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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on December 31, 2003

Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

Texas (State or Other Jurisdiction of Incorporation or Organization)	2590 (Primary Standard Industrial Classification No.)	74-1891727 (I.R.S. Employer Identification No.)
8023 Vantage Drive San Antonio, TX 78230 (210) 524-9000 (Address, Including Zip Code, and Telephone Number, including Area Code of Registrant's Principal Executive Offices)
Dennis E. Noll Senior Vice President, General Counsel & Secretary Kinetic Concepts, Inc. 8023 Vantage Drive San Antonio, TX 78230 (210) 524-9000 (Name, Address and Telephone Number, Including Area Code, of Agent For Service)

Copies to:
Thomas J. Ivey Kenton J. King Skadden, Arps, Slate, Meagher & Flom LLP 525 University Avenue Palo Alto, California 94301 (650) 470-4500		William J. McDonough Cox & Smith Incorporated 112 East Pecan Street San Antonio, Texas 78205 (210) 554-5268		Bruce Czachor Shearman & Sterling LLP 1080 Marsh Road Menlo Park, California 94025 (650) 838-3600

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box. o

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

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

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

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities To Be Registered	Proposed Maximum Aggregate Offering Price⁽¹⁾	Amount Of Registration Fee


Common Stock, par value $0.001 per share	$460,000,000	$37,214

(1): Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

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

The information in this prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we and the selling shareholders are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion

Preliminary Prospectus dated January , 2004

PROSPECTUS

Shares

Common Stock

This is Kinetic Concepts, Inc.'s initial public offering of its common stock. We are offering shares and the selling shareholders are offering shares. We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders. We expect the public offering price to be between $ and $ per share.

Currently, no public market exists for the shares. We have applied to have the common stock approved for listing on the New York Stock Exchange under the symbol "KCI."

Investing in our common stock involves risks. See "Risk Factors" beginning on page 10.

	Per Share	Total
Public offering price	$	$
Underwriting discount	$	$
Proceeds before expenses, to Kinetic Concepts, Inc.	$	$
Proceeds before expenses, to Selling Shareholders	$	$

The underwriters may also purchase up to an additional shares from the selling shareholders, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about , 2004.

Joint Book-Running Managers

Merrill Lynch & Co.

JPMorgan

Joint Lead Managers

Credit Suisse First Boston

Goldman, Sachs & Co.

Citigroup		Deutsche Bank Securities
Piper Jaffray		SG Cowen

The date of this prospectus is , 2004.

[INSIDE FRONT COVER ART]

TABLE OF CONTENTS

		Page
Prospectus Summary		1
Risk Factors		10
Special Note Regarding Forward-Looking Statements		20
Use of Proceeds		21
Dividend Policy		21
Capitalization		22
Unaudited Pro Forma Consolidated Financial Information		23
Dilution		28
Selected Consolidated Financial Data		29
Management's Discussion and Analysis of Financial Condition and Results of Operations		31
Business		57
Management		78
Certain Relationships and Related Party Transactions		89
Principal and Selling Shareholders		91
Description of Capital Stock		95
Shares Eligible for Future Sale		100
Material United States Federal Income Tax Considerations for Non-U.S. Holders of our Common Stock		102
Underwriters		104
Legal Matters		107
Experts		107
Where You Can Find More Information		107
Index to Consolidated Financial Statements		F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

Until , 2004 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

TRADEMARKS

The following terms used in this prospectus 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®, 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.® Therapy™, The V.A.C.® System™, Vacuum Assisted Closure® and V.A.C.® Instill™. All other trademarks appearing in this prospectus are the property of their holders.

PROSPECTUS SUMMARY

You should read the following summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and related notes appearing in the back of this prospectus. You should carefully consider, among other things, the matters discussed in "Risk Factors" In this prospectus, unless the context requires otherwise, the words "we," "our," "us," and "KCI" refer to Kinetic Concepts, Inc.

KINETIC CONCEPTS, INC.

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 which can significantly improve clinical outcomes while reducing the overall cost of patient care by accelerating the healing process or preventing complications. Our advanced wound care systems incorporate our proprietary Vacuum Assisted Closure®, or V.A.C.®, technology, which has been clinically demonstrated to promote wound healing and reduce the cost of treating patients with difficult-to-treat wounds. 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. From 1999 to 2002, we increased revenue at a compound annual growth rate of 21.8%.

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

Based on our analysis of third-party data, we estimate that the annual market opportunity in the United States for V.A.C. systems is approximately one million patients, representing approximately $2.3 billion in revenue. We also believe there is a significant market for V.A.C. systems internationally. We expect these markets to continue to grow as a result of several factors, including the acceptance of V.A.C. therapy as a treatment for additional wound types, medical trends such as continued growth in the incidence of diabetes, and the aging population. For the nine-month period ended September 30, 2003, our V.A.C. products and related services generated $339.3 million in revenue, as compared to $217.4 million for the nine-month period ended September 30, 2002. From 1999 to 2002, we increased revenue generated by V.A.C. products and related services at a compound annual growth rate of 65.0%.

We offer a broad line of therapeutic surfaces designed to deliver pressure relief, pulmonary care and bariatric care, and to treat and prevent complications associated with immobility and obesity, such as pressure sores and pneumonia. These complications, if left untreated, can be life threatening. Our specialty beds and mattress overlays help reduce the amount of pressure on a patient's skin by using air, foam, silicon beads or viscous fluid as support. We also manufacture beds which rotate to prevent and treat medical problems suffered by immobile patients, such as pneumonia and blood clots. Our line of bariatric care products, which are designed to accommodate obese individuals weighing up to 1,000 pounds, permits patients to be treated effectively and reduces the risk of injury to health care personnel related to handling these patients. For the nine-month period ended September 30, 2003, therapeutic surfaces generated $207.4 million of revenue, as compared to $197.3 million for the nine-month period ended September 30, 2002.

Our customers generally prefer to rent our V.A.C. systems and therapeutic surfaces and purchase the related disposable products, such as V.A.C. dressings. Our rental model and service center network improve our capital efficiency and facilitate our ability to introduce new products. We have extensive

contractual relationships and reimbursement coverage for the V.A.C. in the United States. In acute and extended care, we have contracts with nearly all major hospital group purchasing organizations, or GPOs, and most major extended care GPOs. Hospitals and extended care facilities pay us directly for our services. In the home care market, we provide V.A.C. products and services directly to patients and bill third-party payers, including Medicare Part B and private insurance. We currently have V.A.C. contracts with private insurance companies covering over 148 million lives in the United States. This represents more than one-half of all individuals covered by private insurance in the United States and is seven times the number of covered lives we had under contract as of mid-2000.

Competitive Strengths

We believe we have the following competitive strengths:

•: Leading global market positions. V.A.C. is the leading revenue-generating product line in the global advanced wound care market. We are also the number two provider, based on revenue, of therapeutic surfaces in the United States and one of the largest providers in Europe. We believe that our market leadership results from the demonstrated clinical efficacy of our products, our ability to help our customers reduce health care costs and our extensive relationships with healthcare providers and third-party payers.
•: Superior clinical efficacy. The superior clinical efficacy of our V.A.C. systems and our therapeutic surfaces is supported by an extensive collection of published clinical studies. V.A.C. systems have been reviewed in at least 91 peer reviewed journal articles, 160 abstracts, 21 case studies and 22 textbook citations. Of these, the research for six articles and 12 abstracts was funded by research grants from KCI. Some of these studies demonstrate that V.A.C. therapy also delivers significant cost savings to the health care system. Similarly, our most advanced rotational therapy, Kinetic Therapy, has been reviewed in at least 15 randomized clinical trials, 22 peer reviewed articles, 27 other published articles, 40 abstracts, 15 case studies and five textbook citations. Of these, the research for 10 articles, 29 abstracts and 15 case studies was funded by research grants from KCI.
•: Product innovation and commercialization. We have a successful track record in pioneering new wound care and therapeutic surface technologies. Our recent development and commercialization of both new V.A.C. systems and disposable dressing variations have strengthened KCI's leadership position in advanced wound care. Our therapeutic surface technology originated with the introduction of the Roto Rest™ bed 27 years ago. Since that time, we have developed and commercialized a broad spectrum of therapeutic surfaces, a number of which have significantly enhanced patient care. In addition, we have developed a broad portfolio of bariatric products to improve the care of obese patients.
•: Broad V.A.C. patent portfolio. We have patent protection for V.A.C. products, in the form of owned and licensed patents, including at least 14 issued U.S. patents and at least 16 U.S. patent applications pending. Our base V.A.C. patents, which we license on an exclusive basis, do not begin to expire until 2013. Our international patent portfolio (including owned and licensed patents) relating to current and prospective technologies in the field of V.A.C. therapy includes at least 75 issued patents and more than 100 pending patent applications, with protection in Europe, Canada, Australia and Japan.
•: Broad reach and customer relationships. Our worldwide sales team, consisting of approximately 1,165 individuals, including approximately 350 domestic employees with medical or clinical backgrounds, has strong relationships with our customers due to the clinical support and consultation we provide and our education and training programs. We also have broad reach across all health care settings. In the United States, for example, we have relationships with over 3,000 acute care hospitals, over 4,100 extended care facilities and approximately 4,100 home health care agencies and wound care clinics.

•: Extensive service center network. With a network of 135 U.S. and 82 international service centers, we are able to rapidly deliver our critically needed products to major hospitals in the United States, Canada, Australia and most major European countries. Our network gives us the ability to deliver our products to any major Level I domestic trauma center within hours. This extensive network is critical to securing national GPO contracts and allows us to efficiently serve the home market directly. Our network also provides a platform for the introduction of additional products.
•: Reimbursement expertise. A significant portion of our V.A.C. revenue is derived from home placements, which are reimbursed by third-party payers such as private insurance, managed care, Medicare and Medicaid. We have dedicated significant time and resources to develop capabilities and expertise in third-party reimbursement, and we have developed systems to support and manage the deployment of our domestic and international sales and service efforts.
•: Strong management team. Our management team has a diverse set of industry skills and global operating experience, including backgrounds spanning the health care services and medical device industries, as well as expertise running complex organizations and managing rapid growth. Our executive officers have an average of 20 years of experience in the health care industry.

Business Strategy

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

•

—: Establish V.A.C. therapy as standard of care. Our objective is to establish V.A.C. therapy as standard of care for each of seven targeted wound types, including diabetic ulcers and amputations, pressure ulcers, burns, trauma wounds, skin grafts, dehisced surgical wounds and abdominal compartment syndrome. We are conducting ten prospective, randomized and controlled multicenter clinical studies specifically designed to provide statistically significant evidence of V.A.C. therapy's clinical efficacy for treating each of these specified wound types. In addition, we have developed a strategy for communication, awareness and consensus building that targets each of the professional associations and key opinion leaders whose support is essential for standard-of-care designation.
—: Increase penetration in home care markets. We continue to enhance our contractual relationships with insurance companies, which have already increased covered lives under contract from fewer than 20 million in mid-2000 to over 148 million today. Our physician awareness and penetration initiatives are also important in the home markets, as are our initiatives with home health agencies and wound care clinics. We expect to grow the V.A.C. home care business faster than the overall V.A.C. business.
—: Further penetrate the acute care market. Our principal acute care marketing and selling initiatives focus on expanding usage of V.A.C. systems among current V.A.C. users to other types of wounds and patients as well as extending that usage to other physicians and wound care nurses in those facilities. We have also initiated marketing and selling efforts focused on additional hospitals that are not current V.A.C. customers.

•

Maintain and expand our leadership position in therapeutic surfaces. We believe we will maintain our leadership position in therapeutic surfaces by capitalizing on the growth opportunities in bariatrics and the intensive care unit, or ICU. We are also building on our expertise in Kinetic Therapy to

introduce a new product which will treat Acute Respiratory Distress Syndrome and Acute Lung Injury in the ICU.

•: Expand presence in international markets. We are expanding our international marketing and sales efforts. We have committed resources to expand our presence in under-penetrated markets, obtain standard-of-care designation in other countries and achieve reimbursement for home use of V.A.C. systems. Recently, the German and Austrian associations for wound treatment have recognized V.A.C. therapy as the therapy of choice for several wound care indications.
•: Generate high returns on invested capital. Our returns on invested capital have increased in each year since 1999 and have averaged more than 20% over the last three years, despite our accelerated spending to capitalize on V.A.C. growth opportunities. Starting in the second half of 2002 we increased productivity and achieved profit increases exceeding revenue growth. We will continue to focus on productivity enhancements, capital efficiency and other metrics to improve our performance.

The 2003 Recapitalization

On August 11, 2003, we completed funding for a recapitalization of KCI. Prior to the recapitalization, we had $208.2 million of term loans outstanding under our previously existing credit facility with varying maturities through 2006, with approximately $58.2 million due in 2004. In addition, our previously existing $50.0 million revolving credit facility was scheduled to expire in late 2003. In order to address the approaching maturities, obtain greater financial flexibility, take advantage of favorable debt capital markets and interest rates near 50-year historical lows, and provide liquidity to our existing shareholders, we:

•: entered into a new senior credit facility comprised of a $100.0 million revolving credit facility that matures on August 11, 2009 and a $480 million term loan facility that matures on August 11, 2010;
•: issued $205.0 million principal amount of 7³/8% Senior Subordinated Notes due 2013; and
•: issued $263.8 million of convertible preferred stock.

Proceeds from the recapitalization were used to repay $208.2 million due under our previously existing senior credit facility, redeem all $200.0 million of our 9⁵/8% Senior Subordinated Notes due 2007, repurchase approximately 30.0 million shares of our outstanding common stock and approximately 4.7 million vested stock options at a price equal to $17.00 per share, and pay fees and expenses associated with the recapitalization.

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

THE OFFERING

Common stock offered by KCI		shares
Common stock offered by selling shareholders		shares
Common stock to be outstanding after this offering		shares
Use of proceeds		We expect to use the net proceeds of this offering to repay, redeem or otherwise retire indebtedness and for general corporate purposes, including the payment of special bonuses to management payable as a result of this offering. (See "Use of Proceeds"). We will not receive any proceeds from the sale of the common stock by the selling shareholders.
Proposed NYSE symbol		"KCI"
Dividend policy		We do not intend to pay dividends on our common stock in the foreseeable future. (See "Dividend Policy").

The above information is based on the number of shares of common stock outstanding as of September 30, 2003, and assumes the conversion of all the outstanding shares of preferred stock into 19,199,520 shares of common stock prior to the closing of this offering, and excludes:

•: 12,113,709 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2003, with exercise prices ranging from $0.91 to $17.00 per share and a weighted average exercise price of $4.80 per share; and
•: 759,209 shares of common stock reserved for future grants under our stock option plans as of September 30, 2003.

Except as otherwise noted, all information in this prospectus assumes the following:

•: no exercise of the underwriters' over-allotment option, which will be granted by the selling shareholders; and
•: the conversion of all of our shares of preferred stock into 19,199,520 shares of common stock immediately prior to the closing of this offering.

SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data for the periods presented. You should read the following financial information together with the information under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for fiscal 2000, 2001 and 2002 is derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for fiscal 1998 and 1999 is derived from our audited consolidated financial statements not included in this prospectus.

The unaudited consolidated balance sheet data as of September 30, 2003 and the unaudited consolidated statement of operations data for the nine months ended September 30, 2002 and September 30, 2003 has been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting only of normal recurring adjustments, we consider necessary for the fair presentation of the information. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2003.

The pro forma consolidated statement of operations data for fiscal 2002 and the nine months ended September 30, 2003 gives effect to the recapitalization and the offering as if these transactions had occurred on January 1, 2002 and January 1, 2003, respectively. The pro forma, as adjusted, consolidated balance sheet data at September 30, 2003 gives effect to the recapitalization and the offering as if these transactions had occurred on September 30, 2003 (see "Unaudited Pro Forma Consolidated Financial Information" and related notes included elsewhere in this prospectus). The pro forma statements of operations are not necessarily indicative of results that would have occurred had the recapitalization and offering been completed on January 1, 2002 and January 1, 2003 and should not be construed as being representative of future results of operations. Likewise, the pro forma, as adjusted, balance sheet data at September 30, 2003 is not necessarily indicative of our financial position had the offering been completed on September 30, 2003. Certain information normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States has been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

The unaudited segment operating data for the five years ended December 31, 2002 and the nine months ended September 30, 2002 and 2003 is derived from our accounting records.

																							Pro Forma for the Recapitalization and Offering⁽⁷⁾
		Year Ended December 31,															Nine Months Ended September 30,						Year Ended December 31,	Nine Months Ended September 30,
		1998			1999			2000⁽¹⁾			2001			2002			2002			2003			2002	2003
		(in thousands)
Consolidated Statement of Operations Data:
Revenue:
	Rental and service	$	258,482		$	245,983		$	274,331		$	361,634		$	453,060		$	325,061		$	421,455		$	$
	Sales and other		71,463			74,249			77,701			94,313			125,902			90,714			126,467

	Total revenue		329,945			320,232			352,032			455,947			578,962			415,775			547,922

Rental expenses			166,629			167,397			176,392			220,485			276,125			199,326			259,808
Cost of goods sold			26,219			29,811			29,645			32,952			51,824			36,632			46,410

	Gross profit		137,097			123,024			145,995			202,510			251,013			179,817			241,704
Selling, general and administrative expenses			69,537			75,208			80,294			114,828			141,594			102,717			134,096
Recapitalization expenses			—			—			—			—			—			—			69,955
Unusual item-litigation settlement⁽²⁾			—			—			—			—			(173,250	)		—			—

	Operating earnings		67,560			47,816			65,701			87,682			282,669			77,100			37,653
Interest income			616			348			897			280			496			278			933
Interest expense⁽³⁾			(48,594	)		(46,502	)		(48,635	)		(45,116	)		(40,943	)		(30,877	)		(41,562	)
Foreign currency gain (loss)			20			(1,356	)		(2,358	)		(1,638	)		3,935			2,053			5,683

	Earnings before income taxes and minority interest		19,602			306			15,605			41,208			246,157			48,554			2,707
Income taxes			7,851			620			6,476			17,307			96,001			19,422			1,015

	Earnings (loss) before minority interest		11,751			(314	)		9,129			23,901			150,156			29,132			1,692
Minority interest in subsidiary loss			25			—			—			—			—			—			—

	Net earnings (loss)	$	11,776		$	(314	)	$	9,129		$	23,901		$	150,156		$	29,132		$	1,692		$	$
Preferred stock dividends			—			—			—			—			—			—			(3,427	)

	Net earnings (loss) available to common shareholders	$	11,776		$	(314	)	$	9,129		$	23,901		$	150,156		$	29,132		$	(1,735	)	$	$

Net earnings (loss) per share available to common shareholders
	Basic	$	0.17		$	(0.00	)	$	0.13		$	0.34		$	2.12		$	0.41		$	(0.03	)	$	$

	Diluted	$	0.16		$	(0.00	)	$	0.12		$	0.32		$	1.93		$	0.38		$	(0.03	)	$	$

Weighted average shares outstanding
	Basic		70,873			70,915			70,915			70,917			70,927			70,927			64,398

	Diluted⁽⁴⁾		73,233			73,254			73,219			73,996			77,662			77,674			64,398

	September 30, 2003
	Actual			Pro Forma As Adjusted⁽⁸⁾
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	41,128		$
Working capital⁽⁵⁾		147,524
Total assets		488,837
Total debt⁽⁶⁾		688,978
Convertible preferred stock		255,655
Total shareholders' deficit		(580,116	)

				Year Ended December 31,										Nine Months Ended September 30,
				1998		1999		2000⁽¹⁾		2001		2002		2002		2003
				(in thousands)
Segment Operating Data:
USA
	V.A.C.
		Rental		$	21,747	$	28,552	$	55,343	$	134,428	$	214,979	$	150,154	$	222,801
		Sales			8,864		8,605		14,637		31,814		53,245		36,887		59,850

			Total V.A.C.		30,611		37,157		69,980		166,242		268,224		187,041		282,651
	Therapeutic surfaces/other
		Rental			186,617		160,538		153,852		156,704		150,793		112,745		111,532
		Sales			34,678		37,561		32,750		31,177		27,770		22,103		22,717

			Total therapeutic surfaces/other		221,295		198,099		186,602		187,881		178,563		134,848		134,249
		Total USA rental			208,364		189,090		209,195		291,132		365,772		262,899		334,333
		Total USA sales			43,542		46,166		47,387		62,991		81,015		58,990		82,567

			Subtotal—USA		251,906		235,256		256,582		354,123		446,787		321,889		416,900

International
	V.A.C.
		Rental			3,015		4,323		7,510		11,577		21,946		14,370		28,747
		Sales			3,918		5,396		8,256		12,182		23,244		16,004		27,881

			Total V.A.C.		6,933		9,719		15,766		23,759		45,190		30,374		56,628
	Therapeutic surfaces/other
		Rental			47,103		52,611		57,625		58,924		65,343		47,792		58,375
		Sales			24,003		22,646		22,059		19,141		21,642		15,720		16,019

			Total therapeutic surfaces/other		71,106		75,257		79,684		78,065		86,985		63,512		74,394
	Total International rental				50,118		56,934		65,135		70,501		87,289		62,162		87,122
	Total International sales				27,921		28,042		30,315		31,323		44,886		31,724		43,900

			Subtotal—International		78,039		84,976		95,450		101,824		132,175		93,886		131,022

Total revenue				$	329,945	$	320,232	$	352,032	$	455,947	$	578,962	$	415,775	$	547,922

(1)

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

(2)

Includes accrual in connection with an installment payment of $175.0 million ($173.3 million net of expenses of $1.7 million) from Hillenbrand as part of an antitrust settlement. See Note 16 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus for discussion of the antitrust settlement.

(3)

Amounts for 2003 include an aggregate $16.3 million expense for the redemption premium and consent fee paid in connection with the redemption of our 9⁵/8% Senior Subordinated Notes due 2007 combined with the write off of unamortized loan issuance costs associated with the previously existing senior credit facility.

(4)

Dilutive potential common shares from stock options totaling 5,763,061 shares and dilutive potential common shares from preferred stock conversion totaling 2,859,514 shares have been excluded from the diluted earnings per share calculation for the nine-month period ended September 30, 2003 due to their antidilutive effect.

(5)

Working capital represents total current assets less total current liabilities.

(6)

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

(7)

Pro forma for the recapitalization and the offering gives effect to:

•: the exclusion of $86.3 million of non-routine costs and the related tax effects incurred in connection with the recapitalization;
•: the inclusion of the sale by us of shares of our common stock at an assumed public offering price of $ per share;
•: the conversion of all our preferred stock into 19,199,520 shares of our common stock immediately prior to the closing of this offering;
•: the impact of using the net proceeds generated from this offering to repay, redeem or otherwise retire outstanding indebtedness;
•: the use of $19.0 million of the net proceeds to pay bonuses to management that we are obligated to pay as a result of this offering; and

•: the use of any remaining net proceeds generated from this offering for general corporate purposes, including working capital, research and development, sales and marketing efforts and acquisitions and other strategic investments. We have no commitments with respect to any acquisitions or strategic investments.

(8)

The pro forma, as adjusted, balance sheet at September 30, 2003 represents our historical balance sheet at September 30, 2003 which includes the effects of the recapitalization adjusted to give effect to the following as if these events occurred on September 30, 2003:

•: the conversion of all outstanding shares of our preferred stock into 19,199,520 shares of our common stock immediately prior to the closing of this offering;
•: the sale of shares of our common stock at an assumed initial public offering price of $ , after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and
•: the use of proceeds to repay, redeem or otherwise retire indebtedness and for other general corporate purposes including a special management bonus of $19.0 million.

The pro forma, as adjusted, balance sheet at September 30, 2003 includes all non-recurring costs associated with the recapitalization and this offering.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below before deciding to invest in shares of our common stock. If any of the following risks occur, the value of our common stock could decline.

Risks Related to Our Business

We face significant competition in our V.A.C. and therapeutic surfaces businesses, which may result in other companies commercializing competing products before or more successfully than us.

The competition for our V.A.C. systems in wound healing and tissue repair consists in large part of wound-healing modalities which do not operate in a manner similar to V.A.C. systems, including traditional wound care dressings, advanced wound care dressings, skin substitutes, products containing growth factors and medical devices used for wound care. Recently, BlueSky Medical Corporation introduced a medical device which has been marketed to compete with V.A.C. systems. We have filed suit against BlueSky and related parties seeking to prohibit their continued marketing and sales of the device, which we believe infringes our patent rights. (See "Business—Legal Proceedings"). If a product similar to any V.A.C. system is introduced into the market by a legitimate competitor and protections afforded us under intellectual property laws are 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 competition from Huntleigh Healthcare and Pegasus Limited.

Competitive conditions could intensify in our markets. Competitors may:

•: develop or commercialize new technologies which are more effective than our products;
•: introduce new competing products with greater safety or efficacy, or lower prices;
•: secure exclusive arrangements with health care providers and GPOs;
•: devote greater resources to marketing and promotional campaigns; or
•: secure regulatory clearances or approvals that surpass those of our products.

Any one of these competitive developments, or a combination of them, could cause us to lose market share and ultimately reduce our profitability.

If we are unsuccessful in protecting our intellectual property, particularly relating to the V.A.C., or are sued by third parties for alleged infringement, our competitive position would be harmed.

We place considerable importance on obtaining and maintaining patent protection for our products. We have numerous patents on our existing products and processes and we file applications as appropriate for patents covering new technologies as they are developed. However, 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, or licensed to, us may be challenged, invalidated or circumvented, or the rights granted under issued patents may not provide us with competitive advantages. As the market for, and revenues generated by, the V.A.C. expand, we believe additional competitors may introduce products designed to mimic the V.A.C. We would incur substantial costs and diversion of management resources if existing disputes are not resolved amicably, or 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 rights. 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. (See "Business—Legal Proceedings").

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

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. The patent was upheld at a hearing on December 9, 2003, 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. A written ruling is expected in the next several months. We intend to appeal the new screen means definition established by the panel. We believe it will take two to three years to complete the appeal process and we may not be successful in our 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 $45.4 million for the nine months ended September 30, 2003. (See "Business—Legal Proceedings").

We also rely on a combination of copyright, trade secret and other laws, and contractual restrictions on disclosure, copying and transferring title, including confidentiality agreements with vendors, strategic partners, co-developers, employees, consultants and other third parties, to protect our proprietary rights. Such protections may not prove adequate and such contractual agreements may be breached. We may not have adequate remedies for any such breaches, and our trade secrets may otherwise become known to or independently developed by others. We have trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for our products in the marketplace. Our trademarks may be used by unauthorized third parties, and we may not be able to stop such unauthorized use if it occurs. We also have agreements with third parties 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 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, 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 commitments and investments on our part, which we may be unable to recover.

Because we depend on revenue from sales and rentals of V.A.C. products, our financial condition could suffer if V.A.C. sales and rentals do not grow as we anticipate.

For the nine-month period ended September 30, 2003, we derived 61.9% of our revenue from V.A.C. sales and rentals. We expect that sales and rentals of V.A.C. products will continue to be the predominant source of our revenue for the foreseeable future. If revenue from our V.A.C. sales and rentals does not grow as we anticipate, our results of operations and financial condition could suffer because we have scaled our business to accommodate anticipated future growth.

Failure of any of our randomized and controlled studies to demonstrate V.A.C. therapy's clinical efficacy may reduce physician usage of V.A.C. and cause our V.A.C. sales 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 V.A.C. sales to suffer.

Health care reform could cause a decrease in demand for our V.A.C. and therapeutic surfaces products.

There are widespread legislative efforts to control health care costs in the United States and abroad, which we expect will continue in the future. For example, the recent enactment of the Medicare Prescription Drug Improvement and Modernization Act of 2003 provides that from 2004 through 2008, payment amounts will no longer be increased on an annual basis and a competitive bidding program will be phased in for therapeutic surfaces. At this time, we are unable to determine whether and to what extent these changes would be applied to our products and our business. Similar legislative efforts in the future could negatively impact demand for our products.

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 products could decrease. In addition, in the event any public or private third-party payers challenge our billing, documentation or other practices as inconsistent with their reimbursement policies, we could experience significant delays, reductions or denials in obtaining reimbursements. In light of increased controls on health care spending, especially on Medicare and Medicaid spending, 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.

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. As of September 30, 2003, we had $170.6 million of receivables outstanding, net of reserves of $34.1 million for doubtful accounts, and for the nine-month period ended September 30, 2003, our receivables were outstanding for an average of 79 days. 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 Durable Medical Equipment Regional Carriers, or DMERCs, which serve as the government's agents for the processing of claims for products sold for home use, periodically conduct audits and request medical records and other documents to support claims submitted by us for payment of services rendered to our customers. Because we are a DME supplier, those audits involving home use involve audits of patient claims records. Such audits can result in delays in obtaining reimbursement and denials of claims for payment submitted by us. In addition, the government could demand significant refunds or recoupments of amounts paid by the government for claims which are determined by the government to be inadequately supported by the required documentation.

For example, after a routine review by the Region A DMERC during 2003, the DMERC identified overpayments of approximately $110,000. We are currently reviewing the DMERC's decision to determine which, if any, of the denied claims should be appealed for review by an administrative law judge.

Also, in December 2002, we submitted a written request to the medical directors of the four DMERCs in which we requested clarification of a number of issues with respect to the DMERCs' "Negative Pressure Wound Therapy Policy." That policy establishes Medicare Part B reimbursement criteria for our V.A.C. products. In June 2003, we received a response from the medical directors and, in some instances, their interpretation of the policy differed from our interpretation. In September 2003, we learned that one of the DMERCs published in its regional newsletter an interpretation of the policy consistent with its June response. 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 of 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 do not believe that the DMERC medical directors' interpretation reflects the current Negative Pressure Wound Therapy policy or current medical practice. As a result, we intend to continue working with the medical directors in an effort to clarify the policy while at the same time maintaining coverage for all Medicare Part B beneficiaries for whom V.A.C. treatment is medically necessary. In the event that the medical directors do not agree to revise their interpretations on these issues, the rate of V.A.C. revenue growth would be impacted. 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 2.5% of our overall annual revenue.

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, effective October 2002 for our U.S.-related orders and in May 2003 for our international-related orders. This supply agreement has a three-year term with an automatic extension for an additional twelve months if neither party gives notice of termination. V.A.C. disposables represented 11% of our revenue for the nine-month period ending September 30, 2003. V.A.C. therapy cannot be administered by our V.A.C. rental units without use of the appropriate V.A.C. disposables. Any shortage of V.A.C. disposables could lead to lost revenues from decreased V.A.C. rentals. If we lose any supplier (including any sole-source supplier), we would be required to obtain one or more replacement suppliers and may be required to conduct a significant level of product development to incorporate new parts into our products. The need to change suppliers or to alternate between suppliers might cause material delays in delivery or significantly increase costs.

Our growth rates may decline or be less predictable due to the economic, political and other risks associated with our international business.

For the nine-month period ending September 30, 2003, approximately 24% of our revenue, and approximately 15% of our operating earnings (excluding the Hillenbrand settlement and recapitalization expenses), were derived from our international segment. We intend to continue to expand our presence in international markets. Accordingly, our future results could be harmed by a variety of factors, including:

•: the difficulties in enforcing agreements and collecting receivables under many foreign countries' legal systems;
•: the longer payment cycles often associated with customers in many foreign countries, such as Spain and Italy;
•: the possibility that foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade;
•: fluctuations in exchange rates, which may affect product demand and adversely affect the profitability, in U.S. dollars, of products and services provided by us in foreign markets where payment for our products and services is made in the local currency;
•: increased restrictions on our ability to obtain U.S. export licenses and other required export or import licenses or approvals, such as current proposals for more onerous import and foreign manufacturing licenses in Japan;
•: changes in the political, regulatory, safety or economic conditions in a country or region; and
•: difficulties enforcing intellectual property rights in foreign countries.

We may continue to experience difficulties in our efforts to expand product sales in international markets. For example, while we have committed resources to expand our presence in Italy, France and Japan, we have had some difficulty successfully penetrating the Japanese market because of the restrictive manner in which the Japanese government regulates medical devices and their importation. In addition, the reimbursement systems in most foreign markets are relatively undeveloped, which makes it more difficult to be appropriately reimbursed for our products in such markets. If we are unable to successfully penetrate new foreign markets, our growth could be negatively impacted.

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 limit our ability to distribute our products and could cause us to incur significant compliance costs.

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

We are also subject to various federal and state laws pertaining to health care fraud and abuse, including prohibitions on the submission of false claims and the payment or acceptance of kickbacks or other remuneration in return for the purchase or lease of our products. The United States Department of Justice and the Office of the Inspector General of the United States Department of Health and Human Services 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.

Product liability claims could expose us to significant costs associated with adverse judgments or could reduce the demand for our products.

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

Risks Related to Our Capital Structure

Our substantial indebtedness could adversely affect our financial condition.

We have a significant amount of debt. As of November 30, 2003, we had $686.1 million of outstanding indebtedness (long-term debt, capital lease obligations and our liability associated with interest rate swaps)

and a shareholders' deficit of $564.1 million. This level of indebtedness could have important consequences, including the following:

•: it may be difficult for us to satisfy our obligations under our new senior credit facility and the 7³/8% Senior Subordinated Notes due 2013;
•: 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 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, 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 89.8% of our outstanding variable-rate borrowings as of November 30, 2003 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 November 30, 2003, our annual interest expense, 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, subject to risks and uncertainties that are beyond our control. If we are unable to meet our debt obligations, we may need to refinance all or a portion of our indebtedness, sell assets or raise funds in the capital markets. Our ability to refinance will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Restrictive covenants in the new 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 new 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 new 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 exceed certain minimum thresholds and maintain minimum levels of EBITDA (as defined in our new senior credit facility). Under our new senior credit facility, EBITDA excludes charges associated with the recapitalization. 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 new senior credit facility may also impair our ability to finance future operations or capital needs, or to enter into acquisitions or joint ventures or engage in other favorable business activities.

If we default under our new 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 new 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 new senior credit facility, or if we are unable to maintain the financial ratios under our new senior credit facility, we will be in default under our new 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 new senior credit facility are secured by substantially all of our assets.

Our obligations under our new senior credit facility are secured by liens on substantially all of our assets, and the guarantees of certain of our subsidiaries under our new 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 new senior credit facility or of other secured obligations are accelerated, the lenders under our new senior credit facility or the obligees with respect to the other secured obligations will be entitled to exercise the remedies available to a secured lender under applicable law and the applicable agreements and instruments, 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.

Risks Related to This Offering

If a significant number of shares of our common stock are sold into the market following this offering, the market price of our common stock could significantly decline, even if our business is doing well.

Based on shares outstanding as of September 30, 2003, on a pro forma, as adjusted, basis assuming the conversion of all outstanding shares of our preferred stock into shares of common stock immediately prior

to the closing of this offering and the sale by us of shares of common stock in this offering, upon completion of this offering, we will have shares of common stock outstanding. Of these shares, approximately shares will be freely tradable without restriction or further registration under federal securities laws, and shares held by our affiliates will be subject to the trading restrictions of Rule 144 under the Securities Act. The remaining shares of common stock outstanding after this offering, based upon shares outstanding as of September 30, 2003, will be available for sale in the public market as follows:

Number of Shares		Date of Availability for Sale
		On the date of this prospectus.
		180 days after the date of this prospectus, subject to an extension of up to 18 days.

The above table assumes the effectiveness of the lock-up agreements which the holders of % of our common stock have agreed not to sell or otherwise dispose of their shares of common stock. Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements.

After this offering, the holders of approximately shares of common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other shareholders. These registration rights of our shareholders could impair our ability to raise capital by depressing the price at which we could sell our common stock.

As soon as practicable after the completion of this offering, we intend to file a registration statement under the Securities Act covering shares of common stock issuable upon exercise of outstanding options under our stock plans and shares of common stock reserved for future issuance under our equity incentive and employee stock purchase plan. Accordingly, 90 days after the date of this prospectus, approximately shares of common stock will be eligible for sale in the public market pursuant to Rule 701 under the Securities Act, subject to vesting restrictions with us and the lock-up agreements described above.

If a trading market develops for our common stock, our employees, officers and directors may elect to sell their shares of our common stock or exercise their stock options in order to sell the stock underlying their options in the market. Sales of a substantial number of shares of our common stock in the public market after this offering could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.

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

Our articles of incorporation and bylaws 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, and such provisions in our articles of incorporation can generally only be amended or repealed upon the consent of a majority of our outstanding shares. Our articles of incorporation allow our board of directors to issue up to 50,000,000 shares of preferred stock. The board can determine the price, rights, preferences and privileges of those shares without any further vote or action by the shareholders. As a result, our board of directors could make it difficult for a third party to acquire a majority of our outstanding voting stock, for example, by adopting a shareholder's rights plan.

Special meetings of our shareholders may only be called by our president, the board of directors or the holders of not less than 10% of all the shares entitled to vote at such meeting. The limitation on the ability of shareholders to call a special meeting 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.

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

There is currently no public market for our common stock. An active trading market for our common stock may not develop. You may be unable to resell the common stock you buy at or above the initial public offering price. We will establish the initial public offering price through our negotiations with the representatives of the underwriters. You should not view the price they and we establish as any indication of the price that will prevail in the trading market.

Some specific factors that may have a significant effect on our common stock market price include:

•: 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.

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

Upon completion of this offering, Fremont Partners, L.P., Dr. James R. Leininger and Blum Capital Partners, L.P., and their respective affiliates will together own greater than % of our outstanding shares of voting stock, based on shares outstanding as of September 30, 2003, on a pro forma, as adjusted, basis assuming the conversion of all outstanding shares of our preferred stock into shares of common stock immediately prior to the closing of this offering and the sale by us of shares of common stock. As a result of this ownership, Fremont Partners, Dr. Leininger and Blum Capital Partners will be able to direct our affairs and to approve any matter requiring the approval of our shareholders. Such matters include the election of directors, the adoption of amendments to our articles of incorporation and bylaws 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. (See "Principal and Selling Shareholders").

This offering will cause dilution in net tangible book value.

Purchasers in this offering of our common stock will experience immediate and substantial dilution in pro forma net tangible book value of $ per share. Additional dilution is likely to occur upon the exercise of options granted by us. To the extent we raise additional capital by issuing equity securities, our shareholders may experience additional substantial dilution.

We have broad discretion in how we use the net proceeds of this offering, and we may not use these proceeds effectively or in ways with which you agree.

Our management will have broad discretion as to the application of the net proceeds of this offering and could use them for purposes other than those contemplated at the time of this offering. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Moreover, our management may use the net proceeds for corporate purposes that may not increase the market price of our common stock.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•: foreign and domestic economic and business conditions;
•: demographic changes;
•: government regulations and changes in, or our failure to comply with, government regulations;
•: changes in the health care reimbursement policies of Medicare Part B or other governmental or private payers;
•: competition;
•: the loss of any significant customers;
•: restrictions imposed on us due to our significant indebtedness;
•: our ability to effectively protect our intellectual property and not infringe on the intellectual property of others;
•: loss of any significant suppliers, especially sole-source suppliers;
•: failure of the home care market to continue expanding as we expect;
•: failure of V.A.C. therapy to gain home care reimbursement in Europe and other locations;
•: any deviation from our expectations for increases in rental and sales volumes for V.A.C. systems and related disposables;
•: any deviation from our expectations of the impact of the recapitalization on our business going forward;
•: any deviation from our expectations for increases in future demand for V.A.C. systems;
•: liability resulting from litigation; and
•: other factors discussed elsewhere in this prospectus and the registration statement of which this prospectus is a part.

USE OF PROCEEDS

We estimate that net proceeds from the sale of the shares by us in this offering will be approximately $ , based on the assumed initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of the common stock by the selling shareholders.

The principal purposes of this offering are to obtain additional capital, establish a public market for our common stock and to facilitate our future access to the public capital markets. We anticipate that we will use the net proceeds of this offering, together with cash on hand and the net after-tax proceeds from the $75.0 million Hillenbrand antitrust settlement that is due in January 2004, to repay, redeem or otherwise retire outstanding indebtedness, and pay $19 million for bonuses to management that we are obligated to pay as a result of this offering. (See "Management—Management Plans"). We will use any remaining net proceeds from the sale of the shares by us in the offering for general corporate purposes, including working capital, research and development, sales and marketing efforts and acquisitions and other strategic investments. We have no commitments with respect to any acquisitions or strategic investments. Pending their ultimate use, we intend to invest the net proceeds to us from this offering in short-term, interest-bearing, investment grade securities.

The outstanding indebtedness that may be repaid, redeemed or otherwise retired with the proceeds to us in this offering was incurred in connection with our recapitalization that was consummated on August 11, 2003. We used the proceeds of this indebtedness, together with proceeds from (1) the issuance of convertible preferred stock, (2) tax benefits arising from the recapitalization and (3) cash on hand to (a) redeem all of our then-outstanding 9⁵/8% Senior Subordinated Notes due 2007, (b) repay then outstanding debt under our previously existing senior credit facility, (c) repurchase shares of our common stock and (d) pay transaction fees and expenses in connection with the recapitalization.

DIVIDEND POLICY

We do not currently pay cash dividends on our common stock. Our board of directors currently intends to retain any future earnings to support our operations and to finance the growth and development of our business and does not intend to declare or pay cash dividends on our common stock for the foreseeable future. Any future payment of cash dividends on our common stock will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our board. Our new senior credit facility and the indenture governing our outstanding 7³/8% Senior Subordinated Notes due 2013 each restricts us from paying dividends on our common stock with limited exceptions.

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2003:

•

on an actual basis; and

•

on an as adjusted basis assuming the following:

—: the conversion of all outstanding shares of our preferred stock into 19,199,520 shares of our common stock immediately prior to the closing of this offering;
—: the sale of shares at an assumed initial public offering price of $ , after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and
—: the use of proceeds to repay, redeem or otherwise retire indebtedness and for other general corporate purposes, including a special management bonus of $19.0 million.

You should read the data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Capital Stock" and our consolidated financial statements and related notes included elsewhere in this prospectus.

				September 30, 2003
				Actual			As Adjusted
				($ in thousands)
Cash and cash equivalents				$	41,128		$

Total debt:
	New senior credit facility			$	478,800		$
	7³/8% Senior Subordinated Notes due 2013				205,000
	Other debt and capitalized lease obligations				5,178

		Total debt			688,978

Preferred stock, issued and outstanding 263,794 actual; 0 as adjusted					255,655
Shareholders' equity (deficit):
	Common stock, par value $0.001, 150,000,000 shares authorized; issued and outstanding 41,166,380 actual;				41
	Deferred compensation				(451	)
	Retained deficit				(580,240	)
	Accumulated other comprehensive income				534

		Total shareholders' deficit			(580,116	)

			Total capitalization	$	364,517		$

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

Our audited consolidated financial statements as of and for the year ended December 31, 2002 and our unaudited consolidated financial statements as of and for the three and nine-month periods ended September 30, 2003 are included elsewhere in this prospectus. The unaudited pro forma consolidated financial information presented herein should be read together with those financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

The unaudited pro forma consolidated financial information has been provided to enable readers to understand our historical financial results in relation to our recent recapitalization and the sale of our common stock offered by this prospectus.

