Seller must transmit written notice of any price increases to Purchasing Partners at least ninety (90) days prior to the anniversary date of this Agreement.

         7.1.3 Large Orders. In the event a single order equals or exceeds the "large order" dollar threshold set forth in Item 7 of the Cover Sheet, Seller shall grant additional discounts as negotiated between Seller and applicable Participating Members. Seller shall provide Purchasing Partners advance notice of any order qualifying for a "large order" discount or incentive.

         7.1.4 Trade-ins. Seller may grant trade-in allowances applied to the purchase of the Product(s). The reasonable value of such allowances shall be based on the model, age, condition and volume of trade-in items. Trade-in allowance shall be deducted off the net price (list price less discount).

         7.1.5 Special Promotions. Seller may, on occasion and with Purchasing Partners prior consent, offer special promotions. Any such promotion will be offered to all Participating Members and will be limited to the terms and conditions of the specific promotion. All such promotions shall be coordinated by Seller through Purchasing Partners.

         7.2 Competitive Pricing. [*] Seller agrees to extend any terms or pricing offered to a individual Participating Member to all Participating Members, excluding existing agreements and "special circumstances". Special circumstances include, but are not limited to, large volume customers, beta site testing, clinical studies and/or clinical evaluations.

         7.3 Pricing of New Products. Pricing for any additional and/or new Products which the Parties mutually agree to add to Exhibit A will be negotiated at prices consistent with the prices of Products already covered by this Agreement. Seller agrees to inform the Purchasing Partners contract director/manager responsible for this Agreement (as set forth on the Cover Sheet) of new Products (branded or generic) that Seller plans to introduce to the market at least 60 days prior to the introduction of such new products to the market. Upon Purchasing Partners' request, Seller also agrees to provide to Purchasing Partners, as soon as practical, a copy of the summary basis of approval or medical officer's report for new Products approved by the FDA.

         7.4 Group Buy Programs. From time to time, Purchasing Partners may request that Seller participate in group buy programs whereby Seller provides designated Products to a defined group of Participating Members at additional discounts (over and above the discounts set forth herein) for a limited period of time ("Group Buy Programs"). Seller shall use best efforts to participate in and support Group Buy Programs. Seller's participation in any such Group Buy Programs shall be subject to the terms and conditions of this Agreement and described in an amendment hereto executed by both Parties.

8.0 MARKETING; SALES SUPPORT; TRAINING

         8.1 Seller Representatives. Seller will provide representatives to call upon Participating Members on a periodic basis mutually agreed to by Seller and each individual Participating Member.

         8.2 User Training. Seller will provide at no additional charge and upon the request of the Participating Member, user training related to the Products, including without limitation, clinical training, applications and in-service training, as reasonably required or requested by each Participating Member. Seller will maintain a properly qualified training staff to provide such training, and Seller will be solely responsible for any expenses for staff travel, room and board related to such training. The scheduling of training shall be coordinated directly with each Participating Member and shall accommodate all shifts that require training.

      Seller will also provide to the Participating Member at no additional charge a written training guide and/or set of training video tapes to be used for future training by Participating Member staff.

      Also included in the price of the sale Product(s), Seller shall supply Participating Members with the following items prior to or at the time of delivery of the Product(s): (a) two (2) copies of operator manuals covering all equipment and accessories; and (b) two (2) copies of complete service manuals detailing all equipment and accessories including, without limitation, non-proprietary and non-confidential parts lists and schematic diagrams. Seller shall provide at no additional charge all updates to manuals and final versions (where applicable) of manuals throughout the useful life of the Product(s). Participating Members shall have the right to make copies, for internal purposes only, of any training materials provided by Seller.

         8.3 Biomedical Training; Technical Programs. Seller will make available at no additional charge factory service school training , for one person designated by each Participating Member which purchases Product(s) hereunder. Seller shall make such training available to other persons designated by Participating Members and Purchasing Partners at the rates set forth in Exhibit A hereto. In the event that a published Product In-service video does not exist, Seller will allow video recording of training sessions for future use by Participating Members provided the Participating Member s sign a mutually acceptable non-disclosure agreement related to the use of such video and subject to Seller's approval of final content. If possible, training shall be provided at regional locations to accommodate several Participating Members at the same time. Participating Members and Purchasing Partners agree that this training and video t aping shall be for internal, non-commercial use.

      Factory service school training will include the same course content used in the training program for Seller's service organization as it relates to the Product(s). Standard prerequisites as defined in Seller's course outline and involving minimum technical competencies must be met before any individual may attend a given course.

      Seller shall commence training activities during installation of the Product(s). Seller agrees to allow Participating Members, the designees of Participating Members and Purchasing Partners employees to observe the installation process.

         8.4 Demonstration Models for Evaluation. Upon the request of Purchasing Partners or Participating Member, Seller shall provide demonstration models, where practical, of the Product(s) and any appropriate consumables/disposables required to operate and evaluate the Product(s) to any Participating Members at no charge for a mutually agreed upon time period.

         8.5 Service and Maintenance Agreements. The form of Seller's service and maintenance agreement(s), which include pricing and service descriptions, is set forth as Exhibit J hereto. Such form agreement(s) are subject to Purchasing Partners' prior approval.

         8.6 Replacement Parts. Seller will provide all replacement parts for the Product(s) within twenty-four (24) hours of Participating Member's order released to Seller's warehouse. If a replacement part cannot be provided within twenty-four (24) hours and product purchased is still under Seller warranty then Seller shall provide a loaner at no additional charge until Participating Member received replacement part. All replacement parts for the Product(s) will be available for not less than five (5) years following the earlier of either (a) the date when Seller ceases to sell the Product(s) or a reasonable substitute of the Product(s) or (b) the expiration of the warranty period referenced in Section 12.2, including all extensions thereto, if applicable. Included in the price of the Product(s), Seller shall provide all software and hardware modifications necessary to meet regulatory requirements.

         8.7 Downtime Protection. "Downtime" means the period of time during a Product's normally scheduled hours of operation that the Participating Member owning the Product determines in good faith that the Product is not available for clinical use during the term of such Product's warranty and/or any service agreement that exists between such Member and Seller. Downtime will commence upon the Participating Member's telephone notice to Seller's dispatcher that a Product is not available for clinical use and will end when the Participating Member and Seller in good faith mutually agree in writing that the Product is available for clinical use and is operating according to Specifications.

      It is agreed that Products will be available for routine clinical use ("Uptime") at a level of at least ninety-six percent (96%) measured every six months. The measurement criteria for calculating Uptime is the Participating Member's elected coverage hours of: a hours per day, b days per week for 26 weeks, less c hours spent on planned maintenance during that interval. Therefore, the number of hours of Uptime required to meet Seller's Uptime guarantee is equal to: [(a x b x 26) - c] x .96.

      Should any Product covered under this Agreement fail to meet the Uptime guarantee of 96% in any six month period, Seller will provide an extension of the term of the applicable service agreement or warranty with respect to that Product at no additional charge. Seller will extend the warranty or service agreement by one month for each 1% (e.g., if uptime is determined to be 93%, such extension would be 3 months [96% - 93% = 3% = 3 month extension]).

         8.8 Operating Software. Included in the price of the Product(s), Participating Members will be entitled to receive the following software ("Operating Software"): (a) all software updates which maintain existing capabilities and enable the Product(s) to perform in accordance with the Specifications; and (b) any software necessary to standardize Product(s) for service maintenance. Operating Software shall be provided to Participating Members regardless of whether Participating Members purchase service contracts from Seller. Seller shall make available for purchase by Participating Members any software upgrades which allow the Product(s) to exceed performance Specifications.

         8.9 Diagnostic Software. For purchased Products, Seller shall provide diagnostic software, if available, upon the reasonable request of Purchasing Partners and/or Participating Members for the sole purpose of maintaining and repairing the Product(s). Any license agreement to use such software shall be included in Exhibit K hereto.

         8.10 DICOM Conformance. N/A

         8.11 HL7 Compliance. N/A. The Products shall be capable of bi-directional communication with

9.0 PRODUCT PRICING INFORMATION; SALES DOCUMENTATION; ADMINISTRATIVE FEE REPORTING.

         9.1 Product Pricing Information (Sales Catalogs). Seller will provide to Purchasing Partners product rental pricing information according to the delivery instructions and in the ANSI X.12 format via EDI VAN Services as described on Purchasing Partners' web-site. Instructions for accessing such reporting information on Purchasing Partners' web-site are set forth in Exhibit D. If Seller cannot provide rental or product pricing information in such format, Seller may utilize the alternative format as detailed on Purchasing Partners' web-site. Purchasing Partners shall have the right to update Exhibit D as well as the delivery and reporting format guidelines on its web-site from time to time upon notice to Seller. Further, Purchasing Partners shall have the right to disclose all such rental or pricing information to Participating Members. In the case of electronic transfer of data, the file format described on Purchasing Partners' web-site must be used.

