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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

or

Commission File Number: 0-20086

UNIVERSAL HOSPITAL SERVICES, INC.

(Exact name of Registrant as specified in its charter)

1250 Northland Plaza

3800 American Boulevard West

Bloomington, Minnesota 55431-4442

(Address of principal executive offices)

(Zip Code)

(952) 893-3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

DOCUMENTS INCORPORATED BY REFERENCE

None.

The number of shares outstanding of common stock, $.01 par value, as of March 5, 2004 was 122,725,617.8.

FORM 10-K INDEX

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PART I

Our Company

We are a leading, nationwide provider of medical technology outsourcing and services to the health care industry, including national, regional and local acute care hospitals and alternate site providers, such as nursing homes and home care providers. We service customers across the spectrum of the equipment life cycle as a result of our position as the industry’s largest purchaser, outsourcer and reseller of movable medical equipment. Our diverse customer base includes more than 2,900 acute care hospitals and approximately 3,050 alternate site providers. We also have extensive and long-standing relationships with over 300 major medical equipment manufacturers and the nation’s largest group purchasing organizations, or GPOs, and integrated delivery networks, or IDNs. Our service offerings fall into three general categories: Medical Equipment Outsourcing, Technical and Professional Services, and Medical Equipment Sales, Remarketing and Disposables. All of our services leverage our nationwide logistics network and our more than 60 years of experience managing and servicing all aspects of movable medical equipment. These services are paid for by our customers and not through reimbursement from governmental or other third-party payors. We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001. Our revenue, profits, and assets, for the prior three years are described in “Item 6 – Selected Financial Data.”

Medical Equipment Outsourcing

Our flagship business is our Medical Equipment Outsourcing unit, which accounted for $140.2 million, or approximately 82.0%, of our revenues for the year ended December 31, 2003. We own approximately 144,000 pieces of movable medical equipment in four primary categories: critical care, respiratory therapy, monitoring and newborn care.

Our outsourcing programs include the following range of services:

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Our medical equipment programs enable health care providers to replace the fixed costs of owning and/or leasing medical equipment with variable costs that are more closely related to their revenues and current equipment needs. The increased flexibility and services provided to our customers allows them to access our extensive data and expertise on the cost, performance, features and functions of all major items of medical equipment; increase productivity of available equipment; reduce maintenance and management costs through use of our dedicated and knowledgeable outsourcing staff and technology; increase the productivity and satisfaction of their nursing staff by allowing them to focus on primary patient care responsibilities; reduce equipment obsolescence risk; and facilitate compliance with regulatory and record keeping requirements and manufacturers’ specifications on tracking and maintenance of medical equipment.

We currently provide outsourcing services to a wide spectrum of acute care hospitals in the United States, including such premier institutions as UCLA Medical Center, Brigham and Women’s Hospital, Johns Hopkins Medical Center, Baylor University and Kansas University Medical Center. We have contracts in place with several of the leading national GPOs for both the acute care and alternate site markets, including Premier Technology Management L.L.C., Novation, LLC, MedAssets HSCA, Inc. and Amerinet, Inc. We also have agreements with national alternate site providers, including Omnicare, Inc., Apria Healthcare Group Inc. and Beverly Enterprises, Inc. We expect much of our

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anticipated future growth to be driven by our customers outsourcing more of their equipment needs and taking advantage of our expanded offering of one-stop services.

Technical and Professional Services

Our more than 60 years of experience managing and servicing our own fleet of movable medical equipment has allowed us to extend our offerings to include technical and professional services for equipment owned by both health care providers and manufacturers. We provide medical equipment repair, inspection, preventative maintenance, logistic and consulting services through our nationwide network of 190 technicians and professionals, as well as our nationwide network of district offices and service centers. Our technicians are trained and certified on an ongoing basis directly by equipment manufacturers to enable them to be skilled in servicing a wide spectrum of medical equipment. These services, which accounted for $14.7 million, or approximately 8.6%, of our revenues for the year ended December 31, 2003, allow us to leverage our extensive expertise and national network of facilities and trained professionals. Our technicians are required and encouraged to maintain current certifications, to be cross-trained across equipment lines and to refresh their training on a regular basis. Our technical and professional service offerings are less capital intensive than our Medical Equipment Outsourcing business, and provide a complementary alternative for customers that wish to own their medical equipment, or lack the expertise, funding or scale to perform these functions. Our customers include manufacturers, large hospitals, small and critical access hospitals and alternate site providers, such as nursing homes and home care providers.

We also operate a quality assurance department to develop and document our own quality standards for our equipment. All equipment maintenance, inspection and repair is performed to our specifications and recorded utilizing our proprietary record keeping software and meets or exceeds FDA, CSA and JCAHO standards. These maintenance records are available to our customers and to regulatory agencies to demonstrate the maintenance of our equipment throughout its useful life.