Our historical September 30, 2003 balance sheet already reflects the financial impact of the recapitalization. We prepared the unaudited pro forma balance sheet to reflect the offering as if such events had occurred on September 30, 2003. We prepared the unaudited pro forma consolidated statements of operations to reflect the recapitalization and the offering of our common stock as if such events had occurred on January 1, 2002 and January 1, 2003. The pro forma consolidated balance sheet data at September 30, 2003 and statement of operations data for fiscal 2002 and the nine months ended September 30, 2003 give effect to the recapitalization and the sale of shares of our common stock at an assumed public offering price of $ per share and the conversion of all shares of our preferred stock into 19,199,520 shares of our common stock immediately prior to the closing of this offering along with the use of proceeds from this offering to repay, redeem or otherwise retire indebtedness and for other general corporate purposes, including a special management bonus of $19.0 million.

We have excluded $86.3 million of non-routine costs incurred in connection with the recapitalization from our pro forma results of operations for the year ended December 31, 2002 and for the nine months ended September 30, 2003. We have also excluded $ million of non-routine costs incurred in connection with this offering from our pro forma results of operations for the year ended December 31, 2002 and for the nine months ended September 30, 2003.

Certain information normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States has been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The pro forma statement of operations data is not necessarily indicative of results that would have occurred had the recapitalization and this offering been completed on January 1, 2002 and January 1, 2003 and should not be construed as being representative of future results of operations. Likewise, the pro forma balance sheet data at September 30, 2003 is not necessarily indicative of our financial position at September 30, 2003 had the offering been completed on September 30, 2003.

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

Pro Forma Consolidated Balance Sheet

(in thousands)
(unaudited)

			September 30, 2003
			Historical			Offering Adjustments	Pro Forma for Offering
Assets:
Current Assets:
	Cash and cash equivalents		$	41,128		$	$
	Accounts receivable, net			170,639
	Inventories, net			31,026
	Prepaid expenses and other current assets			16,428

		Total current assets		259,221

Net property, plant and equipment				131,172
Loan issuance costs, less accumulated amortization of $525				19,385
Goodwill				48,796
Other assets, less accumulated amortization of $7,332				30,263

			$	448,837		$	$

Liabilities and Shareholders' Deficit:
Current liabilities:
	Accounts payable		$	13,843		$	$
	Accrued expenses			92,789
	Current installments of long-term debt			4,950
	Current installments of capital lease obligations			115

		Total current liabilities		111,697

Long-term debt, net of current installments				679,300
Capital lease obligations, net of current installments				12
Derivative financial instruments				4,601
Deferred income taxes, net				8,234
Deferred gain, sale of headquarters facility				9,241
Other noncurrent liabilities				213

				813,298
Preferred stock, issued and outstanding 264 actual; 0 pro forma				255,655
Shareholders' equity (deficit):
	Common stock; issued and outstanding 41,166 actual; pro forma			41
	Deferred compensation			(451	)
	Retained deficit			(580,240	)
	Accumulated other comprehensive income			534

		Shareholders' deficit		(580,116	)

			$	488,837		$	$

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

Pro Forma Consolidated Statement of Operations

(in thousands, except per share data)
(unaudited)

				Nine Months ended September 30, 2003
				Historical			Recapitalization Adjustments			Pro Forma for Recapitalization			Offering Adjustments	Pro Forma for Recapitalization and Offering
Revenue:
	Rental and service			$	421,455		$	—		$	421,455		$	$
	Sales and other				126,467			—			126,467

		Total revenue			547,922			—			547,922

Rental expenses					259,808			—			259,808
Cost of goods sold					46,410			—			46,410

		Gross profit			241,704			—			241,704
Selling, general and administrative expenses					134,096			—			134,096
Recapitalization expenses					69,955			69,955	(a)		—

		Operating earnings			37,653			(69,955	)		107,608
Interest income					933			—			933
Interest expense					(41,562	)		(16,302	)(a)		(31,342	)
								(25,260	)(b)
								31,342	(c)
Foreign currency gain					5,683			—			5,683

		Earnings before income taxes			2,707			(80,175	)		82,882
Income taxes					1,015			(32,346	)(a)		31,080
								2,281	(d)

		Net earnings		$	1,692		$	(50,110	)	$	51,802		$	$

Preferred stock dividends					(3,427	)		(3,427	)(e)		(18,564	)
								18,091	(f)
								473	(g)

		Net earnings (loss) to common shareholders		$	(1,735	)	$	(34,973	)	$	33,238		$	$

		Net earnings (loss) per share available to common shareholders:
			Basic	$	(0.03	)				$	0.81			$

			Diluted	$	(0.03	)				$	0.73			$

		Weighted average shares outstanding:
			Basic		64,398						41,116

			Diluted(h)		64,398						45,789

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

Pro Forma Consolidated Statement of Operations

(in thousands, except per share data)
(unaudited)

				Year Ended December 31, 2002
				Historical			Recapitalization Adjustments			Pro Forma for Recapitalization			Offering Adjustments	Pro Forma for Recapitalization and Offering
Revenue:
	Rental and service			$	453,060		$	—		$	453,060		$	$
	Sales and other				125,902			—			125,902

		Total revenue			578,962			—			578,962

Rental expenses					276,125			—			276,125
Cost of goods sold					51,824			—			51,824

		Gross profit			251,013			—			251,013
Selling, general and administrative expenses					141,594			—			141,594
Unusual item—litigation settlement					(173,250	)		—			(173,250	)

		Operating earnings			282,669			—			282,669
Interest income					496			—			496
Interest expense					(40,943	)		(40,943	)(b)		(42,819	)
								42,819	(c)
Foreign currency gain					3,935			—			3,935

		Earnings before income taxes			246,157			1,876			244,281
Income taxes					96,001			703	(d)		95,298

		Net earnings		$	150,156		$	1,173		$	148,983		$	$

Preferred stock dividends					—			24,485	(f)		(25,128	)
								643	(g)

		Net earnings to common shareholders		$	150,156		$	26,301		$	123,855		$	$

		Net earnings per share to common shareholders:
			Basic	$	2.12					$	3.02			$

			Diluted	$	1.93					$	2.46			$

		Weighted average shares outstanding:
			Basic		70,927						40,997

			Diluted		77,662						60,444

Notes to unaudited pro forma consolidated statements of operations

The following adjustments were applied to our consolidated statements of operations for the nine months ended September 30, 2003 and the year ended December 31, 2002:

(a): The elimination of non-routine expenses of $86.3 million, before taxes, incurred in connection with the recapitalization. Of the total $86.3 million, $70.0 million is recorded as recapitalization expenses and includes $67.5 million related to compensation expense for the repurchase, or cash settlements of vested options, along with $2.5 million related to miscellaneous fees and expenses associated with the share repurchase. The remaining $16.3 million is recorded as interest expense and includes a $9.6 million early redemption premium and an approximately $1.5 million consent fee related to the redemption of the 9⁵/8% Senior Subordinated Notes due 2007 along with the non-cash write off of $5.2 million of debt issuance costs associated with our previously existing senior credit facility and the 9⁵/8% Senior Subordinated Notes due 2007. We recorded a tax benefit associated with these recapitalization expenses of $32.3 million. These recapitalization expenses and the related tax benefit have been excluded from our pro forma results as they are non-routine charges.
(b): Amount represents eliminated interest expense of $23.5 million and $38.6 million, respectively, and amortization of loan issuance costs of $1.8 million and $2.3 million, respectively, recorded on our interest bearing debt prior to the recapitalization.
(c): Amount represents estimated interest expense that would have been incurred during applicable period on the new senior credit facility of $17.4 million and $24.3 million, respectively, and the 7³/8% Senior Subordinated Notes due 2013 of $12.0 million and $15.8 million, respectively, along with other interest bearing debt of $241,000 and $320,000, respectively, and amortization of loan issuance costs of $1.8 million and $2.4 million, respectively. Amount assumes that no amounts would have been drawn on the revolving credit facility during the applicable period. Amount also assumes that the eight interest rate swaps in effect at September 30, 2003 were outstanding during the applicable period in accordance with the requirements of our new senior credit facility. Interest rates were assumed to be those in effect under our new senior credit facility, the 7³/8% Senior Subordinated Notes due 2013 and our interest rate swaps during the third quarter of 2003.
(d): Amount represents estimated tax benefit from additional interest expense incurred under the new senior credit facility and new notes at our current effective tax rate of 37.5%.
(e): Amount represents the reversal of the 9% cumulative quarterly dividend recorded during the nine months ended September 30, 2003.
(f): Amount represents 9% cumulative quarterly dividend calculated for the applicable period assuming that the preferred stock was issued at the beginning of each period and all dividends were paid-in-kind during the period.
(g): Amount represents amortization of preferred stock beneficial conversion feature, discount and issuance costs during the applicable period amortized using the effective interest method.
(h): Due to their antidilutive effect, 5,763,061 dilutive potential common shares from stock options and 2,859,514 dilutive potential common shares from preferred stock conversion have been excluded from the historical diluted weighted average shares outstanding calculation for the nine months ended September 30, 2003. Similarly, the pro forma calculation of diluted weighted average shares outstanding for the nine months ended September 30, 2003 excludes 16,217,675 dilutive potential common shares from preferred stock conversion due to their antidilutive effect.

DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share. Our net tangible book value as of September 30, 2003 was $ . Our pro forma net tangible book value per share set forth below represents our total tangible assets less total liabilities divided by the number of shares of our common stock outstanding on September 30, 2003 and assumes the conversion of all of our outstanding shares of preferred stock into 19,199,520 shares of common stock immediately prior to the closing of this offering.

Dilution per share to new investors represents the difference between (1) the amount per share paid by new investors who purchase shares of common stock in this offering and (2) the pro forma net tangible book value per share of common stock immediately after the completion of this offering. Giving effect to the sale of shares of our common stock offered by us at the initial public offering price of $ , and deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2003 would have been approximately $ . This amount represents an immediate increase in pro forma net tangible book value of $ per share to our existing shareholders, and an immediate dilution in pro forma net tangible book value of $ per share to new investors purchasing shares of our common stock in this offering. The following table illustrates this dilution:

Initial public offering price per share			$
	Net tangible book value per share as of September 30, 2003	$
	Increase per share due to automatic conversion of preferred
	Increase per share attributable to new investors
Pro forma net tangible book value per share after this offering

Dilution per share to new investors			$

The following table summarizes as of September 30, 2003, on the pro forma basis described above, the number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share paid to us by existing shareholders and to be paid by new investors purchasing shares of our common stock in this offering. The table reflects the initial public offering price of $ per share before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

		Shares Purchased			Total Consideration			Average Price
		Number	Percent		Amount	Percent		Per Share
Existing shareholders				%	$		%	$
New investors

	Total			%	$		%	$

The above information excludes:

•: 12,113,709 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2003, with exercise prices ranging from $0.91 to $17.00 per share and a weighted average exercise price of $4.80 per share; and
•: 759,209 shares of common stock reserved for future grants under our stock option plans as of September 30, 2003.

To the extent the outstanding options are exercised, you will experience further dilution.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.

SELECTED CONSOLIDATED FINANCIAL DATA

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

			Year Ended December 31,															Nine Months Ended September 30,
			1998			1999			2000⁽¹⁾			2001			2002			2002			2003
			(in thousands)
Consolidated Statement of Operations Data:
Revenue:
	Rental and service		$	258,482		$	245,983		$	274,331		$	361,634		$	453,060		$	325,061		$	421,455
	Sales and other			71,463			74,249			77,701			94,313			125,902			90,714			126,467

		Total revenue		329,945			320,232			352,032			455,947			578,962			415,775			547,922

Rental expenses				166,629			167,397			176,392			220,485			276,125			199,326			259,808
Cost of goods sold				26,219			29,811			29,645			32,952			51,824			36,632			46,410

		Gross profit		137,097			123,024			145,995			202,510			251,013			179,817			241,704
Selling, general and administrative expenses				69,537			75,208			80,294			114,828			141,594			102,717			134,096
Recapitalization expenses				—			—			—			—			—			—			69,955
Unusual item-litigation settlement⁽²⁾				—			—			—			—			(173,250	)		—			—

		Operating earnings		67,560			47,816			65,701			87,682			282,669			77,100			37,653
Interest income				616			348			897			280			496			278			933
Interest expense⁽³⁾				(48,594	)		(46,502	)		(48,635	)		(45,116	)		(40,943	)		(30,877	)		(41,562	)
Foreign currency gain (loss)				20			(1,356	)		(2,358	)		(1,638	)		3,935			2,053			5,683

		Earnings before income taxes and minority interest		19,602			306			15,605			41,208			246,157			48,554			2,707
Income taxes				7,851			620			6,476			17,307			96,001			19,422			1,015

		Earnings (loss) before minority interest		11,751			(314	)		9,129			23,901			150,156			29,132			1,692
Minority interest in subsidiary loss				25			—			—			—			—			—			—

		Net earnings (loss)	$	11,776		$	(314	)	$	9,129		$	23,901		$	150,156		$	29,132		$	1,692
Preferred stock dividends				—			—			—			—			—			—			(3,427	)

		Net earnings (loss) available to common shareholders	$	11,776		$	(314	)	$	9,129		$	23,901		$	150,156		$	29,132		$	(1,735	)

Net earnings (loss) per share available to common shareholders
	Basic		$	0.17		$	(0.00	)	$	0.13		$	0.34		$	2.12		$	0.41		$	(0.03	)

	Diluted		$	0.16		$	(0.00	)	$	0.12		$	0.32		$	1.93		$	0.38		$	(0.03	)

Weighted average shares outstanding
	Basic			70,873			70,915			70,915			70,917			70,927			70,927			64,398

	Diluted⁽⁴⁾			73,233			73,254			73,219			73,996			77,662			77,674			64,398

	As of December 31,															As of September 30,
	1998			1999			2000			2001			2002			2002			2003
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	4,366		$	7,362		$	2,139		$	199		$	54,485		$	44,907		$	41,128
Working capital⁽⁵⁾		76,593			62,482			40,411			100,335			243,862			139,492			147,524
Total assets		306,117			283,261			288,091			343,193			618,059			421,890			488,837
Total debt⁽⁶⁾		515,651			502,780			489,119			509,540			523,443			525,051			688,978
Convertible preferred stock		—			—			—			—			—			—			255,655
Total shareholders' deficit		(261,588	)		(264,735	)		(257,953	)		(236,325	)		(80,436	)		(203,061	)		(580,116	)

(1): In December 2000, we began reporting international results on a current-month basis. As a result of this change, the 2000 fiscal year included a 13th monthly period for the international segment which increased reported revenue and operating earnings by approximately $8.0 million and $1.1 million, respectively.
(2): Includes accrual in connection with an installment payment of $175.0 million ($173.3 million, net of expenses of $1.7 million) from Hillenbrand as part of an antitrust settlement. See Note 16 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus for discussion of the antitrust settlement.
(3): Amounts for 2003 include an aggregate of $16.3 million in expense for the redemption premium and consent fee paid in connection with the redemption of our 9⁵/8% Senior Subordinated Notes due 2007 combined with the write off of unamortized loan issuance costs associated with the previously existing senior credit facility.
(4): Dilutive potential common shares from stock options totaling 5,763,061 shares and dilutive potential common shares from preferred stock conversion totaling 2,859,514 shares have been excluded from the diluted earnings per share calculation for the nine-month period ended September 30, 2003 due to their antidilutive effect.
(5): Working capital represents total current assets less total current liabilities.
(6): Total debt equals both current and long-term debt along with capital lease obligations and our liability associated with interest rate swaps.

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

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 which can significantly improve clinical outcomes while reducing the overall cost of patient care by accelerating the healing process or preventing complications. Our advanced wound care systems incorporate our proprietary Vacuum Assisted Closure, or V.A.C., technology, which has been clinically demonstrated to promote wound healing and reduce the cost of treating patients with difficult-to-treat wounds. 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. From 1999 to 2002, we increased revenue at a compound annual growth rate of 21.8%.

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 61.9% of total revenue in the first nine months of 2003, up from 52.3% in the first nine months of 2002. We expect V.A.C. growth and the percentage of total revenue from V.A.C. rentals and sales to continue to increase, as it has in each of the last three years. Driven by continued market penetration, increased awareness and the introduction of three new V.A.C. systems, rental and sales volumes have continued to increase. Revenue for V.A.C. systems and related services increased 56.1% from $217.4 million for the nine months ended September 30, 2002 to $339.3 million for the nine months ended September 30, 2003. Both the U.S. and international business segments contributed to this growth.

We have direct operations in the United States, Canada, Europe, Australia and South Africa, and conduct additional business through distributors in Latin America, the Middle East and Asia. We manage our business in two geographical segments, our USA and International divisions. In the United States, which accounted for 76.1% of our revenue for the nine months ended September 30, 2003, we have a substantial presence in all care settings. In the U.S. acute and extended care settings, which accounted for more than half of our revenue, we bill our customers, such as hospitals and extended care facilities, directly. 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 bill third party payers, such as Medicare and private insurance. Domestic home care revenue is growing faster than the acute or extended care settings. Internationally, substantially all of our revenue is generated from the acute care setting. A small amount of international V.A.C. revenue comes from home care. However, we expect the home care market to increase to the extent that we gain home care reimbursement for V.A.C. therapy with third party payers in Europe and other international locations. Our international operations are subject to foreign currency fluctuations. As a result, we establish and evaluate our business using a constant exchange rate by country. By using a constant exchange rate for comparing our current year activity with prior periods, we effectively eliminate from our operations the variances arising from foreign currency fluctuations. We refer to this internal analysis as revenue and expenses excluding the effects of foreign currency exchange rate fluctuations throughout this prospectus.

For the nine-month period ended September 30, 2003, worldwide V.A.C. revenue from the combined acute and extended care settings grew approximately 59% and V.A.C. revenue from the home care setting grew approximately 52% as compared to the nine-month period ended September 30, 2002. The home care market accounted for approximately 44% of V.A.C. business and approximately 27% of our total revenue for the nine-month period ended September 30, 2003. V.A.C. systems used in the home are reimbursed by government insurance (Medicare and Medicaid), private insurance and managed care organization payers. We have over 148 million member lives under contract with private insurance and managed care organizations.

The 2003 Recapitalization

On August 11, 2003, we completed funding for a recapitalization of KCI. Prior to the recapitalization, we had $208.2 million of term loans outstanding under our previously existing credit facility, with varying maturities through 2006, and approximately $58.2 million due in 2004. In addition, our previously existing $50.0 million revolving credit facility was scheduled to expire in late 2003. In order to address these approaching maturities, obtain greater financial flexibility, take advantage of favorable debt capital markets and interest rates near 50-year historical lows, and provide liquidity to our existing shareholders, we:

•: entered into a new senior credit facility, comprised of a $100.0 million revolving credit facility that matures on August 11, 2009 and a $480.0 million term loan facility that matures on August 11, 2010;
•: issued $205.0 million principal amount of 7³/8% Senior Subordinated Notes due 2013; and
•: issued $263.8 million of our Series A Convertible Participating Preferred Stock, which (1) is mandatorily convertible into common stock at a ratio of $17.00 per share of common stock and (2) accrues cumulative dividends quarterly at the rate of 9% per annum (or the dividends paid on common stock, on an as-converted basis, if greater), subject to certain exceptions (See "Description of Capital Stock—Preferred Stock").

Proceeds from the recapitalization were used to repay the $208.2 million due under our previously existing senior credit facility, redeem all $200.0 million of our 9⁵/8% Senior Subordinated Notes due 2007, repurchase approximately 30.0 million shares of our outstanding common stock and approximately 4.7 million vested stock options at a price equal to $17.00 per share, and to pay fees and expenses associated with the recapitalization. The refinancing of our debt in the recapitalization provides us greater financial flexibility and a lower overall cost of capital.

Our September 30, 2003, three-month and nine-month results reflect the impact of the recapitalization including a charge to earnings of $86.3 million before tax benefits related to the recapitalization of $32.3 million. The charge to earnings, pretax, included a $67.5 million charge to compensation expense for the repurchase, or cash settlement, of vested options, together with $11.1 million in expenses for the payment of a consent fee and an early redemption premium related to the redemption of the 9⁵/8% Senior Subordinated Notes due 2007. Additionally, we wrote off debt issuance costs related to our previously existing senior credit facility and the 9⁵/8% Senior Subordinated Notes due 2007 totaling approximately $5.2 million, pretax. The remaining expenses of approximately $2.5 million, pretax, were related to miscellaneous fees and expenses associated with the share repurchase. (See Note 2 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this prospectus for a further discussion of the recapitalization.)

Results of Operations

First Nine Months of 2003 Compared to First Nine Months of 2002

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

			Nine months ended September 30,
			Revenue Relationship				Variance
			2002		2003		$			%
Revenue:
	Rental and service		78	%	77%		$	96,394		30%
	Sales and other		22		23			35,753		39

		Total revenue	100		100			132,147		32
Rental expenses			48		47			60,482		30
Cost of goods sold			9		9			9,778		27

		Gross profit	43		44			61,887		34
Selling, general and administrative expenses			24		24			31,379		31
Recapitalization expenses			—		13			69,955		nm

		Operating earnings	19		7			(39,447	)	—
Interest income			—		—			655		236
Interest expense			(7	)	(8)			(10,685	)	—
Foreign currency gain			—		1			3,630		177

		Earnings before income taxes	12		—			(45,847	)	—
Income taxes			5		—			(18,407	)	—

		Net earnings	7	%	—	%	$	(27,440	)	—	%

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

					Nine months ended September 30,
									Variance
					2002		2003		$			%
USA
	V.A.C.
		Rental			$	150,154	$	222,801	$	72,647		48.4	%
		Sales				36,887		59,850		22,963		62.3

			Total V.A.C.			187,041		282,651		95,610		51.1
	Therapeutic surfaces/other
		Rental				112,745		111,532		(1,213	)	(1.1	)
		Sales				22,103		22,717		614		2.8

			Total therapeutic surfaces/other			134,848		134,249		(599	)	(0.4	)
	Total USA rental					262,899		334,333		71,434		27.2
	Total USA sales					58,990		82,567		23,577		40.0

			Subtotal—USA			321,889		416,900		95,011		29.5

International
	V.A.C.
		Rental				14,370		28,747		14,377		100.0
		Sales				16,004		27,881		11,877		74.2

			Total V.A.C.			30,374		56,628		26,254		86.4
	Therapeutic surfaces/other
		Rental				47,792		58,375		10,583		22.1
		Sales				15,720		16,019		299		1.9

			Total therapeutic surfaces/other			63,512		74,394		10,882		17.1
	Total International rental					62,162		87,122		24,960		40.2
	Total International sales					31,724		43,900		12,176		38.4

				Subtotal—International		93,886		131,022		37,136		39.6

Total revenue					$	415,775	$	547,922	$	132,147		31.8	%

Total revenue in the first nine months of 2003 increased $132.1 million, or 31.8%, from the prior-year period due primarily to increased rental and sales volumes for V.A.C. systems and related disposables resulting from increased market penetration and product awareness. Rental revenue increased $96.4 million, or 29.7%, from the first nine months of 2002 due primarily to higher unit demand for the V.A.C. Sales revenue for the nine-month period increased approximately $35.7 million, or 39.4%, compared to the prior-year period due primarily to increased sales volumes of V.A.C. disposables, partially offset by $1.8 million lower sales of vascular products.

Total domestic revenue for the first nine months of 2003 increased $95.0 million, or 29.5%, from the prior-year period due directly to increased V.A.C. rentals and sales. Domestic rental revenue in the first nine months of 2003 increased $71.4 million, or 27.2%, from the prior-year period and domestic sales revenue in the first nine months of 2003 increased $23.6 million, or 40.0%, from the prior-year period. The increases in total domestic rental and sales revenue are due to increased V.A.C. rental volumes which resulted in increased demand for associated disposables, partially offset by a $1.8 million decrease in sales revenue from vascular products and a $2.3 million, or 11.4% decrease in surface rentals in the extended

care market. For the nine-month period ended September 30, 2003, average V.A.C. units out on rent increased 50.6% as compared to the same period a year ago.

Domestic V.A.C. revenue increased in the first nine months of 2003 by $95.6 million, or 51.1%, from the prior-year period due to an increase of rental and sales volumes resulting from increased market penetration and product awareness. Revenue from V.A.C. rentals increased $72.6 million, or 48.4%, from the prior-year period. The increased rental revenue resulted from an increase in average units on rent per month of 50.6% for the nine-month period, which was partially offset by a 1.5% decline in average rental price. Some managed care organizations pay an all-inclusive daily rate, which covers the rental of V.A.C. systems and all needed disposables. All revenue associated with all-inclusive pricing is included in rental revenue. We are experiencing a shift away from all-inclusive pricing in the home care setting with third party payers. As we contract with these third party payers, our contracts are providing separate pricing for rental and disposable sale products versus the all-inclusive pricing previously used. Therefore, we have experienced, and expect to continue experiencing, a shift in revenue between the rental classification and the sales classification. V.A.C. sales increased in the first nine months of 2003 by $23.0 million, or 62.3%, from the prior-year period due to the shift in pricing methodology discussed above along with increased demand for V.A.C. disposables associated with increased V.A.C. systems rentals. The cost of V.A.C. disposables, whether purchased through all-inclusive pricing or by itemized sale, is included in cost of goods sold.

Domestic therapeutic surfaces/other revenue of $134.2 million for the nine-month period ended September 30, 2003 decreased approximately $600,000, or 0.4%, from the prior-year period. Rental revenue from therapeutic surfaces/other remained materially unchanged when compared to the prior-year period as higher blended unit pricing of 4.9% in the acute, extended and home care markets was offset by an 18.1% lower unit volume in the combined extended and home care markets. Sales revenue from vascular devices and dressings was down $1.8 million. The following table sets forth, for the periods indicated, the amount of total rental and sales revenue derived from each of our domestic care settings (dollars in thousands):

		Nine months ended September 30,
						Variance
		2002		2003		$			%
Acute/extended surfaces		$	119,164	$	119,744	$	580		0.5	%
Home surfaces			7,061		7,515		454		6.4
Vascular-compression therapy			7,585		5,741		(1,844	)	(24.3	)
Other			1,038		1,249		211		20.3

	Total	$	134,848	$	134,249	$	(599	)	(0.4	)%

The majority of our therapeutic surfaces/other business is generated in the hospital, or acute care, setting. Average acute care rental therapeutic surface units on rent per month remained essentially unchanged compared to the prior-year period, while average pricing increased 1.8% due primarily to product mix changes. Our acute care revenue is fueled by growth in our bariatric line. Extended care rental units decreased 17.6% due to lower overall Medicare Part A reimbursement in nursing homes and continued local and regional competition for our lower-therapy products. Extended care surface rental pricing improved 7.6% over the prior year on average. Home care therapeutic surface revenue increased 6.4% from the prior-year period due to a change in our revenue mix. We experienced increased sales of lower-therapy wound care therapeutic surface units, which, in turn, decreased the rental of therapeutic surfaces in the home care setting. Overall, the average number of domestic therapeutic surface rental units per month for the first nine months of 2003 declined 5.7% as compared to the prior-year period, but this decline was offset by a 4.9% price increase resulting from changes in our product mix.

Revenue from our international operating unit for the first nine months of 2003 increased $37.1 million, or 39.6%, over the prior-year period. Favorable foreign currency exchange movements accounted for $16.7 million of the total international revenue increase when compared to the prior year period. The majority of our international revenue is generated in the acute care setting. International rental revenue increased $25.0 million, or 40.2%, from the prior-year period and sales revenue was up $12.2 million, or 38.4%, compared to the prior year. Excluding the effects of foreign currency exchange rate fluctuations, total international revenue increased $20.4 million, or 20.7%, from the prior-year period, rental revenue increased $13.7 million, or 21.0%, and sales revenue increased $6.7 million, or 20.2%. The rental revenue increase reflects a 55.3% increase in V.A.C. systems out on rent along with a 6.0% increase in therapeutic surface rental units on rent, primarily in overlays. We also experienced improved rental pricing for our V.A.C. systems for the nine months ended September 30, 2003 as compared to the same period in the prior year. International surfaces revenue for the first nine months of 2003 was $74.4 million, a $10.9 million, or 17.1%, increase from a year ago. Therapeutic surfaces rental pricings remained essentially unchanged as compared to the prior year. The international sales increase was due to increased demand for V.A.C. systems and related disposables.

Rental Expenses: Rental, or "field," expenses of $259.8 million for the nine-month period increased $60.5 million, or 30.3%, from $199.3 million in the prior-year period. Rental expenses are variable and fluctuate with revenue. The field expense increase was directly associated with the growth in V.A.C. revenue, such as increased labor of $20.0 million, product licensing expenses of $12.8 million, incentive compensation of $7.4 million, rental equipment depreciation of $5.6 million, marketing expenses of $3.5 million, parts expense of $3.1 million and delivery expense of $2.1 million. Of the $60.5 million variance in rental expenses for the nine months ended September 30, 2003, approximately $12.2 million resulted from favorable foreign currency exchange rate fluctuations. Field expenses for the first nine months of 2003 represented 61.6% of total rental revenue compared to 61.3% in the first nine months of 2002.

Cost of Goods Sold: Cost of goods sold of $46.4 million in the first nine months of 2003 increased $9.8 million, or 26.7%, from $36.6 million in the prior year due to increased sales of V.A.C. disposables and higher excess and obsolescence inventory reserve provisions related to therapeutic surface products with low demand. Sales margins increased to 63.3% in the first nine months of 2003 as compared to 59.6% in the prior-year period due to the shift away from all-inclusive pricing arrangements discussed above and cost reductions resulting from favorable pricing in our global supply contract for V.A.C. disposables entered into in December 2002.

Gross Profit: Gross profit in the first nine months of 2003 increased approximately $61.9 million, or 34.4%, to $241.7 million from $179.8 million in the prior year due primarily to the year-to-year increase in revenue resulting from increased demand for V.A.C. systems and related disposables. Gross profit margin in the first nine months of 2003 was 44.1%, up slightly from 43.2% in the prior year due primarily to the increase in revenue discussed above.

Selling, General and Administrative Expenses: Selling, general and administrative expenses increased $31.4 million, or 30.5%, to $134.1 million in the first nine months of 2003 from $102.7 million in the prior-year period. This $31.4 million variance includes higher administrative costs of $12.1 million associated with hiring 276 personnel for our national call center and billing and collections departments, division labor and incentive compensation of $4.0 million, and product licensing expense of $2.3 million. Additionally, insurance costs of $3.3 million, professional fees of $2.6 million, engineering and manufacturing costs of $1.7 million and medical studies expenses of $1.4 million were all higher in the current period when compared to the prior year. As a percentage of total revenue, selling, general and administrative expenses decreased slightly to 24.5% in the first nine months of 2003 as compared to 24.7% in the first nine months of 2002.

Recapitalization Expenses: During the third quarter of 2003, we recognized $70.0 million in fees and expenses, excluding $16.3 million charged to interest expense, resulting from the transactions associated with the recapitalization. (See Note 2 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this prospectus.)

Operating Earnings: Operating earnings for the first nine months of 2003 decreased $39.4 million, or 51.2%, to $37.7 million compared to $77.1 million in the prior-year period primarily due to expenses of $70.0 million recorded related to the recapitalization. Excluding recapitalization expenses, operating earnings would have increased $30.5 million over the prior year period, or 39.6%, to $107.6 million. This increase in operating earnings was directly attributable to the increase in revenue for the period, partially offset by higher operating costs and expenses. Operating margins for the first nine months of 2003, excluding recapitalization expenses, would have been 19.6%, up from 18.5% in the prior year period, due to the increase in revenue.

Interest Expense: Interest expense in the first nine months of 2003 was $41.6 million compared to $30.9 million in the prior year. This increase is primarily due to expenses related to the recapitalization completed in the third quarter of 2003. Excluding recapitalization expenses, interest expense would have decreased $5.6 million, or 18.2%, to $25.3 million. This decrease was due primarily to the partial paydown on our previously existing credit facility resulting from the $175 million antitrust settlement payment received in January 2003 and lower interest rates on our new senior credit facility and new subordinated notes. (See Notes 2, 5 and 9 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this prospectus.)

Net Earnings: Net earnings of $1.7 million for the first nine months of 2003 decreased $27.4 million, or 94.2%, from the prior-year period primarily due to the expenses recorded related to the recapitalization. Excluding the recapitalization expenses, net earnings would have increased by $26.5 million, or 90.9%, to $55.6 million due to the increase in operating earnings discussed above. Effective tax rates for the first nine months of 2003 and 2002 were 37.5% and 40.0%, respectively.

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

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

			Year Ended December 31,
			Revenue Relationship				Variance
			2001		2002		$			%
Revenue:
	Rental and service		79	%	78	%	$	91,426		25.3	%
	Sales and other		21		22			31,589		33.5

		Total revenue	100		100			123,015		27.0
Rental expenses			49		48			55,640		25.2
Cost of goods sold			7		9			18,872		57.3

		Gross profit	44		43			48,503		24.0
Selling, general and administrative expenses			25		24			26,766		23.3
Unusual item-litigation settlement			—		(30	)		(173,250	)	nm

		Operating earnings⁽¹⁾	19		49			194,987		222.3
Interest income			—		—			216		77.1
Interest expense			(10	)	(7	)		4,173		9.2
Foreign currency gain			—		1			5,573		340.2

		Earnings before income taxes	9		43			204,949		497.4
Income taxes			4		17			78,694		454.7

		Net earnings	5	%	26	%	$	126,255		528.2	%

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

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

					Year Ended December 31,
									Variance
					2001		2002		$			%
USA
	V.A.C.
		Rental			$	134,428	$	214,979	$	80,551		59.9	%
		Sales				31,814		53,245		21,431		67.4

			Total V.A.C.			166,242		268,224		101,982		61.3
	Therapeutic surfaces/other
		Rental				156,704		150,793		(5,911	)	(3.8	)
		Sales				31,177		27,770		(3,407	)	(10.9	)

			Total therapeutic surfaces/other			187,881		178,563		(9,318	)	(5.0	)
	Total USA rental					291,132		365,772		74,640		25.6
	Total USA sales					62,991		81,015		18,024		28.6

			Subtotal—USA			354,123		446,787		92,664		26.2

International
	V.A.C.
		Rental				11,577		21,946		10,369		89.6
		Sales				12,182		23,244		11,062		90.8

			Total V.A.C.			23,759		45,190		21,431		90.2
	Therapeutic surfaces/other
		Rental				58,924		65,343		6,419		10.9
		Sales				19,141		21,642		2,501		13.1

			Total therapeutic surfaces/other			78,065		86,985		8,920		11.4
	Total International rental					70,501		87,289		16,788		23.8
	Total International sales					31,323		44,886		13,563		43.3

			Subtotal—International			101,824		132,175		30,351		29.8

				Total revenue	$	455,947	$	578,962	$	123,015		27.0	%

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

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

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

Domestic therapeutic surface revenue decreased $9.3 million, or 5.0%, due to lower unit volume in the extended and home care markets and lower average pricing caused in part by the negotiation and extension of a GPO contract with Novation, LLC, which became effective September 2001, which was partially offset by higher utilization of bariatric therapeutic surfaces. The following table sets forth, for the periods indicated, the amount of total rental and sales revenue derived from each of our domestic care settings (dollars in thousands):

		Year Ended December 31,
						Variance
		2001		2002		$			%
Acute/extended surfaces		$	162,528	$	158,815	$	(3,713	)	(2.3	)%
Home surfaces			11,860		9,769		(2,091	)	(17.6	)
Vascular-compression therapy			13,493		9,979		(3,514	)	(26.0	)

	Total	$	187,881	$	178,563	$	(9,318	)	(5.0	)%

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

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

Rental Expenses. Rental, or "field", expenses of $276.1 million increased $55.6 million, or 25.2%, from $220.5 million in the prior year. The field expense increase was due primarily to increased labor and incentive compensation of $26.6 million, product marketing of $4.2 million, parts and disposables of $2.8 million and product licensing expenses of $9.3 million directly associated with the growth in V.A.C. revenue. Field expenses for 2002 represented 60.9% of total rental revenue compared to 61.0% in 2001.

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

all-inclusive managed care revenue was recorded as rental revenue, while the cost of V.A.C. disposables associated with these placements has been recorded in cost of goods sold.

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

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $26.8 million, or 23.3%, to $141.6 million in 2002 from $114.8 million in 2001. This increase was due, in part, to higher administrative labor costs of $4.4 million associated with hiring 138 additional personnel for claims billing and for product licensing expenses of $2.5 million associated with the increased usage of V.A.C. systems and related disposables, particularly in the home. The 2002 results also included approximately $7.9 million of legal expenses associated with the antitrust lawsuit filed against Hillenbrand compared to $4.3 million in the prior year.

Manufacturing and engineering costs increased $4.8 million, labor and incentive compensation increased $2.8 million, and depreciation increased $1.1 million, in the current year when compared to 2001. In addition, expenditures for research and development were $16.0 million, or approximately 3.4% of our total operating expenditures for the current year compared to $12.5 million, or 3.4% in 2001. On a comparable basis, as a percentage of total revenue, selling, general and administrative expenses of 25.0% in 2002 were flat compared to the prior year.

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

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

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

Interest Expense. Interest expense in 2002 was $40.9 million compared to $45.1 million in the prior year. The interest expense decrease was due to lower effective interest rates associated with our previously existing senior credit facility. (See Note 4 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus.)

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

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

			Year Ended December 31,
			Revenue Relationship				Variance
			2000		2001		$			%
Revenue:
	Rental and service		78	%	79	%	$	87,303		31.8	%
	Sales and other		22		21			16,612		21.4

		Total revenue	100		100			103,915		29.5
Rental expenses			50		49			44,093		25.0
Cost of goods sold			8		7			3,307		11.2

		Gross profit	42		44			56,515		38.7
Selling, general and administrative expenses			23		25			34,534		43.0

		Operating earnings	19		19			21,981		33.5
Interest income			—		—			(617	)	(68.8	)
Interest expense			(14	)	(10	)		3,519		7.2
Foreign currency gain (loss)			(1	)	—			720		30.5

		Earnings before income taxes	4		9			25,603		164.1
Income taxes			1		4			10,831		167.2

		Net earnings (loss)	3	%	5	%	$	14,772		161.8	%

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

					Year Ended December 31,
									Variance
					2000		2001		$			%
USA
	V.A.C.
		Rental			$	55,343	$	134,428	$	79,085		142.9	%
		Sales				14,637		31,814		17,177		117.3

			Total V.A.C.			69,980		166,242		96,262		137.6
	Therapeutic surfaces/other
		Rental				153,852		156,704		2,852		1.9
		Sales				32,750		31,177		(1,573	)	(4.8	)

			Total therapeutic surfaces/other			186,602		187,881		1,279		0.7
	Total USA rental					209,195		291,132		81,937		39.2
	Total USA sales					47,387		62,991		15,604		32.9

			Subtotal—USA			256,582		354,123		97,541		38.0

International
	V.A.C.
		Rental				7,510		11,577		4,067		54.2
		Sales				8,256		12,182		3,926		47.6

			Total V.A.C.			15,766		23,759		7,993		50.7
	Therapeutic surfaces/other
		Rental				57,625		58,924		1,299		2.3
		Sales				22,059		19,141		(2,918	)	(13.2	)

			Total therapeutic surfaces/other			79,684		78,065		(1,619	)	(2.0	)
	Total International rental					65,135		70,501		5,366		8.2
	Total International sales					30,315		31,323		1,008		3.3

			Subtotal—International			95,450		101,824		6,374		6.7

				Total revenue	$	352,032	$	455,947	$	103,915		29.5	%

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

Total domestic revenue for 2001 increased $97.5 million, or 38.0%, from the prior year due primarily to increased usage of V.A.C. systems. Domestic rental revenue increased $81.9 million, or 39.2%, due primarily to increased V.A.C. rentals. Domestic sales revenue increased $15.6 million, or 32.9%, from the prior year. This sales increase resulted from higher V.A.C. disposable sales, which were partially offset by lower sales of vascular products. The V.A.C. growth resulted from higher unit demand due to increased customer awareness of the benefits of V.A.C. therapy and the start of Medicare reimbursement for V.A.C. usage in the home setting. Domestic V.A.C. revenue increased $96.3 million, or 137.6%, in 2001 over 2000 due primarily to a 160.3% increase in average units on-rent, which was somewhat offset by a decline in average price realized of 6.6%.

Domestic therapeutic surface and other revenue in 2001 increased, approximately $1.3 million, or 0.7%, over 2000, due to higher units on-rent in the acute and extended markets offset by lower units on-rent in the home care market and an approximate 3.3% increase in average price arising mostly from product mix changes in the extended and home care market. Improved product mix, including increased demand for pulmonary and bariatric products, resulted in higher average rental prices during 2001. The following table sets forth, for the periods indicated, the amount of total rental and sales revenue derived from our domestic care settings (dollars in thousands):

		Year Ended December 31,
						Variance
		2000		2001		$			%
Acute/extended care surfaces		$	157,141	$	162,526	$	5,385		3.4	%
Home surfaces			13,699		11,860		(1,839	)	(13.4	)
Vascular-compression therapy			15,762		13,495		(2,267	)	(14.4	)

	Total	$	186,602	$	187,881	$	1,279		0.7	%

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

Rental Expenses. Rental, or "field", expenses of $220.5 million increased $44.1 million, or 25.0%, from $176.4 million in the prior year. The field expense increase was due primarily to increased labor and incentive compensation of $16.7 million, marketing of $4.1 million, parts and disposables of $6.3 million, travel of $1.5 million and product licensing expenses of $11.7 million associated with the growth in V.A.C. revenue and was partially offset by currency fluctuations of $3.0 million. Field expenses for 2001 represented 61.0% of total rental revenue compared to 64.3% in 2000. This relative decrease is attributable to the increase in rental revenue combined with a relatively fixed cost structure. Excluding the international 13th month, field expenses would have increased $48.7 million, or 28.4%, from $171.7 million in 2000.

Cost of Goods Sold. Cost of goods sold of $33.0 million in 2001 increased approximately $3.4 million, or 11.2%, from $29.6 million in the prior year due to higher sales volumes arising from increased V.A.C. disposable sales associated with V.A.C. rentals. Sales margins increased to 65.1% in 2001 as compared to 61.8% in the prior year due to improved product mix and favorable manufacturing variances. On a comparable basis, excluding the international 13th month for 2000, cost of goods sold increased $4.4 million, or 15.6%.

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

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $34.5 million, or 43.0%, to $114.8 million in 2001 from $80.3 million in 2000. This increase was due primarily to higher claims billings costs of $9.6 million, labor costs of $3.4 million and consulting costs of $4.0 million associated with the increased rentals and sales of V.A.C. systems and related disposables.

In addition, provisions for bad debts increased $5.5 million, engineering costs increased $5.3 million, and depreciation increased $835,000 in the current year when compared to 2000. In addition, expenditures for research and development were $12.5 million, or approximately 3.4% of our total operating expenditures for the current year compared to $7.0 million, or 2.4% in 2000. On a comparable basis, as a percentage of total revenue, selling, general and administrative expenses were 25.2% in 2001 compared to 23.0% in 2000. Excluding the international 13th month for 2000, selling, general and administrative expenses increased $35.6 million, or 45.0%, from the prior year.

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

Interest Expense. Interest expense in 2001 was $45.1 million compared to $48.6 million in 2000. The interest expense decrease was due to lower effective interest rates associated with our previously existing senior credit facility obtained through fixed-rate interest contracts. (See Note 4 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus.)