         9.2 Sales Documentation. Seller will provide Purchasing Partners with monthly reports of all Products rented or purchased by and delivered to each Participating Member during each calendar month of the term. Seller shall provide Purchasing Partners such reports no later than thirty (30) days after the last day of the applicable calendar quarter. Effective October 1, 2004 Seller shall provide Purchasing Partners such reports no later than thirty (30) days after the last day of the applicable calendar month. Reports will include, without limitation, reporting period start and end dates, Participating Member name, city, state, and monthly rental or sales volume per Product (totaled per Participating Member). Participating Members will be identified by HIN number, DEA number, and/or, as noted in the Membership Roster, the Premier Entity Code number. Seller will provide such rental or sales information according to th e delivery instructions and in the ANSI X.12 format via EDI VAN Services as described on Purchasing Partners' web-site. Instructions for accessing such reporting information on Purchasing Partners' web-site are set forth in Exhibit D. If Seller cannot provide such information in such format, Seller may utilize the alternative format detailed on Purchasing Partners' web-site. Purchasing Partners shall have the right to update Exhibit D as well as the delivery and reporting format guidelines on its web-site from time to time upon notice to Seller. In the case of electronic transfer of data, the file format described on Purchasing Partners' web-site must be used.

         9.3 Administrative Fee Reporting. Seller will provide Purchasing Partners with quarterly reports setting forth the Purchasing Partners Administrative Fee (as defined in Article 10 below) amounts generated by each Participating Member during each calendar month of the term. Seller shall provide Purchasing Partners such reports no later than thirty (30) days after the last day of the applicable calendar quarter. Effective October 1, 2004 such reports shall be provided to Purchasing Partners on a monthly basis. Monthly reports shall be provided no later than thirty (30) days after the last day of the applicable calendar month. Participating Members will be identified by HIN number, DEA number, and/or, as noted in the Membership Roster, the Premier Entity Code number. Seller will provide such information according to the delivery instructions and in the ANSI X.12 format via EDI VAN Services as described on Purchasing Pa rtners' web-site. Instructions for accessing such reporting information on Purchasing Partners' web-site are set forth in Exhibit D. If Seller cannot provide such information in this format, Seller may utilize the alternative format as detailed on Purchasing Partners' web-site. Purchasing Partners shall have the right to update Exhibit D as well as the delivery and reporting format guidelines on its web-site from time to time upon notice to Seller. In the case of electronic transfer of data, the file format described on Purchasing Partners' web-site must be used.

         9.4 Participating Members' EDI Transaction Sets. Seller shall use best efforts to accommodate the requests of Participating Members with respect to Seller's use of Electronic Data Interchange ANSI X.12 Transaction Sets, including without limitation, Transaction Sets 810 (invoice), 820 (payment order/remittance advice), 832 (price/sales catalog), 850 (purchase order), 855 (purchase order acknowledgment), 856 (ship notice/manifest), 844 (product transfer account adjustment), and 849 (response to product transfer account adjustment [or charge back or rebate]). This Section 9.4 shall exclude any rental transactions involving the Products.

         9.5 Supplier Qualification Review Process and Quality Standards Information. Seller shall comply with Purchasing Partners' reasonable requests for non-confidential or non-proprietary information necessary to assure the qualification of the Seller as an eligible Seller consistent with the requirements of Purchasing Partners' Supplier Qualification Review Process. Seller shall also comply with reasonable requests by Purchasing Partners' or Participating Members for non-confidential or non-proprietary information necessary to assure the quality of Services, to include responses to Contract Products/Supplier Experience Reports as provided to Seller by and pursuant to the directions of Purchasing Partners.

         9.6 Failure to Provide Reports. Seller's repeated failure to provide the information and reports described in Sections 9.1, 9.2, 9.3 and/or 9.5 shall be deemed a material breach of this Agreement.

         9.7 NDC/UPN Bar Coding Implementation. Seller acknowledges that national drug code ("NDC") and universal product numbering ("UPN") systems enhance standardization, product tracking and supply chain efficiencies through common use of standard product numbers or symbols. Seller supports Purchasing Partners' efforts to implement bar coding on all patient package units that include NDC/UPN, lot number and expiration date. Seller shall implement any NDC and/or UPN systems reasonably adopted by Purchasing Partners.

10.0 FEES.

         10.1 Purchasing Partners Administrative Fee. Seller will pay Purchasing Partners an administrative fee (the "Purchasing Partners Administrative Fee") equal to the percentage set forth in Item 6 of the Cover Sheet of [*]. For purposes of this Agreement, a Product will be deemed to have been "rented" or "purchased" on the date it is invoiced to a Participating Member.

Notwithstanding the foregoing, Seller shall continue to pay the Purchasing Partners Administrative Fee under this Article 10 with respect to rental or sales of any Products which occur after the expiration or termination of this Agreement pursuant to a direct contract between Seller and a Participating Member (a "Member Agreement") which was entered into during the term of this Agreement. Seller's obligation to pay such administrative fees shall continue until the expiration or termination of the then-current term of the Member Agreement. Further, all other provisions relating to the Purchasing Partners Administrative Fee, including without limitation, the obligation to provide sales documentation and administrative fee reporting pursuant to Sections 9.2 and 9.3 above, shall survive the expiration or termination of this Agreement and remain in effect with respect to Product purchases under Member Agreements until the expiration or termination of the then-current term of the applicable Member Agreement.

         10.2 Manner of Payment. Seller will pay to Purchasing Partners the Purchasing Partners Administrative Fee quarterly, without demand or notice, within thirty (30) days after the end of each calendar quarter during the term hereof. Seller's failure to timely pay the Purchasing Partners Administrative Fee shall be deemed a material breach of this Agreement.

      Effective October 1, 2004 Seller will pay to Purchasing Partners the Purchasing Partners Administrative Fee monthly, without demand or notice, within thirty (30 ) days after the end of each calendar month during the term hereof. Seller's failure to timely pay the Purchasing Partners Administrative Fee shall be deemed a material breach of this Agreement.

      All payments shall be by wire or electronic transfer to the account of "Premier Purchasing Partners, L.P." or by a check payable to "Premier Purchasing Partners, L.P." in accordance with the written instructions set forth in Exhibit E. Seller shall pay to Purchasing Partners interest on any past due amount owing Purchasing Partners hereunder at the lesser of (a) one and one-half percent (1-1/2%) per month or (b) the maximum interest rate legally permitted.

11.0 COMPLIANCE WITH LAWS AND REGULATIONS.

      11.1 General. Seller represents and warrants that throughout the term of this Agreement and any extension hereof, Seller and all Products shall be and shall remain in compliance with all applicable federal, state and local laws and regulations, including without limitation all applicable "safe harbor" regulations relating to group purchasing organizations and fees, discounts and incentives paid and/or granted to group purchasing organizations and any participants therein. Seller shall disclose to Participating Members, per applicable regulations, the specified dollar value of discounts or reductions in price. The Parties acknowledge and agree that for purposes of 42 C.F.R. Section 1001.952(h), any reduction in the amount Seller charges a Participating Member (excluding group purchasing organization fees, such as the Purchasing Partners Administrative Fee) is a "discount or other reduction in price" to the Part icipating Member. Participating Members shall disclose the specified dollar value of discounts or reductions in price under any state or federal program which provides cost or charge-based reimbursement to such Participating Members for the Products and services covered by this Agreement in accordance with applicable regulations.

      Seller agrees that, until the expiration of four (4) years after the furnishing of any goods and services pursuant to this Agreement, it will make available, upon written request of the Secretary of Health and Human Services or the Comptroller General of the United States or any of their duly authorized representatives, copies of this Agreement and any books, documents, records and other data of Seller that are necessary to certify the nature and extent of the costs incurred by Participating Members in purchasing such goods and services. If Seller carries out any of its duties under this Agreement through a subcontract with a related organization involving a value or cost of ten thousand dollars ($10,000) or more over a twelve-month period, Seller will cause such subcontract to contain a clause to the effect that, until the expiration of four (4) years after the furnishing of any good or service pursuant to said contract, the related organization will m ake available upon written request of the Secretary of Health and Human Services or the Comptroller General of the United States or any of their duly authorized representatives, copies of this Agreement and any books, documents, records and other data of said related organization that are necessary to certify the nature and extent of costs incurred by Seller for such goods or services. Seller shall give Purchasing Partners notice immediately upon receipt of any request from the Secretary of Health and Human Services or the Comptroller General of the United States or any of their duly authorized representatives for disclosure of such information.

      Seller represents and warrants that as of the date of this Agreement, Seller has not: (a) been listed by any federal or state agency as excluded, debarred, suspended or otherwise ineligible to participate in federal and/or state programs; or (b) been convicted of any crime relating to any federal and/or state program. Seller further agrees to immediately notify Purchasing Partners in writing in the event Seller is listed by a federal or state agency as excluded, debarred, suspended or otherwise ineligible to participate in any federal and/or state programs or if Seller is convicted of any crime relating to any such program.

         11.2 HIPAA Compliance. The U.S. Department of Health and Human Services issued regulations on "Privacy Standards for Individually Identifiable Health Information," which comprise 45 C.F.R. ss ss 160.101 through 164.534, promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 (the "Privacy Standards"). Seller shall comply with the Privacy Standards, pursuant to the manner set forth in the HIPAA Privacy Addendum attached hereto, if applicable.