We provide our technical and professional services to four distinct categories of customers:

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Medical Equipment Sales, Remarketing and Disposables

We offer three areas of medical equipment sales and remarketing services, which collectively accounted for $16.1 million, or approximately 9.4%, of our revenues for the year ended December 31, 2003. They are:

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Business Operations

District Offices

We currently operate 69 full service district offices throughout the United States, allowing us to effectively service customers in all 50 states. Each district office maintains an inventory of equipment and other items tailored to accommodate the needs of the individual customers within its geographical area. Should additional or unusual equipment be required by one of our customers, a district office can draw upon the resources of all of our other districts, with access to approximately 144,000 owned pieces of equipment, to obtain the necessary equipment within 24 hours.

Our district offices are staffed by multi-disciplined teams of account managers, service representatives and technicians trained to provide the spectrum of services we offer our customers. Each office is under the guidance of a district manager with responsibility for the overall operation of the office, as well as directing the sales, technical and professional employees. Our district offices are also managed on a centralized basis to ensure a high standard of quality and service while taking advantage of economies of scale.

Service Centers

Our district offices are supported by our network of 13 regional service centers. Our service centers support our district offices with their ability to perform more sophisticated maintenance and repair of equipment. In addition to providing advanced technical capabilities, our service centers provide overflow capacity to ensure that we meet our customers’ repair and maintenance needs in a timely manner. Our service centers also enable us to offer warranty, recall and other services to our equipment manufacturer customers.

Centralized Functions

At the core of our nationwide service is our corporate office located in Bloomington, Minnesota. We have centralized many of the key elements of our equipment and service offerings in order to maximize our operating efficiencies and uniformity of service. Some of the critical aspects of our business that we have centralized include the

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administration of certain contracts, purchasing, pricing, logistics and information technology.

Equipment Inventory

We purchase movable medical equipment in the areas of critical care, respiratory therapy, monitoring and newborn care. Equipment acquisitions may be made to expand our pool of existing equipment or to add new equipment technologies to our existing equipment pool. In making equipment purchases, we consider a variety of factors, including equipment mobility, anticipated utilization level, service intensiveness and anticipated obsolescence. Of additional consideration are the relative safety of, and the risks associated with, such equipment.

As of December 31, 2003, we owned approximately 144,000 pieces of equipment available for use by our customers. The cost of each category of equipment in our outsourcing pool relative to the entire pool as of December 31, 2003 was: critical care, 54%; respiratory therapy, 29%; monitoring, 15%; and newborn care, 2%.

During 2003, we purchased 85% of our movable medical equipment from approximately 106 manufacturers and 15% from the used equipment market. Our ten largest manufacturers of movable medical equipment, which supplied approximately 66% of our direct movable medical equipment purchases for 2003, were: Baxter Healthcare Corporation; Tyco International, Ltd. (Mallinckrodt and Kendall Healthcare Products Company); Alaris Medical Systems; Tri-Anim Health Services, Inc.; Datascope Corporation; Sims Deltec, Inc.; Respironics, Inc.; Sammons Preston Rolyan; Abbott Laboratories and Viasys Healthcare, Inc. Although our top ten manufacturers remain relatively constant from year to year, the relative ranking of suppliers within this group may vary over time. We believe that alternative sources of movable medical equipment are available to us should they be needed.

We seek to ensure availability of equipment at favorable prices. Although we do not generally enter into long-term fixed price contracts with suppliers of our equipment, we may receive price discounts related to the volume of our purchases. The purchase price for our equipment generally ranges from $1,000 to $50,000 per item.

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Principal Types of Movable Medical Equipment Available

Our Strengths

We believe our business model presents an attractive value proposition to our customers and has resulted in significant growth since 1998. Our unique position in our flagship Medical Equipment Outsourcing business presents us with considerable competitive advantages, and has facilitated further growth in complementary areas. We service customers across the spectrum of the equipment life cycle as a result of our position as the industry’s largest purchaser, outsourcer and reseller of movable medical equipment. We attribute our historical success to, and believe that our potential for future growth comes from, the following strengths:

Unique position in the health care arena. We are one of only two national companies providing movable medical equipment outsourcing programs to the health care industry. We are the only nationwide provider that maintains ownership and management control of its nationwide network, allowing us to deliver consistent quality and service anywhere in the United States. Our extensive and long-standing relationships with more than 2,900 hospitals, approximately 3,050 alternate site providers, over 300 medical equipment manufacturers and the nation’s most prominent GPOs and IDNs present a considerable competitive advantage over our smaller regional competitors. We are uniquely

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positioned in the health care industry as a result of our: (a) strategic capital investments and access to capital to maintain the most extensive and modern fleet of equipment in the industry; (b) nationwide infrastructure, national service and logistics network; (c) proprietary medical equipment asset management software and tools and (d) commitment to customer service that has earned us a reputation as a leader in quality and service in our industry.

Superior service and strong customer relationships. We distinguish ourselves as the recognized leader in our industry for service and quality. Our modern equipment fleet, quality assurance programs and proprietary reporting technologies and management tools minimize obsolescence risk and place us in a leadership position in the areas of quality and patient safety. We have a broad nationwide network that has enabled us to effectively compete for large national contracts, drive regional and local growth and strengthen our competitive positioning.