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

Liquidity and Capital Resources

General

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

Sources of Capital

During the last three years, our principal sources of liquidity have been cash flows from operating activities and borrowings under our previously existing senior credit facility. Based upon the current level of operations, we believe cash flows from operating activities and availability under our new revolving credit facility will be adequate to meet our anticipated cash requirements for interest payments, debt service, working capital and capital expenditures through 2004. During the first nine months of 2003, our primary source of capital was cash from operations. The following table summarizes the net cash provided

and used by operating activities, investing activities and financing activities for the last three years ended December 31, 2002 and the nine-month periods ended September 30, 2003 and 2002 (dollars in thousands):

	Year ended December 31,									Nine months ended September 30,
	2000			2001			2002			2002			2003
Net cash provided by operating activities	$	40,151		$	29,895		$	76,254		$	52,845		$	153,017	⁽¹⁾
Net cash used by investing activities		(32,012	)		(48,325	)		(39,027	)		(25,358	)		(56,834	)
Net cash provided (used) by financing activities		(12,715	)		16,829			16,100			16,708			(110,732)	⁽²⁾⁽³⁾

Total	$	(4,576	)	$	(1,601	)	$	53,327		$	44,195		$	(14,549	)

(1): Includes receipt of $107 million, net of taxes and related expenses paid, related to the Hillenbrand antitrust settlement.
(2): Includes paydown of $107 million of indebtedness on our previously existing senior credit facility utilizing funds received related to the antitrust settlement.
(3): Includes cash recapitalization expenses of $20.7 million.

At September 30, 2003, cash and cash equivalents of $41.1 million were available for general corporate purposes. Availability under the revolving portion of our new credit facility was $88.7 million, net of $11.3 million in letters of credit, at November 30, 2003.

Working Capital

At December 31, 2002, 2001 and 2000, we had a working capital surplus of $243.9 million, $100.3 million and $40.4 million, respectively. The antitrust settlement with Hillenbrand accounted for the majority of the change between 2002 and 2001. Excluding the antitrust settlement, our working capital surplus increased approximately $36.9 million from 2001 to 2002 due to increases in cash and accounts receivable. The working capital decrease from 2000 to 2001 was primarily due to a decrease in current installments of long-term debt obligations and an increase in accounts receivable and inventory associated with the V.A.C. product line. For the years ended December 31, 2002, 2001 and 2000, operating cash flows were $76.3 million, $29.9 million and $40.2 million, respectively. The increase between 2001 and 2002 was primarily due to higher earnings and lower working capital requirements, primarily inventory, accrued expenses and deferred income taxes. The decrease between 2000 and 2001 was primarily due to increased working capital requirements, primarily accounts receivable and inventory associated with the V.A.C. product line, partially offset by higher earnings.

At September 30, 2003, we had current assets of $259.2 million, including $31.0 million in inventory, and current liabilities of $111.7 million resulting in a working capital surplus of $147.5 million, compared to a surplus of $243.9 million at December 31, 2002. The paydown of long-term obligations with funds from the payment received pursuant to the Hillenbrand antitrust settlement accounted for a majority of this change. Operating cash flows for the first nine months of 2003 were $153.0 million as compared to $52.8 million for the prior-year period. This increase in operating cash flows was due primarily to the Hillenbrand antitrust settlement, together with higher earnings excluding recapitalization expenses, and improved working capital management.

We expect rental and sales volumes for V.A.C. systems and related disposables to continue to increase, which could have the effect of increasing accounts receivable due to extended payment cycles for third-party payers. We have adopted a number of policies and procedures to reduce these extended payment cycles, which we believe have been effective and will continue to improve our collection turnaround times. For example, our revenue for the first nine months of 2003 grew 31.8% over the prior-year period while our receivables have increased only 23.0% for the same period. If we were to have an increase in accounts receivable, we would expect to manage such an increase with available cash on hand and, if necessary,

through increased borrowing under our new revolving credit facility. We expect that cash on hand, cash flow from operations and additional borrowings under our new revolving credit facility will be sufficient to meet our working capital needs.

Capital Expenditures

During 2002, 2001 and 2000, we made capital expenditures of $54.5 million, $44.0 million and $31.7 million. During the first nine months of 2003, we made capital expenditures of $56.6 million compared to $43.8 million in the prior-year period. The period-to-period increase is primarily due to purchases of materials for V.A.C. systems and other high-demand rental products. As of September 30, 2003, we have commitments to purchase new product inventory of $16.6 million over the next twelve months. Other than commitments for new product inventory, we have no material long-term purchase commitments at the end of the period. We expect future demand for V.A.C. systems to increase, which will require increased capital expenditures over time.

Debt Service

As of November 30, 2003, scheduled principal payments remaining under our new senior credit facility for the years 2003, 2004 and 2005 are $1.2 million, $4.8 million and $4.8 million, respectively.

New Senior Credit Facility

Our new senior credit facility consists of a $480.0 million seven-year term loan facility and a $100.0 million six-year revolving credit facility. The following table sets forth the amounts owing 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 September 30, 2003 (dollars in thousands):

New Senior Credit Facility		Effective Interest Rate		Amounts Outstanding		Amount Available For Additional Borrowing
Revolving credit facility		—			—	$	88,700	⁽²⁾
Term loan facility		4.86	%⁽¹⁾	$	478,800		—

	Total			$	478,800	$	88,700

(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 September 30, 2003 was 3.89%.
(2): At September 30, 2003, amounts available under the revolving portion of our new senior credit facility are reduced by $11.3 million of letters of credit issued on our behalf, none of which have been drawn upon by the beneficiaries thereunder.

At November 30, 2003, total borrowings under our new senior credit facility were $478.8 million.

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

our new senior credit facility, EBITDA excludes charges associated with the recapitalization. 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, our 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.

As of September 30, 2003 we were in compliance with all covenants under the new senior credit facility.

On December 5, 2003, we entered into an amendment to the new senior credit facility which allows us, subject to certain limitations, to redeem or repurchase notes with (1) the net after tax proceeds of the $75.0 million Hillenbrand antitrust settlement that is due in January 2004, (2) cash strike payments arising from the exercise of outstanding options to purchase our common stock as part of the recapitalization and (3) the estimated tax benefit to us from the recapitalization. Accordingly, we may, from time to time, repurchase notes in the open market or in privately-negotiated transactions.

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. Interest on the notes accrues at the rate of 7³/8% per annum and is payable semiannually in cash on each May 15 and November 15, commencing on November 15, 2003, to the persons who are registered holders at the close of business on May 1 and November 1 immediately preceding the applicable interest payment date. Interest on the notes accrues from and including the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance of the notes. Interest is computed on the basis of a 360-day year consisting of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed. The notes are not entitled to the benefit of any mandatory sinking fund.

The notes are unsecured obligations of KCI, ranking subordinate in right of payment to all senior debt of KCI. The notes are guaranteed by each of our 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 5 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this prospectus.)

Each guarantor jointly and severally guarantees KCI's obligation under the notes. The guarantees are subordinated to guarantor senior debt on the same basis as the notes are subordinated to senior debt. The obligations of each guarantor under its guarantor senior debt will be limited as necessary to prevent the guarantor senior debt from constituting a fraudulent conveyance under applicable law.

The indenture governing the notes, limits our ability, among other things, to:

•: incur additional debt;
•: pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments;
•: place limitations on distributions from our restricted subsidiaries;
•: issue or sell capital stock of restricted subsidiaries;
•: issue guarantees;
•: sell or exchange assets;
•: enter into transactions with affiliates;
•: create liens; and
•: effect mergers.

Interest Rate Protection

We have variable interest rate debt and other financial instruments, which are subject to interest rate risk and could have a negative impact on our business if not managed properly. We have a risk management policy, which is designed to reduce the potential negative earnings effect arising from the impact of fluctuating interest rates. We manage our interest rate risks on our borrowings through interest rate swap agreements which effectively convert a portion of our variable-rates 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.

The following chart summarizes interest rate hedge transactions effective during the first nine months of 2003 (dollars in thousands):

Accounting Method	Effective Dates	Nominal Amount		Fixed Interest Rate		Status
Shortcut	12/31/02-12/31/03	$	80,000	1.745	%	Outstanding
Shortcut	12/31/02-12/31/04		100,000	2.375		Outstanding
Shortcut	08/21/03-08/22/05		60,000	2.150		Outstanding
Shortcut	08/21/03-08/22/05		20,000	2.130		Outstanding
Shortcut	08/21/03-08/21/05		20,000	2.135		Outstanding
Shortcut	08/21/03-08/21/06		50,000	2.755		Outstanding
Shortcut	08/21/03-08/21/06		50,000	2.778		Outstanding
Shortcut	08/21/03-08/21/06		50,000	2.788		Outstanding

As of December 31, 2002, two $100.0 million interest rate swap agreements were in effect to take advantage of low interest rates. On January 31, 2003, we sold $20.0 million of our $100.0 million, 1.745% interest rate swap effective March 31, 2003 which resulted in an expense of approximately $74,000 which was recorded in the first quarter of 2003. Our new senior credit facility requires that we fix the base-borrowing rate applicable to at least 50% of the outstanding amount of our term loan under our new senior credit facility for a period of two years from the date of issuance. In August 2003, we entered into six new interest rate swap agreements pursuant to which we fixed the rates on an additional $250 million notional amount of our outstanding variable rate borrowings outstanding at September 30, 2003. As a result of the eight swap agreements currently in effect as of September 30, 2003, approximately 89.8% of

our variable rate interest rate debt outstanding is fixed. (See Note 5 of the Notes to Condensed Consolidated Financial Statements included elsewhere is this prospectus.)

All of the interest rate swap agreements have quarterly interest payments, based on three month LIBOR, due on the last day of each March, June, September and December, commencing on September 30, 2003. The fair value of these swaps at inception was zero. Due to subsequent movements in interest rates, as of September 30, 2003, the fair values of these swap agreements were negative and were adjusted to reflect a liability of approximately $4.6 million. During the first nine months of 2003 and 2002, we recorded interest expense of approximately $1.6 million and $2.0 million, 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 have not guaranteed the debt of any other party. The following table summaries our contractual cash obligations as of September 30, 2003, for each of the periods indicated (dollars in thousands):

Fiscal	Long-Term Debt Amortization		Capital Lease Obligations		Operating Lease Obligations		Purchase Obligations		Total
2003	$	1,350	$	115	$	16,805	$	16,558	$	34,828
2004		4,800		12		13,850		—		18,662
2005		4,950		—		11,473		—		16,423
2006		4,950		—		9,790		—		14,740
2007		4,800		—		7,633		—		12,433
2008		4,800		—		3,695		—		8,495
Thereafter		658,600		—		12,655		—		671,255

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 borrowing 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 top financial management. We do not use financial instruments for speculative or trading purposes.

Our new senior credit facility requires that we fix the base-borrowing rate applicable to at least 50% of the outstanding amount of our term loan under the new senior credit facility for a period of two years from the date of issuance. As of September 30, 2003, we have eight interest rate swap agreements pursuant to which we have fixed the rates on $430.0 million of our variable rate debt as follows:

•: 1.745% per annum on $80.0 million of our variable rate debt through December 31, 2003;
•: 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.

As a result of the eight swap agreements currently in effect as of September 30, 2003, 89.8% of our variable interest rate debt outstanding is fixed.

All interest rate swap agreements have quarterly interest payments, based on three month LIBOR, due on the last day of each March, June, September and December, commencing on September 30, 2003. The fair value of these swaps at inception was zero. Due to subsequent movements in interest rates, as of September 30, 2003, the fair values of these swap agreements were negative and were adjusted to reflect a liability of approximately $4.6 million.

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 September 30, 2003 and the end of the 2001 and 2002 fiscal years. For long-term debt, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest 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 field curve at the reporting date (dollars in thousands):

		September 30, 2003
		Expected Maturity Date
		2003			2004			2005			2006			Thereafter			Total			Fair Value
Long-term debt
	Fixed rate	$	150			—		$	150		$	150		$	205,000		$	205,450		$	211,100
	Average interest rate		7.000	%		—			7.000	%		7.000	%		7.375	%		7.374	%
	Variable rate	$	1,200		$	4,800		$	4,800		$	4,800		$	463,200		$	478,800		$	478,800
	Average interest rate		3.890	%		3.890	%		3.890	%		3.890	%		—			3.890	%
Interest rate swaps⁽¹⁾
	Variable to fixed	$	80,000		$	100,000		$	100,000		$	150,000			—		$	430,000		$	(4,601	)
	Average pay rate		1.745	%		2.375	%		2.143	%		2.780	%		—			2.343	%
	Average receive rate		1.140	%		1.140	%		1.140	%		1.140	%		—			1.140	%

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

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

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

Foreign Currency and Market Risk

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

We maintain no other derivative instruments to mitigate our exposure to translation and/or transaction risk. International operations reported operating profit of $16.4 million for the nine months ended September 30, 2003. We estimate that a 10% fluctuation in the value of the dollar relative to these foreign currencies at September 30, 2003 would change our net income for the nine months ended September 30, 2003 by approximately $1.2 million. Our analysis does not consider the implications that such fluctuations could have on the overall economic activity that could exist in such an environment in the U.S. or the foreign countries or on the results of operations of these foreign entities.

Critical Accounting Policies

The SEC defines critical accounting policies as those that are, in management's opinion, very important to the portrayal of our financial condition and results of operations and require our management's most difficult, subjective or complex judgments. In preparing our financial statements in accordance with generally accepted accounting principles in the United States, we must often make estimates and assumptions that effect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex. Consequently, actual results could differ from our estimates. The accounting policies that are most subject to important estimates or assumptions include those described below. (See Note 1 of the Notes to Condensed Consolidated Financial Statements included elsewhere is this prospectus.)

Revenue Recognition

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

1.: A contract or sales arrangement exists.
2.: Products have been shipped and title has transferred or services have been rendered.
3.: The price of the products or services is fixed or determinable.
4.: Collectibility is reasonably assured.

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

Accounts Receivable-Allowance for Doubtful Accounts

We utilize a combination of factors in evaluating the collectibility of account receivables. For unbilled receivables, we establish reserves against revenue to allow for denied or uncollectible items beginning at 60 days after the end of service or usage. Items that remain unbilled for more than 90 days or beyond an established billing window are reversed out of revenue and receivables. For billed receivables, we generally establish reserves for bad debt based on the length of time that the receivables are past due. The reserve rates vary by payer group and are based upon our historical experience on a weighted average basis. The reserves range in value from 0% for current amounts to 50% for amounts over 180 days for most payer groups and 100% for certain higher risk payers. In addition, we have recorded specific reserves for bad debt when we become aware of a customer's inability to satisfy its debt obligations, such as in the event of a bankruptcy filing. If circumstances change, such as higher than expected claims denials, payment defaults or an unexpected material adverse change in a major customer's or payer's ability to meet its obligations, our estimates of the realizability of amounts due from trade receivables could be reduced by a material amount.

Goodwill and Other Intangible Assets

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

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

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

Inventory

Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Costs include material, labor and manufacturing overhead costs. Inventory expected to be converted into equipment for short-term rental is reclassified to property, plant and equipment. We review our inventory balances monthly for excess sale products or obsolete inventory levels. Except where firm orders are on-hand, inventory quantities of sale products in excess of the last twelve months demand are considered excess and are reserved at 50% of cost. For rental products, we review both product usage and product life cycle to classify inventory as active, discontinued or obsolete. Obsolescence reserve balances are established on an increasing basis from 0% for active, high-demand products to 100% for obsolete products. The reserve is reviewed, and if necessary, adjustments made on a monthly basis. We rely on historical information to support our reserve and utilize management's business judgment for "high risk" items, such as products that have a fixed shelf life. Once the inventory is written down, we do not adjust the reserve balance until the inventory is sold.

Long-Lived Assets

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

Income Taxes

We operate in multiple tax jurisdictions both inside and outside the United States, with different tax rates, accordingly we must determine the appropriate allocation of income in accordance with local law for each of these jurisdictions. In the normal course of our business, we will undergo scheduled reviews by taxing authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. Tax reviews often require an extended period of time to resolve and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates. We believe our income tax accruals are adequate to cover exposures related to such potential changes in income allocations between jurisdictions. To the extent additional information becomes available, such accruals are adjusted to reflect probable outcomes.

Legal Proceedings and Other Loss Contingencies

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

New Accounting Pronouncements

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

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, we must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We have adopted FIN 45 and have determined that it will not have a material impact on our financial position or results of operations.

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

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

Specifically, we are evaluating the consolidation provisions of FIN 46 on our beneficial ownership of two Grantor Trusts, which we acquired in December 1996 and December 1994. The assets held by each Trust consist of a McDonnell Douglas DC-10 aircraft and three engines. In connection with the acquisitions, KCI paid cash of $7.2 million and $7.6 million, respectively. At the date of the acquisition, the Trusts held debt of $48.4 million and $51.8 million, respectively, which is non-recourse to KCI. The aircraft are leased to the Federal Express Corporation through June 2012 and January 2012, respectively. Federal Express pays monthly rent to a third party who, in turn, pays the entire amount to the holders of the non-recourse indebtedness, which is secured by the aircraft. The holder's recourse in event of a default is limited to the Trust assets.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, or ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This

statement amends SFAS 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. We do not expect the adoption of SFAS 149, which will be effective for contracts entered into or modified after September 30, 2003, to have a material effect on our financial condition or results of operations.

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

BUSINESS

General

Clinical Applications

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

Wound Healing and Tissue Repair

Based on research conducted by third parties engaged by KCI, we believe that of the more than 10 million wounds treated worldwide by doctors, hospitals and clinics each year, approximately 10%-15% are complex, life threatening or difficult-to-treat conditions. Based on our analysis of this data, we estimate that the annual market opportunity in the United States for V.A.C. systems is approximately one million patients, representing approximately $2.3 billion in revenue. We also believe there is a significant market for V.A.C. systems internationally. We expect these markets to continue to grow as a result of several factors, including the acceptance of V.A.C. therapy as a treatment for additional wound types, medical trends such as continued growth in the incidence of diabetes, and the aging population. V.A.C. is now the leading revenue-generating product line used to treat these difficult wounds.

In the acute care setting, serious trauma wounds, failed surgical closures, amputations (especially those resulting from complications of diabetes), burns covering a large portion of the body and serious pressure ulcers present special challenges to the physician. These are often deep and/or large wounds that are prone to serious infection and further complications due to the extent of tissue damage or the compromised state of the patient's health. These wounds are often difficult—or in the worst cases, impossible—to treat quickly and successfully with more conventional products. In addition, when surgeons use skin grafts to close wounds, a substantial portion of the closures are not fully effective. Physicians and hospitals need a therapy that addresses the special needs of these wounds with high levels of clinical and cost effectiveness. Given the high cost and infection risk of treating these patients in health care facilities, the ability to create healthy wound beds and reduce bacterial levels in the wound is particularly important. Our V.A.C. Classic and V.A.C.^ATS systems are designed to meet these needs by quickly reducing edema, managing exudate, reducing infection risk, and stimulating the growth of healthy, vascularized granulation tissue.

In the extended care and home care settings, different types of wounds—with different treatment implications—present the most significant challenges. Although a substantial number of acute wounds require post-discharge treatment, a majority of the challenging wounds in the home care setting are non-healing chronic wounds. These wounds often involve physiologic and metabolic complications such as reduced blood supply, compromised lymphatic system or immune deficiencies that interfere with the body's normal wound healing processes. Diabetic ulcers, arterial and venous insufficiency wounds and pressure ulcers are often slow-to-heal wounds. These wounds often develop due to a patient's impaired vascular and tissue repair capabilities. These conditions can also inhibit the patient's healing process, and wounds such as these often fail to heal for many months, and sometimes for several years. Difficult-to-treat wounds do not always respond to traditional therapies, such as hydrocolloids, hydrogels and alginates.

Physicians and nurses look for therapies that can promote the healing process and overcome the obstacles of the patients' compromised conditions. They also prefer therapies that are easy to administer, especially in the home care setting, where full-time skilled care is generally not available. In addition, because many of these patients are not confined to bed, they want therapies which are minimally disruptive to their lives. Our Mini V.A.C. and V.A.C. Freedom systems are designed to allow patients mobility to conduct normal lives while their wounds heal.

Therapies to Treat Complications of Immobility

The most critically ill patient population is cared for in the intensive care unit, or ICU, of a hospital, where they can receive the most intense medical attention. Patients seen in the ICU usually suffer from serious acute and chronic complications from a wide variety of diseases and traumatic injuries. These patients often have, or develop, pulmonary complications, such as Acute Respiratory Distress Syndrome, directly resulting from their conditions or stemming from their impaired mobility. Movement is essential to human physiology. When a patient cannot move normally, due to spinal cord injury, stroke or other medical condition, fluids tend to accumulate and the patient is at risk of developing pneumonia, blood clots and other medical problems. Some ICU patients are in such acute distress that their organ systems are at risk of failure and many are on some type of life-support. In 2001, there were approximately 1.0 million ICU patients in the United States with pulmonary complications. Treating pulmonary complications requires special equipment and treatment methods. Because of the aggressive and specialized treatments required to address these life-threatening conditions, daily patient care costs in the ICU are relatively high. Our Kinetic Therapy systems provide movement to patients who cannot move themselves. These systems are designed to meet the special needs of ICU patients and have been shown in independent clinical studies to reduce the incidence of certain pulmonary complications and length of stay in the ICU. Our specialized therapies for ICU patients include the Roto Rest Delta and TriaDyne Proventa for the treatment of pulmonary complications associated with immobility.

Wound Treatment and Prevention

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

Bariatric Care

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

Products

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

Wound Healing and Tissue Repair

Our five wound healing and tissue repair systems incorporate our proprietary V.A.C. technology. A V.A.C. system consists of the therapy unit and four types of disposables: a foam dressing, an occlusive drape, a tube system connecting the dressing to the therapy unit and a canister. The therapy unit consists of a pump that generates negative pressure and internal software that controls and monitors the application of the therapy. The therapy can be programmed for individualized use. Recent advancements, which are incorporated in our V.A.C.^ATS and V.A.C. Freedom, enable the unit to flexibly control the time, rate and application of negative pressure to the wound and adapt its operations as it senses the progress of the application of the therapy to the originally targeted levels. The V.A.C. unit also responds in real time to problems encountered during use and alerts users to any blockage or other interference with the pre-set protocol. The system has a number of on screen user assist features such as treatment protocols and suggestions to address specific patient issues.

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

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

•: The V.A.C.^ATS System was introduced in 2002 to meet the acute care requirements for a flexible, easy-to-use, high-capacity system that is effective with the largest and most challenging trauma, orthopedic reconstruction and abdominal wounds. The V.A.C.^ATS incorporates advanced features and controls to provide flexibility to customize the treatment protocol to the requirements of different wound types and physician preferences. It also incorporates our proprietary T.R.A.C. technology, which enables the system to monitor pressure at the wound site and automatically adjust system operation to maintain the desired therapy protocol. It also incorporates smart alarms that help ensure patient safety, and simplifies dressing changes.
•: The V.A.C.® Instill™ System was introduced in 2003 to add additional therapy capability to V.A.C. systems. The V.A.C. Instill combines the ability to instill fluids into the wound with V.A.C. therapy. Any fluid approved for topical use—including antibiotics, antiseptics and anesthetics—can be instilled, making the system particularly well suited for infected and painful wounds. Future uses could include cytokines, growth factors, or other agents to stimulate wound healing. Because the system is based on the V.A.C.^ATS system, it also includes all the capabilities and features of the V.A.C.^ATS.
•: The V.A.C. Freedom System, also introduced in 2002, was designed to meet the requirements for a robust, lightweight, high-performance product suitable for patients who are able to walk and

are not confined to bed. Similar to the V.A.C.^ATS system, it incorporates advanced features and T.R.A.C. technology, but in a 3.2 pound package adapted for convenient unobtrusive use by more active patients. It also includes special filters that help reduce wound odor, a common and embarrassing problem for many ambulatory wound patients, and a controlled drawdown feature that helps reduce pain when therapy is initiated. While the design of the V.A.C. Freedom system addresses the treatment needs of chronic wound patients, its 300 cc canister capacity also makes it appropriate for patients with highly exudating wounds.

•: The Mini V.A.C. System was specially designed for patients who need high levels of mobility. At 2.2 pounds, it provides a convenient solution for patients needing advanced wound healing performance in a highly portable package. It is best suited for smaller and drier wounds due to its smaller canister.
•: The V.A.C. Classic System, launched in 1995, is a first-generation system that provides the basic therapeutic functionality and wound healing capability of our other V.A.C. products. For those who do not require the advanced features of our newer V.A.C. products, it provides our most economical advanced wound-healing package.

The superior clinical efficacy of our V.A.C. systems is supported by an extensive collection of published clinical studies. V.A.C. systems have been reviewed in at least 91 peer reviewed journal articles, 160 abstracts, 21 case studies and 22 textbook citations. Of these, the research for six articles and 12 abstracts was funded by research grants from KCI.

In addition, we are conducting 10 prospective, randomized and controlled multicenter clinical studies specifically designed to provide statistically significant evidence of V.A.C. therapy's clinical efficacy for treating a wide range of targeted wound types. These clinical studies are managed by our 24-member medical department.

Products Treating Complications of Immobility

Our Kinetic Therapy products include the TriaDyne Proventa, TriaDyne II, Roto Rest Delta and PediDyne products. The TriaDyne line is used primarily in acute care settings and provides patients with three distinct therapies on an air suspension surface. The TriaDyne line applies Kinetic Therapy by rotating the patient up to 45 degrees on each side and provides a novel feature of simultaneously turning the patient's torso and lower body in opposite directions while keeping the patient positioned in the middle of the bed. Our products also provide percussion therapy to loosen mucous buildup in the lungs and pulsation therapy to promote capillary and lymphatic flow. The Roto Rest Delta is a specialty bed that can rotate a patient up to 62 degrees on each side for the treatment of severe pulmonary complications. The Roto Rest Delta has been shown to improve the care of patients suffering from multiple trauma, spinal cord injury, severe pulmonary complications, respiratory failure and deep vein thrombosis. Our most advanced rotational therapy, Kinetic Therapy, has been reviewed in at least 15 randomized clinical trials, 22 peer reviewed articles, 27 other published articles, 40 abstracts, 15 case studies and five textbook citations. Of these, the research for 10 articles, 29 abstracts and 15 case studies was funded by research grants from KCI.

Wound Treatment and Prevention

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

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

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

Bariatric Care

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

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

Business Strategy

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

•

Continue to capture the current V.A.C. opportunity. Based on studies conducted by third parties engaged by KCI, we believe that we have only penetrated approximately 15-20%, based on revenue, of the U.S. market for V.A.C. systems and even less of the international market. We believe that we can significantly increase our market penetration. We will continue to capitalize on our current strengths, including our sales and service infrastructure, our intellectual property portfolio, V.A.C. product pipeline and demonstrated clinical efficacy. In addition, we have a number of strategic initiatives underway which will support this progress:

—: Establish V.A.C. therapy as standard of care. Our objective is to establish V.A.C. therapy as standard of care for each of seven targeted wound types, including diabetic ulcers and amputations, pressure ulcers, burns, trauma wounds, skin grafts, dehisced surgical wounds

and abdominal compartment syndrome. We are conducting ten prospective, randomized and controlled multicenter clinical studies specifically designed to provide statistically significant evidence of V.A.C. therapy's clinical efficacy for treating each of these specified wound types. In addition, we have developed a strategy for communication, awareness and consensus building that targets each of the professional associations and key opinion leaders whose support is essential for standard-of-care designation.

—: Increase penetration in home care markets. We continue to enhance our contractual relationships with insurance companies, which have already increased covered lives under contract from fewer than 20 million in mid-2000 to over 148 million today. Our physician awareness and penetration initiatives are also important in the home markets, as are our initiatives with home health agencies and wound care clinics. We expect to grow the V.A.C. home care business faster than the overall V.A.C. business.
—: Further penetrate the acute care market. Our principal acute care marketing and selling initiatives focus on expanding usage of V.A.C. systems among current V.A.C. users to other types of wounds and patients as well as extending that usage to other physicians and wound care nurses in those facilities. We have also initiated marketing and selling efforts focused on additional hospitals that are not current V.A.C. customers.

•: Maintain and expand our leadership position in therapeutic surfaces. We believe we will maintain our leadership position in therapeutic surfaces by capitalizing on the growth opportunities in bariatrics and the ICU. We are also building on our expertise in Kinetic Therapy to introduce a new product which will treat Acute Respiratory Distress Syndrome and Acute Lung Injury in the ICU.
•: Expand presence in international markets. We are expanding our international marketing and sales efforts. We have committed resources to expand our presence in under-penetrated markets, obtain standard-of-care designation in other countries and achieve reimbursement for home use of V.A.C. systems. Recently, the German and Austrian associations for wound treatment have recognized V.A.C. therapy as the therapy of choice for several wound care indications.
•: Generate high returns on invested capital. Our returns on invested capital have increased in each year since 1999, and averaged more than 20% over the last three years, despite our accelerated spending to capitalize on V.A.C. growth opportunities. Starting in the second half of 2002 we increased productivity and achieved profit increases exceeding revenue growth. We will continue to focus on productivity enhancements, capital efficiency and other metrics to improve our performance.

Customers

We have broad reach across all health care settings. In the United States, for example, we have relationships with over 3,000 acute care hospitals, over 4,100 extended care facilities and approximately 4,100 home health care agencies and wound care clinics. During 2002, we served approximately 2,100 medium to large hospitals in the United States. Through our network of 135 U.S. and 82 international service centers, we are able to rapidly deliver our critically needed products to major hospitals in the United States, Canada, Australia and most major European countries. This extensive network is critical to securing national GPO contracts and allows us to efficiently serve the home market directly. Our network also provides a platform for the introduction of additional products.

Billing and Reimbursement

We have extensive contractual relationships and reimbursement coverage for the V.A.C. in the United States. In acute and extended care, we have contracts with nearly all major hospital, and most major extended-care group purchasing organizations. Hospitals and extended care facilities pay us directly for our services. In the home care market, we provide V.A.C. products and services directly to patients and bill

third-party payers, including Medicare and private insurance. V.A.C. systems are covered by Medicare Part B. We currently have V.A.C. contracts with private insurance covering over 148 million lives in the United States. This represents more than one-half of all individuals covered by private insurance in the United States and is seven times the number of covered lives we had under contract as of mid-2000.

In the home care market, we have developed a significant base of reimbursement expertise that consists of our experienced professionals and our relationships with payers across all care settings and are enhancing our electronic systems to simplify the labor intensive and complex reimbursement process. We have significantly improved our days receivable outstanding from approximately 225 days in early 2002 to approximately 145 days as of September 30, 2003, while our revenues have increased during such period.

Corporate Organization

Our business has two geographical operating segments: USA and International.

With approximately 1,670 employees as of October 31, 2003, our USA division serves the domestic acute care, extended care and home care markets with the full range of our products. The domestic division distributes our medical devices and therapeutic surfaces to over 3,000 acute care hospitals and more than 4,100 extended care facilities and also directly serves the home care market through our service center network. Our USA division accounted for approximately 77%, 78% and 73% of our total revenue in the years ended December 31, 2002, 2001 and 2000, respectively.

During 2002, our International division had direct operations in 15 foreign countries including Germany, Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland, Australia, Italy, Denmark, Sweden, Ireland, Belgium, Spain and South Africa. The International division distributes our medical devices and therapeutic surfaces through a network of 82 service centers. Our international corporate office is located in Amsterdam, The Netherlands. International manufacturing and engineering operations are based in the United Kingdom. In addition, our International division serves the demands of a growing global market through relationships with approximately 70 active independent distributors in Latin America, the Middle East, Asia and Eastern Europe. The International division consists of approximately 1,090 employees who are responsible for all sales, service and administrative functions within the various countries we serve. Our International division accounted for approximately 23%, 22% and 27% of our total revenue in the years ended December 31, 2002, 2001 and 2000, respectively.

Sales and Marketing Organization

Our worldwide sales organization consists of approximately 1,165 individuals, 350 of whom in the United States have medical or clinical backgrounds. Our sales organization is focused by care setting. Since physicians and nurses are critical to the adoption and use of advanced medical systems, a major element of the sales force's responsibility is to educate and train these medical practitioners in the application of our products, including the specific knowledge necessary to assure that the use of our systems results in optimal clinical and economic outcomes. In 2003, we expect that our sales staff will make more than 130,000 contacts with these targeted clinical decision-makers. We have approximately 225 clinical consultants, all of whom are health care professionals, whose principal responsibilities are to make product rounds, consult on complex cases and assist facilities and home health agencies to develop their patient care protocols. Our clinicians educate the hospital, long-term care facility or home health agency staff on the use of our products. In addition, we employ approximately 115 field-based specialists who consult with our customers regarding the often demanding and complex paperwork required by Medicare and private insurance companies. In fulfilling the paperwork requirements, these specialists enhance the overall productivity of our sales force.

Our international sales organization includes more than 380 employees in 15 foreign countries. In addition, in each foreign market where we have a presence, we sell our products through our direct sales force or through local distributors with local expertise.

Sales, marketing and advertising expenses in each of the last three years ended December 31 were as follows (dollars in thousands):

		Year Ended
		2000			2001			2002
Sales		$	64,685		$	88,347		$	110,819
	Percentage of total revenue		18	%		19	%		19	%
Marketing		$	6,859		$	13,109		$	17,546
	Percentage of total revenue		2	%		3	%		3	%
Advertising		$	678		$	2,085		$	4,802
	Percentage of total revenue		—			—			1	%

Service Organization

Our USA division has a national 24-hour, seven day-a-week customer service communications system, which allows us to quickly and efficiently respond to our customers' needs. The domestic division distributes our medical devices and therapeutic surfaces to more than 3,000 acute care hospitals and more than 4,100 extended care facilities through a network of 135 domestic service centers and also directly serves the home care market through our extensive service center network. Our USA division's network gives us the ability to deliver our products to any major Level I domestic trauma center within hours. Our International division distributes our medical devices and therapeutic surfaces through a network of 82 service centers.

In addition to delivery, pick-up, and technical support services, our service organization cleans, disinfects, and reconditions products between rentals. To assure availability when products are needed, the service organization manages our rental fleet of approximately 50,000 units, deploying units to meet individual service center demand patterns while maintaining high levels of rental asset utilization. Service is provided by more than 765 people in the United States and more than 400 people internationally.

Research and Development

We have a successful track record in pioneering new wound care and therapeutic surface technologies through new product introductions and significant enhancements to existing products. Our recent development and commercialization of both new V.A.C. systems and V.A.C. disposable dressing variations have established KCI as a leader in advanced wound care. Our therapeutic surfaces technology originated with the introduction of the Roto Rest bed 27 years ago. Since that time, we have developed and commercialized a broad spectrum of therapeutic surfaces, a number of which have significantly enhanced patient care. In addition, we have developed a broad portfolio of bariatric products to improve the care of obese patients.

Our primary focus for innovation is to increase the clinical and economic benefit of our products to our customers and their patients. In addition, we strive to make our products user-friendly and increase their operational efficiency, both of which are critical in the demanding and sometimes short-staffed world of health care today. Significant investments in our 2002 research and development included:

•: new wound healing systems and dressings tailored to the needs of different care settings and wound types;
•: new technologies in wound healing and tissue repair;
•: new applications of V.A.C. technology and enhanced therapeutic effectiveness through improved understanding of the V.A.C. systems' various mechanisms of action;
•: a new therapeutic surface to address critical needs of Acute Respiratory Distress Syndrome, cardiac arrest and stroke patients; and
•: significant upgrades to several of our core therapeutic surfaces products.

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

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

We intend to increase our research and development expenditures in absolute dollars and as a percentage of revenue. However, we expect that research and development spending will remain a modest percentage of overall revenue.

Patents, Trademarks and Licenses

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

We have patent protection for our current V.A.C. products, in the form of owned and licensed patents, including at least 14 issued U.S. patents and at least 16 U.S. patent applications pending. Our international patent portfolio (including owned and licensed patents) relating to current and prospective technologies in the field of V.A.C. therapy includes at least 75 issued patents and more than 100 pending patent applications, with protection in Europe, Canada, Australia and Japan. Most of the V.A.C. patents in our patent portfolio have an average life of 20 years from their date of filing. Our base V.A.C. patents do not begin to expire until 2013. We have multiple patents covering unique aspects, and improvements to the V.A.C. system.

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

Manufacturing

Our manufacturing processes for V.A.C. therapeutic units, therapeutic surfaces, mattress replacement systems and overlays involve producing final assemblies in accordance with a master production plan. Assembly of our products is accomplished using (1) metal parts that are fabricated, machined, and finished internally, (2) fabric that is cut and sewn internally and externally, and (3) plastics, electronics and other component parts that are purchased from outside suppliers. Internal fabrication, machining, finishing and sewing are accomplished on modern equipment. Component parts and materials are obtained from industrial distributors, original equipment manufacturers and contract manufacturers. The majority of parts and materials are readily available in the open market (steel, aluminum, plastics, fabric, etc.) for which price volatility is low. The manufacturing process is in compliance with ISO 9001 (1994), ISO 13485, and FDA Quality System Regulations.

We contract for the manufacture of V.A.C. disposables through Avail Medical Products, Inc., a leading contract manufacturer of sterile medical disposables. We entered into a sole-source agreement with Avail for our V.A.C. related disposable products, which became effective in October 2002 for our U.S. related orders and in May 2003 for our international related orders. This supply agreement has a three-year term and was recently extended for an additional year. Approximately 11% of our total revenue for the nine month period ended September 2003 was generated from the sale of these disposable supplies. The terms of the supply agreement provide that key indicators be provided to us that would alert us to Avail's inability to perform under the agreement. We, together with Avail, will maintain certain levels of on-hand supply. In the event that Avail is unable to fulfill the terms of this agreement, we have identified other suppliers that could provide such inventory to meet our needs. However, in the event that we are unable to replace a shortfall in supply, our revenue could be negatively impacted in the short term.

Working Capital Management

We maintain inventory to support customer needs in our service centers and in our manufacturing facility. For our surface and V.A.C. businesses, we maintain parts and supplies inventory for replacement parts in both our service centers and manufacturing facilities. We also maintain inventory for conversion to our surface and V.A.C. rental fleet in our manufacturing facilities. Our V.A.C. rental equipment cannot be used without the disposables that support the V.A.C. systems. As such, we buy and ship disposable inventory directly from our sole supplier to the customer. We have commitments to purchase inventory from our sole disposable supplier as discussed in "—Manufacturing".

Our payment terms with hospitals and extended care facilities are consistent with industry standards and provide for payment within 30 days. Our payment terms with third party payers, including Medicare and private insurance, are consistent with industry standards and provide for payment within 45 days. A portion of our receivables relate to unbilled revenues arising in the normal course of business, due to monthly billing cycles requested by our hospital or extended care facility customers or due to our internal paperwork processing procedures regarding billing third party payers.

Competition

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

In wound healing and tissue repair, we compete with other treatment methods offered by a number of companies in the advanced wound care business. These methods are substantially different than the V.A.C. and include traditional wound care dressings, advanced wound care dressings (hydrogels, hydrocolloids, alginates), skin substitutes, products containing growth factors and medical devices used for wound care. Many of these devices can be used to compete with the V.A.C. or as adjunctive therapy which complements the V.A.C. For example, caregivers may use one of our V.A.C. systems to prepare a healthy wound bed in order to reduce the wound size, and then use a skin substitute to manage the wound to final closure. As the market for, and revenues generated by, the V.A.C. expand, we believe additional competitors may introduce products designed to mimic the V.A.C. Recently, BlueSky Medical Corporation introduced a medical device which has been marketed to compete with the V.A.C. system. We have filed suit against BlueSky and related parties seeking to restrict the continued marketing and sale of their device, which we believe infringes our patent rights. (See "Legal Proceedings").

With respect to therapeutic surfaces for treatment of pulmonary complications in the ICU, wound treatment and prevention and bariatric care, our primary competitors are Hill-Rom Company, Huntleigh

Healthcare and Pegasus Limited. We also compete on a regional, local and market segment level with a number of smaller companies.

Market Outlook

Health Care Reform

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

Certain portions of the BBA were amended by the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 (the "Refinement Act") and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"). In essence, the Refinement Act and BIPA attempted to lessen the detrimental economic impact which the BBA had on the health care industry. Regarding SNF reimbursement, some payment relief had been provided under the Refinement Act and BIPA, however, some of the relief expired on September 30, 2002. Because that reimbursement relief was not carried over into 2003, our therapeutic surfaces revenue in the extended care market is down approximately 10% for the nine months ended September 30, 2003 as compared to the same period in 2002.

On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("Modernization Act"), which includes revisions to payment methodologies and other standards for items of DME. These revisions could have a direct impact on our business. At this time, we are unable to determine with precision whether and to what extent these changes would be applied to our products and our business. Several provisions of the Modernization Act are significant. First, beginning in 2004 through 2008, the payment amounts for DME, including V.A.C. systems will no longer be increased on an annual basis. Second, beginning in 2007, a competitive acquisition program will be phased in to replace the existing fee schedule payment methodology. Third, supplier quality standards will be established for DME suppliers. The standards will be applied by independent accreditation organizations. Fourth, clinical conditions for payment will be established for certain products.

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

In addition, the BBA authorized CMS to explore possible ways of changing Medicare reimbursement rates so that they better reflect market levels. Specifically, the BBA authorized CMS to implement up to five competitive bidding systems by December 31, 2002, to evaluate how competitive bidding would impact Medicare program payments, access, diversity of product selection and quality. Under competitive bidding, CMS would change its approach to reimbursing products and services covered by Medicare Part B from

the current fee schedule amount to an amount that would be established through a bidding process between the agency and suppliers. Two systems covering eight products have been completed and under the Modernization Act, starting in 2007, Medicare will begin to implement a nationwide competitive bidding program in ten high population metropolitan statistical areas ("MSAs"), and in 2009, this program is to be expanded to 80 MSAs (and additional areas thereafter). We do not know what impact inherent reasonableness and competitive bidding would have on us or the reimbursement of our products.

Health Insurance Portability and Accountability Act (HIPAA) Compliance

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") covers a variety of provisions which will impact our business including the privacy of patient health care information, the security of that information and the standardization of electronic data transactions for billing. Sanctions for violating HIPAA include criminal penalties and civil sanctions. The U.S. Department of Health and Human Services has promulgated regulations pursuant to a legislative mandate in HIPAA, which became effective in April 2003. In order to ensure our compliance with the HIPAA regulations by the April 2003 deadline, KCI established a multi-disciplinary HIPAA Compliance Team, which defined the legal requirements, reviewed KCI's prior HIPAA compliance efforts and developed a comprehensive compliance plan. We also designated a HIPAA Privacy Officer and HIPAA Information Security Officer to oversee the implementation of the compliance plan and monitor modifications to the current regulations.

HIPAA regulations regarding standardization of electronic data billing transactions will also impact our business. At the present time, we invoice third-party payers using a variety of different systems. In 2003, we transitioned our billing systems to the American National Standard Institute format for electronic data billing transactions as required by HIPAA. In some instances, we found it difficult to differentiate between products which are covered by a single billing code but have different prices. Therefore, we applied to CMS for additional product codes to support our current billing practices. However, CMS may not establish any of the requested billing codes. We have been working with all business associates with whom we share protected health information in order to make the transition to standardized billing codes as smooth as possible. However, the transition to standardized billing codes may create billing difficulties or business interruptions for us.