12.0 INDEMNIFICATION; WARRANTIES; SPECIFICATIONS AND NOTICES.

         12.1 Indemnification. Seller hereby agrees to indemnify, defend and hold harmless Purchasing Partners and each Participating Member and their respective directors, officers, employees, agents and insurers from and against any and all claims, demands, actions, losses, expenses, damages, liabilities, costs (including, without limitation, interest, penalties and reasonable attorneys' fees) and judgments arising out of: (a) alleged bodily injury, property damage or any other damage or injury allegedly caused by in whole or in part, contributed by, or associated with any of the Products covered by this Agreement, and (b) any alleged acts or omissions of Seller and its employees and agents acting under its control or supervision. Purchasing Partners hereby agrees to indemnify, defend and hold harmless Seller and its directors, officers, employees, agents and insurers from and against any and all claims, demands, actions, losse s, expenses, damages, liabilities, costs (including, without limitation, interest, penalties and reasonable attorneys' fees) and judgments arising out of the acts or omissions of Purchasing Partners and its employees and agents acting under its control or supervision.

         12.2 Warranties and Published Specifications. Seller hereby warrants that each of the Products shall be free from defects in material and workmanship and shall conform to Specifications and Seller's representations regarding the functions and uses for which the Product is marketed. Attached hereto as Exhibit I is a detailed description of additional warranties applicable to the Products.

         12.3 Product Notices. Seller agrees to send all Product notices (including without limitation recall notices and product availability notices), as well as notices of any other changes affecting the Products and notices of new Products, to each Participating Member with copies to Purchasing Partners. Seller shall provide Purchasing Partners written notice of any Class I FDA recall affecting any of the Products within twenty-four (24) hours of Seller's receipt of any such recall. Seller shall provide Purchasing Partners written notice of any Class II or Class III FDA recall affecting any of the Products within seventy-two (72) hours of Seller's receipt of any such recall. Further, Seller agrees to immediately notify Purchasing Partners and each Participating Member of any material problems in the manufacture or production of any Products and of any back-order situation that might materially affect Seller's ability to mee t Seller's obligations under this Agreement. Upon Purchasing Partners' request, Seller shall provide Purchasing Partners copies of any FDA Form 483, regulatory letter, and/or warning letter relating to the Products and Seller's response thereto.

         12.4 Insurance. Seller shall maintain Products liability and General Liability insurance in amounts of no less than $2,000,000 per occurrence/ $3,000,000 annual aggregate covering the Products purchased by Participating Members from it under the Agreement. Seller shall make Purchasing Partners a named additional insured in Seller's General Liability insurance policy containing the required coverage. When requested by Purchasing Partners, an insurance certificate indicating the foregoing coverage, issued by an insurance company licensed to do business in the relevant state or states and signed by an authorized agent, shall be furnished to Purchasing Partners. Seller shall provide Purchasing Partners with written notice of any cancellation or material modification of such insurance within a reasonable time.

13.0 TERMINATION.

         13.1 Termination for Breach. In the event of breach of any provision of this Agreement, the non-breaching party shall notify the breaching party in writing of the specific nature of the breach and shall request that it be cured. If the breaching party does not cure the breach within thirty (30) days of such notice, the non-breaching party may immediately terminate this Agreement on written notice to the breaching party, and such termination shall not preclude the non-breaching party from pursuing any and all remedies available to it at law or in equity.

         13.2 Orders Placed Prior to Termination. Seller shall fulfill, in accordance with the terms of this Agreement, all orders for Products and Services submitted by Participating Members and received by Seller prior to termination or expiration of this Agreement.

         13.3 Termination Without Cause. Either party may terminate this Agreement at any time without cause or penalty upon providing the other party with ninety (90) days' advance written notice.

         13.4 Survival. The following paragraphs of this Agreement shall survive expiration or termination of this Agreement: (a) the payment of Administrative Fees pursuant to Article 10.0 including, but not limited to, fees relating to Products ordered prior to the effective date of expiration or termination and delivered after expiration or termination, and fees related to sales of Products under Member Agreements (as described in Section 10.1 above) which occur after the expiration or termination of this Agreement; (b) the audit undertakings set forth in Section 15.12; (c) the representations, warranties and covenants set forth in Section 12.2; (d) the indemnification undertaking contained in Section 12.1; (e) the designation of Participating Members as third party beneficiaries pursuant to Section 15.7; (f) the undertaking to fill orders submitted to and received by Seller prior to the date of expiration or termination set f orth in Section 13.2; (g) the confidentiality undertakings contained in Article 14; (h) the rights and limitations on assignment contained in Sections 15.4 and 15.10; (i) the governing law provisions contained in Section 15.1; (j) reasonable attorney's fees provided for in Section 15.9; (k) compliance with laws and regulations provided for in Article 11.0; (l) the rights of Participating Members under Section 6.8 relating to the rejection of Products which were ordered prior to the effective date of expiration or termination; and (m) Seller's obligations under Article 2.0 to provide Improvements free of charge for a period of up to 12 months after the expiration or termination of this Agreement.

14.0 CONFIDENTIALITY.

         14.1 Confidential Information. For the purposes of this Agreement, confidential information ("Confidential Information") shall mean all proprietary, secret or confidential information or data relating to Purchasing Partners, Participating Members, or Seller and their respective operations, employees, services, patients or customers.

         14.2 Protection of Confidential Information. Seller and Purchasing Partners acknowledge that Seller, Purchasing Partners, or Participating Members may disclose Confidential Information to each other in connection with this Agreement. If Seller or Purchasing Partners receives Confidential Information, it shall: (a) maintain the Confidential Information in strict confidence; (b) use at least the same degree of care in maintaining the secrecy of the Confidential Information as it uses in maintaining the secrecy of its own proprietary, secret, or confidential information, but in no event less than a reasonable degree of care; (c) use Confidential Information only to fulfill its obligations under this Agreement; and (d) return or destroy all documents, copies, notes, or other materials containing any portion of the Confidential Information upon request by Purchasing Partners or Seller. Notwithstanding the foregoing, Purchas ing Partners and Seller shall have the right to disclose Confidential Information to outside consultants as necessary for either party to provide support services for Participating Members in connection with this Agreement, provided any such consultants agree to the same level of confidentiality as described herein.

         14.3 Agreement Confidentiality. Neither Purchasing Partners nor Seller shall disclose the terms of this Agreement to any other person or entity outside its organization and affiliates other than to a Participating Member or as required by law. For purposes of this provision, an affiliate is an entity in which Purchasing Partners or Seller, as appropriate, maintains an ownership position in or a contractual relationship with, and the disclosure is required so that the disclosing party may fulfill its obligations hereunder. Neither party shall make any public announcement concerning the existence of this Agreement or its terms unless such party receives prior written approval by the other party.

         14.4 Limitation on Obligation. Seller and Purchasing Partners shall have no obligation concerning any portion of the Confidential Information which: (a) was known to it before receipt, directly or indirectly, from the disclosing party; (b) is lawfully obtained, directly or indirectly, by it from a non-party which was under no obligation of confidentiality; (c) is or becomes publicly available other than as a result of an act or failure to act by the receiving party; (d) is required to be disclosed by the receiving party by applicable law or legal process; or (e) is developed by the receiving party independent of the Confidential Information disclosed by the disclosing party. The receiving party shall not disclose any portion of the Confidential Information to any person except those of its employees and affiliates having a need to know such portion to accomplish the purposes contemplated by this Agreement.

         14.5 License Granted to Seller. Purchasing Partners has developed Confidential Information (as defined in Section 14.1 above) and trade secrets relating to the sale of goods to a large number of customers in the healthcare industry using proprietary business processes. Seller acknowledges that Purchasing Partners and its affiliates have invested substantial money in the development and maintenance of such processes and in the sourcing and sales of products and services. Seller will have a position of special trust and confidence for the use of such Confidential Information (including without limitation the roster of Participating Members set forth in Exhibit B hereto) to support the purposes of this Agreement. Accordingly, only for the term of this Agreement, Purchasing Partners hereby grants to Seller a non-exclusive license to use Confidential Information and such trade secrets for the limited purpose of providing t he Products and Services to Purchasing Partners and Participating Members under this Agreement.

         14.6 Data. Seller hereby acknowledges and agrees that all information and data generated or otherwise made available to Seller as a result of the participation of Participating Members under this Agreement ("Participating Member Data"") is proprietary to and owned exclusively by the applicable Participating Member and/or Purchasing Partners. Seller shall not sell, market or commercialize Participating Member Data, create derivative products or applications based on Participating Member Data or otherwise use Participating Member Data in any manner unrelated to the performance of Seller's obligations under this Agreement. Participating Member Data shall be deemed Confidential Information of Participating Members and/or Purchasing Partners and therefore subject to the provisions of Article 14 hereof. Seller hereby consents to the release to Purchasing Partners of transactional data relating to purchasing ac tivity by Participating Members under this Agreement. [Such consent shall extend to the release to Purchasing Partners of such data by any third party that operates an electronic marketplace or exchange.]

15.0 MISCELLANEOUS.

         15.1 Governing Law and Venue. This Agreement is being delivered and executed in the State of Illinois. In any action brought by or against Purchasing Partners, the validity, construction and enforcement of this Agreement shall be governed in all respects by the laws of the State of Illinois, and venue shall be proper only in a court of competent jurisdiction located in the State of Illinois in Cook County. In the event of any dispute arising out of this Agreement, whether at law or in equity, brought by or against a Premier Participating Member, venue shall be proper only in a court of competent jurisdiction located in the county and state in which such member is located. The parties agree to be subject to personal jurisdiction in and consent to service of process issued by a court in which venue is proper as defined in this Section 15.1.

         15.2 Modification and Waiver. No modification of this Agreement shall be deemed effective unless in writing and signed by each of the parties hereto. Any waiver of a breach of any provision(s) of this Agreement shall not be deemed effective unless in writing and signed by the party against whom enforcement of the waiver is sought.

         15.3 Headings. The descriptive headings of the sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any provision hereof.

         15.4 Assignment. Purchasing Partners shall have the right, without Seller's consent, to assign Purchasing Partners' rights, title and interest under this Agreement to any entity owned or controlled by Premier, Premier Purchasing Partners, L.P. ("Purchasing Partners") and/or Purchasing Partners or under common ownership or control with Premier, Purchasing Partners and/or Purchasing Partners. Except as set forth in the foregoing sentence, neither party may assign, subcontract, delegate or otherwise transfer this Agreement or any of its rights or obligations hereunder, nor may it contract with third parties to perform any of its obligations hereunder except as contemplated in this Agreement, without the other party's prior written consent.

         15.5 Severability. If any part of this Agreement shall be determined to be invalid, illegal or unenforceable by any valid Act of Congress or act of any legislature or by any regulation duly promulgated by the United States or a state acting in accordance with the law, or declared null and void by any court of competent jurisdiction, then such part shall be reformed, if possible, to conform to the law and, in any event, the remaining parts of this Agreement shall be fully effective and operative insofar as reasonably possible.

         15.6 Notices. Any notice required to be given pursuant to the terms and provisions hereof shall be in writing, postage and delivery charges pre-paid, and shall be sent by telecopier, hand delivery, overnight mail service, first-class mail or certified mail, return receipt requested, to Purchasing Partners or Seller at the addresses and/or facsimile numbers set forth on the Cover Sheet. Any party may change the address to which notices are to be sent by notice given in accordance with the provisions of this section. Notices hereunder shall be deemed to have been given, and shall be effective upon actual receipt by the other party, or, if mailed, upon the earlier of the fifth (5^th) day after mailing or actual receipt by the other party. Seller shall provide a copy of any notice to Purchasing Partners provided under this Section to the Premier Legal Department at the following address:

            Premier Legal Department
            12225 El Camino Real
            San Diego, CA 92130-2099
            Tel No.: (858) 509-6361
            Fax No.: (858) 481-0538
            Attn: General Counsel

         15.7 Enforceability. The parties hereto acknowledge and agree that (a) this Agreement is entered into by Purchasing Partners for the express, intended benefit of Participating Members, (b) each of the Participating Members shall be and constitute an intended third-party beneficiary of the representations, warranties, covenants and agreements of the Seller contained herein, and (c) each of the Participating Members shall be entitled to enforce the terms and provisions of this Agreement to the same extent as Purchasing Partners.

         15.8 Independent Contractors. The parties' relationship hereunder is that of independent contractors. This Agreement does not create any employment, agency, franchise, joint venture, partnership or other similar legal relationship between Purchasing Partners and Seller. Neither party has the authority to bind or act on behalf of the other party except as otherwise specifically stated herein.

         15.9 Attorneys' Fees. Should any party engage an attorney for the purpose of enforcing this Agreement or any judgment based hereon in any court, including bankruptcy court, courts of appeal or arbitration proceedings, the prevailing party shall be entitled to receive its reasonable attorneys' fees and costs in addition to any other relief granted.

         15.10 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

         15.11 Force Majeure. The obligations of either party to perform under this Agreement will be excused during each period of delay caused by acts of God or by shortages of power or materials or government orders which are beyond the reasonable control of the party obligated to perform ("Force Majeure Event"). In the event that either party ceases to perform its obligations under this Agreement due to the occurrence of a Force Majeure Event, such party shall: (a) immediately notify the other party in writing of such Force Majeure Event and its expected duration; (b) take all reasonable steps to recommence performance of its obligations under this Agreement as soon as possible. In the event that any Force Majeure Event delays a party's performance for more than thirty (30) days following notice by such party pursuant to this Agreement, the other party may terminate this agreement immediately upon written notice to such par ty.

         15.12 Audit of Costs. Seller shall permit Purchasing Partners or its agent to conduct periodic audits of records relating to Seller's performance under this Agreement including without limitation relevant orders, invoices, volume reports and administrative fees. At a minimum, Seller shall maintain and have available for review the following documents in connection with an audit: electronic copies of volume and administrative fee files previously sent to Purchasing Partners, copies of the Membership Rosters utilized by Seller in performing under this Agreement, records of all rental and sales made to Participating Members under this Agreement (in a format that allows for re-querying of the data), an electronic listing of all Products rental or purchased during the term of this Agreement (in a format that allows for re-querying of the data) which can be used as the basis for confirming total Participating Member rental or purchase volume and total Purchasing Partners Administrative Fees due under this Agreement, and a cross reference between Seller's internal customer numbers and Purchasing Partners-approved entity code numbers (in the event that Purchasing Partners' entity code numbers are not loaded into Seller's information system). The audits shall be conducted upon reasonable advance notice during regular business hours at Seller's principal office and in such a manner as not to unduly interfere with Seller's operations. Audits pursuant to this Section shall be conducted no more than once in any contract year. In the event any audit reveals an underreporting of Purchasing Partners Administrative Fees in excess of the lesser of $25,000 or 5% of the total Purchasing Partners Administrative Fees paid in any reporting period, or in aggregate for the entire audit period, then the costs of the audit, including labor, outside consultant fees, out-of-pocket expenses and administrative charges to perform the review shall be r eimbursed to Purchasing Partners by Seller within thirty (30) days of Seller's receipt of an invoice therefore from Purchasing Partners.

         15.13 Minority, Woman-Owned and Small Businesses. On or before the Effective Date, Seller shall provide to Purchasing Partners a copy of Seller's current supplier diversity policy. Such policy shall set forth the manner in which Seller intends to comply with Purchasing Partners Minority, Woman-Owned, and Small Business Policy set forth in Exhibit F hereto. In this regard, Seller acknowledges that it will use commercially reasonable efforts to spend a minimum of three percent (3%) of its annual production and raw material costs with minority-owned businesses and a minimum of two percent (2%) of such costs with women-owned businesses.

         15.14 Entire Agreement. This Agreement, including the Cover Sheet, the Additional Terms and Conditions (if any) and all Exhibits hereto, constitutes the entire understanding and agreement between Seller and Purchasing Partners concerning the subject matter hereof, and supersedes all prior negotiations, agreements and understandings between Seller and Purchasing Partners, whether oral or in writing, concerning the subject matter hereof, including, but not limited to, all prior agreements between Seller and either Purchasing Partners, AmHS Purchasing Partners, L.P., American Healthcare Systems, Inc., Premier Health Alliance, Inc., or SunHealth Alliance, Inc., whether or not assigned to Purchasing Partners, Purchasing Partners or Premier.

         15.15 Labor and Employment Laws. Seller represents and warrants that it complies with applicable labor and employment laws and prohibits any form of child labor or other exploitation of children in the manufacturing and delivery of Products, consistent with provisions of the International Labor Organization's Minimum Age Convention of 1973. A child is any person who is less than fourteen (14) years of age or who is younger than the compulsory age to be in school in the country in which Seller's business is being conducted, if that age is higher than fourteen (14).

         15.16 No Additional Obligations Imposed by Seller. Except as expressly set forth herein, Seller shall not impose any obligations on Purchasing Partners and/or Participating Members as a condition to receiving any of the benefits set forth in this Agreement.

         15.17 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same agreement.

         15.18 Data/Payment Exchange; Electronic Commerce. Seller hereby acknowledges that Purchasing Partners and/or its affiliates are currently developing technology and electronic commerce ("e-commerce") processes which may enable Participating Members and Seller to more efficiently purchase and sell products, supplies and equipment, exchange information and make payments (e.g., through use of the Internet). Seller shall implement any e-commerce system reasonably adopted by Purchasing Partners and/or its affiliates for group purchasing activities and shall cooperate in all reasonable respects with Purchasing Partners and/or its affiliates in integrating any such e-commerce systems into Seller's systems. Any such e-commerce system shall be owned by and proprietary to Purchasing Partners and/or its affiliates. Further, Seller agrees during the term of this Agreement not to direct or otherwise encourage Participating Members t o use e-commerce systems other than the system promoted, developed and/or operated by Purchasing Partners and/or its affiliates.