Our cost of compliance with HIPAA could be significant. Moreover, although we believe our business practices comply with HIPAA, our practices may be challenged under these laws in the future and such a challenge may have a material adverse effect on our business, financial condition or results of operations.

Consolidation of Purchasing Entities

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

Reimbursement of Health Care Costs

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

The importance of payer coverage policies was recently demonstrated by our experience with our V.A.C. technology in the home care setting. On October 1, 2000, a Medicare Part B policy was approved, which provided for reimbursement codes, an associated coverage policy and allowable rates for the V.A.C. systems and V.A.C. disposable products in the home care setting. The policy facilitated claims processing, permitted electronic claims submissions and created a more uniform claims review process. Because many payers look to Medicare for guidance in coverage, a specific Medicare policy is often relied upon by other payers.

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

In light of increased scrutiny on Medicare spending, as well as revisions to payment methodologies imposed by the Modernization Act, the outcome of future coverage or payment decisions for any of our products or services by governmental or non-governmental third-party payers remain uncertain.

Patient Demographics

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

Obesity is increasingly being recognized as a serious medical complication. In 2001, approximately 1.1 million patients in U.S. hospitals had a primary or secondary diagnosis of obesity. Obese patients tend to have limited mobility and are, therefore, at risk for circulatory problems and skin breakdown.

Properties and Facilities

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

We conduct domestic manufacturing, shipping, receiving, engineering and storage activities in a 171,100 square foot facility in San Antonio, Texas, which we purchased in January 1988, and an adjacent

32,600 square foot facility purchased in 1993. Our operations are conducted with approximately 75% cumulative utilization of plant and equipment. We also lease two storage facilities in San Antonio, Texas. We lease approximately 135 domestic distribution centers, including each of our seven regional headquarters.

Internationally, we lease approximately 82 service centers. Our international corporate office is located in Amsterdam, The Netherlands. International manufacturing and engineering operations are based in the United Kingdom and are conducted in an 24,800 square foot plant, with 100% cumulative utilization of plant and equipment.

The following is a summary of our major facilities:

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

Employees

As of October 31, 2003, we had 4,021 employees. Approximately 1,455 of these employees are located in San Antonio, Texas and perform functions associated with corporate, manufacturing, finance and administration. Our employees are not represented by labor unions and we consider our employee relations to be good.

Government Regulation

United States

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

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

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

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

Fraud and Abuse Laws

We may also be subject to federal and state physician self-referral laws. Federal physician self-referral legislation (commonly known as the Stark Law) prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain "designated health services" if the physician or an immediate family member has any financial relationship with the entity. A person who engages in a scheme to circumvent the Stark Law's referral prohibition may be fined up to $100,000 for each such arrangement or scheme. The penalties for violating the Stark Law also include civil monetary penalties of up to $15,000 per referral and possible exclusion from federal health care programs such as Medicare and Medicaid. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral, and any person collecting any amounts in

connection with an unlawful referral is obligated to refund such amounts. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a health care provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state.

We may also be subject to federal and state anti-kickback laws. Section 1128B(b) of the Social Security Act, commonly referred to as the Anti-Kickback Law, prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal health care program such as Medicare and Medicaid. The Anti-Kickback Law is broad, and it prohibits many arrangements and practices that are otherwise lawful in businesses outside of the health care industry. The U.S. Department of Health and Human Services ("DHHS") has issued regulations, commonly known as safe harbors, that set forth certain provisions which, if fully met, will assure health care providers and other parties that they will not be prosecuted under the federal Anti-Kickback Law. Although full compliance with these provisions ensures against prosecution under the federal Anti-Kickback Law, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Law will be pursued. The penalties for violating the Anti-Kickback Law include imprisonment for up to five years, fines of up to $25,000 per violation and possible exclusion from federal health care programs. Many states have adopted laws similar to the federal Anti-Kickback Law, and some of these state prohibitions apply to referral of patients for health care services reimbursed by any source, not only federal health care programs such as Medicare and Medicaid.

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

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

The OIG has taken certain actions, which suggest that arrangements between manufacturers or suppliers of durable medical equipment or medical supplies and SNFs (or other providers) may be under continued scrutiny. In June 1995, the OIG issued a Special Fraud Alert setting forth fraudulent and abusive practices that the OIG had observed in the home health industry. Later that same year, OIG issued another Special Fraud Alert describing certain relationships between SNFs and suppliers that the OIG viewed as abusive under the federal Anti-Kickback Law. In July 1999, the OIG published OIG compliance program guidance for the durable medical equipment, prosthetics, orthotics and supply ("DMEPOS") industry developed by the OIG in cooperation with, and with input from, the Health Care Financing Administration ("HCFA"), which is now known as the Centers for Medicare and Medicaid Services, the DOJ and representatives of various trade associations and health care practice groups. The guidance identifies specific areas of DMEPOS industry operations that may be subject to fraud and abuse. Furthermore, the OIG Work Plan for 2004 focused on compliance of durable medical equipment suppliers with Medicare rules and regulations. These initiatives create an environment in which there will continue to be significant scrutiny regarding compliance with federal and state fraud and abuse laws.

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

Claims Audits

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

ISO Certification

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

Environmental Laws

We are subject to various federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of nonhazardous and hazardous substances and wastes, and emissions and discharges into the environment. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We also are subject to

laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or operated properties, or properties to which substances or wastes were sent from current or former operations at our facilities. From time to time, we have incurred costs and obligations for correcting environmental noncompliance matters and for cleanup of certain of our properties and third party sites. We believe we have complied with our environmental obligations to date in all material respects and that such liabilities will not have a material adverse effect on our business or financial performance. However, such liabilities in the future may have a material adverse effect on our business or financial performance.

Other Laws

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

International

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

We operate in multiple tax jurisdictions both inside and outside the United States. In the normal course of our business, we will undergo reviews by taxing authorities regarding the tariff classifications of our products and the amount of tariffs we pay on the importation and exportation of these products. Foreign and domestic tariffs have not had a material impact on our results of to date, however, our profitability could be harmed if foreign governments impose additional unanticipated tariffs.

Reimbursement

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

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

Medicare

Medicare is a federally funded program that provides health coverage primarily to the elderly and disabled. Medicare is composed of four parts: Part A, Part B, Part C and Part D. Medicare Part A (hospital insurance) covers, among other things, inpatient hospital care, home health care and skilled nursing facility services. Medicare Part B (supplementry medical insurance) covers various services, including those services provided on an outpatient basis. Medicare Part B also covers medically necessary durable medical equipment and medical supplies. Medicare Part C, also known as "Medicare Advantage," offers

beneficiaries a choice of various types of health care plans, including several managed care options. Medicare Part D is the new Voluntary Prescription Drug Benefit Program, which becomes effective in 2006. The Medicare program has established guidelines for the coverage and reimbursement of certain equipment, supplies and support services. In general, in order to be reimbursed by Medicare, a health care item or service furnished to a Medicare beneficiary must be reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body part and not otherwise excluded by statute. Effective October 1, 2000, we received Medicare Part B reimbursement codes, an associated coverage policy and allowable rates for our V.A.C. systems and related disposables in the home care setting.

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

Hospital Setting

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

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

Skilled Nursing Facility Setting

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

on September 30, 2002 and, in effect, the RUGs rates for the most common categories of SNF patients decreased. Because the RUGs system provides SNFs with fixed daily cost reimbursement, SNFs have become less inclined to use products which had previously been reimbursed as variable ancillary costs.

Home Setting

Our products are also provided to Medicare beneficiaries in home care settings. Medicare, under the Part B program, reimburses beneficiaries, or suppliers accepting an assignment of the beneficiary's Part B benefit, for the purchase or rental of DME for use in the beneficiary's home or a home for the aged (as opposed to use in a hospital or skilled nursing facility setting). As long as the Medicare Part B coverage criteria are met, certain of our products, including air fluidized beds, air-powered flotation beds, alternating pressure air mattresses and our V.A.C. systems and related disposables are reimbursed in the home setting under the DME category known as "Capped Rental Items." Pursuant to the fee schedule payment methodology for this category, Medicare pays a monthly rental fee (for a period not to exceed 15 months for products other than the V.A.C. system, for which the base treatment period generally does not exceed four months) equal to 80% of the established allowable charge for the item. The patient (or his or her insurer) is responsible for the remaining 20%. The Modernization Act provides for revisions to the manner in which payment amounts are to be calculated over the next five years (and thereafter). We cannot predict the full impact of the new law on our financial position or results of operations, which may be impacted negatively.

Medicaid

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

Private Payers

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

Legal Proceedings

On February 21, 1992, Novamedix Limited, or Novamedix, filed a lawsuit against us in the United States District Court for the Western District of Texas, San Antonio Division. Novamedix manufactures a product that directly competes with one of our vascular products, the PlexiPulse. The suit alleges that the PlexiPulse infringes several patents held by Novamedix, that we breached a confidential relationship with Novamedix and a variety of ancillary claims. Novamedix seeks injunctive relief and monetary damages. A judicial stay which was in effect with respect to all patent claims in this case has been lifted. Although it is

not possible to reliably predict the outcome of this litigation or the damages, which could be awarded, we believe that our defenses to these claims are meritorious and that the litigation will not have a material adverse effect on our business, financial condition or results of operations.

On July 1, 1998, Mondomed N.V. filed an opposition in the Opposition Division of the European Patent Office to a European patent owned by Wake Forest University, which we license for our V.A.C. system. They were joined in this opposition by Paul Hartmann A.G. on December 16, 1998. The patent was upheld at a hearing before a European Patent Office Opposition Division Panel on December 9, 2003. The patent, as originally granted, 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. A written ruling is expected in the next several months. Any party to the Opposition is entitled to appeal after the issuance of the written order. We intend to appeal the new screen means definition established by the panel. We believe it will take two to three years to complete the appeal process. During the pendency of the appeal, the original patents will remain in place. We believe that this decision will not affect our U.S. patents. (See "Risk Factors—Risks Related to Our Business—If we are unsuccessful in protecting our intellectual property, particularly relating to the V.A.C., or are sued by third parties for alleged infringement our competitive position would be harmed").

On January 4, 2002, Safe Bed Technologies Company, or Safe Bed, filed a lawsuit against us in the United States District Court for the Northern District of Illinois, Eastern Division. The suit alleges that certain of our therapeutic surfaces products, including the TriaDyne and BariAir products, infringe a Safe Bed patent. We have asserted counterclaims for declarations of non-infringement and patent invalidity. Although it is not possible to reliably predict the outcome of this litigation or the damages which could be awarded, we believe that we have meritorious defenses to Safe Bed's claim and that the litigation will not have a material adverse effect on our business, financial condition or results of operations.

On August 28, 2003, KCI, KCI Licensing Inc., KCI USA, Inc. and Wake Forest University Health Sciences filed a lawsuit against BlueSky Medical Corporation, Medela AG, Medela, Inc. and Patient Care Systems, Inc. in the United States District Court for the Western District of Texas, San Antonio Division alleging infringement of multiple claims under two V.A.C. patents, arising from the manufacturing and marketing of a medical device by BlueSky. In addition to patent infringement, we have asserted causes of action for breach of contract, tortious interference and unfair competition. BlueSky and Medela, Inc. have filed answers to the complaint and have asserted counterclaims against us for declarations of non-infringement and patent invalidity. Patient Care Systems, Inc. has filed an answer, but has not asserted any counterclaims. Medela AG has filed a motion to dismiss based on lack of personal jurisdiction. Such motion has not been ruled upon by the Court. Although it is not possible to reliably predict the outcome of this litigation, we believe our claims are meritorious.

We are a party to several additional lawsuits arising in the ordinary course of our business. Provisions have been made in our financial statements for estimated exposures related to these lawsuits. We anticipate that the legal fees incurred in connection with the litigation discussed above will be immaterial. In the opinion of management, the disposition of these matters will not have a material adverse effect on our business, financial condition or results of operations.

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

MANAGEMENT

Directors and Executive Officers

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

Name	Age	Position
Robert Jaunich II	63	Chairman of the Board
Dennert O. Ware	62	Director, President and Chief Executive Officer
James R. Leininger, M.D.	59	Director, Chairman Emeritus
John P. Byrnes	45	Director
Ronald W. Dollens	57	Director
James T. Farrell	39	Director
Harry R. Jacobson, M.D.	56	Director
N. Colin Lind	47	Director
David J. Simpson	57	Director
C. Thomas Smith	65	Director
Donald E. Steen	57	Director
Dennis E. Noll	49	Senior Vice President, General Counsel and Secretary
Christopher M. Fashek	54	President, KCI USA
Jorg W. Menten	46	President, KCI International
Martin J. Landon	44	Vice President, Chief Financial Officer
G. Frederick Rush	54	Vice President, Corporate Development
Michael J. Burke	57	Vice President, Manufacturing and Quality
Daniel C. Wadsworth, Jr.	50	Vice President, Global Research and Development
Steven J. Hartpence	55	Vice President, Business Systems

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

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

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

John P. Byrnes became a director in 2003. He has served as Chief Executive Officer of Lincare Holdings Inc., a home health care company since January 1997 and as a director of Lincare since May 1997. Mr. Byrnes was appointed Chairman of the Board of Lincare Holdings Inc. in March 2000. Mr. Byrnes has been President of Lincare since June 1996. Prior to becoming President, Mr. Byrnes served

Lincare in a number of capacities over a ten-year period, including serving as Lincare's Chief Operating Officer throughout 1996.

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

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

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

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

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

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

Donald E. Steen became a director in 1998. Mr. Steen founded United Surgical Partners International, Inc. in February 1998 and has served as its Chief Executive Officer and Chairman since that

time. Mr. Steen served as President of the International Group of HCA—The Healthcare Company, formerly known as Columbia/HCA Healthcare Corporation, from 1995 until 1997 and as President of the Western Group of HCA from 1994 until 1995. Mr. Steen founded Medical Care International, Inc., a pioneer in the surgery center business, in 1982. Mr. Steen is also a member of the board of directors of Horizon Health Care, Inc.

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

Christopher M. Fashek joined KCI in February 1995 as President, KCI USA. Prior to joining KCI, he served as General Manager, New Zealand at Sterling Winthrop, a division of Eastman Kodak, from February 1993 to February 1995, and served as Vice President of Sales at Sterling Winthrop USA, a division of Eastman Kodak, from 1989 until February 1993. Mr. Fashek currently serves as an advisory board member of Network Consulting Information.

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

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

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

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

Daniel C. Wadsworth, Jr. joined KCI in March 2002 as Vice President, Global Research and Development. Prior to joining KCI, Mr. Wadsworth worked for C.R. Bard, Inc., a worldwide health care products company focused on vascular, urology, and oncology disease states, for 18 years, where he most recently served as Staff Vice President, New Technology and Research Alliances.

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

Composition of our Board of Directors

We currently have 11 members on our board of directors.

Director Compensation

During 2002, each non-employee director, other than James R. Leininger, M.D., Robert Jaunich II, James Farrell and N. Colin Lind, received an annual fee of $15,000 plus $2,500 for each board meeting attended. Aggregate fees paid to directors in 2002 were $67,500. Except for the foregoing and except for reimbursement of travel expenses to attend board meetings, the directors of KCI received no other compensation for services as directors.

Committees of our Board of Directors

We anticipate that immediately prior to the closing of this offering, our board of directors will have an audit committee, a compensation committee, a nominating and corporate governance committee, each of which will have the composition and responsibilities described below.

Audit Committee

Our audit committee will oversee our corporate accounting and financial reporting process as required under applicable NYSE listing standards.

Compensation Committee

Our compensation committee will oversee our executive compensation and employee benefit plans and practices as required under applicable NYSE listing standards.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee will identify and recommend to our board of directors individuals qualified to serve as members of our board of directors and on committees of our board of directors; advise our board of directors with respect to the composition of and procedures for our board of directors and its committees; develop and recommend to our board of directors corporate governance principles applicable to us; and oversee the evaluation of our board of directors and our management.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our board or compensation committee.

Code of Ethics

We anticipate that, prior to the closing of this offering, our board of directors will adopt a Code of Ethics applicable to our chief executive officer, chief financial officer and other of our senior financial officers performing similar functions.

Executive Compensation

The following table sets forth the compensation paid or accrued by Kinetic Concepts, Inc. to the Chief Executive Officer, each of the four most highly compensated executive officers and our former Chief

Financial Officer (collectively, the "named executive officers") for their services for the years ended December 31, 2002, 2001 and 2000.

	Annual Compensation							Long Term Compensation Awards
Name and Principal Position	Year	Salary		Bonus		Other Annual Compensation⁽¹⁾		Securities Underlying Options	All Other Compensation⁽²⁾
Dennert O. Ware Chief Executive Officer & President	2002 2001 2000	$	495,000 467,000 318,750	$	314,991 400,950 190,500	$	— — 332,799	— — 5,500,000	$	6,039 3,917 1,755
Dennis E. Noll Senior Vice President, General Counsel & Secretary	2002 2001 2000	$	233,200 220,000 153,900	$	323,716 170,200 84,000	$	— — —	— — 85,714	$	2,727 1,664 1,478
Christopher M. Fashek President, KCI USA	2002 2001 2000	$	247,200 246,600 239,250	$	139,239 144,067 97,000	$	— — —	— — 128,571	$	3,228 2,225 2,179
G. Frederick Rush Vice President, Corporate Development	2002 2001 2000	$	251,505 235,500 125,340	$	127,332 177,100 —	$	— — —	— 100,000 396,429	$	3,231 2,145 460
Michael J. Burke Vice President, Manufacturing and Quality	2002 2001 2000	$	221,220 213,333 200,000	$	106,080 109,200 84,000	$	— — —	— — 85,714	$	3,300 2,021 1,966
William M. Brown⁽³⁾ Vice President & Chief Financial Officer	2002 2001 2000	$	260,303 252,300 226,000	$	110,000 149,122 95,000	$	— — 52,245	— — 128,571	$	754,515 3,250 3,074

(1): The personal benefits provided to each of the named executive officers under various programs did not exceed 10% of the individual's combined salary and bonus in any year except Messrs. Ware and Brown. Mr. Ware received $204,399 for reimbursement of relocation expenses and $128,400 for reimbursement for the payment of taxes in 2000. Mr. Brown received $27,435 for reimbursement of relocation expenses and $18,290 for reimbursement for the payment of taxes in 2000.
(2): The "All Other Compensation" column includes a contribution of $2,000 in 2002 and $1,000 in 2001 and 2000 to our 401(k) plan for the named individuals, a premium for term life insurance in an amount which varied depending on the age of the executive officer and a $750,000 payment in connection with the termination of Mr. Brown's employment in December 2002.
(3): Mr. Brown served as KCI's Vice President and Chief Financial Officer from July 1998 to December 2002.

Management Plans

In April 2000, we established the CEO Special Bonus Plan. This plan establishes a bonus pool for our chief executive officer of up to $13 million. Upon consummation of this offering, the full $13 million bonus will be due and payable to our chief executive officer, Dennert O. Ware, provided that Mr. Ware has been continuously employed by KCI until such date, unless otherwise determined by the board of directors.

In April 2000, we established the 2000 Special Bonus Plan. This plan establishes a bonus pool of up to $6 million, the full amount of which will be due and payable upon consummation of this offering. The bonuses under the 2000 Special Bonus Plan will be paid to members of management who received stock options in April 2000 and who are chosen by the board of directors, in its sole discretion, at the time of any initial public offering or a sale transaction, provided that such individuals have been continuously employed by KCI until such date, unless otherwise determined by the board of directors.

Employment and Severance Agreements

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

2003 Non-Employee Directors Stock Plan

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

Maximum Number of Shares

The maximum aggregate number of shares of common stock that may be issued in connection with grants under the directors plan is 400,000 shares, subject to adjustment as provided for in the directors plan. If an option or restricted stock granted under this plan is forfeited, expires or terminates, the forfeited shares that are not purchased again become available for issuance under the directors plan.

Administration

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

•: interpret all provisions of the directors plan;
•: prescribe the form of any award agreement and notice and manner for executing such agreement and giving such notice;
•: amend all award agreements under the directors plan;
•: adopt, amend and rescind rules for the administration of the directors plan;
•: make all determinations it deems advisable for the administration of the directors plan;
•: amend the terms of outstanding options and impose terms and conditions on the shares of stock issued under the directors plan;
•: impose restrictions, conditions or limitations as to the timing and manner of any resales, subject to consent of any participant whose rights would be adversely materially affected; and
•: waive conditions and/or accelerate the exercisability or vesting of an option or stock award under the directors plan.

Automatic Option Grants and Restricted Stock Awards

Each non-employee director who was not receiving a management fee from us or who was not appointed by a shareholder who was receiving a management fee, and who was serving on May 28, 2003, was automatically granted on such date an option to purchase a number of shares of common stock equal to $50,000 divided by the fair market value of the common stock as of the date of grant, and a restricted stock award equal to $50,000 divided by the fair market value of the common stock as of the date of grant.

In August 2003, concurrently with the completion of our recapitalization, we terminated payment of the management fees described above and granted to each of directors James T. Farrell, James R. Leininger, M.D., N. Colin Lind and Robert Jaunich II an option to purchase a number of shares of common stock equal to $50,000 divided by the fair market value of the common stock as of the date of grant and a restricted stock award equal to $50,000 divided by the fair market value of the common stock as of the date of grant, provided that the options and restricted stock awards for Mr. Farrell and Mr. Jaunich were granted instead to Fremont Partners, L.P., of which Mr. Farrell and Mr. Jaunich are principals, and the option and restricted stock award for Mr. Lind were granted instead to Blum Capital Partners, L.P., of which Mr. Lind is a principal. Each person who is elected to be a non-employee director after May 28, 2003 will automatically be granted an option to purchase a number of shares of common stock equal to $50,000 divided by the fair market value of the common stock as of the date of grant, and a restricted stock award equal to $50,000 divided by the fair market value of the common stock as of the date of grant, which is the first date after May 28, 2003 that the person is elected to serve as a member of our board of directors. Each year thereafter, each non-employee director serving on the board of directors will automatically be granted an additional option to purchase a number of shares of common stock equal to $50,000 divided by the fair market value of the stock and a restricted stock award equal to $50,000 divided by the fair market value of the common stock on the anniversary of the initial grant date. In each case, however, any options and restricted stock awards which would otherwise be granted to Mr. Farrell or Mr. Jaunich will be granted instead to Fremont Partners, L.P. and any options and restricted stock awards which would otherwise be granted to Mr. Lind will be granted instead to Blum Capital Partners, L.P.

Option Terms

Each option will vest over three years with one-twelfth of the number of shares of common stock subject to the option vesting every three months, provided that the non-employee director is serving as a board member. The right to exercise an option will terminate seven years after the grant date unless terminated sooner. Generally, options will remain exercisable for three months after the optionholder's service terminates. However, if such termination is due to the optionholder's death or disability, the option will fully vest and may be exercised within 12 months after such death or disability. If an optionholder fails to be reelected to the board of directors, the option, to the extent vested as of the optionholder's last day of service as a member of the board of directors, may be exercised within 12 months of such event. If an optionholder is terminated as a member of our board of directors on account of fraud, dishonesty or other acts detrimental to our interests, the option (whether vested or unvested) will terminate as of the date of such termination of service.

Method of Option Exercise

Options may be exercised in whole or in compliance with such requirements as determined by the committee, but in no event sooner than six months following the date of grant. Except as otherwise provided in an award agreement, the following methods of payment may be used to pay the exercise price of the options:

•

cash;

•

when the common stock is publicly traded on a recognized exchange or automated trading system:

—: delivery of common stock that was acquired at least six months prior to the exercise of the option; or
—: delivery of irrevocable instructions to a KCI-designated broker to deliver promptly to KCI sufficient funds to pay the exercise price plus all applicable income and employment taxes required to be withheld by KCI by reason of such exercise;

•

in other consideration acceptable to the committee; or

•: a combination of such methods of payments.

Restricted Stock Terms

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

Unrestricted Stock Awards and Terms

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

Other Provisions

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

If KCI experiences a "change in control", then generally all options that are outstanding become fully vested and exercisable immediately prior to the change-in-control event and the restriction period on an outstanding restricted stock award automatically expires and all restrictions imposed under such restricted

stock award immediately lapse. For purposes of the directors plan, a change-in-control will occur upon any of the following events:

•: any person other than an individual who is a shareholder on the date of the adoption of the directors plan becomes the "beneficial owner" of our securities representing more than 50% of the total voting power represented by our then outstanding voting securities;
•: shareholder approval of a merger or consolidation in which we are not the surviving corporation; or
•: shareholder approval of a liquidation or a sale or disposition of all of substantially all of our assets.

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

•: any outstanding option be assumed by the surviving corporation or any successor corporation;
•: any outstanding option be converted into a right to receive cash in an amount equal to the aggregate value of the consideration that would have been paid or issued in exchange for shares of common stock had the option been exercised immediately prior to the change-in-control less the aggregate exercise price of the option;
•: any outstanding option cannot be exercised; or
•: any outstanding option may be dealt with in any other manner determined in the discretion of the committee.

The Board of Directors may amend or terminate the directors plan at any time, however, no amendment having a material adverse effect on an optionholder's right will be valid without such optionholder's consent. In addition, shareholder approval is required for any amendment that increases the aggregate number of shares of common stock available for issuance under the directors plan.

Option Grants and Exercises in Last Fiscal Year

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

Fiscal Year-End Option Value

The following table sets forth certain information concerning the number and value of the options held by the named executive officers as of December 31, 2002. As part of the recapitalization that we consummated in the third quarter of 2003, approximately 42.2% of the options vested as of July 23, 2003 held by each of the named executive officers were settled for cash pursuant to the share repurchase at a price equivalent to $17.00 per share of common stock.

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

Michael J. Burke		593,600 69,714		$	2,124,750 52,500
William M. Brown⁽²⁾		— —			— —

(1): KCI's common stock is not publicly traded. In August 2001, the Board of Directors determined that the fair market value of our common stock, for purposes of the Kinetic Concepts, Inc. Management Equity Plan, was $7.00. Accordingly, for purposes of this calculation, the fair market value of the common stock as of December 31, 2002 was assumed to be $7.00 per share. Since December 31, 2002, the Board of Directors has twice made a determination of the fair market value of our common stock representing an increase over the $7.00 value represented in the table above. The first determination was made in February 2003, increasing the fair market value to $10.00 per share. The second determination was made in July 2003 in connection with the recapitalization, increasing the fair market value to $17.00 per share.
(2): Mr. Brown's options were cancelled in connection with the termination of his employment in December 2002.

Indemnification of Directors and Officers and Limitation of Liability

Texas Law, our articles of incorporation and our bylaws contain provisions for indemnification of our directors and officers.

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

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

Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act provides that a corporation's articles of incorporation may limit or eliminate the director's liability for monetary damages to the corporation or its shareholders for an act or omission in the director's capacity as a director, except that no limitation or elimination of liability is permitted to the extent the director is found liable for a breach of

the duty of loyalty, an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law, a transaction involving an improper personal benefit to the director, or an act or omission for which liability is expressly provided by an applicable statute.

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

Article Twelve of our articles of incorporation states that we shall indemnify our directors to the fullest extent provided by the TBCA.

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

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

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

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

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

KCI is owned principally by three shareholders: Fremont Partners, L.P., Dr. James R. Leininger, Blum Capital Partners, L.P., and their respective affiliates. As of December 16, 2003, on a pro forma as adjusted basis assuming the conversion of all outstanding shares of our preferred stock into shares of our common stock and the sale by us of shares in connection with this offering, Fremont Partners, Dr. Leininger and Blum Capital Partners owned approximately %, % and % of the outstanding voting stock of KCI, respectively. Together, these shareholders have the power to appoint the entire board of directors, and to control the affairs of KCI. Pursuant to the Shareholder Rights Agreement entered into in 1997, as amended by and among KCI, Dr. Leininger and affiliates of Fremont Partners and Blum Capital Partners, the following representatives of our principal shareholders serve on the board of directors:

•: Dr. Leininger, serving in the capacity of Chairman Emeritus;
•: Mr. Jaunich, a Managing Director of Fremont Partners, serving in the capacity of Chairman of the Board;
•: Mr. Farrell, a Managing Director of Fremont Partners; and
•: Mr. Lind, a Managing Director of Blum Capital Partners.

Mr. Farrell and Mr. Jaunich each own a minority interest in Fremont Partners and certain affiliated funds. Messrs. Ware, Noll and Steen also own small passive investments in funds affiliated with Fremont Partners. Mr. Lind owns a minority interest in Blum Capital Partners and certain affiliated funds.

Pursuant to a Management Services Agreement entered into in November 1997 by and among KCI, Fremont Partners, Dr. Leininger and Blum Capital Partners, we have made semi-annual payments to each of Fremont Partners, Dr. Leininger and Blum Capital Partners of approximately $300,000, $250,000 and $200,000 respectively, as a management fee. On August 11, 2003, we amended the Management Services Agreement to, among other things, terminate the management fee and continue to provide for indemnification and reimbursement of expenses. We made final management fee payments of $300,000 and $450,000 in July and August 2003, respectively, relating to services performed through June 30, 2003. KCI will indemnify each of Fremont Partners and Blum Capital Partners and their respective directors, members, officers, employees, agents, representatives and affiliates and Dr. Leininger and his employees, agents, representatives and affiliates for losses, damages, costs or expenses which they may suffer arising out of their performance of services under the Management Services Agreement, provided that they will not be indemnified for losses resulting primarily from their gross negligence or willful misconduct.

We issued to Fremont Partners, Blum Capital Partners, and Dr. Leininger, and their affiliates, an aggregate of $190.0 million of the convertible preferred stock that we offered in connection with the recapitalization. In addition, we issued to John P. Byrnes, Harry R. Jacobson, M.D., David J. Simpson and C. Thomas Smith, all of whom are non-employee directors of ours, an aggregate $1.8 million of the convertible preferred stock that we offered in connection with the recapitalization. We anticipate that all outstanding shares of our preferred stock will be converted into shares of our common stock immediately prior to the closing of this offering.

In connection with the preferred stock issuance, Fremont Partners, Blum Capital Partners, and Dr. Leininger, and their affiliates, along with certain other non-employee directors to whom we concurrently issued additional preferred stock as part of the recapitalization, entered into an Investors' Rights Agreement with us. The Investors' Rights Agreement provides for, among other things, "piggy-back" registration rights, restrictions on transfer of the shares of preferred stock, rights of first offer, "tag-along" rights and "bring-along" rights.

A member of our Board of Directors, David J. Simpson, is an officer of Stryker Corporation, with which we conduct business on a limited basis. During fiscal 2000, 2001 and 2002 and the nine months

ended September 2003, we purchased approximately $975,000, $1.5 million, $3.6 million and $1.8 million in hospital bed frames from Stryker, respectively. During those same periods, we sold approximately $585,000, $340,000, $220,000 and $200,000 of therapeutic surfaces to Stryker, respectively. The transactions between KCI and Stryker are not material to either party. Moreover, our relationship with Stryker predates Mr. Simpson's election to our Board. We have had a business relationship with Stryker since 1994 and Mr. Simpson joined our Board of Directors in 2003.

Dr. Peter Leininger, the brother of Dr. James R. Leininger, who is one of our major shareholders, has a consulting agreement with us. Dr. Peter Leininger served us in a variety of senior positions from 1978 to 1997 and consults with us on medical matters. The consulting agreement has a one-year term. Under the consulting agreement, Dr. Peter Leininger receives an annual fee of $10,000 per year and is entitled to retain the stock options which were granted to him during his employment with us. Dr. Peter Leininger has stock options covering 82,123 shares of our common stock. We have agreed to pay Dr. Peter Leininger $250,000 to resolve a dispute concerning a stock option granted to him which expired. Dr. Peter Leininger has agreed to use the $250,000 to pay the exercise price and associated federal income taxes on certain of his stock options.

A member of our board of directors, C. Thomas Smith, became a member of our board of directors in April 2003, after he had retired as the Chief Executive Officer and President of VHA Inc. VHA Inc. is affiliated with Novation, LLC. Novation is a GPO with which we have had major supply contracts since the 1980s. During fiscal 2000, 2001 and 2002 and the nine months ended September 30, 2003, respectively, we received approximately $98.2 million, $109.9 million, $113.1 million and $94.3 million in V.A.C. and therapeutic surfaces revenues under our Novation contracts.

PRINCIPAL AND SELLING SHAREHOLDERS

Beneficial Ownership of Capital Stock

The following table sets forth information regarding beneficial ownership of our capital stock as of December 16, 2003, and on a pro forma as adjusted basis to reflect the conversion of all outstanding shares of our Series A Preferred Convertible Participating Preferred Stock into shares of our common stock immediately prior to the sale of our common stock in this offering, for:

•: each person, or group of affiliated persons, known by us to own beneficially 5% or more of our capital stock;
•: each of our directors;
•: each of our named executive officers;
•: all directors and executive officers as a group; and
•: all selling shareholders.

The percentage of beneficial ownership is based on 41,263,016 shares of our common stock outstanding as of December 16, 2003 and shares of common stock to be outstanding upon completion of this offering.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, (i) shares of common stock subject to options held by that person that are currently exercisable or become exercisable within 60 days of December 16, 2003 are considered to be beneficially owned by such person and (ii) shares of common stock which can be acquired upon the conversion of Series A Convertible Participating Preferred Stock within 60 days of December 16, 2003, assuming successful completion of this offering, are considered to be beneficially owned by such person. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

			Shares Beneficially Owned Prior to This Offering⁽¹⁾
			Shares Beneficially Owned Prior to This Offering⁽¹⁾							Shares of Common Stock Beneficially Owned After This Offering⁽¹⁾
			Common Stock			Series A Preferred Stock
Name			# of Shares	% of Total		# of Shares	% of Total		Shares of Common Stock Offered Hereby	# of Shares	% of Total
Fremont Partners, L.P. and related parties⁽²⁾⁽³⁾			21,782,864	46.56	%	75,872	28.76	%
Richard C. Blum, Blum Capital Partners, L.P. and related parties⁽⁴⁾			14,388,964	32.04	%	50,122	19.00	%
DLJ Merchant Banking and related parties⁽²⁾⁽⁵⁾			2,692,941	6.13	%	37,000	14.03	%
The Goldman Sachs Group, Inc. and affiliates⁽⁶⁾			2,547,378	5.81	%	35,000	13.27	%
Directors and Executive Officers
	Robert Jaunich II⁽⁷⁾		21,782,864	46.56	%	75,872	28.76	%
	James R. Leininger, M.D.⁽⁸⁾		18,368,068	40.00	%	64,006	24.26	%
	Dennert O. Ware⁽⁹⁾		4,023,000	8.88	%	—	—
	John P. Byrnes^(10)(11)		79,614	*		1,000	*
	Ronald W. Dollens^(10)(12)		78,699	*		—	—
	James T. Farrell⁽⁷⁾		21,782,864	46.56	%	75,872	28.76	%
	Harry R. Jacobson, M.D.^(10)(13)		43,223	*		500	*
	N. Colin Lind^(5)(14)		14,388,964	32.04	%	50,122	19.00	%
	David J. Simpson^(10)(15)		24,611	*		250	*
	C. Thomas Smith^(10)(16)		10,034	*		44	*
	Donald E. Steen^(10)(17)		98,168	*		—	—
	Dennis E. Noll⁽¹⁸⁾		358,916	*		—	—
	Christopher M. Fashek⁽⁹⁾		667,842	1.59	%	—	—
	G. Frederick Rush⁽⁹⁾		220,323	*		—	—
	Michael J. Burke⁽⁹⁾		393,439	*		—	—
	Steven J. Hartpence⁽⁹⁾		69,714	*		—	—
	Martin J. Landon⁽⁹⁾		123,777	*		—	—
	Jorg W. Menten⁽⁹⁾		148,965	*		—	—
	Daniel C. Wadsworth, Jr.⁽⁹⁾		61,714	*		—	—
		Directors and Executive Officers as a Group	60,941,935	99.22	%	191,794	72.71	%

*: Less than one percent (1%).
(1): Unless otherwise indicated, the address of each of the individuals listed in this table is c/o Kinetic Concepts, Inc., 8023 Vantage Drive, San Antonio, Texas 78230.
(2): The person or entity named has sole voting power and investment power with respect to all shares indicated.
(3): Shares of common stock currently held by Fremont Partners, L.P. and its related parties include (i) 8,655,164 shares held by Fremont Acquisition Co. II, L.L.C., (ii) 2,154,186 shares held by Fremont Acquisition Co. IIA, L.L.C., (iii) 3,318,502 shares held by Fremont-KCI Co-Investment Co., L.L.C., (iv) 2,125,327 shares held by Fremont-KCI Co-Investments II, L.L.C., (v) 3,529 shares held by Fremont Partners, L.L.C., (vi) 3,529 shares held by Fremont Partners III, L.L.C. and (vii) the 5,522,136 shares of common stock into which the shares of Series A Convertible Preferred Stock specified in the next sentence will be converted immediately prior to the closing of this offering. Shares of Series A Convertible Preferred Stock held by Fremont Partners, L.P. include (i) 47,824 shares held by Fremont Partners III, L.P., (ii) 2,176 shares held by Fremont Partners III Side-By-Side, L.P., (iii) 21,355 shares held by Fremont Acquisition Company II, L.L.C., and (iv) 4,517 shares held by Fremont Acquisition Company IIA, L.L.C. The address for Fremont Partners, L.P. and its related parties is 199 Fremont Street, Suite 2300, San Francisco, CA 94105.
(4): Mr. Blum is the chairman of Richard C. Blum and Associates, Inc., which is the general partner of Blum Capital Partners, L.P. and a Managing Member of Blum Strategic GP II, L.L.C., which is the general partner of Blum Strategic Partners II, L.P. and the Managing limited partner of Blum Strategic Partners II GmbH & Co. KG.

Mr. Blum disclaims beneficial ownership of the shares held by Blum Capital Partners, L.P. and its related parties, except to the extent of his proportionate pecuniary interest in such shares.

Shares of common stock held by Blum Capital Partners, L.P. and its related parties include (i) 9,641,891 shares held by RCBA-KCI Capital Partners, L.P., (ii) 598,115 shares held by Stinson Capital Partners II, L.P., (iii) 486,907 shares held by Blum Strategic Partners II, L.P., (iv) 10,040 shares held by Blum Strategic Partners II GmbH & Co. KG, (v) 3,529 shares held by Blum Capital Partners, L.P. and (vi) 3,647,992 shares of common stock into which the shares of Series A Convertible Preferred Stock specified in the next sentence will be converted immediately prior to the closing of this offering. Shares of Series A Convertible Preferred Stock held by Blum Capital Partners, L.P. and its related parties include (i) 2,273 shares held by Blum Strategic Partners II, L.P., (ii) 47 shares held by Blum Strategic Partners II GmbH and Co. KG, (iii) 2,792 shares held by Stinson Capital Partners II, L.P., and (iv) 45,010 shares held by RCBA-KCI Capital Partners, L.P.

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

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

(5): All shares of common stock beneficially owned by DLJ Merchant Banking and its related parties reflect conversion of 37,000 shares of Series A Convertible Preferred Stock into 2,692,941 shares of common stock immediately prior to the closing of this offering. Shares of Series A Convertible Preferred Stock held by DLJ Merchant Banking and its related parties include (i) 29,311 shares held by DLJ Merchant Banking Partners III, L.P., (ii) 2,018 shares held by DLJ Merchant Banking III, Inc., on behalf of DLJ Offshore Partners III, C.V., (iii) 518 shares held by DLJ Merchant Banking III, Inc., on behalf of DLJ Offshore Partners III-1, C.V., (iv) 369 shares held by DLJ Merchant Banking III, Inc., on behalf of DLJ Offshore Partners III-2, C.V., (v) 245 shares held by DLJ MB Partners III GmbH & Co. KG, (vi) 99 shares held by Millennium Partners II, L.P. and (vii) 4,440 shares held by MBP III Plan Investors, L.P. The address for DLJ Merchant Banking and its related parties is Eleven Madison Ave., 16th Floor, New York, NY 10010.
(6): All shares of common stock beneficially owned by The Goldman Sachs Group, Inc. ("GSG") and affiliates reflect conversion of 35,000 shares of Series A Convertible Preferred Stock into 2,547,378 shares of common stock immediately prior to the closing of this offering. Shares of Series A Convertible Preferred Stock are held by the following investment partnerships, of which affiliates of GSG are the general partner, managing general partner or investment manager. Includes (i) 18,864 shares held by GS Capital Partners 2000, L.P., (ii) 6,854 shares held by GS Capital Partners 2000 Offshore, L.P., (iii) 788 shares held by GS Capital Partners 2000 GmbH & Co. Beteiligungs KG, (iv) 5,994 shares held by GS Capital Partners 2000 Employee Fund, L.P., and (v) 2,500 shares held by Goldman Sachs Direct Investment Fund 2000, L.P. GSG disclaims beneficial ownership of the shares owned by such investment partnerships to the extent attributable to partnership interests held therein by persons other than GSG and its affiliates. GSG and each of such investment partnerships shares voting and investment power with certain of its respective affiliates. Goldman, Sachs & Co. is an indirect, wholly-owned subsidiary of GSG. The address for Goldman, Sachs & Co. and its related parties is 85 Broad Street, 10th Floor, New York, NY 10004.
(7): Messrs. Jaunich and Farrell are managing directors of Fremont Partners, L.P. and certain of its related parties. The shares shown include the shares beneficially owned by Fremont Partners, L.P. and such related parties. Messrs. Jaunich and Farrell disclaim beneficial ownership of the shares held by Fremont Partners, L.P. and such related parties, except to the extent of their respective proportionate pecuniary interest in such shares.
(8): Includes 490 shares acquirable upon the exercise of options and 10,100 shares of common stock held by J&E Investments, L.P., in which Dr. Leininger is a 1% general partner. Dr. Leininger disclaims beneficial ownership in the shares held by J&E Investments, except to the extent of his proportionate pecuniary interest in such shares. Also includes a total of 600,000 shares of common stock sold by Dr. Leininger to Dr. Leininger's brothers,

Peter A. Leininger and Daniel E. Leininger, and the 1987 Brian C. Leininger Trust, 1987 Kelly C. Leininger Trust, 1987 Tracy M. Leininger Trust and 1992 Joshua A. Leininger Trust, as to each of which Peter A. Leininger is the trustee. Dr. Leininger disclaims beneficial ownership of all such shares, except to the extent of any pecuniary interest therein.