         15.19 Technology Breakthroughs. Purchasing Partners believes an essential element of advancing the core objectives and mission of Premier is to encourage the development of health care technology which significantly improves the quality, process and/or outcome of care. In support of this belief, the Parties acknowledge that certain Products which incorporate breakthrough technologies ("Breakthrough Products") have the potential to significantly improve safety to patients or hospital staff, significantly improve process of care or clinical outcomes when compared to the level of safety, process of care and/or outcomes delivered through use of the Products. Purchasing Partners therefore reserves the right to enter into agreements with the supplier(s) of such Breakthrough Products in order to make such Products available to Participating Members. Seller hereby agrees that the purchase of such Breakthrough Pr oducts by Participating Members shall not negatively impact such members' access to any favorable terms and conditions offered under this Agreement. Notwithstanding the foregoing, a product shall not be deemed a Breakthrough Product under this Section unless and until it has been submitted for review and approved under the Purchasing Partners' Technology Breakthroughs Standard Review Process ("The Breakthrough Review Process").

         15.20 Controlling Document. In the event of any conflict between this Agreement and any document, instrument or agreement prepared by Seller (including without limitation Seller's purchase orders, invoices and warranties), the terms of this Agreement shall control.

         15.21 Seller Information Sheet. Concurrent with the execution of this Agreement, Seller shall complete and return to Purchasing Partners the Seller Information Sheet set forth as Exhibit G.

End of Standard Terms and Conditions

I. GENERAL PROVISIONS

      Section 1. Effect. This Addendum supplements, modifies and amends any and all agreements, whether oral or written, between Purchasing Partners and Seller and relates to the disclosure of protected health information ("PHI") by Participating Members to Seller, or the creation or receipt of PHI by Seller on behalf of Participating Members (the "Agreement(s)"). The terms and provisions of this Addendum shall supercede any other conflicting or inconsistent terms and provisions in any Agreement(s) between Purchasing Partners and Seller, including all exhibits or other attachments thereto and all documents incorporated therein by reference. Without limitation of the foregoing, any limitation or exclusion of damages provisions shall not be applicable to this Addendum.

      Section 2. Amendment. Seller and Purchasing Partners agree to amend this Addendum to the extent necessary to allow either Seller or Participating Members to comply with the Privacy Standards, the Standards for Electronic Transactions (45 C.F.R. Parts 160 and 162) and the Security Standards (45 C.F.R. Part 142) (collectively, the "Standards") promulgated or to be promulgated by the Secretary or other regulations or statutes. Seller agrees that it will fully comply with all such Standards and that it will agree to amend this Addendum to incorporate any material terms required by the Standards.

      Section 3. Definitions. Capitalized terms used herein without definition shall have the respective meanings assigned to such terms in Part IV of this Addendum.

II. OBLIGATIONS OF SELLER

      Section 1. Use and Disclosure of Protected Health Information. Seller may use and disclose PHI only as required to satisfy its obligations under the Agreement(s), as permitted herein, or as required by law, but shall not otherwise use or disclose any PHI. Seller shall not, and shall ensure that its directors, officers, employees, contractors and agents do not, use or disclose PHI received from a Participating Member in any manner that would constitute a violation of the Privacy Standards if used by the Participating Member, except that Seller may use PHI (i) for Seller's proper management and administrative services, (ii) to carry out the legal responsibilities of Seller or (iii) to provide data aggregation services relating to the health care operations of Participating Member if required under the Agreement(s). Seller hereby acknowledges that, as between Seller and Participating Members, all PHI shall be and remain the sole proper ty of Participating Members, including any and all forms thereof developed by Seller in the course of its fulfillment of its obligations pursuant to this Addendum. Seller further represents that, to the extent Seller requests that a Participating Member disclose PHI to Seller, such a request is only for the minimum necessary PHI for the accomplishment of Seller's purpose.

      Section 2. Safeguards Against Misuse of Information. Seller agrees that it will use all appropriate safeguards to prevent the use or disclosure of PHI other than pursuant to the terms and conditions of this Addendum.

      Section 3. Reporting of Disclosures of Protected Health Information. Seller shall, within thirty (30) days of becoming aware of any use or disclosure of PHI in violation of this Addendum by Seller, its officers, directors, employees, contractors or agents or by a third party to which Seller disclosed PHI pursuant to Section II.4 of this Addendum, report any such disclosure to Purchasing Partners and applicable Participating Members.

      Section 4. Agreements by Third Parties. Seller shall obtain and maintain an agreement with each agent or subcontractor that has or will have access to PHI, which is received from, or created or received by Seller on behalf of Participating Members, pursuant to which agreement such agent or subcontractor agrees to be bound by the same restrictions, terms and conditions that apply to Seller pursuant to this Addendum with respect to such PHI.

      Section 5. Access to Information. Within five (5) days of a request by a Participating Member for access to PHI about an individual contained in a Designated Record Set, Seller shall make available to the Participating Member such PHI for so long as such information is maintained in the Designated Record Set. In the event any individual requests access to PHI directly from Seller, Seller shall within two (2) days forward such request to Participating Member. Any denials of access to the PHI requested shall be the responsibility of Participating Member.

      Section 6. Availability of Protected Health Information for Amendment. Within ten (10) days of receipt of a request from a Participating Member for the amendment of an individual's PHI or a record regarding an individual contained in a Designated Record Set (for so long as the PHI is maintained in the Designated Record Set), Seller shall provide such information to Participating Member for amendment and incorporate any such amendments in the PHI as required by 45 C.F.R. ss164.526.

      Section 7. Accounting of Disclosures. Within ten (10) days of notice by a Participating Member to Seller that it has received a request for an accounting of disclosures of PHI, other than related to the treatment of the patient, the processing of payments related to such treatment, or the operation of a covered entity or its business associate and not relating to disclosures made earlier than six (6) years prior to the date on which the accounting was requested, Seller shall make available to Participating Member such information as is in Seller's possession and is required for Participating Member to make the accounting required by 45 C.F.R. ss164.528. At a minimum, Seller shall provide Participating Member with the following information: (i) the date of the disclosure, (ii) the name of the entity or person who received the PHI and, if known, the address of such entity or person, (iii) a brief description of the PHI disclosed, and (iv) a brief statement of the purpose of such disclosure which includes an explanation of the basis for such disclosure. In the event the request for an accounting is delivered directly to Seller, Seller shall within two (2) days forward such request to Participating Member. Seller hereby agrees to implement an appropriate recordkeeping process to enable it to comply with the requirements of this Section.

      Section 8. Availability of Books and Records. Seller hereby agrees to make its internal practices, books and records relating to the use and disclosure of PHI received from, or created or received by Seller on behalf of, a Participating Member available to the Secretary for purposes of determining Participating Member's compliance with the Privacy Standards.

      Section 9. Indemnification. Seller hereby agrees to indemnify and hold Purchasing Partners and Participating Members harmless from and against any and all liability and costs, including attorneys' fees, created by a breach of this Addendum by Seller, its agents or subcontractors, without regard to any limitation or exclusion of damages provision otherwise set forth in the Agreement(s).

      Section 10. Insurance. Seller shall obtain and maintain during the term of this Agreement liability insurance covering claims based on a violation of the Standards or any applicable state law or regulation concerning the privacy of patient information. A copy of such policy or a certificate evidencing the policy shall be provided to Purchasing Partners upon written request.

III. TERMINATION OF AGREEMENT WITH SELLER

      Section 1. Term. This Addendum shall become effective on the later of April 14, 2003 or the effective date of the Agreement and, unless otherwise terminated as provided herein, shall continue to be effective until superseded by another agreement or until the relationship between Participating Members and Seller ceases.

      Section 2. Termination Upon Breach of Provisions Applicable to Protected Health Information. Any other provision of the Agreement(s) notwithstanding, this Addendum and the Agreement(s) may be terminated by Purchasing Partners upon thirty (30) days written notice to Seller in the event that Seller breaches any provision contained in this Addendum and such breach is not cured within such thirty (30) day period. Participating Member may terminate its relationship with Seller in the event that Seller breaches any provision contained in this Addendum with respect to such Participating Member; provided, however, that in the event that termination of this Addendum with respect to such Participating Member is not feasible, in Participating Member's sole discretion, Seller hereby acknowledges that Participating Member shall have the right to report the breach to the Secretary, notwithstanding any other provision of this Addendum or any Agreement (s) to the contrary.

      Section 3. Return or Destruction of Protected Health Information upon Termination. Upon termination of this Addendum with respect to a certain Participating Member, Seller shall either return or destroy all PHI received from such Participating Member or created or received by Seller on behalf of such Participating Member and which Seller still maintains in any form. Seller shall not retain any copies of such PHI. Notwithstanding the foregoing, to the extent that Participating Member agrees that it is not feasible to return or destroy such PHI, the terms and provisions of this Addendum shall survive termination and such PHI shall be used or disclosed solely for such purpose or purposes which prevented the return or destruction of such PHI.

IV. DEFINITIONS FOR USE IN THIS ADDENDUM

            "Data Aggregation" shall mean, with respect to PHI created or received by Seller in its capacity as the business associate of a Participating Member, the combining of such PHI by Seller with the PHI received by Seller in its capacity as a business associate of another covered entity, to permit data analyses that relate to the health care operations of the respective covered entities.

            "Designated Record Set" shall mean a group of records maintained by or for a Participating Member that is (i) the medical records and billing records about individuals maintained by or for such Participating Member, (ii) the enrollment, payment, claims adjudication, and case or medical management record systems maintained by or for a health plan; or (iii) used, in whole or in part, by or for such Participating Member to make decisions about individuals. As used herein the term "Record" means any item, collection, or grouping of information that includes PHI and is maintained, collected, used, or disseminated by or for Participating Member.

            "Electronic Media" shall mean the mode of electronic transmissions. It includes the Internet, extranet (using Internet technology to link a business with information only accessible to collaborating parties), leased lines, dial-up lines, private networks, and those transmissions that are physically moved from one location to another using magnetic tape, disk, or compact disk media.

            "Individually Identifiable Health Information" shall mean information that is a subset of health information, including demographic information collected from an individual, and

                         (i) is created or received by a health care provider, health plan, employer, or health care                                clearinghouse; and

                        (ii) relates to the past, present, or future physical or mental health or condition of an individual; the                                provision of health care to an individual; or the past, present or future payment for the provision                                of health care to an individual; and (a) identifies the individual, or (b) with respect to which there                                is a reasonabl e basis to believe the information can be used to identify the individual.

            "Privacy Standards" shall mean the Standard for Privacy of Individually Identifiable Health Information, 45 C.F.R. Parts 160 and 164.

            "Protected Health Information" shall mean Individually Identifiable Health Information that is (i) transmitted by electronic media, (ii) maintained in any medium constituting Electronic Media; or (iii) transmitted or maintained in any other form or medium. "Protected Health Information" shall not include (i) education records covered by the Family Educational Right and Privacy Act, as amended, 20 U.S.C. ss1232g and (ii) records described in 20 U.S.C.ss1232g(a)(4)(B)(iv).

            "Secretary" shall mean the Secretary of the U.S. Department of Health and Human Services.

Exhibit A

Products & Services

Exhibit A

PRODUCT AND PRICE LIST

SELLER: KCI USA, Inc.

CONTRACT NUMBER: PP-CE-310
Vacuum Assisted Wound Closure Devices defined as: Continuous and/or Intermittent Negative Pressure Wound Therapy, Fluid Management System, Control/Monitor Unit, Device Specific

PRODUCTS: Dressings and Accessories.

1. Base, Commitment, and System/IDN: Pricing/Discount tiers for Products shall vary according to the following:

          VOLUME TIERS      TOTAL PRODUCT PURCHASES ($ PER CALENDAR YEAR)

TIER 1      < [*]

TIER 2      [*] - [*]

2. TIER 3 [*] +Pricing: The attached price list sets forth the net prices to be offered to Participating Members. Such prices do not reflect applicable Authorized Distributor fees.

3. [*]

4. Aggregation Pricing Option: Participating Members which operate multi-facility systems and/or have established networks of facilities for purposes of group purchasing and have the ability to influence the purchasing decisions of such facilities shall be entitled to aggregate the purchasing volume within their respective systems and networks in order to meet the desired discount tier.

5. Market Checks: Upon Purchasing Partners' reasonable request, Seller shall meet and confer in good faith with Purchasing Partners to determine the on-going competitiveness of Product pricing under this Agreement. To the extent necessary to address competitive conditions, and upon the parties' mutual written consent, Product prices shall be reduced. Examples of competitive conditions requiring a price decrease include without limitation industry-wide price decreases or situations where a group purchasing organization which competes with Purchasing Partners enters into a contract with a competitor of Seller for products which are competitive with the Products at prices significantly below the prices charged for Products under this Agreement.

6. Designation Form: Attached hereto is a Designation Form which, if reasonably deemed necessary by Seller, shall be used by Participating Members to indicate their desired level of participation under the Discount Tiers as well as designate whether they wish to invoke the Aggregation Pricing Option described in Section 4 above and direct their Authorized Distributors to automatically substitute generically equivalent Products covered under this Agreement in lieu of any products described in the Participating Member's purchase orders which are not covered under this Agreement. The Designation Form shall not be required if Seller already possesses sufficient information indicating Participating Members' preferences with respect to these issues ("Member Preference Information") or Seller and Purchasing Partners mutually agree that the Designation Form will not be utilized. Purchasing Partners shall have the right to confirm the accuracy of any such Member Preferenc e Information prior to Seller's reliance thereon. In instances where Seller reasonably determines that completion of the Designation Form by Participating Members is necessary for the administration of this Agreement, Seller hereby acknowledges that Participating Members which purchase Products without completing and returning the Designation Form shall nonetheless be deemed to have purchased Products under this Agreement at Tier 1 and without application of the Aggregation Pricing Option or Automatic Substitution until such time as a Designation Form is completed and returned which indicates a different preference. The Purchasing Partners Administrative Fees described in Section 10.1 of the Agreement shall be due and payable by Seller with respect to all purchases of Products by Participating Members whether or not the applicable Participating Member has completed and returned the Designation Form. Seller and Purchasing Partners shall use their commercially reasonable efforts to implement a system whereby D esignation Forms (or Participating Members' Discount Tier, and Aggregation Pricing Option and Automatic Substitution elections in lieu of the Designation Form) may be transmitted electronically rather than in paper form.

7. Reporting: Upon request, Seller shall provide Purchasing Partners copies of Participating Members' Designation Forms and any other information in Seller's possession indicating Participating Members' Discount Tier participation.

KCI USA, Inc. V.A.C.® Acute Care and Extended Care Facilities Only
			List Price
ITEM	Part Number	Quantity	Rental V.A.C.® Therapy Unit	Volume Tier I <[*]/Year	Volume Tier II [*]-[*]/Year	Volume Tier III [*]+/Year
V.A.C.® Daily Rental	8259914	1/carton	[*]	[*]	[*]	[*]
Mini V.A.C.® Daily Rental	M8259936	1/carton	[*]	[*]	[*]	[*]
V.A.C.® Disposables
V.A.C.® GranuFoam™ Small Dressing	M6275001	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Small Dressing	M6275001-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Medium Dressing	M6275002	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Medium Dressing	M6275002-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Large Dressing	M6275003	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Large Dressing	M6275003-5	5/carton	[*]	[*]	[*]	[*]
Canister without Gel	M6275007	10/carton	[*]	[*]	[*]	[*]
Canister without Gel	M6275007-5	5/carton	[*]	[*]	[*]	[*]
Canister with Gel	M6275008	10/carton	[*]	[*]	[*]	[*]
Canister with Gel	M6275008-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing Assy
10x15cm	M6275038	10/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing Assy
10x7.5cm	M6275039	10/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ 10x7.5cm Dressing	M6275030	10/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ 10x15cm Dressing	M6275031	10/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ 10x7.5cm Dressing	M6275033	10/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ 10x15cm Dressing	M6275034	10/carton	[*]	[*]	[*]	[*]
2-Way Connector	M6275012	10/carton	[*]	[*]	[*]	[*]
4-Way Connector	M6275015	10/carton	[*]	[*]	[*]	[*]
miniV.A.C.® VersaFoam™ Dressing	M6275021-5	5/carton	[*]	[*]	[*]	[*]
miniV.A.C.® GranuFoam™ Dressing	M6275037-5	5/carton	[*]	[*]	[*]	[*]
miniV.A.C.® Canisters	M6275022-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® Extension Tubing	M6275025	10/carton	[*]	[*]	[*]	[*]
V.A.C.® Drape	M6275009	10/carton	[*]	[*]	[*]	[*]
V.A.C.® Tubing	M6275040-5	5/carton	[*]	[*]	[*]	[*]
Y-Connector	M6275013	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Hand Dressing	M6275042-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Extra Large
Dressing	M6275043-5	5/carton	[*]	[*]	[*]	[*]

KCI USA, Inc. V.A.C.® ATS Acute Care and Extended Care Facilities Only
			List Price
ITEM	Part Number	Quantity	Rental V.A.C.® ATS Therapy Unit	Volume Tier I <[*]/Year	Volume Tier II [*]-[*]/Year	Volume Tier III [*]+/Year
V.A.C. ATS Therapy Unit	M8259968	1/carton	[*]	[*]	[*]	[*]
T.R.A.C. Disposables
V.A.C.® GranuFoam™ Small
Dressing	M6275051	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Small
Dressing	M6275051-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Medium
Dressing	M6275052	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Medium
Dressing	M6275052-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Large
Dressing	M6275053	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Large
Dressing	M6275053-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® ATS Canister without Gel	M6275071	10/carton	[*]	[*]	[*]	[*]
V.A.C.® ATS Canister without Gel	M6275071-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® ATS Canister with Gel	M6275063	10/carton	[*]	[*]	[*]	[*]
V.A.C.® ATS Canister with Gel	M6275063-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing
10x15cm	M6275067	10/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing
10x15cm	M6275067-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing
10x7.5cm	M6275068	10/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing
10x7.5cm	M6275068-5	5/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Canister Tubing Cap	M6275069	10/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Canister Tubing Cap	M6275069-5	5/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Y-Connector	M6275066	10/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Y-Connector	M6275066-5	5/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Pad	M6275057	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Thin Dressing	M6275081-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Round
Dressing	M6275075-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® Abdominal Dressing System	M6275080-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Heel Dressing	M6275074-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Hand Dressing	M6275064-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ X-Large
Dressing	M6275065-5	5/carton	[*]	[*]	[*]	[*]
V.A.C. ATS Power Cord Clamp	M3262615	1/carton	[*]	[*]	[*]	[*]
V.A.C. ATS Power Cord	M4268840	1/carton	[*]	[*]	[*]	[*]