(9): Shares consist entirely of common stock acquirable upon the exercise of options.
(10): The persons named are outside directors and are not affiliated with Fremont Partners, L.P. or Blum Capital Partners, L.P.
(11): Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares), 832 shares acquirable upon the exercise of options and 72,782 shares acquirable upon the conversion of Series A Convertible Preferred Stock.
(12): Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares) and 72,699 shares acquirable upon the exercise of options.
(13): Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares), 832 shares acquirable upon the exercise of options and 36,391 shares acquirable upon the conversion of Series A Convertible Preferred Stock.
(14): N. Colin Lind is the managing director of Richard C. Blum & Associates, Inc., which is the general partner of Blum Capital Partners, L.P. and a Managing Member of Blum Strategic GP II, L.L.C., which is the general partner of Blum Strategic Partners II, L.P. and the Managing limited partner of Blum Strategic Partners II GmbH & Co. KG. Mr. Lind disclaims beneficial ownership of the shares held by Blum Capital Partners, L.P. and its related parties, except to the extent of his proportionate pecuniary interest in such shares.
(15): Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares), 416 shares acquirable upon the exercise of options and 18,195 shares acquirable upon the conversion of Series A Convertible Preferred Stock.
(16): Common stock holdings include 6,000 shares currently held (5,000 of which are restricted shares), 832 shares acquirable upon the exercise of options and 3,202 shares acquirable upon the conversion of Series A Convertible Preferred Stock.
(17): Common stock holdings include 39,536 shares currently held (5,000 of which are restricted shares) and 58,632 shares acquirable upon the exercise of options.
(18): Common stock holdings include 5,270 shares currently held and 353,646 shares acquirable upon the exercise of options.

DESCRIPTION OF CAPITAL STOCK

General

After this offering, our authorized capital stock will consist of shares of common stock, par value $0.001 per share and shares of preferred stock, par value $0.001 per share. As of December 16, 2003 there were 41,263,016 shares of common stock outstanding and 263,794 shares of Series A Convertible Participating Preferred Stock outstanding. As of December 16, 2003, we had 42 record holders of our common stock. We anticipate that all outstanding shares of our preferred stock will convert into shares of common stock immediately prior to the closing of this offering. Upon the closing of this offering, after giving effect to the conversion of our preferred stock, we will have shares of common stock and no shares of preferred stock outstanding. In addition, as of December 16, 2003, 1,053,560 shares of our common stock were reserved for issuance under our stock option plans and options to purchase 11,707,623 shares of our common stock were outstanding.

The following description of our capital stock and provisions of our related articles of incorporation and bylaws are summaries of all of their material terms and provisions and are qualified by reference to our articles of incorporation and bylaws, copies of which have been filed with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus is a part.

Common Stock

Our board of directors is authorized to issue one class of common stock. The shares of our common stock outstanding prior to this offering are, and the shares of our common stock issued in connection with this offering will be, fully paid and nonassessable.

Voting Rights

Shareholders are entitled to one vote for each share of our common stock held of record on all matters on which shareholders are entitled or permitted to vote. Texas law provides that a shareholder may cumulate his votes provided he gives written notice of such intention to the secretary of the Company on or before the day preceding the election at which such shareholder intends to cumulate his votes. All shareholders entitled to vote cumulatively may cumulate their votes if any shareholder gives the requisite written notice.

Preemptive, Conversion and Redemption Rights

Holders of 40,699,695 shares of our common stock and an additional 19,199,520 shares of common stock issuable upon conversion of our Series A Preferred Stock have contractual preemptive rights that require us to offer to those holders the right to purchase, on a pro rata basis, shares of capital stock that we may issue from time to time. These preemptive rights do not apply to (1) any issuance of capital stock as a dividend or stock split in respect of outstanding capital stock or (2) any issuance of capital stock in an underwritten public offering. Our common stock is not otherwise subject to any preemptive rights. Our common stock is not subject to conversion, redemption or any sinking fund provision.

Right to Receive Liquidation Distributions

In the event of our liquidation, dissolution or winding up, the holders of our common stock will be entitled to share ratably in all assets remaining after payment of liabilities, subject to the rights of any then outstanding preferred stock.

Preferred Stock

Our board of directors is authorized to issue up to a total of 50,000,000 shares of preferred stock in one or more series, without shareholder approval. Our board of directors is authorized to establish from

time to time the number of shares to be included in each series of preferred stock, and to fix the designations, preferences, limitations and relative rights, including voting rights, of the shares of such series.

In August 2003, our board of directors approved the creation of a class of preferred stock designated as Series A Convertible Participating Preferred Stock, with a par value of $0.001 per share (the "Series A Preferred Stock"). On August 11, 2003, we issued a total of 263,794 shares of Series A Preferred Stock at an original issue price and initial liquidation preference of $1,000 per share. The Series A Preferred Stock is convertible into common stock at a conversion price of $17.00 per share of common stock. The Series A Preferred Stock accrues cumulative dividends quarterly at the rate of 9% per annum (or the dividends paid on common stock, on an as-converted basis, if greater), and must be paid in kind through August 11, 2006, and after that point may be paid in cash or in kind, at our option. Except as otherwise required by law, the holders of the Series A Preferred Stock are entitled to vote, on an as-converted basis, together with the holders of our common stock. Upon the closing of this offering, all outstanding shares of our Series A Preferred Stock will be converted into shares of common stock.

Upon an initial public offering above $22.00 per share, or upon 20 consecutive post-initial public offering trading days for which the trading price of our common stock exceeds $23.50 per share, the Series A Preferred Stock is mandatorily convertible into common stock. If we consummate an initial public offering at less than $22.00 per share, we can force conversion of the Series A Preferred Stock so long as we make the holders of the Series A Preferred Stock whole for the difference between the initial public offering price and $22.00 per share. Additionally, if the conversion has not been triggered based on trading price, we can force conversion by making the holders of Series A Preferred Stock whole by issuing to them additional common stock as if they had converted at a value of $23.50 per share.

If, prior to December 31, 2005, the Series A Preferred Stock is automatically converted as a result of an initial public offering or post-initial public offering trading or as a result of our forcing conversion, each as described in the paragraph immediately above, or in the event we are acquired, the holders of Series A Preferred Stock would be entitled to receive paid-in-kind dividends through December 31, 2005.

The terms of our Series A Preferred Stock restrict us from declaring and paying dividends on our common stock until such time as all outstanding dividends relating to the Series A Preferred Stock have been paid. The Series A Preferred Stock ranks senior to the common stock with respect to the right to receive dividends or distributions of assets and rights upon our liquidation, dissolution or winding up. The stated value of the Series A Preferred Stock at any time, with respect to the right to receive dividends or distributions of assets and rights upon our liquidation, dissolution or winding up, is equal to the initial liquidation preference together with any accrued dividends through such time that have been added to the stated value through accretion.

The Series A Preferred Stock is to be mandatorily redeemed on August 11, 2015, subject to two extension periods which can, in the aggregate, extend the mandatory redemption date through August 11, 2020. The preferred stock must be redeemed for cash, common stock or a combination of cash and common stock, at our option, for fair market value of the common stock along with any cash, equal to the stated value of the Series A Preferred Stock or the average closing price of the common stock into which such Series A Preferred Stock is then convertible for the 20 consecutive trading days immediately preceding such redemption. However, the common stock must be listed on a United States national securities exchange or quoted on the Nasdaq stock market, and the common stock to be issued in redemption must not represent more then 35% of our fully diluted common stock.

The board may authorize the issuance of additional preferred stock with voting or conversion rights that could harm the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions raising capital and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a

change in control and might harm the market price of our common stock and the voting and other rights of the holders of our common stock.

Registration Rights

Upon completion of this offering, assuming the conversion of all outstanding shares of our Series A Preferred Stock immediately prior to the closing of this offering, holders of an aggregate of shares of our common stock will be entitled to rights to register these shares under the Securities Act. These rights are provided under (1) an Investors' Rights Agreement, dated August 11, 2003, that we entered into with the holders of our Series A Preferred Stock in connection with the issuance of those shares (the "Investors' Rights Agreement") and (2) an Agreement Among Shareholders, dated November 5, 1997, as amended, among us, Fremont Partners, L.P and its affiliates, Richard C. Blum & Associates, L.P. and its affiliates and James R. Leininger, M.D. (the "Shareholder Agreement"). The holders of 263,794 shares of our Series A Preferred Stock, or 16,002,967 shares of our common stock issuable upon conversion of such shares of Series A Preferred Stock (as of December 16, 2003), have piggyback registration rights pursuant to the Investors' Rights Agreement as described below. The holders of 40,709,795 shares of our common stock have piggyback and demand registration rights pursuant to the Shareholder Agreement as described below. The registration rights of each shareholder that is a party to the Investors' Rights Agreement expire at such time after our first firm commitment underwritten public offering of common stock in which all shares of common and preferred stock held by that shareholder can be sold in any 90 day period without registration in compliance with Rule 144 under the Securities Act. We are required to pay all expenses, except for underwriting discounts and commissions to the extent that they are being borne by the selling shareholders, incurred in connection with the registration rights described below.

Piggyback Registration Rights

Pursuant to the piggyback registration rights provisions of the Investors' Rights Agreement, if we propose to register the public offering of any shares of our capital stock (other than in connection with (1) our first firm commitment underwritten public offering of common stock, (2) a registration relating solely to the sale of securities to participants in a benefit plan of ours, (3) a registration relating to a corporate reorganization or other transaction under Rule 145 of the Securities Act or (4) a registration on any SEC registration form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of common or preferred stock), each shareholder that is a party to the Investors' Rights Agreement has the right to include its or his shares in the registration, subject to specified exceptions. The underwriters of any underwritten public offering have the right to limit the number of shares registered by these shareholders due to marketing concerns.

Pursuant to the piggyback registration rights provisions of the Shareholder Agreement, we are required to provide at least 20 days' advance written notice to shareholders that are a party to the Shareholder Agreement prior to filing a registration statement (other than on Form S-4, Form S-8, or other limited purpose form) in connection with our or another security holder's proposed offer and sale of common stock or equity securities convertible into common stock. Each shareholder that is a party to the Shareholder Agreement would then have 10 days to notify us of the number of shares that the shareholder desires to include in that registration statement. If a shareholder exercises piggyback registration rights in connection with a registration statement filed pursuant to another shareholder's request for demand registration (as described below) and that shareholder exercising piggyback registration rights is able to sell at least 75% of the shares requested to be included in the registration, then the fulfillment of the piggyback registration request is deemed to satisfy that piggyback shareholder's right to request a demand registration. The underwriters of any underwritten public offering have the right to limit the number of shares registered by these shareholders due to marketing concerns.

Demand Registration Rights

At any time prior to the completion of a firm commitment underwritten public offering of at least 20% of our then issued and outstanding common stock, each shareholder that is a party to the Shareholder Agreement may make one written request to us for registration of at least 33% of the shares of common stock then held by that shareholder under Form S-3 (or, if we are not eligible to use Form S-3, then another registration form). Each shareholder that is a party to the Shareholder Agreement has the right to request an additional registration of at least 33% of the shares common stock then held by that shareholder at any time after one year, but before three years, following the completion of a firm commitment underwritten public offering of at least 20% of our then issued and outstanding common stock. A registration will not count as a demand registration unless the shareholder is able to register and sell at least 75% of the shares requested to be included; provided, that the shareholder is then entitled to invoke a demand registration right on only one additional occasion.

Description of Provisions of our Articles of Incorporation and Bylaws and Texas Law

A number of provisions in our articles of incorporation and bylaws and under the Texas Business Corporation Act may make it more difficult to acquire control of us. These provisions could deprive the shareholders of opportunities to realize a premium on the shares of common stock owned by them. In addition, these provisions may adversely affect the prevailing market price of our common stock. Our articles of incorporation and bylaws under the Texas Business Corporation Act provide that:

•: our board of directors is authorized to issue preferred stock without shareholder approval; and
•: special meetings of shareholders can be called only by the president of the Company, the board of directors or the holders of not less than 10% of all the shares entitled to vote at the meeting and are subject to advance notice procedures.

Limitation on Liability of Directors and Indemnification

Our articles of incorporation and bylaws limit our directors' liability to the fullest extent permitted under the Texas Business Corporations Act. Specifically, our directors are not liable to us or our shareholders for monetary damages for an act or omission in the director's capacity as director, except for liability for:

•: any breach of the director's duty of loyalty to us or our shareholders;
•: acts or omissions (1) not in good faith and that constitute a breach of duty or (2) which involve intentional misconduct or a knowing violation of law;
•: any transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or
•: an act or omission for which the liability of the director is expressly provided for by statute.

These provisions will generally not limit liability under state or federal securities laws. The effect of these provisions is to eliminate our rights and the rights of our shareholders, including through shareholder derivative suits, to recover monetary damages against a director for breach of fiduciary duty as a director, including breaches resulting from negligent or grossly negligent behavior, except in the situations described above. The inclusion of this provision in our articles of incorporation may, however, discourage or deter shareholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might benefit us and our shareholders.

Our articles of incorporation and bylaws also contain provisions requiring us to indemnify our directors and officers to the fullest extent permitted by the Texas Business Corporations Act. The

indemnification permitted under the Texas Business Corporations Act is not exclusive of any other rights to which such persons may be entitled.

In addition, we maintain directors' and officers' liability insurance to provide our directors and officers with insurance coverage for losses arising from claims based on breaches of duty, negligence, error and other wrongful acts.

At present there is no pending litigation or proceeding involving any director or officer, as to which indemnification is required or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for such indemnification.

Anti-Takeover Provisions Under Texas Law

Part Thirteen of the Texas Business Corporation Act generally prohibits a publicly-held Texas corporation from engaging in a "business combination" with an "affiliated shareholder" for a period of three years following the date the person became an affiliated shareholder, unless:

•: the board of directors approved the transaction in which such shareholder became an affiliated shareholder prior to the affiliated shareholder's share acquisition date; or
•: the business combination is approved by the holders of at least two thirds of the outstanding voting stock not beneficially owned by the affiliated shareholder at a meeting of shareholders called for that purpose (and not by written consent) not less than six months after the affiliated shareholder's share acquisition date.

A "business combination" includes a merger, asset or stock sale, or other transaction between the corporation and an affiliated shareholder. An "affiliated shareholder" is a person who beneficially owns, or within three years prior to the determination of affiliated shareholder status, owned, 20% or more of a corporation's voting stock, subject to specified exceptions.

As a Texas corporation, we would be subject to the three-year moratorium provisions of Part Thirteen of the Texas Business Corporation Act, unless we amended our articles of incorporation or bylaws prior to December 31, 1997, electing not to be governed by Part Thirteen. We amended our bylaws prior to December 31, 1997 to make that election. Accordingly, the three-year moratorium provisions of Part Thirteen do not restrict any person who acquires 20% or more of our outstanding voting stock from engaging in business combinations with us within such a three-year period.

Part Thirteen also permits a corporation's board of directors, when considering the best interests of the corporation, to consider the long-term as well as the short-term interests of the corporation and its shareholders, including the possibility that those interests may be best served by the continued independence of the corporation.

Transfer Agent and Registrar

Our transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.

NYSE Listing

We have applied to list our common stock on the New York Stock Exchange under the trading symbol "KCI."

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, no public market for our common stock has existed. Market sales of shares of our common stock after this offering and from time to time, and the availability of shares for future sale, may reduce the market price of our common stock. Sales of substantial amounts of our common stock, or the perception that those sales could occur, could adversely affect prevailing market prices for our common stock and could impair our future ability to obtain capital, especially through an offering of equity securities.

Based on shares outstanding on December 16, 2003, upon completion of this offering, shares of common stock will be outstanding, assuming (1) the conversion of all of our outstanding preferred stock into 19,199,520 shares of common stock prior to the closing of this offering and (2) that no outstanding options are exercised. Of these outstanding shares, the shares sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, or shares if the underwriters' over-allotment option is exercised in full, unless the shares are purchased by our affiliates as that term is defined under Rule 144 under the Securities Act.

An aggregate of approximately shares of common stock held by existing shareholders upon completion of this offering will be "restricted securities" (as that phrase is defined in Rule 144) and may not be resold in the absence of registration under the Securities Act or pursuant to exemptions from such registration, including among others, the exemption provided by Rule 144 under the Securities Act. Except as described below, 90 days after the date of this prospectus, approximately shares of common stock (plus shares issuable upon exercise of then vested options) will be eligible for sale in the public market pursuant to Rule 701 under the Securities Act, of which shares are subject to lock-up agreements described below. In addition, approximately shares will be eligible for sale in the public market under Rule 144, subject to the volume limitations and other restrictions described below, 90 days after the date of this prospectus and approximately shares will be eligible for sale without restriction under Rule 144(k), of which shares and shares, respectively, are subject to lock-up agreements described below.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of this offering, a person who has beneficially owned restricted securities for at least one year, including the holding period of any prior owner other than one of our affiliates, is entitled to sell a number of restricted shares within any three-month period that does not exceed the greater of (1) one percent of the number of shares of our common stock then outstanding, and (2) the average weekly trading volume of our common stock on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales of restricted shares under Rule 144 are also subject to requirements regarding the manner of sale, notice and the availability of current public information about us. Rule 144 also provides that affiliates that sell shares of our common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares, other than the holding period requirement.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, may sell those shares without complying with the manner-of-sale, public information, volume limitation or notice provisions of Rule 144.

Rule 701

Under Rule 701, shares of our common stock acquired upon the exercise of currently outstanding options or pursuant to other rights granted under our stock plans may be resold, to the extent not subject

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to lock-up agreements, (1) by persons other than affiliates, beginning 90 days after the effective date of this offering, subject only to the manner-of-sale provisions of Rule 144 and (2) by affiliates, subject to the manner-of-sale, current public information, and filing requirements of Rule 144, in each case, without compliance with the one-year holding period requirement of Rule 144.

Form S-8 Registration Statements

We intend to file one or more registration statements on Form S-8 under the Securities Act following this offering to register the shares of our common stock that are issuable pursuant to our stock option plans. These registration statements are expected to become effective upon filing. Shares covered by these registration statements will then be eligible for sale in the public markets, subject to any applicable lock-up agreements and to Rule 144 limitations applicable to affiliates.

Registration Rights

Upon the closing of this offering, assuming the conversion of all outstanding shares of our Series A Preferred Stock immediately prior to the closing of this offering, holders of an aggregate of shares of our common stock may demand that we register shares under the Securities Act or, if we file another registration statement under the Securities Act, may elect to include their shares in such registration. If these shares are registered, they will be freely tradable without restriction under the Securities Act. See "Description of Capital Stock—Registration Rights."

Lock-up Agreements

In connection with this offering, we and our directors, officers and certain shareholders who together hold approximately 40,784,601 shares of our outstanding common stock and all of our outstanding shares of convertible preferred stock have agreed, subject to certain exceptions, that, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus, subject to an extension of up to 18 days upon agreement of Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc. and us: offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our common stock; whether any such transaction described above is to be settled by delivery of our common stock or such other securities, in cash or otherwise. These restrictions, and certain exceptions, are described in more detail under "Underwriters."

101

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF OUR COMMON STOCK

The following is a general discussion of the anticipated material United States federal income and estate tax consequences to a Non-U.S. Holder (as defined below) of the acquisition, ownership and disposition of the common stock under current United States federal income tax law. This discussion does not address specific tax consequences that may be relevant to particular persons in light of their individual circumstances (including, for example, pass-through entities (e.g., partnerships) or persons who hold the common stock through pass-through entities, banks or financial institutions, broker-dealers, insurance companies, regulated investment companies, tax-exempt entities, common trust funds, controlled foreign corporations, dealers in securities or currencies, persons that have a functional currency other than the U.S. dollar and persons in special situations, such as those who hold the common stock as part of a straddle, hedge, conversion transaction, or other integrated investment). Unless otherwise stated, this discussion is limited to the tax consequences to those Non-U.S. Holders who are the original beneficial owners of the common stock and who hold such common stock as capital assets. In addition, this discussion does not describe any tax consequences arising under the tax laws of any state, local or foreign jurisdiction. This discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Department regulations (the "Treasury Regulations") promulgated thereunder, and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change, possibly with retroactive effect.

Prospective purchasers of the common stock are urged to consult their tax advisors concerning the United Sates federal income tax consequences to them of acquiring, owning and disposing of the common stock, as well as the application of state, local and foreign income and other tax laws.

As used herein, a "U.S. Holder" of common stock means a holder that is for United States federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation (including an entity treated as a corporation for United States federal income tax purposes) or partnership created or organized in or under the laws of the United Sates or any political subdivision thereof, (iii) an estate the income of which is subject to United States federal income taxation regardless of its source or (iv) a trust if it (X) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (Y) has a valid election in effect under applicable United States Treasury Regulations to be treated as a United States person. A "Non-U.S. Holder" is a holder that is not a U.S. Holder. If a partnership holds the common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. Persons who are partners of partnerships holding the common stock should consult their tax advisors.

Dividends

Dividends paid to a Non-U.S. Holder of common stock will generally be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Dividends that are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States and, where a tax treaty applies, are attributable to a United States permanent establishment of the Non-U.S. Holder, are not, however, subject to the withholding tax, but are instead subject to United States federal income tax on a net income basis at applicable graduated individual or corporate rates. Certain certification and disclosure requirements must be satisfied for effectively connected income to be exempt from withholding. Any such effectively connected dividends received by a foreign corporation may be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

A Non-U.S. Holder of common stock who wishes to claim the benefit of an applicable income tax treaty rate (and avoid backup withholding as discussed below) for dividends, will be required to (a) complete Internal Revenue Service (IRS) Form W-8BEN (or other applicable form) and certify under

102

penalties of perjury that such holder is not a United States person or (b) if the common stock is held through certain foreign intermediaries, satisfy the relevant certification requirements of applicable United States Treasury regulations. Special certification and other requirements apply to certain Non-U.S. Holders that are entities rather than individuals.

A Non-U.S. Holder of common stock eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim or refund with the IRS.

Gain on Disposition of Common Stock

A Non-U.S. Holder will generally not be subject to United States federal income tax with respect to gain recognized on a sale or other disposition of common stock unless (i) the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States, and, where an income tax treaty applies, is attributable to a United States permanent establishment of the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and holds the common stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, or (iii) the Company is or has been a "United States real property holding corporation" for United States federal income tax purposes.

An individual Non-U.S. Holder described in clause (i) above will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates. An individual Non-U.S. Holder described in clause (ii) above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States source capital losses (even though the individual is not considered a resident of the United States). If a Non-U.S. Holder that is a foreign corporation falls under clause (i) above, it will be subject to tax on its gain under regular graduated United States federal income tax rates and, in addition, may be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.

The Company believes it is not and does not anticipate becoming a "United States real property holding corporation" for United States federal income tax purposes.

Federal Estate Tax

Common stock held by an individual Non-U.S. Holder at the time of death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding

The Company must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty. A Non-U.S. Holder will be subject to backup withholding on dividends paid to such holder unless applicable certification requirements are met.

Information reporting and, depending on the circumstances, backup withholding, will apply to the proceeds of a sale of common stock within the United States or conducted through United States-related financial intermediaries unless the beneficial owner certifies under penalties of perjury that it is a Non-U.S. Holder (and the payer does not have actual knowledge or reason to know that the beneficial owner is a United States person) or the holder otherwise establishes an exemption.

Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such holder's United States federal income tax liability provided the required information is furnished to the IRS.

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UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. are acting as representatives, have severally agreed to purchase, and we and the selling shareholders have agreed to sell to them, the number of shares indicated below:

Name			Number of Shares
Merrill Lynch, Pierce, Fenner & Smith Incorporated
J.P. Morgan Securities Inc.
Credit Suisse First Boston LLC
Goldman, Sachs & Co.
Citigroup Global Markets Inc.
Deutsche Bank Securities Inc.
Piper Jaffray & Co.
SG Cowen Securities Corporation

	Total

The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of specified legal matters by their counsel and to other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below.

The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price.

The selling shareholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares of common stock as the number listed next to the underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ and total proceeds to us would be $ .

The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them.

We and all of our directors and officers and holders of substantially all of our outstanding stock have agreed that, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc., on behalf of the underwriters, we and they will not, during the period ending

104

180 days after the date of this prospectus, subject to an extension of up to 18 days upon agreement of Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc. and us:

•: offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock; or
•: enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our common stock,

whether any such transaction described above is to be settled by delivery of our common stock or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to:

•: the sale of shares of our common stock to the underwriters in connection with this offering;
•: transactions relating to shares of our common stock or other securities acquired in open market transactions after the completion of this offering;
•: transfers by any person other than us of shares of our common stock or securities convertible into shares of our common stock by will or intestacy;
•: the issuance by us of shares of our common stock upon the exercise of an option or the conversion of a security outstanding on the date of and reflected in this prospectus;
•: the issuance by us of shares or options to purchase shares of our common stock pursuant to our stock option plans;
•: transfers or distributions of shares of our common stock or securities convertible into shares of our common stock to limited partners or stockholders of the transferor;
•: transfers by any person other than us of shares of our common stock or securities convertible into shares of our common stock as a bona fide gift or gifts; or
•: transfers of shares of our common stock or securities convertible into shares of our common stock to any trust the sole beneficiaries of which are the transferor and/or its immediate family members,

provided that in the case of each of the last three transactions above, each donee, distributee, transferee and recipient agrees to be subject to the restrictions described in the immediately preceding paragraph and no transaction includes a disposition for value; and provided further that in the case of each of the last two transactions above, no filing under the Securities Act is required in connection with these transactions other than a filing made after the expiration of the lock-up period described above.

The estimated offering expenses payable by us, in addition to the underwriting discounts and commissions, are approximately $ , which includes legal, accounting and printing costs and various other fees associated with registering and listing the common stock.

The following table shows the per share and total underwriting discounts and commissions to be paid by us and the selling shareholders assuming no exercise and full exercise of the over-allotment option.

	Per Share		Total
Underwriting discounts and commissions to be paid by	Per Share		Total
Underwriting discounts and commissions to be paid by	No Exercise	Full Exercise	No Exercise	Full Exercise
Us	$	$	$	$
Selling shareholders	$	$	$	$

In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a

105

short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. In addition, to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock to cover syndicate short positions or to stabilize the price of the common stock. These activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time.

The underwriters and their affiliates have in the past provided, and may in the future from time to time provide, investment banking, commercial banking services, and general financing and banking services to us and our affiliates for which they have in the past received, and may in the future receive, customary fees. Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and Goldman, Sachs & Co. Inc., who are underwriters in this initial public offering, acted as placement agents in connection with the offering of our 7³/8% Senior Subordinated Notes due 2013 on August 11, 2003. An affiliate of Credit Suisse First Boston LLC acted as joint lead arranger, joint book manager and syndication agent for the new senior credit facility that we entered into on August 11, 2003, and such affiliate received customary fees for its services in such capacities. Furthermore, affiliates of Credit Suisse First Boston LLC and J.P. Morgan Securities Inc. are lenders under the new senior credit facility. Affiliates of certain of the underwriters that are lenders under the new senior credit facility will be partially repaid with a portion of the proceeds of this offering. Affiliates of Credit Suisse First Boston LLC and Goldman, Sachs & Co. hold a portion of our preferred stock. Affiliates of one or more of the underwriters are investors in Fremont Partners, L.P. and its affiliates, one of our principal shareholders.

We have applied to list our common stock on the New York Stock Exchange under the symbol "KCI".

We and the selling shareholders, on the one hand, and the underwriters, on the other hand, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

Pricing of the Offering

Prior to the offering, there has been no public market for the shares of common stock. The initial public offering price was determined by negotiations between us and the underwriters. Among the factors considered in determining the initial public offering price were our future prospects and those of our industry in general, our sales, earnings and other financial operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and financial and operating information of companies engaged in activities similar to ours.

106

LEGAL MATTERS

The validity of the issuance of the common stock offered by this prospectus and certain other legal matters are being passed upon for us by our counsel, Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California, and Cox & Smith Incorporated, San Antonio, Texas. The underwriters will be represented by Shearman & Sterling LLP, Menlo Park, California.

EXPERTS

The consolidated financial statements of Kinetic Concepts, Inc. and subsidiaries at December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

This prospectus is part of a registration statement on Form S-1 that we have filed with the SEC under the Securities Act. This prospectus does not contain all of the information set forth in the registration statement. For further information about us and the common stock offered hereby, you should refer to the registration statement. This prospectus summarizes material provisions of contracts and other documents to which we refer you. Since this prospectus may not contain all of the information that you may find important, you should review the full text of these documents. We have filed these documents as exhibits to our registration statement.

Prior to the filing of the registration statement of which this prospectus is a part, we were not subject to the periodic reporting and other informational requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The indenture governing the 7³/8% Senior Subordinated Notes due 2013 requires that we voluntarily file reports under the Exchange Act with the SEC. Upon the earlier of (1) the effectiveness of the registration statement of which this prospectus is a part and (2) the registration statement on Form S-4 that we filed on September 29, 2003 in connection with an exchange offer for our 7³/8% Senior Subordinated Notes due 2013, we will become subject to the information and periodic reporting requirements of the Exchange Act and, accordingly, will file periodic reports and other information with the SEC pursuant to the requirements of the Exchange Act. Such periodic reports and other information will be available for inspection and copying at the SEC's public reference room and through the SEC's Internet site at http://www.sec.gov.

You may read and copy any document we file with the SEC at the following SEC public reference room: Public Reference Room, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Audited Consolidated Financial Statements of Kinetic Concepts, Inc. and Subsidiaries:
	Report of Ernst & Young LLP, Independent Auditors	F-2
	Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001	F-3
	Consolidated Statements of Earnings for the Years Ended December 31, 2002, December 31, 2001 and December 31, 2000	F-4
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, December 31, 2001 and December 31, 2000	F-5
	Consolidated Statements of Shareholders' Deficit for the Three Years Ended December 31, 2002	F-6
	Notes to Consolidated Financial Statements	F-7
	Schedule II—Valuation and Qualifying Accounts for the Three Years Ended December 31, 2002	F-44
Unaudited Condensed Consolidated Financial Statements of Kinetic Concepts, Inc. and Subsidiaries:
	Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	F-45
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and September 30, 2002	F-46
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and September 30, 2002	F-47
	Notes to Condensed Consolidated Financial Statements	F-48

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Kinetic Concepts, Inc.

We have audited the accompanying consolidated balance sheets of Kinetic Concepts, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of earnings, cash flows, and shareholders' deficit for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15(a). These consolidated financial statements and schedule are the responsibility of KCI's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kinetic Concepts, Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 5 to the consolidated financial statements, in 2002, KCI adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

/s/ ERNST & YOUNG LLP

Ernst & Young LLP

San Antonio, Texas
February 7, 2003

F-2

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

			December 31,
			2002			2001
ASSETS:
Current assets:
	Cash and cash equivalents		$	54,485		$	199
	Accounts receivable, net			152,896			121,364
	Accounts receivable—other (Note 16)			175,000			—
	Inventories, net			37,934			40,166
	Prepaid expenses and other current assets			9,760			9,337

		Total current assets		430,075			171,066

Net property, plant and equipment				105,549			89,981
Loan issuance cost, less accumulated amortization of $11,949 in 2002 and $9,634 in 2001				6,287			8,602
Goodwill				46,357			43,035
Other assets, less accumulated amortization of $6,840 in 2002 and $5,562 in 2001				29,791			30,509

			$	618,059		$	343,193

LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current liabilities:
	Accounts payable		$	11,156		$	8,429
	Accrued expenses			61,556			48,108
	Current installments of long-term obligations			30,550			2,750
	Current installments of capital lease obligations			157			171
	Derivative financial instruments			1,341			2,512
	Income taxes payable			14,615			8,761
	Current deferred income taxes (Note 16)			66,838			—

		Total current liabilities		186,213			70,731

Long-term obligations, net of current installments				491,300			503,875
Capital lease obligations, net of current installments				95			232
Deferred income taxes, net				9,501			4,363
Deferred gain, sale of headquarters facility				10,023			—
Other noncurrent deferred, net				1,363			317

				698,495			579,518

Shareholders' deficit:
	Common stock; issued and outstanding 70,928 in 2002 and 70,925 in 2001			71			71
	Retained deficit			(76,216	)		(226,381	)
	Accumulated other comprehensive loss			(4,291	)		(10,015	)

				(80,436	)		(236,325	)

			$	618,059		$	343,193

See accompanying notes to consolidated financial statements.

F-3

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share data)

			Year Ended December 31,
			2002			2001			2000
Revenue:
	Rental and service		$	453,060		$	361,634		$	274,331
	Sales and other			125,902			94,313			77,701

		Total revenue		578,962			455,947			352,032
Rental expenses				276,125			220,485			176,392
Cost of goods sold				51,824			32,952			29,645

				327,949			253,437			206,037

		Gross profit		251,013			202,510			145,995
Selling, general and administrative expenses				141,594			114,828			80,294
Unusual item-litigation settlement				(173,250	)		—			—

		Operating earnings		282,669			87,682			65,701
Interest income				496			280			897
Interest expense				(40,943	)		(45,116	)		(48,635	)
Foreign currency income (loss)				3,935			(1,638	)		(2,358	)

		Earnings before income taxes		246,157			41,208			15,605
Income taxes				96,001			17,307			6,476

		Net earnings	$	150,156		$	23,901		$	9,129

		Basic earnings per common share	$	2.12		$	0.34		$	0.13

		Diluted earnings per common share	$	1.93		$	0.32		$	0.12

		Average common shares:
		Basic (weighted average outstanding shares)		70,927			70,917			70,915

		Diluted (weighted average outstanding shares)		77,662			73,996			73,219

See accompanying notes to consolidated financial statements.

F-4

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

				Year Ended December 31,
				2002			2001			2000
Cash flows from operating activities:
	Net earnings			$	150,156		$	23,901		$	9,129
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation			33,404			29,530			28,277
		Amortization			3,594			7,685			6,505
		Provision for uncollectible accounts receivable			7,623			8,932			6,466
		Amortization of deferred loss on interest rate swap			—			843			—
		Amortization of deferred gain on sale/leaseback of headquarters facility			(426	)		—			—
		Noncash gain on litigation settlement			(173,250	)		—			—
	Change in assets and liabilities net of effects from purchase of subsidiaries and unusual items:
		Increase in accounts receivable, net			(38,217	)		(39,571	)		(18,488	)
		Decrease (increase) in inventories			2,612			(16,664	)		(2,021	)
		Decrease (increase) in prepaid expenses and other current assets			(423	)		681			124
		Increase in accounts payable			2,568			2,069			3,368
		Increase in accrued expenses			11,864			6,835			5,994
		Increase in income taxes payable			5,732			4,467			1,864
		Increase in current deferred income taxes			66,838			—			—
		Increase (decrease) in deferred income taxes, net			4,179			1,187			(1,067	)

			Net cash provided by operating activities		76,254			29,895			40,151

Cash flows from investing activities:
		Additions to property, plant and equipment			(54,546	)		(43,997	)		(31,718	)
		Increase in inventory to be converted into equipment for short-term rental			(300	)		(2,700	)		(300	)
		Dispositions of property, plant and equipment			1,703			2,744			1,737
		Proceeds from sale of headquarters facility			18,232			—			—
		Business acquisitions, net of cash acquired			(3,596	)		(80	)		(427	)
		Increase in other assets			(520	)		(4,292	)		(1,304	)

			Net cash used by investing activities		(39,027	)		(48,325	)		(32,012	)

Cash flows from financing activities:
		Proceeds from (repayments of) notes payable, long-term, capital lease and other obligations			16,091			16,805			(12,715	)
		Proceeds from the exercise of stock options			9			24			—

			Net cash provided (used) by financing activities		16,100			16,829			(12,715	)

Effect of exchange rate changes on cash and cash equivalents					959			(339	)		(647	)

Net increase (decrease) in cash and cash equivalents					54,286			(1,940	)		(5,223	)
Cash and cash equivalents, beginning of year					199			2,139			7,362

Cash and cash equivalents, end of year				$	54,485		$	199		$	2,139

See accompanying notes to consolidated financial statements.

F-5

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

Three Years Ended December 31, 2002

(in thousands)

	Common Stock		Retained Earnings Deficit			Accumulated Other Comprehensive Loss			Total Shareholders' Deficit
Balances at December 31, 1999	$	71	$	(259,435	)	$	(5,371	)	$	(264,735	)

Net earnings		—		9,129			—			9,129
Foreign currency translation adjustment		—		—			(2,347	)		(2,347	)

Total comprehensive income										6,782

Balances at December 31, 2000	$	71	$	(250,306	)	$	(7,718	)	$	(257,953	)

Net earnings		—		23,901			—			23,901
Foreign currency translation adjustment		—		—			(1,213	)		(1,213	)
Net derivative loss, net of taxes of $1,592		—		—			(2,956	)		(2,956	)
Reclassification adjustment for losses included in income, net of taxes of $713		—		—			1,323			1,323
Reclassification adjustment for loss recognized on termination of interest rate swap, net of taxes of $372		—		—			691			691
Reclassification adjustment for amortization of loss recognized on termination of interest rate swap, net of tax benefit of $76		—		—			(142	)		(142	)

Total comprehensive income										21,604
Exercise of stock options		—		24			—			24

Balances at December 31, 2001	$	71	$	(226,381	)	$	(10,015	)	$	(236,325	)

Net earnings		—		150,156			—			150,156
Foreign currency translation adjustment		—		—			5,511			5,511
Net derivative loss, net of taxes of $562		—		—			(1,045	)		(1,045	)
Reclassification adjustment for losses included in income, net of taxes of $972		—		—			1,807			1,807
Reclassification adjustment for loss recognized on termination of interest rate swap, net of tax benefit of $305		—		—			(549	)		(549	)

Total comprehensive income										155,880
Exercise of stock options		—		9			—			9

Balances at December 31, 2002	$	71	$	(76,216	)	$	(4,291	)	$	(80,436	)

See accompanying notes to consolidated financial statements.

F-6

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements include the accounts of Kinetic Concepts, Inc., together with our consolidated subsidiaries, ("KCI"). All significant inter-company balances and transactions have been eliminated in consolidation. Certain reclassifications of amounts related to prior years have been made to conform with the 2002 presentation. Due to improvements in financial systems and processes, we began reporting international results on a current-month basis effective December 2000. Prior to 2000, we had presented international results using a one-month delay. As a result of this change, the 2000 fiscal year included a 13th monthly period for the international segment (the "international 13th month") which increased reported revenue and operating earnings by approximately $8.0 million and $1.1 million, respectively. Unless otherwise noted, the results reported herein include the international 13th month for fiscal 2000.

(b) Nature of Operations and Customer Concentration

We design, manufacture, market and distribute therapeutic products, primarily medical devices that promote wound healing and therapeutic systems including specialty hospital beds and mattress overlays that treat and prevent the complications of immobility. The principal markets for our products are domestic and international health care providers, predominantly hospitals and extended care facilities throughout the United States, Canada and Europe and home care patients in the U.S. Receivables from these customers are unsecured.

We contract with both proprietary hospital groups and voluntary group purchasing organizations ("GPOs"). Proprietary hospital groups own all of the hospitals which they represent and, as a result, can ensure complete compliance with an executed national agreement. Voluntary GPOs negotiate contracts on behalf of member hospital organizations but cannot ensure that their members will comply with the terms of an executed national agreement. Approximately 36% of our revenue during 2002 was generated under national agreements with GPOs.

We have experienced dramatic growth in V.A.C. device and related disposables revenue since October 2000 when the Medicare Part B program initiated payments for V.A.C. home placements. V.A.C. platforms and related disposable revenue in 2002 of $313.4 million increased 65.0% from the prior year and now accounts for approximately 54.1% of total revenue.

During 2002, KCI International had direct operations in 15 foreign countries including Germany, Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland, Australia, Italy, Denmark, Sweden, Ireland, Belgium, South Africa and Spain. (See Note 13.)

(c) Revenue Recognition

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

1): A contract or sales arrangement exists.
2): Products have been shipped and title has transferred or services have been rendered.
3): The price of the products or services is fixed or determinable.
4): Collectibility is reasonably assured.

F-7

Rental and service revenue are recognized as services are rendered. Sales and other revenue are recognized when products are shipped.

(d) Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of ninety days or less to be cash equivalents.

(e) Fair Value of Financial Instruments

The carrying amount reported in the balance sheet for cash, accounts receivable, long-term securities, accounts payable and long-term obligations approximates their fair value. We estimate the fair value of long-term obligations by discounting the future cash flows of the respective instrument, using our incremental rate of borrowing for a similar instrument.

(f) Accounts Receivable

Accounts receivable consist of amounts due directly from facilities (hospitals, extended care facilities, etc.), third-party payers (both governmental and non-governmental) and patient pay accounts.

Significant concentrations of accounts receivable include:

	2002		2001
Facilities / dealers	63	%	61	%
TPP—Managed care and commercial	26	%	26	%
TPP—Governmental	9	%	11	%
Other	2	%	2	%

The third-party payer reimbursement process requires extensive documentation which has had the short-term effect of slowing both the billing and cash collection cycles relative to the rest of the business, and therefore, increasing total accounts receivable.

We evaluate the collectibility of accounts receivable based on a combination of factors. For unbilled receivables, items that remain unbilled for more than 90 days, or beyond an established billing window, are reversed out of revenue and receivables. For billed receivables, we generally recognize reserves for bad debt based on the length of time that the receivables are past due. The reserves range in value from 0% for current amounts to 100% for amounts over 180 days for certain payer groups. The reserve rates vary by payer group and historical experience on a weighted average basis. In addition, we have recorded specific reserves for bad debt when we become aware of a customer's inability to satisfy its debt obligations, for example bankruptcy filings. If circumstances change, such as higher than expected denials, payment defaults or an unexpected material adverse change in a major customer's or payer's ability to meet its obligations, our estimates of the realizability of amounts due from trade receivables could be reduced by a material amount.

F-8

(g) Inventories

We have a three-year contract effective October 1, 2002 with one supplier to supply the majority of our inventory generating V.A.C. sales revenue.

(h) Property, Plant and Equipment

Property, plant and equipment are stated at cost. Betterments, which extend the useful life of the equipment, are capitalized.

(i) Depreciation

Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful lives (thirty to forty years for buildings and between two and five years for most of our other property and equipment) of the assets.

(j) Goodwill and Business Combinations

Goodwill represents the excess purchase price over the fair value of net assets acquired. Prior to 2002, goodwill was amortized over three to twenty-five years from the date of acquisition using the straight-line method. Effective January 1, 2002, we have applied the provisions of Statement of Financial Accounting Standards No. 142, ("SFAS 142"), Goodwill and Other Intangible Assets in our accounting for goodwill. SFAS 142 requires that goodwill and other intangible assets that have indefinite lives not be amortized but instead be tested at least annually for impairment, or more frequently when event or changes in circumstances indicate that the asset might be impaired. For indefinite lived intangible assets, impairment is tested by comparing the carrying value of the asset to the fair value of the reporting unit to which they are assigned.

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

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

F-9

(k) Other Assets

Other assets consist principally of patents, trademarks, long-term investments and the estimated residual value of assets subject to leveraged leases. Patents and trademarks are amortized over the estimated useful life of the respective asset using the straight-line method.

(l) Income Taxes

We recognize certain transactions in different time periods for financial reporting and income tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The provision for deferred income taxes represents the change in deferred income tax accounts during the year.

(m) Earnings Per Share

Basic earnings per share ("EPS") is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings.

(n) Licensing Fees

We pay licensing fees for the right to market our V.A.C. devices. Licensing fee expenses are based on V.A.C. revenue and recognized in the period that the related revenue is earned.

(o) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(p) Insurance Programs

We established the KCI Employee Benefits Trust (the "Trust") as a self-insurer for certain risks related to our U.S. employee health plan and certain other benefits. We fund the Trust based on the value of expected future payments, including claims incurred but not reported. We have also purchased insurance, which limits the Trust's liability under the benefit plans.