KCI USA, Inc. V.A.C.®ATS Instill Acute Care and Extended Care Facilities Only
			List Price
			Rental V.A.C.®	Volume Tier I	Volume Tier II	Volume Tier III
ITEM	Part Number	Quantity	Instill™ Therapy Unit	<[*]/Year	[*]-[*]/Year	[*]+/Year
V.A.C.® Instill™ Therapy Unit	320100	1/carton	[*]	[*]	[*]	[*]
V.A.C.® Instill™ Pad Therapy Charge[*] [*]This is a one time per patient charge automatically applied to the customer invoice.	THRCHG.P		[*]
T.R.A.C. Disposables
V.A.C.® Instill™ Pad	M6275083-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Small Dressing	M6275051	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Small Dressing	M6275051-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Medium Dressing	M6275052	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Medium Dressing	M6275052-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Large Dressing	M6275053	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Large Dressing	M6275053-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® ATS Canister without Gel	M6275071	10/carton	[*]	[*]	[*]	[*]
V.A.C.® ATS Canister without Gel	M6275071-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® ATS Canister with Gel	M6275063	10/carton	[*]	[*]	[*]	[*]
V.A.C.® ATS Canister with Gel	M6275063-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing 10x15cm	M6275067	10/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing 10x15cm	M6275067-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing 10x7.5cm	M6275068	10/carton	[*]	[*]	[*]	[*]
V.A.C.® VersaFoam™ Dressing 10x7.5cm	M6275068-5	5/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Canister Tubing Cap	M6275069	10/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Canister Tubing Cap	M6275069-5	5/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Y-Connector	M6275066	10/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Y-Connector	M6275066-5	5/carton	[*]	[*]	[*]	[*]
T.R.A.C.™ Pad	M6275057	10/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Thin Dressing	M6275081-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Round Dressing	M6275075-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® Abdominal Dressing System	M6275080-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Heel Dressing	M6275074-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ Hand Dressing	M6275064-5	5/carton	[*]	[*]	[*]	[*]
V.A.C.® GranuFoam™ X-Large Dressing	M6275065-5	5/carton	[*]	[*]	[*]	[*]
V.A.C. ATS Power Cord Clamp	M3262615	1/carton	[*]	[*]	[*]	[*]
V.A.C. ATS Power Cord	M4268840	1/carton	[*]	[*]	[*]	[*]

Exhibit A
PARTICIPATING MEMBER DESIGNATION FORM

SELLER: KCI USA, Inc.

CONTRACT NUMBER: PP-CE-310

PRODUCTS: Vacuum Assisted Wound Closure Devicesdefined as: Continuous and/or IntermittentNegative Pressure Wound Therapy, FluidManagement System, Control/Monitor Unit,Device Specific Dressings and Accessories.

1. Base, Commitment, and System/IDN: Pricing/Discount tiers for Products shall vary according to the following

          a. Select one Tier by initialing below

MemberInitials      VOLUME TIERS      TOTAL PRODUCT PURCHASES($ PER CALENDAR YEAR)

      TIER 1                < [*]

      TIER 2                   [*] - [*]

      TIER 3                   [*] +

      Large Order         [*] +

2. Aggregation Pricing Option. By initialing where indicated below, the undersigned Participating Member hereby elects to invoke the Aggregation Pricing Option whereby such Participating Member shall be entitled to aggregate the purchasing volume within to respective multi-facility system and/or network of facilities in order to meet the discount tier designated in Item 1 above. In order to invoke this election, the undersigned Participating Member must be able to influence the purchasing decisions of the facilities it wishes to aggregate. Attached hereto as Schedule 1 is a list of all such facilities. The undersigned Participating Member shall be respondsible for updating such list on an annual basis. The undersigned Participating Member hereby elects to invoke the Aggregation Pricing Option: Participating Member's Initials:             

3. Automatic Substitution. By initialing where indicated below, the undersigned Participating Member hereby authorizes and directs its Authorized Distributors to automatically substitute any generically equivalent Product covered under the above-referenced Group Purchasing Agreement in lieu of any product described in such Participating Member's purchase orders which is not covered under such agreement. The undersigned Participating Member hereby elects to invoke Automatic Substitution: Participating Member's Initials:             

Participating Member's Primary Distributor.                                                                       Secondary Distributor.

The undersigned Participating Member hereby acknowledges and confirms the above designations.

Print Name of Participating Member. __________________________________
Address: ________________________________________________________
City and State: ___________________________________________________
Phone Number. __________________________________________________
Signature: _______________________________________________________
Print Name of Person Signing: _______________________________________
Title of Person Signing:_____________________________________________
Date Signed: _____________________________________________________
Premier Entity Code: __________________________(to be provided by Premier)

Upon completion, please submit this form to Seller at the addresses below.

Martin Middough, Director of National Accounts
(800) 275-7885 Fax: (210) 255-6983
middougm@kci1 .com

SCHEDULE I

LIST OF PARTICIPATING MEMBER'S FACILITIES
(For Purposes of Implementing the Aggregation Pricing Option)

[TO BE COMPLETED BY THE PARTICIPATING MEMBER AND UPDATED ON AN ANNUAL BASIS]
System name:

Premier Entity Code Participating Facility Name City State Phone Number Contact Name

Exhibit B

Membership Roster

EXHIBIT B
MEMBERSHIP ROSTER ACCESS INSTRUCTIONS

In order to access the Membership Roster, Seller must register for and receive approval to use Purchasing Partners' Supplier Web Site. The following instructions apply:

I. Registration on Premier Web Site
        Instructions:
             1. Go to http://www.premierinc.com/
             2. Locate and select Register button
             3. Read and accept the terms of use
             4. A registration screen will appear
             5. Complete all required fields and click on Submit button

The registration process requires Seller to designate an individual to serve as a Membership Administrator who shall administer and monitor the terms of the Agreement related to the Membership Roster (see Article 3.0 of the Agreement) and reporting of information related to purchases (see Article 9.0 of the Agreement). The name of the Membership Administrator shall be provided to Purchasing Partners as of the Effective Date and Seller shall notify Purchasing Partners as to any change in the Membership Administrator.

Immediately following step 5. above, a confirmation page should appear on-screen. All registration remains subject to approval and verification by Purchasing Partners. Purchasing Partners shall notify Seller by e-mail or otherwise, when registration has been approved.

Following a successful registration, Seller shall access the Membership Roster by completing the following steps:

II. Instructions for Accessing Membership Roster on Premier Web Site

Instructions:

             1. Go to http://www.premierinc.com/
             2. Locate and select Rosters button from the menu
             3. Locate and open the file, Detailed Instructions for Downloading
             4. Review and complete instructions

Exhibit B Rev 12/02 #1447v2

Exhibit C

Authorized Distributions
N/A

Exhibit D

Reporting Formats

EXHIBIT D
REPORTING FORMATS ACCESS INSTRUCTIONS

The required reporting formats as referenced in Article 9.0, are documented in Premier's Electronic Reporting Format (PERF) guide. The PERF guide is available on Premier's website, Premierlnc.com. Please follow the instructions below for access.

If you currently have a contract with Premier:

Seller must register for and receive approval to use Purchasing Partners' Supplier Web Site. If prior registration, as identified in Exhibit B(I), has not been completed, the following instructions apply:

Instructions for website access:

1. Go to http://www.premierinc.com/
2. Locate and select Register button (top left of screen)
3. Read and accept the terms of use
4. A registration screen will appear
5. Complete all required fields and click on Submit button

The registration process requires Seller to designate an individual to serve as a Membership Administrator who shall administer and monitor the terms of the Agreement related to the Roster of Participating Members (see Article 3.0 of the Agreement) and reporting of information related to purchases (see Article 9.0 of the Agreement). The name of the Membership Administrator shall be provided to Purchasing Partners as of the Effective Date and Seller shall notify Purchasing Partners as to any change in the Membership Administrator.

Immediately following step 5 above, a confirmation page should appear on screen. All registration remains subject to approval and verification by Purchasing Partners. Purchasing Partners shall notify Seller by e-mail or otherwise, when registration has been approved.

Following a successful registration, Seller shall access the reporting formats as referenced in Article 9.0, by completing the following steps:

Instructions for PERF guide access:
1. Go to http://www.premierinc.com/
2. Select LOGIN at the top left margin of the screen.
3. Log in using your assigned username and password-press the displayed ENTER button
4. Select the Contracted Suppliers link in the top right margin of the screen
5. Select Premier's Electronic Reporting Format Guide link locatd on the left side links section of the screen.
6. Read the brief article and select Premier's Electronic Reporting Format Guide.pdf in the "Related Links" box.