(q) Foreign Currency Translation

The functional currency for the majority of our foreign operations is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period.

F-10

(r) Stock Options

We use the intrinsic value method in accounting for our stock option plans. In 2002, compensation costs of approximately $800,000, net of estimated taxes, have been recognized in the financial statements related to these plans. No compensation costs were recognized in 2001 and 2000 related to these plans. Had compensation cost for our stock-based employee compensation plans been determined based upon a fair value method consistent with SFAS No. 123, our net earnings and earnings per share would have been decreased to the pro forma amounts indicated below.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information follows (dollars in thousands, except for earnings per share information):

		2002		2001		2000
Net earnings as reported		$	150,156	$	23,901	$	9,129
Pro forma net earnings		$	148,751	$	22,526	$	7,023
Earnings per share as reported
	Basic earnings per common share	$	2.12	$	0.34	$	0.13
	Diluted earnings per common share	$	1.93	$	0.32	$	0.12
Pro forma earnings per share
	Basic earnings per common share	$	2.10	$	0.32	$	0.10
	Diluted earnings per common share	$	1.92	$	0.30	$	0.10

We are not required to apply the method of accounting prescribed by Statement 123 to stock options granted prior to January 1, 1995. Moreover, the pro forma compensation cost reflected above may not be representative of future results.

(s) Research and Development

The focus of our research and development program has been to develop new products and make technological improvements to existing products. Expenditures for research and development are expensed as incurred and represented approximately 3%, 3% and 2% of our total operating expenditures in each of the years ended December 31, 2002, 2001 and 2000, respectively.

(t) Interest Rate Protection Agreements

Periodically, we enter into interest rate protection agreements to modify the interest characteristics of our outstanding debt. Each interest rate swap is designated with all or a portion of the principal balance and term of a specific debt obligation. These agreements involve the exchange of amounts based on variable interest rates for amounts based on fixed interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received, as interest rates change, is accrued and recognized as an adjustment to interest expense related to the debt. (See Notes 4 and 14.)

F-11

(u) Shipping and Handling

We include shipping and handling costs in rental expense. Shipping and handling cost recovered from customers is also included in rental expense. The amount of shipping and handling costs and costs recovered are less than 2% of our total revenue for all periods presented.

(v) Advertising Expenses

Advertising costs are expensed as incurred. Advertising expense was less than 1% of our total revenue in each of the years ended December 31, 2002, 2001 and 2000.

(w) Other Pending Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. This Standard addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Standard requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and to adjust its present value in each subsequent period. In addition, we must capitalize an amount equal to the adjustment by increasing the carrying amount of the related long-lived asset, which is depreciated over the remaining useful life of the related asset. We will adopt SFAS No. 143 during the first quarter of fiscal year 2003 and have not yet determined what effect this statement will have on our earnings or financial position. We believe the adoption of this statement will not have a significant effect on our financial position or results of operations.

In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, we must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We have adopted FIN 45 and have determined that it will not have a material impact on our financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternate methods of transition for an entity that changes to the fair-value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require expanded and more prominent disclosure of the effects of an entity's accounting policy in the summary of significant accounting policies section with respect to stock-based employee compensation. The amendment of the annual disclosure requirements of SFAS No. 123 is effective for fiscal years ending after December 15, 2002. We have included the amended disclosure requirement of SFAS No. 148 in the above discussion of "Stock Options."

F-12

NOTE 2. Acquisitions and Dispositions

In 1996, we acquired a 26% interest in the capital stock of Polymedics N.V., ("Polymedics"), a Belgium manufacturer of foam used in certain V.A.C. dressings which was accounted for on a cost basis. During the first quarter of 2002, we acquired the remaining 74% of Polymedics stock for approximately $3.6 million in cash at which time the financial position and results of operations were reflected on a consolidated basis. Polymedics' operating results did not have a material impact on our results of operations for 2002, 2001 or 2000.

In August 2002, we sold our corporate headquarters facility and adjacent land and buildings under a 10-year sale/leaseback arrangement. The properties were sold for $17.9 million, net of selling costs, resulting in a deferred gain of approximately $10.4 million. The deferred gain is being amortized over the term of the lease. Approximately $425,000 of amortization was recognized in income in 2002. The initial lease term is 10 years and requires minimum annual lease payments ranging from $3.2 million to $3.8 million. We have two options to renew the lease for a term of three or five years each. Rental expense of $1.5 million was recognized in 2002.

The following table indicates the estimated future cash lease payments, inclusive of executory costs, for the years set forth below (dollars in thousands):

Year Ended December 31,	Estimated Cash Lease Payments
2003	$	3,232
2004		3,311
2005		3,390
2006		3,470
2007		3,549
2008 and thereafter		17,075

	$	34,027

F-13

NOTE 3. Supplemental Balance Sheet Data

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

			December 31, 2002			December 31, 2001
Trade accounts receivable:
	Facilities/dealers		$	92,359		$	73,088
	Third-party payers:
		Medicare/Medicaid		31,118			22,006
		Managed care commercial and other		53,229			40,375

				176,706			135,469
Medicare V.A.C. receivables prior to October 1, 2000				14,351			14,351
Employee and other receivables				2,410			2,075

				193,467			151,895
Less: Allowance for doubtful accounts				(26,220	)		(16,180	)
	Allowance for Medicare V.A.C. receivables prior to October 1, 2000			(14,351	)		(14,351	)

			$	152,896		$	121,364

Inventories consist of the following (dollars in thousands):

		December 31, 2002			December 31, 2001
Finished goods		$	16,411		$	11,244
Work in process			2,411			3,540
Raw materials, supplies and parts			31,825			37,081

			50,647			51,865
Less: Amounts expected to be converted into equipment for short-term rental			(11,100	)		(10,800	)
	Reserve for excess and obsolete inventory		(1,613	)		(899	)

		$	37,934		$	40,166

F-14

Net property, plant and equipment consist of the following (dollars in thousands):

	December 31, 2002			December 31, 2001
Land	$	549		$	1,439
Buildings		10,528			18,732
Equipment for short-term rental		178,022			149,347
Machinery, equipment and furniture		89,742			74,442
Leasehold improvements		3,209			1,804
Inventory to be converted to equipment		11,100			10,800

		293,150			256,564
Less accumulated depreciation		(187,601	)		(166,583	)

	$	105,549		$	89,981

Accrued expenses consist of the following (dollars in thousands):

	December 31, 2002		December 31, 2001
Payroll, commissions and related taxes	$	26,363	$	19,484
Interest expense		4,017		4,307
Insurance accruals		2,758		1,987
Other accrued expenses		28,418		22,330

	$	61,556	$	48,108

F-15

NOTE 4. Long-Term Obligations

Long-term obligations consist of the following (dollars in thousands):

			December 31, 2002			December 31, 2001
Senior Credit Facility:
	Revolving bank credit facility		$			$	11,800
	Term loans:
		Tranche A due 2003		27,500			27,500
		Tranche B due 2004		85,500			86,400
		Tranche C due 2005		85,500			86,400
		Tranche D due 2006		93,575			94,525
		Tranche E due 2005		29,775			—

				321,850			306,625
9⁵/8% Senior Subordinated Notes Due 2007				200,000			200,000

				521,850			506,625
Less current installments				(30,550	)		(2,750	)

			$	491,300		$	503,875

The senior credit facility originally totaled $400.0 million and consisted of (i) a $50.0 million six-year revolving credit facility, (ii) a $50.0 million six-year Acquisition Facility, (iii) a $120.0 million six-year amortizing Term Loan A, (iv) a $90.0 million seven-year amortizing Term Loan B and (v) a $90.0 million eight-year amortizing Term Loan C (collectively, the "Term Loans"). On February 17, 2000, we, entered into a third amendment to our $400.0 million senior credit agreement (the "Amendment"). The Amendment established revised financial covenant levels for Interest Coverage, Leverage Ratio and Minimum EBITDA. On June 15, 2001, we entered into an Amended and Restated Credit and Guarantee Agreement, which funded a $95 million Tranche D Term Loan as part of a refinancing of our senior secured credit facility. Proceeds from the Tranche D Term Loan were used to pay down existing indebtedness, including $60 million outstanding under the Tranche A Term Loan, approximately $8 million outstanding under the acquisition facility and $26 million under the revolving credit facility with the remaining proceeds used to pay fees and expenses associated with this transaction. On April 4, 2002, we entered into a Second Amended and Restated Credit and Guarantee Agreement (the "Amended Credit Agreement"). The Amended Credit Agreement funded a $30 million Tranche E Term Loan as part of a refinancing of our senior secured credit facility. Proceeds from the Tranche E Term Loan were used to pay down existing indebtedness of $29.6 million under the revolving credit facility with the remaining proceeds used to pay fees and expenses associated with the transaction. As of December 31, 2002, we had no revolving loans outstanding. However, we had four letters of credit in the amount of $8.7 million outstanding and the aggregate availability under the revolving credit facility of $41.3 million.

Senior Credit Facility

As of December 31, 2002, indebtedness under the senior credit facility, including the revolving credit facility (other than certain loans under the revolving credit facility designated in foreign currency) and the

F-16

term loans, bears interest at rates determined under either of the following alternative methods, at our option:

Method 1

The base rate, which is the higher of:

—: the rate of interest publicly announced by Bank of America as its "referenced rate"; or
—: the federal funds effective rate from time to time plus 0.50%;

PLUS

The percentage set forth below for the applicable loan/facility:

—: 0.75% in respect of Tranche A term loans and loans under our revolving credit facility;
—: 1.50% in respect of Tranche B term loans;
—: 1.75% in respect of Tranche C and Tranche E term loans; and
—: 1.625% in respect of Tranche D term loans, or

Method 2

The Eurodollar Rate (as defined in our senior credit facility agreement) for one, two, three or six months;

PLUS

The percentage set forth below for the applicable loan/facility:

—: 1.75% in respect of Tranche A term loans and loans under our revolving credit facility;
—: 2.50% in respect of Tranche B term loans;
—: 2.75% in respect of Tranche C and Tranche E term loans; and
—: 2.625% in respect to Tranche D term loans.

Revolving loans designated in foreign currency bear interest at a rate based upon the cost of funds for such loans plus 1.75%.

The term loans, other than Tranches D and E, are subject to quarterly amortization payments, which began on March 31, 1998. The Tranche D term loan amortizes at 1% per year beginning September 30, 2001 through December 31, 2005 with a final payment of $90.7 million due March 31, 2006. The Tranche E term loan amortizes at 1% per year beginning September 30, 2002 with a final payment of $29.0 million due December 31, 2005. We may borrow additional funds under the revolving credit facility at any time up to the borrowing limits thereunder. As of December 31, 2002, we had no revolving loans outstanding under the revolving credit facility, however, we had four letters of credit in the amount of $8.7 million and the aggregate availability under the revolving credit facility was $41.3 million.

Our indebtedness under the senior credit facility is guaranteed by certain of our subsidiaries and is secured by (i) a first priority security interest in all of our tangible and intangible assets and those of our domestic subsidiaries (subject to certain customary exceptions), including, without limitation, intellectual

F-17

property and real estate owned by us and our subsidiaries, (ii) a first priority perfected pledge of all our capital stock and the capital stock of our domestic subsidiaries and (iii) a first priority perfected pledge of up to 65% of the capital stock of foreign subsidiaries owned directly by us or our domestic subsidiaries.

Our senior credit agreement requires us to meet certain financial tests, including minimum levels of EBITDA, minimum interest coverage, maximum leverage ratio and capital expenditures. The senior credit agreement also contains covenants which, among other things, limit our ability to: incur additional indebtedness, make investments, announce or pay dividends, make loans and advances, make capital expenditures, enter into transactions with affiliates, dispose of our assets, enter into acquisitions, mergers or consolidation transactions, make prepayments on other indebtedness, create or permit to be created any liens on any of our properties, or undertake certain other matters customarily restricted in such agreements. As of December 31, 2002, we were in compliance with all applicable covenants.

Our senior credit agreement also contains customary events of default, including payment defaults, any breach of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, failures under ERISA plans, judgment defaults, any change in our company's control and failure of any guaranty, security document, security interest or subordination provision under the senior credit agreement. In addition, the senior credit agreement provides for mandatory repayments, subject to certain exceptions, of the term loans and the revolving credit facility based on certain net asset sales outside the ordinary course of our business and our subsidiaries' business, the net proceeds of certain debt and equity issuances and excess cash flows.

Interest Rate Protection

The following chart summarizes interest rate hedge transactions effective during 2002 (dollars in thousands):

Accounting Method	Effective Dates	Nominal Amount		Fixed Interest Rate		Status
Hypothetical⁽¹⁾	10/01/01-12/31/02	$	150,000	3.570	%	Matured 12/31/02
Shortcut	10/01/01-12/31/02	$	100,000	2.990	%	Matured 12/31/02
Shortcut⁽²⁾	12/31/02-12/31/03	$	100,000	1.745	%	Outstanding
Shortcut⁽²⁾	12/31/02-12/31/04	$	100,000	2.375	%	Outstanding

(1): On October 1, 2001, we entered into a $150 million interest rate swap agreement to take advantage of lower interest rates. Although no cash was exchanged, the $150.0 million swap did not qualify for the shortcut method because the fair value of the swap was not zero at inception (it had a negative value). We elected to use the "hypothetical derivative" method to measure effectiveness, which allowed us to use the change in the fair value of a "hypothetical derivative" (one which had no fair value at inception with terms mirroring the actual derivative that would be assumed to be perfectly effective) as a proxy for the change in the expected fair value of the hedged transactions. As of December 31, 2002, the $150 million swap agreement had matured. Hedge ineffectiveness, of approximately $27,000, in 2002 was immaterial and recognized as an increase of interest expense.
(2): As of December 31, 2002, these two $100 million interest rate swap agreements effectively fix the base-borrowing rate on 62% of our variable rate debt. The fair value of these swaps at inception was zero. However, due to subsequent movements in interest rates, as of December 31, 2002, the fair value

F-18

of the one-year, 1.7450% swap and the two-year, 2.3750% swap agreements were in an unfavorable position and were adjusted to a liability of approximately $330,000 and $1.0 million, respectively.

We have designated our interest rate protection agreements as cash flow hedge instruments. As a result of these agreements during 2002 and 2001, we recorded additional interest expense of approximately $2.8 million and $2.1 million, respectively. Interest expense for 2001 includes a write-off of $1.1 million, the fair value of a prior $150 million swap upon termination. (See Notes 10, 14 and 17.)

Senior Subordinated Notes

In November 1997, we issued $200.0 million of 9⁵/8% Senior Subordinated Notes due 2007. The notes are unsecured obligations, ranking subordinate in right of payment to all of our senior debt and will mature on November 1, 2007. Interest on the notes accrues at the rate of 9⁵/8% per annum and is payable semiannually in cash on each May 1 and November 1, commencing on May 1, 1998, to the persons who are registered Holders at the close of business on April 15 and October 15, respectively, immediately preceding the applicable interest payment date. Interest on the notes accrues from and includes the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance. As of December 31, 2002, the entire $200.0 million of our Notes were issued and outstanding.

Our notes are not entitled to the benefit of any mandatory sinking fund. The notes are redeemable, at our option, in whole at any time or in part from time to time, on and after November 1, 2002, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on November 1 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption.

Year	Percentage
2002	104.813	%
2003	103.208	%
2004	101.604	%
2005 and thereafter	100.000	%

At any time, or from time to time, we may acquire a portion of the notes through open-market purchases. In order to affect the foregoing redemption with the proceeds of any equity offering, we would make such redemption not more than 120 days after the consummation of any such equity offering.

Interest and Future Maturities

Interest paid during 2002, 2001 and 2000 was approximately $39.0 million, $42.9 million and $45.6 million, respectively.

F-19

As a result of the senior credit refinancing, future maturities of long-term debt at December 31, 2002 are as follows (dollars in thousands):

Year	Amount
2003	$	30,550
2004	$	86,750
2005	$	113,825
2006	$	90,725
2007	$	200,000

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NOTE 5. Accounting for Goodwill and Other Noncurrent Assets

Goodwill represents the excess purchase price over the fair value of net assets acquired. Prior to 2002, goodwill was amortized over three to twenty-five years from the date of acquisition using the straight-line method. Effective January 1, 2002, we have applied the provisions of Statement of Financial Accounting Standards No. 142, ("SFAS 142"), Goodwill and Other Intangible Assets in our accounting for goodwill. Under SFAS 142, goodwill and intangible assets that have indefinite useful lives are no longer subject to amortization over their estimated useful life. Rather, goodwill and intangible assets that have indefinite useful lives are and will be tested at least annually for impairment. SFAS 142 provides specific guidance for testing goodwill for impairment. Intangible assets with finite useful lives will continue to be amortized over their useful lives. Goodwill has been tested for impairment during the first and fourth quarters of 2002 and will be tested for impairment at least annually.

Goodwill was $46.4 million at December 31, 2002, compared to $43.0 million at December 31, 2001. This increase relates to our acquisition of Polymedics in the first quarter of 2002. (See Note 2.) Goodwill represented 7.5% and 12.5% of total assets at December 31, 2002 and December 31, 2001, respectively.

The following table shows the effect of the adoption of SFAS 142 on our net income as if the adoption had occurred on January 1, 2000 (dollars in thousands, except per share data):

	Pro Forma Year Ended December 31,
	2001		2000
Net earnings—as reported	$	23,901	$	9,129
Amortization adjustment		3,372		3,494

Adjusted net earnings	$	27,273	$	12,623

Basic earnings per common share—as reported	$	0.34	$	0.13
Amortization adjustment		0.04		0.05

Adjusted basic earnings per common share	$	0.38	$	0.18

Dilutive earnings per common share—as reported	$	0.32	$	0.12
Amortization adjustment		0.05		0.05

Adjusted dilutive earnings per common share	$	0.37	$	0.17

F-21

We have recorded amortizable intangible assets, which are included in Other Assets on our consolidated balance sheets. Other assets include the following (dollars in thousands):

	December 31, 2002			December 31, 2001
Patents, trademarks and other	$	10,868		$	10,083
Accumulated amortization		(6,840	)		(5,562	)

		4,028			4,521
Investment in assets subject to leveraged leases		16,445			16,445
Deposits and other		9,318			9,543

Other tangible, noncurrent assets, net		25,763			25,988

Total other assets, net	$	29,791		$	30,509

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

Amortization expense, related to finite-lived intangibles, was approximately $1.3 million, $1.9 million, and $573,000 for 2002, 2001, and 2000, respectively. We amortize these intangible assets over 5 to 17 years, depending on the estimated economic life of the individual asset. The following table shows the estimated amortization expense, in total for all finite-lived intangible assets, to be incurred over the next five years (dollars in thousands):

Year Ended December 31,	Estimated Amortization Expense
2003	$	488
2004	$	434
2005	$	385
2006	$	265
2007	$	225

NOTE 6. Leasing Obligations

We are obligated for equipment under various capital leases, which expire at various dates during the next two years. At December 31, 2002, the gross amount of equipment under capital leases totaled approximately $900,000 and related accumulated depreciation was approximately $800,000.

We lease our headquarters facility, computer and telecommunications equipment, service vehicles, office space, various storage spaces and manufacturing facilities under non-cancelable operating leases, which expire at various dates over the next ten years. Total rental expense for operating leases was

F-22

$17.7 million, $13.0 million and $13.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Future minimum lease payments under capital and non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2002 are as follows (dollars in thousands):

	Capital Leases		Operating Leases
2003	$	196	$	16,805
2004		95		13,850
2005		—		11,473
2006		—		9,790
2007		—		7,633
Later years		—		16,350

Total minimum lease payments		291	$	75,901

Less amount representing interest		39

Present value of net minimum capital lease payments		252
Less current portion		157

Obligations under capital leases, excluding current installments	$	95

NOTE 7. Income Taxes

Earnings before income taxes consists of the following (dollars in thousands):

	Year Ended December 31,
	2002		2001		2000
Domestic	$	229,270	$	28,824	$	133
Foreign		16,887		12,384		15,472

	$	246,157	$	41,208	$	15,605

Income tax expense attributable to income from continuing operations consists of the following (dollars in thousands):

	Year Ended December 31, 2002
	Current		Deferred			Total
Federal	$	15,195	$	68,256		$	83,451
State		1,318		4,204			5,522
International		7,922		(894	)		7,028

	$	24,435	$	71,566		$	96,001

F-23

	Year Ended December 31, 2001
	Current		Deferred			Total
Federal	$	9,371	$	1,818		$	11,189
State		2,283		(433	)		1,850
International		4,467		(199	)		4,268

	$	16,121	$	1,186		$	17,307

	Year Ended December 31, 2000
	Current		Deferred			Total
Federal	$	1,070	$	99		$	1,169
State		435		(343	)		92
International		6,038		(823	)		5,215

	$	7,543	$	(1,067	)	$	6,476

Income tax expense attributable to earnings before income taxes differed from the amounts computed by applying the statutory tax rate of 35 percent to pre-tax earnings from continuing operations as a result of the following (dollars in thousands):

	Year Ended December 31,
	2002			2001			2000
Computed "expected" tax expense	$	86,155		$	14,423		$	5,462
Goodwill		—			324			509
State income taxes, net of federal benefit		3,590			1,202			60
Tax-exempt interest from municipal bonds		(32	)		—			—
Foreign income taxed at other than U.S. rates		(441	)		(419	)		(657	)
Utilization of foreign net operating loss		(47	)		(48	)		—
Non-consolidated foreign net operating loss		1,606			401			457
Foreign, other		3,817			1,693			—
Other, net		1,353			(269	)		645

	$	96,001		$	17,307		$	6,476

F-24

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are presented below (dollars in thousands):

	2002			2001
Deferred Tax Assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	7,553		$	10,851
Intangible assets, deducted for book purposes but capitalized and amortized for tax purposes		1,099			1,616
Foreign net operating loss carry forwards		1,606			663
Inventories, principally due to additional costs capitalized for tax purposes pursuant to the Tax Reform Act of 1986		981			356
Deferred gain on sale of headquarters facility		3,401			—
Derivative tax adjustments		469			879
Accrued liabilities		1,948			1,956
Deferred foreign tax asset		1,453			559
Other		5,561			6,181

Total gross deferred tax assets		24,071			23,061
Less: valuation allowance		(1,606	)		(663	)

Net deferred tax assets		22,465			22,398

Deferred Tax Liabilities:
Plant and equipment, principally due to differences in depreciation and basis		(29,360	)		(25,243	)
Deferred Revenue		(61,250	)		—
Deferred state tax liability		(4,737	)		(534	)
Intangible assets, deducted for book purposes over a longer life than for tax purposes		(1,956	)		(984	)
Other		(1,501	)		—

Total gross deferred tax liabilities		(98,804	)		(26,761	)

Net deferred tax liability		(76,339	)		(4,363	)
Less: current portion		66,838			—

	$	(9,501	)	$	(4,363	)

At December 31, 2002, we had $1.6 million of foreign operating loss carryforwards available to reduce future taxable income. These loss carryforwards must be utilized within the applicable carryforward periods. A valuation allowance has been provided for the deferred tax assets related to the foreign loss carryforwards. Carryforwards of approximately $1.2 million can be used indefinitely and the remainder expire from 2007 through 2021.

We anticipate that the reversal of existing taxable temporary differences and future income will provide sufficient taxable income to realize the tax benefit of the remaining deferred tax assets.

Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $57.3 million, $38.8 million and $30.5 million at December 31, 2002, 2001 and 2000, respectively. These earnings are considered to be permanently reinvested and, accordingly, no provision for U.S. federal or state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividend or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for

F-25

foreign tax credits) and withholding taxes payable to various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

Income taxes paid during 2002, 2001 and 2000 were $24.6 million, $12.0 million and $7.2 million, respectively.

NOTE 8. Shareholders' Equity and Employee Benefit Plans

Common Stock:

We are authorized to issue 100.0 million shares of Common Stock, $0.001 par value (the "Common Stock"). The number of shares of Common Stock issued and outstanding at the end of 2002 and 2001 was 70,928,040 and 70,925,000, respectively.

Preferred Stock:

We are authorized to issue up to 20.0 million shares of Preferred Stock, par value $0.001 per share, in one or more series. As of December 31, 2002 and December 31, 2001, none were issued.

Investment Plan:

We have an Investment Plan intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code of 1986. The Investment Plan is available to all domestic employees and we match employee contributions up to a specified limit. In 2002, 2001 and 2000, we made matching contributions and charged to expense approximately $2.0 million, $1.4 million and $1.2 million, respectively.

NOTE 9. Stock Option Plans

In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 123, "Accounting and Disclosure of Stock-Based Compensation." While the accounting standard encouraged the adoption of a new fair-value method for expense recognition, Statement 123 allows companies to continue accounting for stock options and other stock-based awards as provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). We have elected to follow the provisions of APB 25 and related interpretations in accounting for our stock options plans because, as discussed below, the alternative fair-value method prescribed by FASB Statement No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of our employee stock options generally equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

In December 1997, our Board of Directors approved the 1997 Management Equity Plan. The maximum aggregate number of shares of Common Stock that may be issued in connection with grants under the Management Equity Plan, as amended, is approximately 13.9 million shares, subject to adjustment as provided for in the plan. The Management Equity Plan is administered, and grants determined, by a committee of the Board of Directors. The exercise price and term of options granted under the Management Equity Plan shall be determined by the committee, however, in no event shall the term of any option granted under the Management Equity Plan exceed ten (10) years. The Management Equity Plan supersedes all other stock option plans. During the 1997 recapitalization transaction, 60 employees rolled stock options covering an additional 5.5 million shares of our common stock into the 1997 Management Equity Plan.

F-26

Pro forma information regarding net income and earnings per share is required by Statement 123 and has been calculated based on the assumption that we had accounted for our employee stock options under the fair-value method of that statement. The fair value for options granted during the three fiscal years ended December 31, 2002, 2001 and 2000, respectively, was estimated using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 4.2%, 4.5% and 4.7%, dividend yields of 0.4%, 0.4% and 0.7%, volatility factors of the expected market price of our common stock of .22, .24 and .33 and a weighted-average expected option life of 6.2 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Other option valuation models also require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the underlying assumptions can materially affect the fair value estimate, in management's opinion, Black-Scholes and other models do not necessarily provide a reliable measure of the fair value of our employee stock options.

		2002		2001		2000
Net earnings as reported		$	150,156	$	23,901	$	9,129
Pro forma net earnings		$	148,751	$	22,526	$	7,023
Earnings per share as reported
	Basic earnings per common share	$	2.12	$	0.34	$	0.13
	Diluted earnings per common share	$	1.93	$	0.32	$	0.12
Pro forma earnings per share
	Basic earnings per common share	$	2.10	$	0.32	$	0.10
	Diluted earnings per common share	$	1.92	$	0.30	$	0.10

The following table summarizes information about stock options outstanding at December 31, 2002 (options in thousands):

Range of Exercise Prices	Options Outstanding at 12/31/02	Weighted Average Remaining Contract Life (years)	Weighted Average Exercise Price		Options Exercisable at 12/31/02	Weighted Average Exercise Price
$0.91 to $1.13	1,175	1.6	$	1.07	1,175	$	1.07
$1.25 to $2.28	513	1.9	$	1.72	513	$	1.72
$2.78 to $4.81	14,854	4.1	$	4.58	9,855	$	4.46
$4.82 to $7.00	503	7.6	$	7.00	32	$	7.00

	17,045	3.9	$	4.32	11,575	$	4.00

F-27

A summary of our stock option activity, and related information, for years ended December 31, 2002, 2001 and 2000 follows (options in thousands):

	2002				2001				2000
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Options outstanding—beginning of year	17,542		$	4.28	16,985		$	4.18	9,617		$	3.65
Granted	293		$	7.00	1,677		$	5.09	7,921		$	4.81
Exercised	(121	)	$	3.69	(734	)	$	3.67	(319	)	$	3.10
Forfeited	(669	)	$	4.42	(386	)	$	4.81	(234	)	$	4.81

Options outstanding—end of year	17,045		$	4.32	17,542		$	4.28	16,985		$	4.18

Exercisable at end of year	11,575		$	4.00	9,540		$	3.78	8,113		$	3.50

Weighted average fair value of options granted during the year			$	2.15			$	1.84			$	1.83

NOTE 10. Other Comprehensive Income

Our other comprehensive income is comprised of net earnings, foreign currency translation adjustment and adjustments to derivative financial instruments.

The earnings associated with certain of our foreign affiliates are considered to be permanently invested and no provision for U.S. Federal and State income taxes on these earnings or translation adjustments has been made.

As of December 31, 2002, derivative financial instruments valued at a liability of approximately $1.3 million were recorded as a result of our adoption of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This liability is based upon the valuation of our interest rate protection agreements associated with our Senior Credit Facilities. (See Notes 4, 14 and 17.)

NOTE 11. Earnings Per Share

The following table sets forth the reconciliation from basic to diluted average common shares and the calculations of net earnings per common share. Net earnings for basic and diluted calculations do not differ (dollars in thousands, except per share):

		2002		2001		2000
Net earnings		$	150,156	$	23,901	$	9,129

Average common shares:
	Basic (weighted-average outstanding shares)		70,927		70,917		70,915
	Dilutive potential common shares from stock options		6,735		3,079		2,304

	Diluted (weighted-average outstanding shares)		77,662		73,996		73,219

Basic earnings per common share		$	2.12	$	0.34	$	0.13

Diluted earnings per common share		$	1.93	$	0.32	$	0.12

F-28

NOTE 12. Commitments and Contingencies

On August 16, 1995, we filed a civil antitrust lawsuit against Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-Rom Company (together "Hillenbrand"). On September 27, 2002, a jury found in KCI's favor. The jury found that Hillenbrand had wrongfully attempted to monopolize the specialty hospital bed market. The jury awarded us $173.6 million, which was subject to trebling under the federal antitrust laws, pending an anticipated appeal. On December 31, 2002, we settled our antitrust lawsuit with Hillenbrand. Under the settlement, Hillenbrand agreed to pay KCI $250 million. The parties released each other from all claims relating to the litigation and all claims between the parties as of the settlement date. On January 2, 2003, the United States District Court for the Western District of Texas, San Antonio Division approved the settlement and dismissed the case. Upon dismissal of the lawsuit, Hillenbrand paid KCI $175 million. Pursuant to the terms of the settlement, Hillenbrand will pay to KCI an additional $75 million in January 2004, subject to certain conditions.

On February 21, 1992, Novamedix Limited ("Novamedix") filed a lawsuit against us in the United States District Court for the Western District of Texas. Novamedix manufactures the principal product which directly competes with the PlexiPulse products. The suit alleges that the PlexiPulse products infringe several patents held by Novamedix, that we breached a confidential relationship with Novamedix and a variety of ancillary claims. Novamedix seeks injunctive relief and monetary damages. A judicial stay which has been in effect with respect to all patent claims in this case has been lifted. Although it is not possible to reliably predict the outcome of this litigation or the damages, which could be awarded, we believe that our defenses to these claims are meritorious and that the litigation will not have a material adverse effect on our business, financial condition or results of operations.

On January 7, 1998, Mondomed N.V. filed an opposition in the European Patent Office (the "Opposition") to a European patent owned by Wake Forest University and licensed by KCI for our V.A.C. They were joined in this Opposition by Paul Hartmann A.G. on December 16, 1998. On February 13, 2002, the Opposition Division of the European Patent Office issued a non-binding Preliminary Opinion in favor of KCI. The opposing parties will have additional opportunities to assert their arguments in relation to an oral hearing that will be held prior to the issuance of a Final Opinion. A final date for the oral hearing has not been set. Although it is not possible to reliably predict the outcome of the Opposition, we believe that the patent will be upheld.

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

Other than commitments for new product inventory, including disposable "for sale" products of $12.5 million, we have no material long-term capital commitments and can adjust our level of capital expenditures as circumstances dictate.

See discussion of our self-insurance program at Note 1 and leases at Note 6.

F-29

NOTE 13. Segment and Geographic Information

We are principally engaged in the rental and sale of innovative therapeutic devices and systems throughout the United States and in 15 primary countries internationally. 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 such, we do not manage our business by product line but rather by operating segments which include our USA and our International segments. We measure segment profit as operating earnings, which is defined as income before interest income or expense, foreign currency gains and losses, income taxes and minority interest. All intercompany transactions are eliminated in computing revenues, operating earnings and assets. Prior years have been made to conform with the 2002 presentation. Information on segments and a reconciliation of consolidated totals are as follows (dollars in thousands):

				Twelve months ended December 31,
				2002			2001			2000
Revenue:
	USA
		V.A.C.		$	268,224		$	166,242		$	69,980
		Therapeutic surfaces/other			178,563			187,881			186,602

			Subtotal - USA		446,787			354,123			256,582

	International
		V.A.C.			45,190			23,759			15,766
		Therapeutic surfaces/other			86,985			78,065			79,684

			Subtotal - International		132,175			101,824			95,450

	Total revenue			$	578,962		$	455,947		$	352,032

Operating earnings:
	USA			$	145,541		$	109,471		$	82,114
	International				18,348			19,124			19,450
	Other⁽¹⁾:
		Executive			(12,272	)		(13,060	)		(9,496	)
		Finance			(17,175	)		(13,040	)		(14,060	)
		Manufacturing/engineering			(6,695	)		(4,394	)		(2,921	)
		Administration			(18,328	)		(10,419	)		(9,386	)
	Unusual item-litigation settlement				173,250			—			—

			Total other		118,780			(40,913	)		(35,863	)

				$	282,669		$	87,682		$	65,701

Depreciation and amortization:
	USA			$	18,865		$	19,902		$	19,464
	International				9,302			8,296			7,945
	Other⁽¹⁾:
		Executive			484			2,123			1,357
		Finance			3,553			2,780			2,333
		Manufacturing/engineering			1,983			1,632			1,478
		Administration			2,811			2,482			2,205

			Total other		8,831			9,017			7,373

				$	36,998		$	37,215		$	34,782

F-30

Total Assets:
	USA			$	280,870	$	222,433	$	182,442
	International				114,192		74,015		64,667
	Other:
		Executive			8,834		14,869		14,750
		Finance			12,270		7,234		5,000
		Manufacturing/engineering			13,605		13,046		11,470
		Administration			188,288		11,596		9,762

			Total other		222,997		46,745		40,982

				$	618,059	$	343,193	$	288,091

Gross capital expenditures:
	USA			$	24,263	$	24,771	$	13,948
	International				15,703		8,097		7,205
	Other:
		Executive			—		—		—
		Finance			13,477		10,901		8,131
		Manufacturing/engineering			1,403		2,928		2,734
		Administration			—		—		—

			Total other		14,880		13,829		10,865

				$	54,846	$	46,697	$	32,018

(1): Other includes general headquarter expenses which are not allocated to the individual segments and are included in selling, general and administrative expenses within our Consolidated Statements of Earnings.

The following is other selected geographic financial information of KCI (dollars in thousands):

			Year Ended December 31,
			2002		2001		2000
Geographic location of long-lived assets:
	Domestic		$	150,133	$	149,689	$	141,281
	Foreign			37,851		22,438		19,994

		Total long-lived assets	$	187,984	$	172,127	$	161,275

NOTE 14. Derivative Financial Instruments

We adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," and its amendments, Statements 137 and 138, on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. In accordance with the transition provisions of SFAS 133, no cumulative effect of an accounting change was necessary. We have designated our interest rate swap agreements as cash flow hedge instruments. The swap agreements are used to manage exposure to interest rate movement by effectively changing the variable interest rate to a fixed rate. Changes in the effective portion of the fair value of the interest rate swap agreement will be recognized in other comprehensive income, net of tax effects, until the hedged item is recognized into earnings, whereas the ineffective portion is recognized into income as incurred. To

F-31

qualify for the shortcut method of accounting, the critical terms of the interest rate swap agreements and the interest-bearing debt associated with the swap agreements must be the same.

The following chart summarizes the cash flow hedge transactions for the period of 2002 and 2001 (dollars in thousands):

Accounting Method	Effective Dates	Nominal		Fixed Interest Rate		Status
Shortcut	01/05/01-12/31/01	$	150,000	5.360	%	Terminated 10/01/01
Hypothetical⁽¹⁾	10/01/01-12/31/02		150,000	3.570		Matured 12/31/02
Shortcut	10/01/01-12/31/02		100,000	2.990		Matured 12/31/02
Shortcut⁽²⁾	12/31/02-12/31/03		100,000	1.745		Outstanding
Shortcut⁽²⁾	12/31/02-12/31/04		100,000	2.375		Outstanding

(1): On October 1, 2001, we terminated our $150.0 million, 5.36% interest rate swap and entered into an agreement to take advantage of lower interest rates. The amount included in other comprehensive income as of September 30, 2001 continued to be recognized over the original date through which interest payments were hedged, December 31, 2002, because the hedged item (interest payments) continued to exist. In addition, accumulated other comprehensive loss was reduced by approximately $550,000 as a loss on termination of interest rate swap during 2001 and increased by approximately $550,000 during 2002.

Although no cash was exchanged, the $150.0 million swap did not qualify for the shortcut method because the fair value of the swap was not zero at inception (it had a negative value). We elected to use the "hypothetical derivative" method to measure effectiveness, which allowed us to use the change in the fair value of a "hypothetical derivative" (one which had no fair value at inception with terms mirroring the actual derivative that would be assumed to be perfectly effective) as a proxy for the change in the expected fair value of the hedged transactions. As of December 31, 2002, the $150 million swap agreement had matured. Hedge ineffectiveness, of approximately $27,000, in 2002 was immaterial and recognized as an increase of interest expense.

(2): As of December 31, 2002 these agreements effectively fix the base-borrowing rate on 62% of our variable rate debt. The fair value of these swaps at inception was zero. However, due to subsequent movements in interest rates, as of December 31, 2002 the fair value of the one-year, 1.7450% swap and two-year, 2.3750% swap agreements were in an unfavorable position and were adjusted to a liability of approximately $330,000 and $1.0 million, respectively.

As a result of interest rate protection agreements during 2002 and 2001, we recorded additional interest expense of approximately $2.8 million and $2.1 million, respectively. The expense for 2001 includes a fourth quarter write-off of $1.1 million, the fair value of the old $150 million swap upon termination. (See Consolidated Statement of Shareholders' Deficit and Notes 4, 10 and 17.)

F-32

NOTE 15. Quarterly Financial Data (unaudited)

The unaudited consolidated results of operations by quarter are summarized below (dollars in thousands, except per share data):

		Year Ended December 31, 2002
		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Revenue		$	127,141	$	137,108	$	150,488	$	164,225
Gross profit		$	55,746	$	58,228	$	65,095	$	71,944
Unusual item-litigation settlement			—		—		—	$	173,250
Operating earnings		$	24,554	$	26,148	$	26,398	$	205,569
Net earnings		$	8,433	$	11,596	$	9,103	$	121,024
Per share:
	Basic earnings per common share	$	0.12	$	0.16	$	0.13	$	1.71
	Dilutive earnings per common share	$	0.11	$	0.15	$	0.12	$	1.56
Average common shares:
	Basic (weighted average outstanding shares)		70,925		70,926		70,928		70,928
	Diluted (weighted average outstanding shares)		77,721		77,683		77,664		77,643

		Year Ended December 31, 2001
		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Revenue		$	103,237	$	108,623	$	117,435	$	126,652
Gross profit		$	44,148	$	47,684	$	53,585	$	57,093
Operating earnings		$	20,257	$	20,755	$	23,527	$	23,143
Net earnings		$	4,314	$	5,350	$	6,817	$	7,420
Per share:
	Basic earnings per common share	$	0.06	$	0.08	$	0.10	$	0.10
	Dilutive earnings per common share	$	0.06	$	0.07	$	0.09	$	0.10
Average common shares:
	Basic (weighted average outstanding shares)		70,915		70,915		70,917		70,920
	Diluted (weighted average outstanding shares)		73,077		73,056		74,255		75,130

Earnings per share for the full year may differ from the total of the quarterly earnings per share due to rounding differences.

NOTE 16. Unusual Item—Litigation Settlement

During the fourth quarter of 2002, we recorded a gain from the settlement of an antitrust lawsuit with Hillenbrand Industries, Inc. and Hill-Rom Company, Inc., a wholly-owned subsidiary of Hillenbrand (together, "Hillenbrand"). On December 31, 2002, under the settlement, Hillenbrand agreed to pay KCI $250.0 million. The initial payment was $175.0 million, payable upon dismissal of the lawsuit by the court. Net of legal fees and expenses, this transaction added $173.3 million of pretax income and $106.4 million of net income to the 2002 results. We recorded a $66.8 million current deferred tax liability related to this gain. This settlement also provides that Hillenbrand will pay to KCI an additional $75.0 million in January 2004, subject to certain conditions, such as the occurrence of a bankruptcy or change in control. No accrual has been made related to this payment. We received the initial payment of $175.0 million on January 2, 2003. (See Note 12 of Notes to Consolidated Financial Statements.)

F-33

NOTE 17. Subsequent Events (unaudited)

On January 2, 2003, we received $175 million pursuant to the settlement of the antitrust lawsuit with Hillenbrand upon dismissal of the lawsuit by the court. The cash received was used to pay down $107 million of indebtedness on the senior credit facility. In addition, a current deferred tax payable of $66.8 million was recorded for estimated tax liabilities related to the gain. After the paydown, our long-term obligations were (dollars in thousands):

			December 31, 2002			Paydown			Subsequent to Paydown
Senior credit facilities
	Term loans:
		Tranche A due 2003	$	27,500		$	9,867		$	17,633
		Tranche B due 2004		85,500			28,217			57,283
		Tranche C due 2005		85,500			28,217			57,283
		Tranche D due 2006		93,575			30,876			62,699
		Tranche E due 2005		29,775			9,823			19,952

				321,850			107,000			214,850
9⁵/8% Senior Subordinated Notes due 2007				200,000			—			200,000

				521,850			107,000			414,850
Less current installments				(30,550	)		(11,382	)		(19,168	)

			$	491,300		$	95,618		$	395,682

After giving effect to the paydown of the senior credit facility, future maturities of long-term debt as of December 31, 2002 are as follows (dollars in thousands):

	December 31, 2002		Paydown		Subsequent to Paydown
2003	$	30,550	$	11,382	$	19,168
2004		86,750		28,475		58,275
2005		113,825		37,363		76,462
2006		90,725		29,780		60,945
2007		200,000		—		200,000

	$	521,850	$	107,000	$	414,850

On January 31, 2003, we sold $20 million of our $100 million, 1.7450% interest rate swap to be effective March 31, 2003 resulting in an expense of $73,500 which will be recorded in the first quarter of 2003. Subsequent to the paydown of $107.0 million of debt, the remaining interest rate swap agreements effectively fix the base-borrowing rate on 83.8% of our variable rate debt. (See Notes 4, 10 and 14.)

NOTE 18. Guarantor Condensed Consolidating Financial Statements

Kinetic Concepts, Inc. issued $200 million in subordinated debt securities to finance a tender offer to purchase certain of our common shares outstanding. In connection with the issuance of these securities, certain of our wholly owned subsidiaries (the "guarantor subsidiaries") act as guarantors. Certain other subsidiaries (the "non-guarantor subsidiaries") do not guarantee such debt. The guarantor subsidiaries are wholly owned by KCI and the guarantees are full, unconditional, and joint and several. We have not

F-34

presented separate financial statements and other disclosures concerning the Subsidiary Guarantors because management has determined that such information is not material to investors.

Our indebtedness under the senior credit agreement is guaranteed by certain of the subsidiaries of KCI and is secured by (i) a first priority security interest in all, subject to certain customary exceptions, of the tangible and intangible assets of KCI and our domestic subsidiaries, including, without limitation, intellectual property and real estate owned by KCI and our subsidiaries, (ii) a first priority perfected pledge of all capital stock of KCI's domestic subsidiaries and (iii) a first priority perfected pledge of up to 65% of the capital stock of foreign subsidiaries owned directly by KCI or our domestic subsidiaries. The senior credit agreement contains covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, loans and advances, capital expenditures, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. The net assets of the guarantor subsidiaries are detailed on the following tables.

The following tables present the condensed consolidating balance sheets of Kinetic Concepts, Inc. as a parent company, our guarantor subsidiaries and our non-guarantor subsidiaries as of December 31, 2002 and 2001 and the related condensed consolidating statements of earnings and cash flows for each year in the three-year period ended December 31, 2002.

F-35

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET

December 31, 2002
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
ASSETS:
Current assets:
	Cash and cash equivalents		$	—		$	41,185		$	13,300	$	—		$	54,485
	Accounts receivable, net			—			125,106			35,612		(7,822	)		152,896
	Accounts receivable—other			175,000			—			—		—			175,000
	Inventories, net			—			20,113			17,821		—			37,934
	Prepaid expenses and other current assets			—			6,377			3,383		—			9,760

		Total current assets		175,000			192,781			70,116		(7,822	)		430,075
	Net property, plant and equipment			—			96,458			23,516		(14,425	)		105,549
	Loan issuance cost, net			—			6,287			—		—			6,287
	Goodwill, net			—			38,724			7,633		—			46,357
	Other assets, net			—			31,044			20,247		(21,500	)		29,791
	Intercompany investments and advances			(187,076	)		508,045			23,447		(344,416	)		—

			$	(12,076	)	$	873,339		$	144,959	$	(388,163	)	$	618,059

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Accounts payable			$	—		$	4,632		$	6,524	$	—		$	11,156
Accrued expenses				1,522			46,058			13,976		—			61,556
Current installments of long-term obligations				—			30,550			—		—			30,550
Current installments of capital lease obligations				—			157			—		—			157
Intercompany payables				—			22,497			—		(22,497	)		—
Derivative financial instruments				—			1,341			—		—			1,341
Income taxes payable				—			8,615			6,000		—			14,615
Current deferred income taxes				66,838			—			—		—			66,838

		Total current liabilities		68,360			113,850			26,500		(22,497	)		186,213

Long-term obligations, net of current installments				—			491,300			—		—			491,300
Capital lease obligations, net of current installments				—			75			20		—			95
Intercompany payables, noncurrent				—			(21,500	)		21,500		—			—
Deferred income taxes, net				—			9,251			—		250			9,501
Deferred gain, sale of headquarters facility				—			10,023			—		—			10,023
Other noncurrent deferred, net				—			22,863			—		(21,500	)		1,363

				68,360			625,862			48,020		(43,747	)		698,495
Shareholders' equity (deficit)				(80,436	)		247,477			96,939		(344,416	)		(80,436	)

			$	(12,076	)	$	873,339		$	144,959	$	(388,163	)	$	618,059

F-36

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET

December 31, 2001
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
ASSETS:
Current assets:
	Cash and cash equivalents		$	—		$	—		$	5,301	$	(5,102	)	$	199
	Accounts receivable, net			—			115,368			25,092		(19,096	)		121,364
	Inventories, net			—			22,432			17,734		—			40,166
	Prepaid expenses and other current assets			—			4,550			4,787		—			9,337

		Total current assets		—			142,350			52,914		(24,198	)		171,066
Net property, plant and equipment				—			93,893			9,184		(13,096	)		89,981
Loan issuance cost, net				—			8,602			—		—			8,602
Goodwill, net				—			39,381			3,654		—			43,035
Other assets, net				—			29,227			22,782		(21,500	)		30,509
Intercompany investments and advances				(236,325	)		500,348			24,291		(288,314	)		—

			$	(236,325	)	$	813,801		$	112,825	$	(347,108	)	$	343,193

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Accounts payable			$	—		$	10,213		$	3,318	$	(5,102	)	$	8,429
Accrued expenses				—			35,471			12,637		—			48,108
Current installments of long-term obligations				—			2,750			—		—			2,750
Current installments of capital lease obligations				—			171			—		—			171
Intercompany payables				—			39,584			—		(39,584	)		—
Derivative financial instruments				—			2,512			—		—			2,512
Income taxes payable				—			7,227			1,534		—			8,761

		Total current liabilities		—			97,928			17,489		(44,686	)		70,731

Long-term obligations, net of current installments				—			503,875			—		—			503,875
Capital lease obligations, net of current installments				—			232			—		—			232
Intercompany payables, noncurrent				—			(21,500	)		21,500		—			—
Deferred income taxes, net				—			15,186			—		(10,823	)		4,363
Other noncurrent deferred, net				—			21,817			—		(21,500	)		317

				—			617,538			38,989		(77,009	)		579,518
Shareholders' equity (deficit)				(236,325	)		196,263			73,836		(270,099	)		(236,325	)

			$	(236,325	)	$	813,801		$	112,825	$	(347,108	)	$	343,193

F-37

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the year ended December 31, 2002
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—		$	365,781		$	87,279	$	—		$	453,060
	Sales and other			—			105,695			44,828		(24,621	)		125,902

		Total revenue		—			471,476			132,107		(24,621	)		578,962
Rental expenses				—			198,477			77,648		—			276,125
Cost of goods sold				—			49,387			16,514		(14,077	)		51,824

				—			247,864			94,162		(14,077	)		327,949

		Gross profit		—			223,612			37,945		(10,544	)		251,013
Selling, general and administrative expenses				—			128,411			13,183		—			141,594
Unusual item—litigation settlement				(173,250	)		—			—		—			(173,250	)

		Operating earnings		173,250			95,201			24,762		(10,544	)		282,669
Interest income				—			294			202		—			496
Interest expense				—			(40,943	)		1,702		(1,702	)		(40,943	)
Foreign currency income				—			3,555			380		—			3,935

		Earnings before income taxes and equity in earnings of subsidiaries		173,250			58,107			27,046		(12,246	)		246,157
Income taxes				66,838			22,682			11,257		(4,776	)		96,001

		Earnings before equity in earnings of subsidiaries		106,412			35,425			15,789		(7,470	)		150,156
Equity in earnings of subsidiaries				43,744			15,790			—		(59,534	)		—

		Net earnings	$	150,156		$	51,215		$	15,789	$	(67,004	)	$	150,156

F-38

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the year ended December 31, 2001
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	291,145		$	70,489		$	—		$	361,634
	Sales and other			—		74,564			27,608			(7,859	)		94,313

		Total revenue		—		365,709			98,097			(7,859	)		455,947
Rental expenses				—		165,618			54,867			—			220,485
Cost of goods sold				—		31,859			8,202			(7,109	)		32,952

				—		197,477			63,069			(7,109	)		253,437

		Gross profit		—		168,232			35,028			(750	)		202,510
Selling, general and administrative expenses				—		105,460			9,368			—			114,828

		Operating earnings		—		62,772			25,660			(750	)		87,682
Interest income				—		174			106			—			280
Interest expense				—		(45,116	)		—			—			(45,116	)
Foreign currency loss				—		(1,322	)		(316	)		—			(1,638	)

		Earnings before income taxes and equity in earnings of subsidiaries		—		16,508			25,450			(750	)		41,208
Income taxes				—		8,852			8,770			(315	)		17,307

		Earnings before equity in earnings of subsidiaries		—		7,656			16,680			(435	)		23,901
Equity in earnings of subsidiaries				23,901		16,680			—			(40,581	)		—

		Net earnings	$	23,901	$	24,336		$	16,680		$	(41,016	)	$	23,901

F-39

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS

For the year ended December 31, 2000
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	209,210		$	65,121		$	—		$	274,331
	Sales and other			—		62,225			27,173			(11,697	)		77,701

		Total revenue		—		271,435			92,294			(11,697	)		352,032
Rental expenses				—		124,685			51,707			—			176,392
Cost of goods sold				—		27,469			10,454			(8,278	)		29,645

				—		152,154			62,161			(8,278	)		206,037

		Gross profit		—		119,281			30,133			(3,419	)		145,995
Selling, general and administrative expenses				—		74,391			5,903			—			80,294

		Operating earnings		—		44,890			24,230			(3,419	)		65,701
Interest income				—		621			276			—			897
Interest expense				—		(48,635	)		—			—			(48,635	)
Foreign currency loss				—		(1,788	)		(570	)		—			(2,358	)

		Earnings (loss) before income taxes and equity in earnings of subsidiary		—		(4,912	)		23,936			(3,419	)		15,605
Income taxes				—		(174	)		8,069			(1,419	)		6,476

		Earnings (loss) before equity in earnings of subsidiaries		—		(4,738	)		15,867			(2,000	)		9,129
Equity in earnings of subsidiaries				9,129		15,867			—			(24,996	)		—

		Net earnings	$	9,129	$	11,129		$	15,867		$	(26,996	)	$	9,129

F-40

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS

For the year ended December 31, 2002
(in thousands)

	Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
Net earnings	$	150,156		$	51,215		$	15,789		$	(67,004	)	$	150,156
Noncash gain on litigation settlement		(173,250	)		—			—			—			(173,250	)
Adjustments to reconcile net earnings to net cash provided by operating activities		22,866			3,991			8,638			63,853			99,348

Net cash provided (used) by operating activities		(228	)		55,206			24,427			(3,151	)		76,254

Cash flows from investing activities:
Additions to property, plant and equipment		—			(31,957	)		(24,499	)		1,910			(54,546	)
Increase in inventory to be converted into equipment for short-term rental		—			(300	)		—			—			(300	)
Dispositions of property, plant and equipment		—			365			1,338			—			1,703
Proceeds from sale of headquarters facility		—			18,232			—			—			18,232
Business acquisitions, net of cash acquired		—			—			(3,596	)		—			(3,596	)
Decrease (increase) in other assets		—			(2,672	)		2,152			—			(520	)

Net cash used by investing activities		—			(16,332	)		(24,605	)		1,910			(39,027	)

Cash flows from financing activities:
Proceeds from notes payable, long-term, capital lease and other obligations		—			16,071			20			—			16,091
Proceeds from the exercise of stock options		9			—			—			—			9
Proceeds (payments) on intercompany investments and advances		(5,506	)		(8,994	)		872			13,628			—
Other		5,725			(4,766	)		7,285			(8,244	)		—

Net cash provided by financing activities:		228			2,311			8,177			5,384			16,100
Effect of exchange rate changes on cash and cash equivalents		—			—			—			959			959

Net increase in cash and cash equivalents		—			41,185			7,999			5,102			54,286
Cash and cash equivalents, beginning of year		—			—			5,301			(5,102	)		199

Cash and cash equivalents, end of year	$	—		$	41,185		$	13,300		$	—		$	54,485

F-41

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS

For the year ended December 31, 2001
(in thousands)

	Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
Net earnings	$	23,901		$	24,336		$	16,680		$	(41,016	)	$	23,901
Adjustments to reconcile net earnings to net cash provided by operating activities		(23,901	)		(18,699	)		(4,465	)		53,059			5,994

Net cash provided by operating activities		—			5,637			12,215			12,043			29,895

Cash flows from investing activities:
Additions to property, plant and equipment		—			(39,651	)		(6,424	)		2,078			(43,997	)
Increase in inventory to be converted into equipment for short-term rental		—			(2,700	)		—			—			(2,700	)
Dispositions of property, plant and equipment		—			1,392			1,352			—			2,744
Business acquisitions, net of cash acquired		—			—			(80	)		—			(80	)
Increase in other assets		—			(4,069	)		(223	)		—			(4,292	)

Net cash used by investing activities		—			(45,028	)		(5,375	)		2,078			(48,325	)

Cash flows from financing activities:
Proceeds from notes payable, long-term, capital lease and other obligations		—			16,805			—			—			16,805
Proceeds from the exercise of stock options		24			—			—			—			24
Proceeds (payments) on intercompany investments and advances		275			22,626			(2,319	)		(20,582	)		—
Other		(299	)		(40	)		(5,376	)		5,715			—

Net cash provided (used) by financing activities		—			39,391			(7,695	)		(14,867	)		16,829

Effect of exchange rate changes on cash and cash equivalents		—			—			—			(339	)		(339	)

Net decrease in cash and cash equivalents		—			—			(855	)		(1,085	)		(1,940	)
Cash and cash equivalents, beginning of year		—			—			6,156			(4,017	)		2,139

Cash and cash equivalents, end of year	$	—		$	—		$	5,301		$	(5,102	)	$	199

F-42

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS

For the year ended December 31, 2000
(in thousands)

	Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
Net earnings	$	9,129		$	11,129		$	15,867		$	(26,996	)	$	9,129
Adjustments to reconcile net earnings to net cash provided by operating activities		(9,129	)		17,172			5,441			17,538			31,022

Net cash provided by operating activities		—			28,301			21,308			(9,458	)		40,151

Cash flows from investing activities:
Additions to property, plant and equipment		—			(29,592	)		(8,342	)		6,216			(31,718	)
Increase in inventory to be converted into equipment for short-term rental		—			(300	)		—			—			(300	)
Dispositions of property, plant and equipment		—			487			1,250			—			1,737
Business acquisitions, net of cash acquired		—			(1	)		(426	)		—			(427	)
Increase in other assets		—			(1,002	)		(302	)		—			(1,304	)

Net cash used by investing activities		—			(30,408	)		(7,820	)		6,216			(32,012	)

Cash flows from financing activities:
Repayments of notes payable, long-term, capital lease and other obligations		—			(12,714	)		(1	)		—			(12,715	)
Proceeds (payments) on intercompany investments and advances		350			15,118			(17,027	)		1,559			—
Other		(350	)		(297	)		(183	)		830			—

Net cash provided (used) by financing activities		—			2,107			(17,211	)		2,389			(12,715	)

Effect of exchange rate changes on cash and cash equivalents		—			—			—			(647	)		(647	)

Net decrease in cash and cash equivalents		—			—			(3,723	)		(1,500	)		(5,223	)
Cash and cash equivalents, beginning of year		—			—			9,879			(2,517	)		7,362

Cash and cash equivalents, end of year	$	—		$	—		$	6,156		$	(4,017	)	$	2,139

F-43

Schedule II

KINETIC CONCEPTS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS

(in thousands)
Three years ended December 31, 2002

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts		Deductions		12/31/00 Balance at End of Period
Allowance for doubtful accounts	$	21,284	$	6,466	$	23	$	7,048	$	20,725

Inventory reserve	$	1,528	$	542	$	—	$	1,306	$	764

Deferred tax asset valuation allowance	$	842	$	—	$	354	$	520	$	676

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts		Deductions		12/31/01 Balance at End of Period
Allowance for doubtful accounts	$	20,725	$	8,932	$	5,031	$	4,157	$	30,531

Inventory reserve	$	764	$	1,612	$	—	$	1,477	$	899

Deferred tax asset valuation allowance	$	676	$	—	$	401	$	414	$	663

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts		Deductions		12/31/02 Balance at End of Period
Allowance for doubtful accounts	$	30,531	$	7,623	$	11,677	$	9,260	$	40,571

Inventory reserve	$	899	$	2,150	$	—	$	1,436	$	1,613

Deferred tax asset valuation allowance	$	663	$	—	$	990	$	47	$	1,606

F-44

KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)

			September 30, 2003			December 31, 2002
			(unaudited)
Assets:
Current assets:
	Cash and cash equivalents		$	41,128		$	54,485
	Accounts receivable, net			170,639			152,896
	Accounts receivable—other			—			175,000
	Inventories, net			31,026			37,934
	Prepaid expenses and other current assets			16,428			9,760

		Total current assets		259,221			430,075

Net property, plant and equipment				131,172			105,549
Loan issuance costs, less accumulated amortization of $525 in 2003 and $11,949 in 2002				19,385			5,911
Goodwill				48,796			46,357
Other assets, less accumulated amortization of $7,332 in 2003 and $6,840 in 2002				30,263			30,167

			$	488,837		$	618,059

Liabilities and Shareholders' Deficit:
Current liabilities:
	Accounts payable		$	13,843		$	11,156
	Accrued expenses			92,789			61,556
	Current installments of long-term debt			4,950			30,550
	Current installments of capital lease obligations			115			157
	Derivative financial instruments			—			1,341
	Income taxes payable			—			14,615
	Current deferred income taxes			—			66,838

		Total current liabilities		111,697			186,213

Long-term debt, net of current installments				679,300			491,300
Capital lease obligations, net of current installments				12			95
Derivative financial instruments				4,601			—
Deferred income taxes, net				8,234			9,501
Deferred gain, sale of headquarters facility				9,241			10,023
Other noncurrent liabilities				213			1,363

				813,298			698,495
Preferred stock, issued and outstanding 264 in 2003				255,655			—
Shareholders' equity (deficit):
	Common stock; issued and outstanding 41,166 in 2003 and 70,928 in 2002			41			71
	Deferred compensation			(451	)		—
	Retained deficit			(580,240	)		(76,216	)
	Accumulated other comprehensive income (loss)			534			(4,291	)

		Shareholders' deficit		(580,116	)		(80,436	)

			$	488,837		$	618,059

See accompanying notes to condensed consolidated financial statements.

F-45

KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

				Three months ended September 30,						Nine months ended September 30,
				2003			2002			2003			2002
Revenue:
	Rental and service			$	151,159		$	116,051		$	421,455		$	325,061
	Sales and other				46,883			34,836			126,467			90,714

		Total revenue			198,042			150,887			547,922			415,775

Rental expenses					92,518			70,272			259,808			199,326
Cost of goods sold					18,052			15,263			46,410			36,632

		Gross profit			87,472			65,352			241,704			179,817
Selling, general and administrative expenses					48,701			38,954			134,096			102,717
Recapitalization expenses					69,955			—			69,955			—

		Operating earnings (loss)			(31,184	)		26,398			37,653			77,100
Interest income					186			169			933			278
Interest expense					(25,334	)		(10,185	)		(41,562	)		(30,877	)
Foreign currency gain (loss)					1,527			(395	)		5,683			2,053

		Earnings (loss) before income taxes (benefit)			(54,805	)		15,987			2,707			48,554
Income taxes (benefit)					(20,552	)		6,884			1,015			19,422

		Net earnings (loss)		$	(34,253	)	$	9,103		$	1,692		$	29,132

Less: Preferred stock dividends					(3,427	)		—			(3,427	)		—

		Net earnings (loss) to common shareholders		$	(37,680	)	$	9,103		$	(1,735	)	$	29,132

		Basic earnings (loss) per common share		$	(0.74	)	$	0.13		$	(0.03	)	$	0.41

		Diluted earnings (loss) per common share		$	(0.74	)	$	0.12		$	(0.03	)	$	0.38

		Average common shares:
			Basic (weighted average outstanding shares)		51,139			70,928			64,398			70,927

			Diluted (weighted average outstanding shares)		51,139			77,664			64,398			77,674

See accompanying notes to condensed consolidated financial statements.

F-46

KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

					Nine months ended September 30,
					2003			2002
Cash flows from operating activities:
	Net earnings				$	1,692		$	29,132
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation				32,228			24,176
		Amortization				2,263			2,883
		Provision for uncollectible accounts receivable				5,132			6,946
		Amortization of deferred gain on sale of headquarters facility				(782	)		(171	)
		Write-off of deferred loan issuance costs				5,233			—
		Non-cash accrual of recapitalization expenses				8,907			—
		Non-cash amortization of stock award to directors				92			—
		Change in assets and liabilities net of effects from purchase of subsidiaries and recapitalization expenses
			Increase in accounts receivable, net			(21,638	)		(22,973	)
			Decrease in other accounts receivable			175,000			—
			Decrease in inventories			7,397			1,351
			Increase in prepaid expenses and other current assets			(6,662	)		(7,972	)
			Increase in accounts payable			2,824			884
			Increase in accrued expenses			22,910			8,475
			Increase (decrease) in income taxes payable			(14,615	)		3,510
			Decrease in current deferred income taxes			(66,838	)		—
			Decrease (increase) in deferred income taxes, net			(126	)		6,604

				Net cash provided by operating activities		153,017			52,845

Cash flows from investing activities:
	Additions to property, plant and equipment					(56,649	)		(43,842	)
	Decrease in inventory to be converted into equipment for short-term rental					800			2,400
	Dispositions of property, plant and equipment					1,590			2,598
	Proceeds from sale of headquarters facility					—			17,924
	Business acquisitions, net of cash acquired					(2,224	)		(3,596	)
	Increase in other assets					(351	)		(842	)

				Net cash used by investing activities		(56,834	)		(25,358	)

Cash flows from financing activities:
	Proceeds from (repayment of) notes payable, long term, capital lease and other obligations					(116,100	)		16,700
	Proceeds from exercise of stock options					903			8
	Recapitalization:
		Payoff of long term debt and bonds				(408,226	)		—
		Proceeds from issuance of new debt and bonds				685,000			—
		Proceeds from issuance of preferred stock, net				258,017			—
		Purchase of common stock				(509,597	)		—
		Debt and preferred stock issuance costs				(20,729	)		—

				Net cash provided (used) by financing activities		(110,732	)		16,708

Effect of exchange rate changes on cash and cash equivalents						1,192			513

Net increase (decrease) in cash and cash equivalents						(13,357	)		44,708
Cash and cash equivalents, beginning of period						54,485			199

Cash and cash equivalents, end of period					$	41,128		$	44,907

Cash paid during the nine months for:
	Interest				$	34,657	(1)	$	24,508
	Income taxes				$	83,812	(2)	$	12,603

(1): Includes $11.1 million of expenses related to the recapitalization, including $9.6 million related to redemption premium and approximately $1.5 million related to early redemption consent fees on our 9⁵/8% Senior Subordinated Notes
(2): Includes $66.8 million of income taxes paid related to the Hillenbrand antitrust settlement.

See accompanying notes to condensed consolidated financial statements.

F-47

KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The 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 periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In our opinion, the consolidated financial statements reflect all adjustments considered necessary for a fair presentation of our results for the periods presented. Certain reclassifications of amounts related to the prior year have been made to conform with the 2003 presentation, including, but not limited to, the reclassification of shipping and handling costs billed to customers from rental expense to other revenue.

(b) Stock Options

We use the intrinsic value method to account for our stock option plans. In the first nine months of 2003 and 2002, compensation costs of approximately $43.9 million and $567,000 respectively, net of estimated taxes, have been recognized in the financial statements related to our plans. Compensation costs for 2003 include $42.2 million of expenses, net of taxes, related to the recapitalization. If the compensation cost for our stock-based employee compensation plan had been determined based upon a fair value method consistent with Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," our net earnings to common shareholders and earnings per share would have been adjusted to the pro forma amounts indicated below. For purposes of pro forma disclosures, the

F-48

estimated fair value of the options is recognized as an expense over the options' respective vesting periods. Our pro forma calculations are as follows (dollars in thousands, except for earnings per share information):

		Three months ended September 30						Nine months ended September 30,
		2003			2002			2003			2002
Net earnings (loss) to common shareholders as reported		$	(37,680	)	$	9,103		$	(1,735	)	$	29,132
Pro forma net earnings:
	Net earnings (loss) to common shareholders as reported	$	(37,680	)	$	9,103		$	(1,735	)	$	29,132
	Compensation charge under intrinsic method		42,209			243			43,855			567
	Compensation expense under fair value method		(3,957	)		(359	)		(4,732	)		(1,093	)

Pro forma net earnings		$	572		$	8,987		$	37,388		$	28,606

Earnings (loss) per share as reported
	Basic earnings (loss) per common share	$	(0.74	)	$	0.13		$	(0.03	)	$	0.41
	Diluted earnings (loss) per common share	$	(0.74	)	$	0.12		$	(0.03	)	$	0.38
Pro forma earnings per share
	Basic earnings per common share	$	0.01		$	0.13		$	0.58		$	0.40
	Diluted earnings per common share	$	0.01		$	0.12		$	0.51		$	0.37

We are not required to apply, and have not applied, the method of accounting prescribed by SFAS 123 to stock options granted prior to January 1, 1995. Moreover, the pro forma compensation cost reflected above may not be representative of future expense.

(c) Self-Insurance

We established the KCI employee benefit trust as a self-insurer for certain risks related to our U.S. employee health plan and certain other benefits. We retain various levels of loss related to certain of our benefits including all short-term disability claims and losses under our Texas Employee Injury Plan up to $500,000 per occurrence. Our health, group life and accidental death and dismemberment plan along with our long-term disability plan are all fully insured. We fund the benefit trust based on the value of expected future payments, including claims incurred but not reported. The liability for retained losses is determined actuarially. These liabilities are not discounted.

(d) Other New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, or ("FIN 46"), "Consolidation of Variable Interest Entities." This interpretation is now effective for fiscal years or interim periods ending after December 15, 2003. FIN 46 addresses accounting for, and disclosure of, variable interest entities. FIN 46 requires the disclosure of the nature, purpose and exposure of any loss related to our involvement with variable interest entities. We adopted the provisions of FIN 46 for post-January 31, 2003 variable interest entities during the first quarter of 2003 and it did not have a

F-49

significant effect on our financial position or results of operations. We continue to evaluate the potential effects of the consolidation provisions of FIN 46 that will be adopted during the fourth quarter of 2003.

Specifically, we are evaluating the consolidation provisions of FIN 46 on our beneficial ownership of two Grantor Trusts, which we acquired in December 1996 and December 1994. The assets held by each Trust consist of a McDonnell Douglas DC-10 aircraft and three engines. In connection with the acquisitions, KCI paid cash of $7.2 million and $7.6 million, respectively. At the date of acquisition, the Trusts held debt of $48.4 million and $51.8 million, respectively, which is non-recourse to KCI. The aircraft are leased to the Federal Express Corporation through June 2012 and January 2012, respectively. Federal Express pays monthly rent to a third party who, in turn, pays the entire amount to the holders of the non-recourse indebtedness, which is secured by the aircraft. The holder's recourse in event of a default is limited to the Trusts assets.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, or ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends SFAS 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. We do not expect the adoption of SFAS 149, which will be effective for contracts entered into or modified after September 30, 2003, to have a material effect on our financial condition or results of operations.

On May 15, 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The statement established standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 must be applied immediately to instruments entered into or modified after May 31, 2003. We have applied the terms of SFAS 150 to the convertible preferred stock issued as a part of the recapitalization and determined that it should be classified as equity and will be reported in the mezzanine section of our balance sheet. All dividends paid or accrued on the preferred stock will be reported as dividends in the Condensed Consolidated Statements of Operations.

(e) Other Significant Accounting Policies

For further information, see Note 1 to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the year ended December 31, 2002.

(2) RECAPITALIZATION

Issuance of 7³/8% Senior Subordinated Notes. 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. Our obligations under the notes are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis, by most of our direct and indirect domestic subsidiaries. (See Note 5.)

New Senior Credit Facility. Concurrently with the issuance and sale of the notes, we entered into a new senior credit facility. The senior credit facility consists of a $480.0 million seven-year term loan facility and an undrawn $100.0 million six-year revolving credit facility. Initially, we borrowed $480.0 million under the new term loan facility. We used $208.2 million of the proceeds from borrowings under the new credit facility to repay all amounts then outstanding under our previously existing senior credit facility.

F-50

Borrowings under the new senior credit facility are secured by a first priority security interest in substantially all of our existing and hereafter acquired assets, including substantially all of the capital stock or membership interests of all of our subsidiaries that are guarantors under the new credit facility and 65% of the capital stock or membership interests of certain of our foreign subsidiaries. (See Note 5.)

Issuance of Preferred Stock. Concurrently with the issuance and sale of the notes, we also issued and sold $263.8 million of our Series A Convertible Participating Preferred Stock, par value $.001 per share. (See Note 6.)

Redemption of 9⁵/8% Senior Subordinated Notes. As of August 11, 2003, we had outstanding $200.0 million in 9⁵/8% Senior Subordinated Notes due 2007. On that date, we notified holders of the notes that, pursuant to their terms, we would redeem all such outstanding notes for a purchase price of 104.813% of their principal amount plus accrued but unpaid interest to the date of redemption. The redemption was completed on August 14, 2003. In addition, we paid approximately $1.5 million in early redemption consent fees related to these notes. (See Note 5.)

Share Repurchase. On August 11, 2003, we commenced a tender offer to purchase for cash up to $589.8 million of our common stock and vested stock options at a price equivalent to $17.00 per share of common stock. Upon closing, we purchased and retired 30.0 million shares of outstanding common stock for $17.00 per share. We also settled for cash 4.7 million vested stock options at a price equivalent to $17.00 per share of common stock. In the first quarter of 2004, we may offer to repurchase additional shares and vested stock options in an amount equal to the sum of the following:

•: the net after-tax proceeds of the $75.0 million Hillenbrand antitrust settlement that we expect to receive in January 2004;
•: the remaining tax benefits to KCI, not previously paid out, related to the recapitalization in an amount not to exceed $40.0 million; and
•: the cash received from the exercise of employee stock options as part of the share repurchase.

The issuance and sale of the 7³/8% Senior Subordinated Notes due 2013 and the preferred stock, the repayment of our old senior credit facility with proceeds from the new senior credit facility, the redemption of our 9⁵/8% senior subordinated notes due 2007 and the share repurchase are referred to herein collectively as the "recapitalization."

F-51

The following sets forth the sources and uses of funds in connection with the recapitalization (dollars in millions):

		Amount
Source of Funds:
Gross proceeds from the sale of the 7³/8% Senior Subordinated Notes Due 2013		$	205.0
Borrowings under the new senior credit facility			480.0
Gross proceeds from the sale of convertible preferred stock			263.8
Proceeds from Hillenbrand antitrust settlement (net of taxes)			46.9
Tax benefits realized from transaction fees and expenses			32.3
Cash on hand			53.4

	Total	$	1,081.4

Use of Funds:
Redemption of 9⁵/8% Senior Subordinated Notes Due 2007⁽¹⁾		$	211.1
Repayment of debt under the old senior credit facility			208.2
Share repurchase⁽²⁾			634.0
Transaction fees and expenses for the recapitalization			28.1

Total		$	1,081.4

(1): Includes early redemption premium of 4.813% of the aggregate principal amount pursuant to the terms of the 9⁵/8% Senior Subordinated Notes due 2007, in addition to the payment of approximately $1.5 million in early redemption consent fees related to amending these notes.
(2): Includes anticipated share repurchase discussed above.

Our September 30, 2003 three-month and nine-month results reflect the impact of the recapitalization including a charge to earnings of $86.3 million, before tax benefits related to the recapitalization of $32.3 million. The charge to earnings, pretax, included a $67.5 million charge to compensation expense for the repurchase, or cash settlement, of vested options, together with $11.1 million in expenses for the payment of a consent fee and an early redemption premium related to the redemption of the 9⁵/8% Senior Subordinated Notes due 2007. Additionally, we wrote off debt issuance costs related to our old senior credit facility and the 9⁵/8% Senior Subordinated Notes due 2007 totaling approximately $5.2 million, pretax. The remaining expenses of approximately $2.5 million, pretax, were related to miscellaneous fees and expenses associated with the share repurchase. Both the premium paid on the redemption of our 9⁵/8% Senior Subordinated Notes and the write-off of commitment fees on unused credit facilities were charged to interest expense. Financing costs of approximately $19.8 million have been deferred and will be amortized over the lives of the debt facilities. Direct and incremental costs related to the issuance of the preferred stock of approximately $950,000 have been deferred and will be amortized over 12 years unless the preferred stock is previously converted or redeemed. (See Note 6.)

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(3) ACCOUNTS RECEIVABLE COMPONENTS

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

			September 30, 2003			December 31, 2002
Trade accounts receivable:
	Facilities/dealers		$	108,790		$	91,756
	Third party payers:
		Medicare/Medicaid		33,308			31,721
		Managed care, insurance and other		60,648			53,229

				202,746			176,706
Medicare V.A.C. receivables prior to October 1, 2000				13,682			14,351
Employee and other receivables				1,993			2,410

				218,421			193,467
Less: Allowance for doubtful accounts				(34,100	)		(26,220	)
	Allowance for Medicare V.A.C. receivables prior to October 1, 2000			(13,682	)		(14,351	)

			$	170,639		$	152,896

(4) INVENTORY COMPONENTS

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

		September 30, 2003			December 31, 2002
Finished goods		$	12,257		$	16,411
Work in process			2,579			2,411
Raw materials, supplies and parts			29,314			31,825

			44,150			50,647
Less: Amounts expected to be converted into equipment for short-term rental			(10,300	)		(11,100	)
	Reserve for excess and obsolete inventory		(2,824	)		(1,613	)

		$	31,026		$	37,934

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(5) LONG-TERM OBLIGATIONS AND DERIVATIVE FINANCIAL INSTRUMENTS

Long-term obligations consist of the following (dollars in thousands):

			September 30, 2003			December 31, 2002
2003 Senior Credit Facility:
	Term loan B due 2010		$	478,800		$	—
	Revolving credit facility due 2009			—			—
Previous Senior Credit Facility:
	Term loans:
		Tranche A due 2003		—			27,500
		Tranche B due 2004		—			85,500
		Tranche C due 2005		—			85,500
		Tranche D due 2006		—			93,575
		Tranche E due 2005		—			29,775
	Revolving credit facility			—			—

				478,800			321,850
7³/8% Senior Subordinated Notes due 2013				205,000			—
9⁵/8% Senior Subordinated Notes due 2007				—			200,000
Note Payable—MedClaims				450			—

				684,250			521,850
Less current installments				(4,950	)		(30,550	)

			$	679,300		$	491,300

New Senior Credit Facility

On August 11, 2003, we entered into a new senior credit facility consisting of a $480.0 million term loan facility due 2010 and an undrawn $100.0 million revolving credit facility.

Loans. The senior credit facility consists of a $480.0 million term loan facility and an undrawn $100.0 million revolving credit facility. Up to $30.0 million of the revolving credit facility is available for letters of credit. At September 30, 2003, $478.8 million was outstanding under the term loan facility and we had no revolving loans outstanding. However, we had outstanding six letters of credit in the aggregate amount of $11.3 million. The resulting availability under the revolving credit facility was $88.7 million at September 30, 2003.

Interest. Amounts outstanding under the senior credit facility bear interest at a rate equal to the base rate (defined as the higher of Citibank, N.A.'s prime rate or ¹/2 of 1% in excess of the federal funds rate) or the Eurodollar rate (the reserve-adjusted LIBOR rate), in each case plus an applicable margin. The applicable margin is equal to (a) with respect to the new revolving credit facility, 2.50% in the case of loans based on the Eurodollar rate and 1.50% in the case of loans based on the base rate and (b) with respect to the new term loan B facility, (1) at any time that the leverage ratio is greater than 3.00 to 1.00, 2.75% in the case of loans based on the Eurodollar rate and 1.75% in the case of loans based on the base rate and

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(2) 2.50% at any other time, in the case of loans based on the Eurodollar rate and 1.50% in the case of loans based on the base rate.

We may choose base rate or Eurodollar pricing and may elect interest periods of 1, 2, 3 or 6 months for the Eurodollar borrowings. Interest on base rate borrowings is payable quarterly in arrears. Interest on Eurodollar borrowings is payable at the end of each applicable interest period or every three months in the case of interest periods in excess of three months. Interest on all past due amounts will accrue at 2.00% over the applicable rate. The senior credit facility requires that we fix the base-borrowing rate applicable to at least 50% of the outstanding amount of the term loan under the senior credit facility. As of September 30, 2003, the current interest rate swap agreements effectively fix the base-borrowing rate on 89.8% of our outstanding amounts under the term loan facility.

Collateral. The senior credit facility is secured by a first priority lien and security interest in (a) substantially all shares of capital stock and intercompany debt of each of our present and future subsidiaries (limited in the case of certain foreign subsidiaries to 65% of the voting stock of such entity) (b) substantially all of our present and future real property (with a value in excess of $5 million individually) and assets and the present and future personal property and assets of our subsidiaries that will be guarantors under the senior credit facility and (c) all proceeds and products of the property and assets described in (a) and (b) above. The security interest is subject to certain exceptions and permitted liens.

Guarantors. Our obligations under the senior credit facility are guaranteed by each of our direct and indirect 100% owned subsidiaries, other than 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.

Repayments. Amounts available under the new revolving credit facility are available for borrowing and reborrowing until maturity. No amounts repaid under the term loan B facility may be reborrowed.

Maturity. The term loan facility matures on August 11, 2010. The revolving credit facility matures on August 11, 2009.

Prepayments. We may prepay, in full or in part, borrowings under the senior credit facility without premium or penalty, subject to minimum prepayment amount and increment limitations. We are required to prepay borrowings under the senior credit facility from certain asset dispositions, debt issuances and equity issuances and beginning after fiscal year 2004 a percentage of excess cash flow, subject to customary exceptions.

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

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The senior credit facility contains financial covenants requiring us to meet certain leverage and interest coverage ratios and maintain minimum levels of EBITDA (as defined in the senior credit agreement). Under the senior credit agreement, EBITDA excludes charges associated with the recapitalization. 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, our 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.

Events of Default. The 2003 senior credit facility contains events of default including, but not limited to, failure to pay principal or interest, breaches of representations and warranties, violations of affirmative or negative convenants, cross-defaults to other indebtedness, a bankruptcy or similar proceeding being instituted by or against us, rendering of certain monetary judgments against us, impairments of loan documentation or security, changes of ownership or operating control and defaults with respect to certain ERISA obligations.

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. Interest on the notes accrues at the rate of 7³/8% per annum and is payable semi-annually in cash on each May 15 and November 15, commencing on November 15, 2003, to the persons who are registered holders at the close of business on May 1 and November 1 immediately preceding the applicable interest payment date. Interest on the notes accrues from and includes the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance of the notes. Interest is computed on the basis of a 360-day year consisting of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed. The notes are not entitled to the benefit of any mandatory sinking fund.

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Each of these subsidiaries is a restricted subsidiary, as defined in the indenture governing the notes. The new notes are guaranteed by the following subsidiaries of KCI:

1.	KCI Holding Company, Inc	6.	KCI Real Properties Limited
2.	KCI Real Holdings, LLC	7.	KCI USA, Inc.
3.	KCI International, Inc.	8.	KCI USA Real Holdings, LLC
4.	KCI Licensing, Inc	9.	MedClaim, Inc.
5.	KCI Properties Limited

The following entities were formerly guarantors of the recently redeemed 9⁵/8% Senior Subordinated Notes due 2007, but are not guarantors of the recently issued 7³/8% Senior Subordinated Notes due 2013.

1.		KCI Therapeutic Services, Inc.
2.		KCI New Technologies, Inc.
3.		KCI Air, Inc.
4.		KCI-RIK Acquisition Corp.
5.		Plexus Enterprises, Inc.
6.		Medical Retro Design, Inc.

Each of these entities no longer exists due to a corporate change such as dissolution or merger into an existing KCI subsidiary. However, the assets of each of these former guarantors remain in the consolidated group.

The indenture governing the notes, limits our ability, among other things, to:

•: incur additional debt;
•: pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments;
•: place limitations on distributions from our restricted subsidiaries;
•: issue or sell capital stock of restricted subsidiaries;
•: issue guarantees;
•: sell or exchange assets;
•: enter into transactions with affiliates;
•: create liens; and
•: effect mergers.

KCI may redeem some or all of the notes, on and after May 15, 2008, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount)

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if redeemed during the twelve-month period commencing on May 15 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption:

	Redemption Price
2008	103.688	%
2009	102.458	%
2010	101.229	%
2011 and thereafter	100.000	%

In addition, at any time prior to May 15, 2008, we may, at our option, redeem the notes, in whole or in part, from time to time, upon not less than 30 nor more than 60 days' notice at a redemption price equal to the greater of (a) 101% of the principal amount of the notes so redeemed, plus accrued and unpaid interest, and (b) a make-whole premium (as defined in the indenture) with respect to the notes, or the portions thereof, to be redeemed, plus, to the extent not included in the make-whole premium, accrued and unpaid interest to the date of redemption.

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

Interest Rate Protection

We follow SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments, SFAS 137 and 138, in accounting for our derivative instruments. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. We have designated our interest rate swap agreements as cash flow hedge instruments. The swap agreements are used to manage exposure to interest rate movements by effectively changing the variable interest rate to a fixed rate. The critical terms of the interest rate swap agreements and the interest-bearing debt associated with the swap agreements must be the same to qualify for the shortcut method of accounting. Changes in the effective portion of the fair value of the interest rate swap agreement will be recognized in other comprehensive income, net of tax effects, until the hedged item is recognized into earnings.

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The following chart summarizes interest rate hedge transactions effective during the first nine months of 2003 (dollars in thousands):

Accounting Method	Effective Dates	Nominal Amount		Fixed Interest Rate		Status
Shortcut	12/31/02-12/31/03	$	80,000	1.745	%	Outstanding
Shortcut	12/31/02-12/31/04	$	100,000	2.375	%	Outstanding
Shortcut	08/21/03-08/22/05	$	60,000	2.150	%	Outstanding
Shortcut	08/21/03-08/22/05	$	20,000	2.130	%	Outstanding
Shortcut	08/21/03-08/21/05	$	20,000	2.135	%	Outstanding
Shortcut	08/21/03-08/21/06	$	50,000	2.755	%	Outstanding
Shortcut	08/21/03-08/21/06	$	50,000	2.778	%	Outstanding
Shortcut	08/21/03-08/21/06	$	50,000	2.788	%	Outstanding

As of December 31, 2002, two $100 million interest rate swap agreements were in effect to take advantage of low interest rates. On January 31, 2003, we sold $20 million of our $100 million, 1.7450% interest rate swap effective March 31, 2003 which resulted in an expense of approximately $74,000 which was recorded in the first quarter of 2003. Our 2003 senior credit facility requires that we fix the base-borrowing rate applicable to at least 50% of the outstanding amount of our term loan under the senior credit facility for a period of two years from the date of issuance. In August 2003, we entered into six new interest rate swap agreements pursuant to which we fixed the rates on an additional $250 million of our variable rate debt. As a result of the eight swap agreements currently in effect as of September 30, 2003, approximately 89.8% of our variable interest rate debt outstanding is fixed.

All of the interest rate swap agreements have quarterly interest payments, based on three month LIBOR, due on the last day of each March, June, September and December, commencing on September 30, 2003. The fair value of these swaps at inception was zero. Due to subsequent movements in interest rates, as of September 30, 2003, the fair values of these swap agreements were negative and were adjusted to reflect a liability of approximately $4.6 million. During the first nine months of 2003 and 2002, we recorded interest expense of approximately $1.6 million and $2.0 million, respectively, as a result of interest rate protection agreements.