If you are a Prospective Supplier:
1. Go to http://www.premierinc.com/
2. Click on the Suppliers link on the left side of the page.
3. Click on Related Links on the left side of the screen.
4. Click on Premier's Electronic Reporting Format Guide in the body of the screen.
5. Read the brief article and select Premier's Electronic Reporting Format Guide.pdf in the "Related Links" box.

Rev 12/03

Docs #5885v4

Exhibit E

Payment Instructions

EXHIBIT E

PAYMENT INSTRUCTIONS

All wires should be set up as follows:

Beneficiary:                    Premier Purchasing Partners, L.P.

Beneficiary Bank:         [*]

Beneficiary Account:   [*]

Bank ABA:                    [*]

Checks should be made payable to "Premier Purchasing Partners LP." and sent to the following address:

                Premier Purchasing Partners, L.P. ID# 35984 BOX 07650
                Los Angeles, CA 90084-7650

Mail Fed-Exes to our lockbox location at the following address:

                Regulus Premier Purchasing Partners 07650 1200 West 7th Street L2-200
                Los Angeles, CA 90017

Exhibit F

Minority and Female-Owned Business Policy

Exhibit F

Premier Purchasing Partners, L.P.
Supplier Diversity Initiative
Minority, Woman-Owned and Small Businesses Policy

Purchasing Partners desires to promote an environment that facilitates equal opportunity and access by qualified diversity suppliers, (i.e., small, minority, and woman-owned businesses) desiring to provide quality goods and services to Participating Members. Purchasing Partners is committed to encouraging such access through its procurement efforts. Purchasing Partners believes that implementing this policy is good business practice consistent with its mission and that of its members. Furthermore, Purchasing Partners and its affiliates recognize and are sensitive to the high level of importance that Premier members place on the development of minority, woman-owned and small businesses in their local communities.

Purchasing Partners will make every effort to offer a diverse supplier portfolio that meets or exceeds its' members' supplier diversity policies. In the event that Purchasing Partners' supplier diversity portfolio does not meet particular members' needs, Purchasing Partners' policy will be to recommend to the Group Purchasing Policy Committee (the "Committee") that it grant compliance exemption requests from affected members to the extent necessary to enable such members to comply with applicable federal, state, local or self- imposed supplier diversity policies. Any such exemption request is subject to the Committee's normal approval process.

Purchasing Partners' contracted suppliers are encouraged to spend a minimum of three percent (3%) of their annual production and raw material costs with minority -owned businesses and a minimum of two percent (2%) of such costs with women-owned businesses. Seller acknowledges that, subject to Purchasing Partners' compliance with its existing contractual obligations, Purchasing Partners may enter into group purchasing agreements with any diverse suppliers and that one of the main factors underlying Purchasing Partners' decision to enter into such agreements could be contracted suppliers' inability or unwillingness to comply with such supplier diversity expenditure targets. Seller shall consider working with any diversity supplier reasonably recommended by Purchasing Partners to assist Seller and Participating Members in complying with the objectives described in this policy.

Seller shall provide a bi-annual report, documenting its expenditures with respect to diverse suppliers. Reporting is to commence within six months of the Effective Date and shall comply with the reporting dates and format set forth in the Premier Business Partner's website, located under Industry Initiatives and is labeled Supplier Diversity 2^"d Tier Report Only reported purchases from minority and women-owned businesses that are certified by a valid national, state or local certification agency shall qualify for consideration under this policy. Each reported small business entity must have completed a self - certification available in the format set forth at www.premierinc.com/supplierdiversity in order to qualify for consideration under this policy.

Suggested certifying agencies are:

               - National Minority Suppliers Development Council ( www.nmsdcus.org)

               - Women's Business Enterprise National Council (www.wbenc.com)

               - Small Business Administration (www.sba.gov)

Supplier Diversity Plan: Seller's diversity plan and compliance with this policy will be discussed during Seller's periodic business reviews with Purchasing Partners.

Exhibit G

Seller Information Sheet

EXHIBIT G

Seller Information Sheet

Seller Name: KCI USA, INC.

Contract #: PP-CE-310

Seller qualifies as a Small Business under the Small Business Administration criteria.
        Yes        X  No (Most organizations qualify if they have fewer than 500 employees. However, there are some exceptions. To review criteria, please consult http://www,sba.gov/size , http://www.sba.gov/size/NAICS-matched-withsize-stds-umbrella.htm, or contact your federal government representative^'s office.)

Seller's business is at least 51% owned/controlled/operated by a non-minority woman and such owner is a U.S. Citizen.

        Yes        X  No

Seller's business is at least 51% owned/controlled/operated by one of the following and such owner is a U.S. Citizen:

              African American (ethnic origin in any of the Black racial groups of Africa)

              Hispanic American (ethnic origin in any of the Spanish speaking areas of Mexico, Central
                   America, South America or the Caribbean basin.)

              Asian-Pacific American (ethnic origin in Japan, China, Taiwan, Korea, Vietnam, Laos, Cambodia,
                   the Philippines, Samoa, Guam, the U.S. Trust Territories of the Pacific or the Northern Marinas)

              Asian-Indian American (ethnic origins in India, Pakistan or Bangladesh)

              Native American (a person who is American Indian, Eskimo, Aleut or Native Hawaiian and regarded
                   as such by the community of which the person claims to be a part)

              Other.

              Veteran

              Special (Blind or Severe Disabilities)

      X     None of the above

Seller currently maintains regular, ongoing certification for the following quality designations:

       X    ISO 9001- Model for quality assurance in design, development, production, installation and servicing

              ISO 9002 - Model for quality assurance in production, installation and servicing

              ISO 9003 - Model for quality assurance in final inspection and test

      X      ISO 13485- Medical Device Manufacturer

              ISO 14001- Model for environmental management systems

              Other National/International Standards or Certifications:

Rev05/02

DOCS 3505v2

EXHIBIT G Seller Information Sheet

Please list any professional associations of which Seller is a member. (These may include, for example, National Association of Manufacturers, Food Distributors International, Medical Device Manufacturers Association, etc.)

KCI management, field, and company are members of numerous professional associations applicable to our industry. Some associations important to mention are Health Industry. Group Purchasing Association (HIGPA), Federation of American Hospital Systems (FAHS), AvaMed, American Association of Occupational Health Nurses (AAOHN), The Association of Manufacturing Excellence (AME), Institute of Supply Management, Healthcare Compliance of America (HCCA), and Advanced Medical Technology Association.

Exhibit H

Product Specifications
N/A

Exhibit I

Warranty
N/A

Exhibit J

Service, Maintenance & License Agreement

N/A

Exhibit K

Return Goods Policy

KCI

The Clinical Advantage

Exhibit K

KCI USA, Inc.
Purchase/Return Policy

To return a product the Customer MUST contact the KCI Advantage Center, phone # 1-800-531-5346 for a return authorization (RMA Number).

KCI USA (KCI_®) will credit 85% of the purchase price for a returned product when the following criteria are met*:

1. The purchase has been made within the last 30 days. KCI cannot accept returns after 30 days.
2. Internal contents must be sealed in original packaging and full case quantity intact.
3. The item is only subject to credit after it is accepted at inspection by KCI's Shipping & Receiving Department. If the product is not rejected at inspection, it will be returned to the customer with the reasons stating why it was rejected and no credit will be issued. No damaged or used items will be accepted. (General Manager will be notified upon rejection for notification to customer.)
4. All Returns must be returned to:

                                           KCI Product Returns
                                           4958 Stout Drive
                                           San Antonio, TX 78219-4334

5. NO CODs ACCEPTED.
6. Customer is responsible for risk of loss during return shipping, for return shipping charges and a 15% restocking fee.

* KCI will credit 100% when shipment made in error by KCI and the above criteria are met.

Exhibit L

Ordering Instructions

ORDERING INSTRUCTION

All rental orders for Products may be placed by telephone through KCI's 24 hour Customer Service Department at the following telephone number: 888-275-4524.

All purchase orders for Products may be submitted via FAX at 800-275-3417, or mailed to KCI at P.O. Box 659508, San Antonio, TX 78265, ATTN: Sales.

EX-31

Exhibit 31.1

CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
(PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

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: August 13, 2004

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

EX-31

Exhibit 31.2

CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
(PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

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: August 13, 2004

                                                              /s/ Martin J. Landon          
                                                          Martin J. Landon
                                                          Vice President and Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Quarterly Report of Kinetic Concepts, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Dennert O. Ware, as Chief Executive Officer of the Company, and Martin J. Landon, as Chief Financial Officer of the Company, each certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, respectively, that (1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents in all material respects the financial condition and results of operations of the Company.

Date: August 13, 2004

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

                 /s/  MARTIN J. LANDON      
                 Martin J. Landon
                 Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Kinetic Concepts, Inc. and will be retained by Kinetic Concepts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.