(6) PREFERRED STOCK

On August 1, 2003, in accordance with our Articles of Incorporation, the board of directors of KCI approved the creation of a class of preferred stock designated as Series A Convertible Participating Preferred Stock with a par value of $0.001 per share. On August 11, 2003, we issued a total of 263,794 shares of the preferred stock at an original issue price and stated value of $1,000 per share. The preferred stock is convertible to common stock at a ratio of $17.00 per share of common stock (the estimated fair value of the common stock at the date of issuance). The preferred stock accrues cumulative dividends quarterly at the rate of 9% per annum (or the dividends paid on common stock, whichever is greater), and must be paid in kind for the first three years from the date of issuance, and after that point may be paid in cash or in kind, at KCI's option. We recorded dividends-in-kind of $3.3 million during the three months ended September 30, 2003.

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Upon an initial public offering above $22.00 per share, or upon 20 consecutive post-initial public offering trading days for which the trading price of the common exceeds $23.50, the preferred stock is mandatorily convertible into common stock. If we have an initial public offering at less than $22.00 per share, we can force conversion if it makes the holders of the preferred whole for the shortfall between the initial public offering price and $22.00 per share. Additionally, if the conversion has not been triggered based on trading price, we can force conversion by making the preferred holders whole by issuing them additional common stock as if they had converted at a value of $23.50 per share.

If, prior to December 31, 2005, conversion of the preferred stock occurs through automatic conversion as a result of initial public offering or post initial public offering trading as discussed above, or as a result of our forcing conversion as described above, or should KCI be sold, the holders would be entitled to receive paid-in-kind dividends as if the preferred stock had remained outstanding through December 31, 2005.

Except as otherwise required by law, the holders of the preferred stock are entitled to vote, on an as-converted basis, together with our common shareholders. KCI, Fremont Partners, L.P., Blum Capital Partners, L.P. and Dr. Leininger, and their affiliates, entered into an Investors' Rights Agreement with the other holders of the preferred stock, which provides for "piggyback" registration rights, restrictions on transfer of the shares of the preferred stock, rights of first offer, "tag-along" rights and "bring-along" rights. Fremont Partners, L.P., Blum Capital Partners, L.P. and Dr. Leininger and their respective affiliates purchased an aggregate of $190.0 million of the preferred stock.

We paid the investors in the preferred stock approximately $5.8 million in arrangement fees. Because the net cash received from the investors related to the preferred stock is approximately $258.0 million and the preferred stock holders are entitled to immediate conversion to common stock for value equal to $263.8 million, a beneficial conversion feature of $5.8 million exists. We have recorded the net proceeds received from the preferred stock holders in equity and have recorded a beneficial conversion feature which has the effect of reducing the preferred stock recorded to $252.2 million. We will accrete through preferred dividends the amount recorded for preferred stock up to its conversion amount over future periods to the redemption date, using the effective interest method. Dividends no longer accrete after twelve years. We also incurred approximately $950,000 in direct and incremental costs related to the preferred stock. We have capitalized these costs and they will be amortized to dividends over 12 years unless the preferred stock is previously converted or redeemed.

After August 11, 2006, the preferred stock dividends may be paid in cash or in kind, at our option. If we opt to pay the dividends in kind, a new beneficial conversion may exist and would be evaluated and recorded at that time.

The terms of our preferred stock restrict us from declaring and paying dividends on our common stock until such time as all outstanding dividends have been paid related to the preferred stock. The preferred stock shall, with respect to the right to receive dividends or distributions of assets and rights upon KCI's liquidation, dissolution or winding up, rank senior to the common stock. The stated value for the preferred stock is equal to the initial stated value together with any accrued dividends through such date that have been added to the stated valued through accretion.

The preferred stock shall be mandatorily redeemed by KCI on the twelfth anniversary of the issue date, subject to two extension periods, which can extend the mandatory redemption date through the seventeenth anniversary of the issue date. The preferred stock must be redeemed for cash, common stock

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or a combination of cash and common stock, at our option, for fair market value of the common stock along with any cash, equal to the stated value of the preferred stock or the average closing price of the common stock into which such preferred stock is then convertible for the 20 consecutive trading days immediately preceding such redemption. However, such common stock must be listed on a United States national securities exchange or quoted on the NASDAQ stock market and the common stock to be issued in redemption shall not represent more then 35% of the fully diluted common stock of KCI.

(7) EARNINGS (LOSS) PER SHARE

The following table sets forth the reconciliation from basic to diluted average common shares and the calculations of net earnings (loss) per common share. 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 in 2003 because their effect was antidilutive. Net earnings (loss) for basic and diluted calculations do not differ (dollars in thousands, except per share data): (See Note 1(b))

		Three months ended September 30,					Nine months ended September 30,
		2003			2002		2003			2002
Net earnings (loss)		$	(34,253	)	$	9,103	$	1,692		$	29,132
Less: Preferred stock dividends, net			(3,427	)		—		(3,427	)		—

Net earnings (loss) to common shareholders		$	(37,680	)	$	9,103	$	(1,735	)	$	29,132

Average common shares:
	Basic (weighted-average outstanding shares)		51,139			70,928		64,398			70,927
	Dilutive potential common shares from stock options⁽¹⁾		—			6,736		—			6,747
	Dilutive potential common shares from preferred stock conversion⁽¹⁾		—			—		—			—

	Diluted (weighted-average outstanding shares)		51,139			77,664		64,398			77,674

Basic earnings (loss) per common share		$	(0.74	)	$	0.13	$	(0.03	)	$	0.41

Diluted earnings (loss) per common share		$	(0.74	)	$	0.12	$	(0.03	)	$	0.38

(1): Dilutive potential common shares from stock options totaling 6,458 and 5,763 shares and dilutive potential common shares from preferred stock conversion totaling 8,485 and 2,860 shares have been excluded from the diluted earnings per share calculation for the three-month and nine-month periods ended September 30, 2003, respectively, due to their antidilutive effect.

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(8) OTHER COMPREHENSIVE INCOME

The components of other comprehensive income are as follows (dollars in thousands):

		Three months ended September 30,
		2003			2002
Net earnings (loss)		$	(34,253	)	$	9,103
Foreign currency translation adjustment			1,868			39
Net derivative income (loss), net of taxes of $1,240 in 2003 and $34 in 2002			(2,302	)		63
Reclassification adjustment for losses included in income, net of taxes of $299 in 2003 and $259 in 2002			556			482
Reclassification adjustment for loss recognized on termination of interest rate swap, net of taxes of $79 in 2002			—			(147	)

	Other comprehensive income	$	(34,131	)	$	9,540

		Nine months ended September 30,
		2003			2002
Net earnings		$	1,692		$	29,132
Foreign currency translation adjustment			6,944			3,531
Net derivative loss, net of taxes of $1,710 in 2003 and $160 in 2002			(3,176	)		(298	)
Reclassification adjustment for losses included in income, net of taxes of $569 in 2003 and $697 in 2002			1,057			1,295
Reclassification adjustment for loss recognized on termination of interest rate swap, net of taxes of $227 in 2002			—			(405	)

	Other comprehensive income	$	6,517		$	33,255

The earnings associated with certain of our foreign affiliates are considered to be permanently invested and no provision for U.S. federal and state income taxes on these earnings or translation adjustments has been made.

As of September 30, 2003, derivative financial instruments valued at a liability of $4.6 million were recorded as a result of our adoption of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This liability is based upon the valuation of our interest rate protection agreements associated with our new senior credit facility. (See Note 5.)

(9) COMMITMENTS AND CONTINGENCIES

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

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During the fourth quarter of 2002, we recorded a gain from the settlement of an antitrust lawsuit with Hillenbrand Industries, Inc. and its wholly-owned subsidiary, Hill-Rom Company, Inc. Under the settlement, Hillenbrand agreed to pay KCI $250 million in two payments. In January 2003, we received the first installment of $175 million pursuant to the settlement. Net of fees and expenses of $1.7 million, this transaction added $173.3 million of pretax income and $106.4 million of net income to the 2002 fourth quarter results. The cash received, net of approximately $66 million of income taxes and approximately $2 million in fees and expenses, was used to pay down $107 million of indebtedness on the old senior credit facility. Hillenbrand is obligated to pay KCI an additional $75 million in January 2004, subject to certain conditions. No accrual has been made related to this payment.

Other than commitments for new product inventory, including disposable "for sale" products of $16.6 million, we have no material long-term capital commitments.

(10) SEGMENT AND GEOGRAPHIC INFORMATION

We are principally engaged in the rental and sale of innovative therapeutic systems and surfaces throughout the United States and in 15 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 such, we do not manage our business by product line but rather by operating segments which include our USA and our International segments. We measure segment profit as operating earnings, which is defined as income before interest income or expense, foreign currency gains and losses and income taxes. All intercompany transactions are eliminated in computing revenue, operating earnings and assets. The prior years have been made to

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conform with the 2003 presentation. Information on segments and a reconciliation of consolidated totals are as follows (dollars in thousands):

					Three months ended September 30,						Nine months ended September 30,
					2003			2002			2003			2002
Revenue:
	USA
		V.A.C.			$	105,861		$	71,130		$	282,651			187,041
		Therapeutic surfaces/other				45,368			44,743			134,249			134,848

			Subtotal - USA			151,229			115,873			416,900			321,889

	International
		V.A.C.				21,781			12,556			56,628			30,374
		Therapeutic surfaces/other				25,032			22,458			74,394			63,512

			Subtotal - International			46,813			35,014			131,022			93,886

	Total revenue				$	198,042		$	150,887		$	547,922		$	415,775

Operating earnings (loss):
	USA				$	52,919		$	38,685		$	144,654		$	103,824
	International					5,264			3,607			16,368			12,255
	Recapitalization expenses					(69,955	)		—			(69,955	)		—
	Other (1):
		Executive				(2,900	)		(2,989	)		(12,239	)		(7,947	)
		Finance				(4,849	)		(4,236	)		(14,773	)		(11,814	)
		Manufacturing/Engineering				(2,186	)		(1,662	)		(4,445	)		(5,321	)
		Administration				(9,477	)		(7,007	)		(21,957	)		(13,897	)

			Total Other			(19,412	)		(15,894	)		(53,414	)		(38,979	)

				Operating earnings (loss)	$	(31,184	)	$	26,398		$	37,653		$	77,100

(1): Other includes general headquarter expenses which are not allocated to the individual segments and are included in selling, general and administrative expenses within our Condensed Consolidated Statements of Operations.

(11) 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.

The notes are guaranteed 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 5.) 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 September 30, 2003 and December 31, 2002 and the related condensed consolidating statements of operations for the three and nine-month periods ended September 30, 2003 and 2002, and the condensed consolidating statements of cash flows for the nine-month periods ended September 30, 2003 and 2002, respectively.

F-64

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Balance Sheet
September 30, 2003
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Assets:
Current assets:
	Cash and cash equivalents		$	—		$	19,495		$	21,633	$	—		$	41,128
	Accounts receivable, net			—			134,913			42,018		(6,292	)		170,639
	Inventories, net			—			14,402			16,624		—			31,026
	Prepaid expenses and other current assets			—			13,462			8,728		(5,762	)		16,428

		Total current assets		—			182,272			89,003		(12,054	)		259,221

Net property, plant and equipment				—			106,958			38,270		(14,056	)		131,172
Loan issuance cost, net				—			19,385			—		—			19,385
Goodwill				—			41,226			7,570		—			48,796
Other assets, net				—			31,551			21,661		(22,949	)		30,263
Intercompany investments and advances				(324,289	)		678,302			9,020		(363,033	)		—

			$	(324,289	)	$	1,059,694		$	165,524	$	(412,092	)	$	488,837

Liabilities and Shareholders' Equity (Deficit):
Current liabilities:
	Accounts payable		$	37		$	9,430		$	4,376	$	—		$	13,843
	Accrued expenses			135			72,558			20,096		—			92,789
	Current installments of long-term obligations			—			4,950			—		—			4,950
	Current installments of capital lease obligations			—			115			—		—			115
	Intercompany payables			—			11,169			9,180		(20,349	)		—
	Income taxes payable			—			4,053			—		(4,053	)		—

		Total current liabilities		172			102,275			33,652		(24,402	)		111,697

Long-term obligations, net of current installments				—			679,300			—		—			679,300
Capital lease obligations, net of current installments				—			—			12		—			12
Derivative financial instruments				—			4,601			—		—			4,601
Intercompany payables, non current				—			(21,500	)		21,500		—			—
Deferred income taxes, net				—			9,683			—		(1,449	)		8,234
Deferred gain, sale of headquarters facility				—			9,241			—		—			9,241
Other noncurrent liabilities				—			21,713			—		(21,500	)		213

				172			805,313			55,164		(47,351	)		813,298
Preferred stock				255,655			—			—		—			255,655
Shareholders' equity (deficit)				(580,116	)		254,381			110,360		(364,741	)		(580,116	)

			$	(324,289	)	$	1,059,694		$	165,524	$	(412,092	)	$	488,837

F-65

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Balance Sheet
December 31, 2002
(in thousands)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Assets:
Current assets:
	Cash and cash equivalents		$	—		$	41,185		$	13,300	$	—		$	54,485
	Accounts receivable, net			—			125,106			35,612		(7,822	)		152,896
	Accounts receivable—other			175,000			—			—		—			175,000
	Inventories, net			—			20,113			17,821		—			37,934
	Prepaid expenses and other current assets			—			6,377			3,383		—			9,760

		Total current assets		175,000			192,781			70,116		(7,822	)		430,075
Net property, plant and equipment				—			96,458			23,516		(14,425	)		105,549
Loan issuance cost, net				—			5,911			—		—			5,911
Goodwill				—			38,724			7,633		—			46,357
Other assets, net				—			31,420			20,247		(21,500	)		30,167
Intercompany investments and advances				(187,076	)		508,045			23,447		(344,416	)		—

			$	(12,076	)	$	873,339		$	144,959	$	(388,163	)	$	618,059

Liabilities and Shareholders' Equity (Deficit):
Current liabilities:
	Accounts payable		$	—		$	4,632		$	6,524	$	—		$	11,156
	Accrued expenses			1,522			46,058			13,976		—			61,556
	Current installments of long-term obligations			—			30,550			—		—			30,550
	Current installments of capital lease obligations			—			157			—		—			157
	Intercompany payables			—			22,497			—		(22,497	)		—
	Derivative financial instruments			—			1,341			—		—			1,341
	Income taxes payable			—			8,615			6,000		—			14,615
	Current deferred income taxes			66,838			—			—		—			66,838

		Total current liabilities		68,360			113,850			26,500		(22,497	)		186,213

Long-term obligations, net of current installments				—			491,300			—		—			491,300
Capital lease obligations, net of current installments				—			75			20		—			95
Intercompany payables, noncurrent				—			(21,500	)		21,500		—			—
Deferred income taxes, net				—			9,251			—		250			9,501
Deferred gain, sale of headquarters facility				—			10,023			—		—			10,023
Other noncurrent liabilities				—			22,863			—		(21,500	)		1,363

				68,360			625,862			48,020		(43,747	)		698,495
Shareholders' equity (deficit)				(80,436	)		247,477			96,939		(344,416	)		(80,436	)

			$	(12,076	)	$	873,339		$	144,959	$	(388,163	)	$	618,059

F-66

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Operations
For the three months ended September 30, 2003
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Historical Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—		$	119,613		$	31,546		$	—		$	151,159
	Sales and other			—			38,919			16,061			(8,097	)		46,883

		Total revenue		—			158,532			47,607			(8,097	)		198,042

Rental expenses				—			62,661			29,857			—			92,518
Cost of goods sold				—			17,509			5,961			(5,418	)		18,052

		Gross profit		—			78,362			11,789			(2,679	)		87,472
Selling, general and administrative expenses				—			43,127			5,574			—			48,701
Recapitalization expenses				—			69,955			—			—			69,955

		Operating earnings (loss)		—			(34,720	)		6,215			(2,679	)		(31,184	)
Interest income				—			180			6			—			186
Interest expense				—			(25,334	)		(611	)		611			(25,334	)
Foreign currency gain				—			1,456			71			—			1,527

		Earnings (loss) before income taxes (benefit) and equity (deficit) in earnings of subsidiaries		—			(58,418	)		5,681			(2,068	)		(54,805	)
Income taxes (benefit)				—			(21,997	)		2,221			(776	)		(20,552	)

		Earnings (loss) before equity (deficit) in earnings of subsidiaries		—			(36,421	)		3,460			(1,292	)		(34,253	)
		Equity (deficit) in earnings of subsidiaries		(34,253	)		3,461			—			30,792			—

		Net earnings (loss)	$	(34,253	)	$	(32,960	)	$	3,460		$	29,500		$	(34,253	)

F-67

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Operations
For the three months ended September 30, 2002
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Historical Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	92,866		$	23,185		$	—		$	116,051
	Sales and other			—		28,095			12,085			(5,344	)		34,836

		Total revenue		—		120,961			35,270			(5,344	)		150,887

Rental expenses				—		49,821			20,451			—			70,272
Cost of goods sold				—		14,016			4,697			(3,450	)		15,263

		Gross profit		—		57,124			10,122			(1,894	)		65,352
Selling, general and administrative expenses				—		35,761			3,193			—			38,954

		Operating earnings		—		21,363			6,929			(1,894	)		26,398
Interest income				—		112			57			—			169
Interest expense				—		(10,185	)		—			—			(10,185	)
Foreign currency loss				—		(392	)		(3	)		—			(395	)

		Earnings before income taxes and equity in earnings of subsidiaries		—		10,898			6,983			(1,894	)		15,987
Income taxes				—		3,304			4,399			(819	)		6,884

		Earnings before equity in earnings of subsidiaries		—		7,594			2,584			(1,075	)		9,103
		Equity in earnings of subsidiaries		9,103		2,584			—			(11,687	)		—

		Net earnings	$	9,103	$	10,178		$	2,584		$	(12,762	)	$	9,103

F-68

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Operations
For the nine months ended September 30, 2003
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Historical Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	333,691		$	87,764		$	—		$	421,455
	Sales and other			—		104,061			44,002			(21,596	)		126,467

		Total revenue		—		437,752			131,766			(21,596	)		547,922

Rental expenses				—		177,643			82,165			—			259,808
Cost of goods sold				—		43,467			15,587			(12,644	)		46,410

		Gross profit		—		216,642			34,014			(8,952	)		241,704
Selling, general and administrative expenses				—		119,748			14,348			—			134,096
Recapitalization expenses				—		69,955			—			—			69,955

		Operating earnings		—		26,939			19,666			(8,952	)		37,653
Interest income				—		850			83			—			933
Interest expense				—		(41,562	)		(611	)		611			(41,562	)
Foreign currency gain				—		5,000			683			—			5,683

		Earnings (loss) before income taxes (benefit) and equity in earnings of subsidiaries		—		(8,773	)		19,821			(8,341	)		2,707
Income taxes (benefit)				—		(1,891	)		6,034			(3,128	)		1,015

		Earnings (loss) before equity in earnings of subsidiaries		—		(6,882	)		13,787			(5,213	)		1,692
		Equity in earnings of subsidiaries		1,692		13,787			—			(15,479	)		—

		Net earnings	$	1,692	$	6,905		$	13,787		$	(20,692	)	$	1,692

F-69

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Operations
For the nine months ended September 30, 2002
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Reclassifications and Eliminations			Historical Kinetic Concepts, Inc. and Subsidiaries
Revenue:
	Rental and service		$	—	$	262,373		$	62,688		$	—		$	325,061
	Sales and other			—		75,421			31,823			(16,530	)		90,714

		Total revenue		—		337,794			94,511			(16,530	)		415,775

Rental expenses				—		143,443			55,883			—			199,326
Cost of goods sold				—		35,415			11,731			(10,514	)		36,632

		Gross profit		—		158,936			26,897			(6,016	)		179,817
Selling, general and administrative expenses				—		93,865			8,852			—			102,717

		Operating earnings		—		65,071			18,045			(6,016	)		77,100
Interest income				—		133			145			—			278
Interest expense				—		(30,877	)		—			—			(30,877	)
Foreign currency gain (loss)				—		2,167			(114	)		—			2,053

		Earnings before income taxes and equity in earnings of subsidiaries		—		36,494			18,076			(6,016	)		48,554
Income taxes				—		13,645			8,183			(2,406	)		19,422

		Earnings before equity in earnings of subsidiaries		—		22,849			9,893			(3,610	)		29,132
		Equity in earnings of subsidiaries		29,132		9,893			—			(39,025	)		—

		Net earnings	$	29,132	$	32,742		$	9,893		$	(42,635	)	$	29,132

F-70

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For the nine months ended September 30, 2003
(in thousands)
(unaudited)

			Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
	Net earnings		$	1,692		$	6,905		$	13,787		$	(20,692	)	$	1,692
	Adjustments to reconcile net earnings to net cash provided by operating activities			105,212			34,490			(1,827	)		13,450			151,325

Net cash provided by operating activities				106,904			41,395			11,960			(7,242	)		153,017

Cash flows from investing activities:
	Additions to property, plant and equipment			—			(30,292	)		(26,497	)		140			(56,649	)
	Decrease in inventory to be converted into equipment for short-term rental			—			800			—			—			800
	Dispositions of property, plant and equipment			—			602			988			—			1,590
	Business acquisitions, net of cash acquired			—			(2,224	)		—						(2,224	)
	Increase in other assets			—			(448	)		(1,351	)		1,448			(351	)

Net cash used by investing activities				—			(31,562	)		(26,860	)		1,588			(56,834	)

Cash flows from financing activities:
	Repayments of notes payable, long-term, capital lease and other obligations			—			(116,092	)		(8	)		—			(116,100	)
	Proceeds from the exercise of stock options			903			—			—			—			903
	Recapitalization:
		Payoff of long term debt and bonds					(408,226	)		—			—			(408,226	)
		Proceeds from issuance of new debt and bonds					685,000			—			—			685,000
		Proceeds from issuance of preferred stock		258,017			—			—			—			258,017
		Purchase of common stock		(509,597	)		—			—			—			(509,597	)
		Loan issuance costs		—			(20,729	)		—			—			(20,729	)
	Proceeds from (repayments of) intercompany investments and advances			138,949			(167,842	)		23,688			5,205			—
	Other			4,824			(3,634	)		(447	)		(743	)		—

Net cash provided (used) by financing activities				(106,904	)		(31,523	)		23,233			4,462			(110,732	)

Effect of exchange rate changes on cash and cash equivalents				—			—			—			1,192			1,192

Net increase (decrease) in cash and cash equivalents				—			(21,690	)		8,333			—			(13,357	)
Cash and cash equivalents, beginning of period				—			41,185			13,300			—			54,485

Cash and cash equivalents, end of period			$	—		$	19,495		$	21,633		$	—		$	41,128

F-71

Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For the nine months ended September 30, 2002
(in thousands)
(unaudited)

		Kinetic Concepts, Inc. Parent Company Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Kinetic Concepts, Inc. and Subsidiaries
Cash flows from operating activities:
	Net earnings	$	29,132		$	32,742		$	9,893		$	(42,635	)	$	29,132
	Adjustments to reconcile net earnings to net cash provided by operating activities		(29,132	)		14,231			4,611			34,003			23,713

Net cash provided by operating activities			—			46,973			14,504			(8,632	)		52,845

Cash flows from investing activities:
	Additions to property, plant and equipment		—			(27,204	)		(17,988	)		1,350			(43,842	)
	Decrease in inventory to be converted into equipment for short-term rental		—			2,400			—			—			2,400
	Dispositions of property, plant and equipment		—			1,719			879			—			2,598
	Proceeds from sale of headquarters facility					17,924			—			—			17,924
	Business acquisitions, net of cash acquired		—			—			(3,596	)		—			(3,596	)
	Increase in other assets		—			(722	)		(120	)		—			(842	)

Net cash used by investing activities			—			(5,883	)		(20,825	)		1,350			(25,358	)

Cash flows from financing activities:
	Proceeds from notes payable, long-term, capital lease and other obligations		—			16,673			27			—			16,700
	Proceeds from exercise of stock options		8			—			—			—			8
	Proceeds (borrowings) on intercompany investments and advances		(6,128	)		(17,815	)		6,343			17,600			—
	Other		6,120			(5,608	)		5,217			(5,729	)		—

Net cash provided (used) by financing activities			—			(6,750	)		11,587			11,871			16,708

Effect of exchange rate changes on cash and cash equivalents			—			—			—			513			513

Net increase in cash and cash equivalents			—			34,340			5,266			5,102			44,708
Cash and cash equivalents, beginning of period			—			—			5,301			(5,102	)		199

Cash and cash equivalents, end of period		$	—		$	34,340		$	10,567		$	—		$	44,907

F-72

[INSIDE BACK COVER ARTWORK]

PART II—INFORMATION NOT REQUIRED IN PROSPECTUS

Unless otherwise defined, all capitalized terms contained in this Part II shall have the meanings ascribed to them in the prospectus, which forms a part of this Registration Statement. Kinetic Concepts, Inc. is sometimes referred to in this Part II as the "Registrant".

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than underwriting discounts and commissions, to be paid by the Registrant in connection with the sale of the common stock being registered. All amounts other than the SEC registration fee, the NASD filing fees and the New York Stock Exchange listing fee are estimates.

	Amount to be Paid
SEC registration fee	$	37,214
NASD filing fee	$	30,500
NYSE application and listing fees
NYSE annual fee (prorated for 2004)
Legal fees and expenses
Accounting fees and expenses
Printing and engraving
Transfer agent and registrar fees
Miscellaneous expenses
Total

Item 14. Indemnification of Directors and Officers.

Texas law, our articles of incorporation and bylaws contain provisions for indemnification of our directors and officers.

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

II-1

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

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

Article Twelve of our articles of incorporation states that we shall indemnify our directors to the fullest extent provided by the TBCA.

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

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

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

The Registrant has obtained liability insurance for its officers and directors.

II-2

Reference is made to the following documents filed as exhibits to the Registration Statement regarding relevant indemnification provisions described above and elsewhere in the prospectus which is a part of this Registration Statement:

Document		Exhibit Number
Form of Underwriting Agreement		1.1
Restated Articles of Incorporation of KCI		3.1
Articles of Amendment to Amended and Restated Articles of Incorporation of KCI		3.2
Second Amended and Restated By-Laws of KCI		3.3

Item 15. Recent Sales of Unregistered Securities.

In the three years prior to the filing of this Registration Statement, the Registrant issued and sold the following unregistered securities.

1.: On August 11, 2003, pursuant to the exemption provided in Section 4(2) of the Securities Act, the Registrant issued a total of 263,794 shares of Series A Convertible Participating Preferred Stock for an aggregate consideration of $263.8 million, in cash and/or in exchange for the repurchase of outstanding common stock and vested options, to GS Capital Partners 2000, L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs KG, GS Capital Partners 2000 Employee Fund, L.P., Goldman Sachs Direct Investment Fund 2000, L.P., DLJ Merchant Banking Partners III, L.P., DLJ MB PartnersIII GmbH & Co. KG, Millennium Partners II, L.P, MBP III Plan Investors, L.P., Fremont Partners III, L.P., Fremont Partners III Side-By-Side, L.P., Fremont Acquisition Company II, L.L.C., Fremont Acquisition Company IIA, L.L.C., Blum Strategic Partners II, L.P., Blum Strategic Partners II GmbH and Co. KG, Stinson Capital Partners II, L.P., RCBA-KCI Capital Partners, L.P., James R. Leininger, M.D., John P. Byrnes, Harry R. Jacobson, M.D., David J. Simpson and C. Thomas Smith.
2.: On August 11, 2003, the Registrant issued an aggregate of $205.0 million principal amount of Series A 7³/8% Senior Subordinated Notes due 2013 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and outside the United States in compliance with Regulation S under the Securities Act.
3.: From December 24, 2000 through December 31, 2003, the Registrant granted options to purchase 2,531,996 shares of common stock to employees under its 1997 Management Equity Plan at exercise prices ranging from $4.81 to $17.00 per share, pursuant to exemptions from registration provided by Rule 701 and/or Section 4(2) under the Securities Act. Of the options granted, 2,067,725 remain outstanding, 178,103 have been exercised and 286,168 have been cancelled and returned to the Management Equity Plan.
4.: From December 24, 2000 through December 31, 2003, the Registrant granted options to purchase 41,764 shares of common stock, 41,764 shares of restricted common stock and 8,352 shares of unrestricted common stock to non-employee directors under its 2003 Non-Employee Directors Stock Plan, pursuant to exemptions from registration provided by Rule 701 and/or Section 4(2) under the Securities Act. The stock options granted have exercise prices ranging from $10.00 to $17.00 per share. None of the options to purchase common stock, restricted common stock or unrestricted common stock granted have been exercised or cancelled.

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Item 16. Exhibits and Financial Statement Schedules.

(a): Exhibits.

Exhibit No.		Exhibit
**1.1		Form of Underwriting Agreement
3.1		Restated Articles of Incorporation of KCI (filed as Exhibit 3.1 on Form S-4, filed on September 29, 2003).
3.2		Articles of Amendment to the Amended and Restated Articles of Incorporation of KCI (filed as Exhibit 3.2 on Form S-4, filed on September 29, 2003).
3.3		Second Amended and Restated By-laws of KCI (filed as Exhibit 3.3 on Form S-4, as amended on December 31, 2003).
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 on Form S-4, filed on September 29, 2003).
4.2		Form of Series B 7³/8% Senior Subordinated Notes due 2013 (included in Exhibit 4.1).
*5.1		Opinion of Cox & Smith Incorporated.
10.1		Registration Rights Agreement, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Scotia Capital (USA) Inc., and Wells Fargo Securities, LLC, as Placement Agents (filed as Exhibit 10.1 on Form S-4, filed on September 29, 2003).
10.2		Credit Agreement, dated as of August 11, 2003 (filed as Exhibit 10.2 on Form S-4, filed on September 29, 2003).
10.3		Guarantee and Collateral Agreement, dated as of August 11, 2003 (filed as Exhibit 10.3 on Form S-4, filed on September 29, 2003).
10.4		Security and Control Agreement, dated as of August 11, 2003, among KCI, U.S. Bank National Association, as Trustee, and U.S. Bank National Association, as Securities Intermediary (filed as Exhibit 10.4 on Form S-4, filed on September 29, 2003).
10.5		Series A Preferred Stock Purchase Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors and the Director Investors (filed as Exhibit 10.5 on Form S-4, filed on September 29, 2003).
10.6		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 on Form S-4, filed on September 29, 2003).
10.7		Statement of Designations, Preferences and Rights of the Series A Convertible Participating Preferred Stock of Kinetic Concepts, Inc. (filed as Exhibit 10.7 on Form S-4, filed on September 29, 2003).
10.8		Agreement Among Shareholders, dated as of November 5, 1997 (filed as Exhibit 10.26 to Registration Statement on Form S-4, filed on December 19, 1997)
10.9		Joinder and Amendment Agreement, dated as of June 25, 2003 (filed as Exhibit 10.9 on Form S-4/A, as amended on October 24, 2003).
10.10		Waiver and Consent, effective as of September 27, 2002 (filed as Exhibit 10.10 on Form S-4, filed on September 29, 2003).
10.11		Amendment and Waiver, dated as of August 11, 2003 (filed as Exhibit 10.11 on Form S-4, filed on September 29, 2003).
10.12		KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1996).

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10.13		Deferred Compensation Plan (filed as Exhibit 99.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1995).
10.14		Kinetic Concepts, Inc. Senior Executive Stock Option Plan (filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31, 1996).
10.15		Form of Option Instrument with respect to Senior Executive Stock Option Plan (filed as Exhibit 10.32 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.16		Kinetic Concepts Management Equity Plan effective October 2, 1997 (filed as Exhibit 10.33 to our Annual Report on Form 10-K for the year ended December 31, 1997).
10.17		Form of Option Instrument with Respect to the Kinetic Concepts, Inc. Management Equity Plan (filed as Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.18		Kinetic Concepts, Inc. CEO Special Bonus Plan (filed as Exhibit 10.12 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.19		Kinetic Concepts, Inc. 2000 Special Bonus Plan (filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.20		Employee Benefits Trust Agreement, by and between the Company and Keith D. Thatcher, dated September 1, 1992 (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1994).
10.21		Letter, dated March 28, 2000, from KCI to Dennert O. Ware outlining the terms of his employment (filed as Exhibit 10.12 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
10.22		Letter, dated November 22, 1994, from KCI to Christopher M. Fashek outlining the terms of his employment (filed as Exhibit 10.23 to our Annual Report on Form 10-K/A, dated December 31, 1994).
10.23		Settlement Agreement, by and among the Company and certain of its subsidiaries and shareholders and Hillenbrand Industries, Inc. and certain of its subsidiaries and shareholders, dated December 31, 2002 (filed as Exhibit 10.16 to our Annual Report on Form 10-K for the year ended December 31, 2002).
10.24		Exhibits to Supplier Agreement, dated September 1, 2001, between Novation, LLC and KCI USA, Inc. (Supplier Agreement filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001) (filed as Exhibit 10.25 on Form S-4/A, as amended on October 24, 2003).
10.25		Therapeutic Specialty Beds, Therapeutic Surfaces & Related Products Supplier Agreement, dated effective September 1, 2001 between Novation, LLC and KCI USA, Inc., as amended by that certain Amendment of Agreement (MS 10730), dated effective May 13, 2002 (filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
10.26		Standard Office Building Lease Agreement, dated July 31, 2002 between CKW San Antonio, L.P. d/b/a San Antonio CKW, L.P. and Kinetic Concepts, Inc. for the lease of approximately 138,231 square feet of space in the building located at 8023 Vantage Drive, San Antonio, Bexar County, Texas 78230 (filed as Exhibit 10.27 on Form S-4, filed on September 29, 2003).
10.27		Amended and Restated Manufacturing Agreement, by and between the Company and Avail Medical Products, Inc., dated December 18, 2002 (filed as Exhibit 10.28 on Form S-4/A, as amended on October 24, 2003).

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10.28		First Amended and Restated Management Services Agreement, dated as of August 11, 2003, among KCI, Dr. James Leininger, Blum Capital Partners, L.P., Blum Strategic GP II, L.L.C., Fremont Partners, L.L.C. and Fremont Partners III, L.L.C. (filed as Exhibit 10.29 on Form S-4, filed on September 29, 2003).
10.29		License Agreement, dated as of October 6, 1993, between Wake Forest University and Kinetic Concepts, Inc., as amended by that certain Amendment to License Agreement, dated as of July 1, 2000 (filed as Exhibit 10.30 on Form S-4, as amended on October 24, 2003).
10.30		Amendment No. 1 to Credit Agreement, dated December 5, 2003 (filed as Exhibit 10.30 on Form S-4, as amended on December 31, 2003).
12.1		Statement Regarding Computation of Ratio of Earnings to Fixed Charges (filed as Exhibit 12.1 on Form S-4, filed on September 29, 2003).
**14.1		Code of Ethics
21.1		List of Subsidiaries (filed as Exhibit 21.1 to our Annual Report on Form 10-K for the year ended December 31, 2002).
*23.1		Consent of Cox & Smith Incorporated (included in Exhibit 5.1).
*23.2		Consent of Ernst & Young LLP.
*24.1		Power of Attorney (included in signature page).

*

Exhibits filed with this registration statement.

To be filed.

(b): Financial Statement Schedules.

Schedules other than those referred to above have been omitted because they are not applicable or not required or because the information is included elsewhere in the consolidated financial statements of the Registrant or the notes thereto.

Item 17. Undertakings.

The Registrant hereby undertakes to provide the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14, or otherwise, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification by the Registrant against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, Texas, on December 31, 2003.

		KINETIC CONCEPTS, INC.
		By:		/s/ ROBERT JAUNICH II
		Name:		Robert Jaunich II
		Title:		Chairman of the Board of Directors

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennert O. Ware, Dennis E. Noll and Martin J. Landon, and each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date

/s/ ROBERT JAUNICH II ROBERT JAUNICH II	Chairman of the Board of Directors	December 31, 2003
/s/ DENNERT O. WARE DENNERT O. WARE	Director, President and Chief Executive Officer (Principal Executive Officer)	December 31, 2003
/s/ MARTIN J. LANDON MARTIN J. LANDON	Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)	December 31, 2003
/s/ JAMES R. LEININGER, M.D. JAMES R. LEININGER, M.D.	Director, Chairman Emeritus	December 22, 2003
/s/ JOHN P. BYRNES JOHN P. BYRNES	Director	December 31, 2003

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/s/ RONALD W. DOLLENS RONALD W. DOLLENS	Director	December 31, 2003
/s/ JAMES T. FARRELL JAMES T. FARRELL	Director	December 31, 2003
/s/ HARRY R. JACOBSON, M.D. HARRY R. JACOBSON, M.D.	Director	December 31, 2003
/s/ N. COLIN LIND N. COLIN LIND	Director	December 17, 2003
/s/ DAVID J. SIMPSON DAVID J. SIMPSON	Director	December 31, 2003
/s/ C. THOMAS SMITH C. THOMAS SMITH	Director	December 31, 2003
/s/ DONALD E. STEEN DONALD E. STEEN	Director	December 31, 2003

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Exhibit Index

Exhibit No.		Exhibit
**1.1		Form of Underwriting Agreement
3.1		Restated Articles of Incorporation of KCI (filed as Exhibit 3.1 on Form S-4, filed on September 29, 2003).
3.2		Articles of Amendment to the Amended and Restated Articles of Incorporation of KCI (filed as Exhibit 3.2 on Form S-4, filed on September 29, 2003).
3.3		Second Amended and Restated Bylaws of KCI (filed as Exhibit 3.3 on Form S-4, as amended on December 31, 2003).
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 on Form S-4, filed on September 29, 2003).
4.2		Form of Series B 7³/8% Senior Subordinated Notes due 2013 (included in Exhibit 4.1).
*5.1		Opinion of Cox & Smith Incorporated.
10.1		Registration Rights Agreement, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Scotia Capital (USA) Inc., and Wells Fargo Securities, LLC, as Placement Agents (filed as Exhibit 10.1 on Form S-4, filed on September 29, 2003).
10.2		Credit Agreement, dated as of August 11, 2003 (filed as Exhibit 10.2 on Form S-4, filed on September 29, 2003).
10.3		Guarantee and Collateral Agreement, dated as of August 11, 2003 (filed as Exhibit 10.3 on Form S-4, filed on September 29, 2003).
10.4		Security and Control Agreement, dated as of August 11, 2003, among KCI, U.S. Bank National Association, as Trustee, and U.S. Bank National Association, as Securities Intermediary (filed as Exhibit 10.4 on Form S-4, filed on September 29, 2003).
10.5		Series A Preferred Stock Purchase Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors and the Director Investors (filed as Exhibit 10.5 on Form S-4, filed on September 29, 2003).
10.6		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 on Form S-4, filed on September 29, 2003).
10.7		Statement of Designations, Preferences and Rights of the Series A Convertible Participating Preferred Stock of Kinetic Concepts, Inc. (filed as Exhibit 10.7 on Form S-4, filed on September 29, 2003).
10.8		Agreement Among Shareholders, dated as of November 5, 1997 (filed as Exhibit 10.26 to Registration Statement on Form S-4, filed on December 19, 1997)
10.9		Joinder and Amendment Agreement, dated as of June 25, 2003 (filed as Exhibit 10.9 on Form S-4/A, as amended on October 24, 2003).
10.10		Waiver and Consent, effective as of September 27, 2002 (filed as Exhibit 10.10 on Form S-4, filed on September 29, 2003).
10.11		Amendment and Waiver, dated as of August 11, 2003 (filed as Exhibit 10.11 on Form S-4, filed on September 29, 2003).

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10.12		KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1996).
10.13		Deferred Compensation Plan (filed as Exhibit 99.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1995).
10.14		Kinetic Concepts, Inc. Senior Executive Stock Option Plan (filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31, 1996).
10.15		Form of Option Instrument with respect to Senior Executive Stock Option Plan (filed as Exhibit 10.32 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.16		Kinetic Concepts Management Equity Plan effective October 2, 1997 (filed as Exhibit 10.33 to our Annual Report on Form 10-K for the year ended December 31, 1997).
10.17		Form of Option Instrument with Respect to the Kinetic Concepts, Inc. Management Equity Plan (filed as Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.18		Kinetic Concepts, Inc. CEO Special Bonus Plan (filed as Exhibit 10.12 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.19		Kinetic Concepts, Inc. 2000 Special Bonus Plan (filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended December 31, 2000).
10.20		Employee Benefits Trust Agreement, by and between the Company and Keith D. Thatcher, dated September 1, 1992 (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1994).
10.21		Letter, dated March 28, 2000, from KCI to Dennert O. Ware outlining the terms of his employment (filed as Exhibit 10.12 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
10.22		Letter, dated November 22, 1994, from KCI to Christopher M. Fashek outlining the terms of his employment (filed as Exhibit 10.23 to our Annual Report on Form 10-K/A, dated December 31, 1994).
10.23		Settlement Agreement, by and among the Company and certain of its subsidiaries and shareholders and Hillenbrand Industries, Inc. and certain of its subsidiaries and shareholders, dated December 31, 2002 (filed as Exhibit 10.16 to our Annual Report on Form 10-K for the year ended December 31, 2002).
10.24		Exhibits to Supplier Agreement, dated September 1, 2001, between Novation, LLC and KCI USA, Inc. (Supplier Agreement filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001) (filed as Exhibit 10.25 on Form S-4/A, as amended on October 24, 2003).
10.25		Therapeutic Specialty Beds, Therapeutic Surfaces & Related Products Supplier Agreement, dated effective September 1, 2001 between Novation, LLC and KCI USA, Inc., as amended by that certain Amendment of Agreement (MS 10730), dated effective May 13, 2002 (filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
10.26		Standard Office Building Lease Agreement, dated July 31, 2002 between CKW San Antonio, L.P. d/b/a San Antonio CKW, L.P. and Kinetic Concepts, Inc. for the lease of approximately 138,231 square feet of space in the building located at 8023 Vantage Drive, San Antonio, Bexar County, Texas 78230 (filed as Exhibit 10.27 on Form S-4, as filed on September 29, 2003).

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10.27		Amended and Restated Manufacturing Agreement, by and between the Company and Avail Medical Products, Inc., dated December 18, 2002 (filed as Exhibit 10.28 on Form S-4/A, as amended on October 24, 2003).
10.28		First Amended and Restated Management Services Agreement, dated as of August 11, 2003, among KCI, Dr. James Leininger, Blum Capital Partners, L.P., Blum Strategic GP II, L.L.C., Fremont Partners, L.L.C. and Fremont Partners III, L.L.C. (filed as Exhibit 10.29 on Form S-4, filed on September 29, 2003).
10.29		License Agreement, dated as of October 6, 1993, between Wake Forest University and Kinetic Concepts, Inc., as amended by that certain Amendment to License Agreement, dated as of July 1, 2000 (filed as Exhibit 10.30 on Form S-4, as amended on October 24, 2003).
10.30		Amendment No. 1 to Credit Agreement, dated December 5, 2003 (filed as Exhibit 10.30 on Form S-4, as amended on December 31, 2003).
12.1		Statement Regarding Computation of Ratio of Earnings to Fixed Charges (filed as Exhibit 12.1 on Form S-4, filed on September 29, 2003).
**14.1		Code of Ethics
21.1		List of Subsidiaries (filed as Exhibit 21.1 to our Annual Report on Form 10-K for the year ended December 31, 2002).
*23.1		Consent of Cox & Smith Incorporated (included in Exhibit 5.1).
*23.2		Consent of Ernst & Young LLP.
*24.1		Power of Attorney (included in signature page).

*: Exhibits filed with this registration statement.
**: To be filed.

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