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Industry with favorable fundamentals. The attractiveness of our business is driven by the overall favorable trends in health care in general and our segment in particular. The growth in the medical equipment outsourcing industry is being driven by a fundamental shift in the needs of hospitals and alternate site providers, from supplemental and peak needs supply of movable medical equipment to full lifecycle asset management programs. This move to full outsourcing is not unlike trends in similar services at hospitals including food services, laundry and professional staffing. The strong fundamentals in medical equipment outsourcing are being driven by the following trends:

Strong value proposition. We bring a focus and expertise to medical equipment lifecycle management that creates a value proposition to our customers. Our programs enable health care providers to replace the fixed costs of owning and/or leasing medical equipment with variable costs that are more closely related to their revenues and present needs. The increased flexibility and services provided to customers allow our customers to enhance productivity of available equipment, reducing the overall costs of acquisition

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and maintenance of medical equipment; accurately capture all provider billing data, thereby maximizing their own revenue from patients and their payors; access our extensive data and expertise on the cost, performance, features and functions of all major pieces or types of medical equipment to assist them in making acquisition, management and disposition decisions; reduce maintenance and management costs through the use of our dedicated and knowledgeable outsourcing staff and asset management software and tools; increase the productivity and satisfaction (as demonstrated by our surveys) of providers’ nursing and professional staff; reduce equipment obsolescence risk; and improve compliance with regulatory and record keeping requirements. Our programs also enable our customers to increase the availability of patient-ready equipment and improve nursing satisfaction.

No direct reimbursement risk. Generally, health care providers rely on payment from patients or reimbursement from governmental or other third party payors. Our fees are paid directly by our acute care hospital, alternate site and manufacturer customers rather than through third party payors. Accordingly, our exposure to uncollectible patient or reimbursement receivables is minimized, as evidenced by our bad debt expense of only 0.4% of total revenues for the year ended December 31, 2003.

Proven management team. We have an industry leading management team with an average of approximately 15 years of health care experience. Our management team has successfully supervised the development of our competitive strategy, continually enhanced our service and product offerings and established our nationwide footprint and reputation as the industry’s service and quality leader.

GROWTH STRATEGY

Historically, we have experienced significant and sustained organic and strategic growth. Our overall strategy is to capitalize on our past success to continue to grow both organically and through strategic acquisitions.

Organic Growth

We believe that the following external and market factors will provide us significant growth opportunities for Medical Equipment Outsourcing, services and sales; (a) the aging population; (b) increasing life expectancy; (c) continued increase in the number and sophistication of medical technologies; (d) increasing cost and staffing pressures of hospitals; and (d) continued growth of outsourcing of non-core functions by hospitals, alternate site providers and manufacturers.

Our organic growth strategy is to continue to grow our flagship Medical Equipment Outsourcing business by continuing to expand our market share and the outsourcing marketplace. We also intend to grow our less capital-intensive Technical and Professional Services business by leveraging our experience across the spectrum of the equipment lifecycle, extensive existing customer relationships and attractive market position.

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We believe that, because of the depth and breadth of our services and our long-standing customer relationships, we are uniquely positioned to increase the marketplace, as well as our market share, through the execution of three organic growth strategies: (a) offering additional products and services to our existing customers, particularly through fully-outsourced asset management services; (b) increasing the number of hospitals and alternate care facilities to whom we provide services; and 3) expanding our relationships with GPOs and the smaller alliances of facilities operating within those groups.

Strategic Growth

Since our 1998 recapitalization, we have made and successfully integrated six strategic acquisitions that have helped us expand our business by increasing our market share in existing markets and enabling us to penetrate new geographic regions. They have also allowed us to expand our offerings of full equipment lifecycle services. We are currently expanding this small hospital strategy across our nationwide network. We intend to continue to pursue a disciplined course of growing our business with complementary acquisitions. We regularly evaluate potential acquisitions, and we may be evaluating or engaging in acquisition negotiations at any time and from time to time.

COMPETITION

We analyze our competition as it relates to our three primary categories of business:

Medical Equipment Outsourcing

We believe that the strongest competition to our outsourcing programs is the traditional purchase and lease alternatives for obtaining movable medical equipment. Currently, many acute care hospitals and alternate site providers view outsourcing primarily as a means of meeting short-term or peak supplemental needs, rather than as a long-term alternative to purchasing or leasing equipment. Although we believe that we can demonstrate the cost-effectiveness of outsourcing movable medical equipment on a long-term per-use basis, we believe that many health care providers will continue to purchase or lease a substantial portion of their movable medical equipment until they are educated in the advantages and efficiencies of outsourcing.

We have one principal national competitor in the movable medical equipment outsourcing business: MEDIQ/PRN, a subsidiary of MEDIQ, based in Pennsauken, New Jersey. Although MEDIQ’s Chapter 11 bankruptcy filing in 2001 has caused it to revise its strategies and approach, it remains our only significant national competitor in the movable medical equipment outsourcing market. On February 2, 2004, MEDIQ was acquired by Hillenbrand Industries. Hillenbrand is a publicly traded holding company serving the health care and funeral services industries. Hillenbrand’s Hill-Rom subsidiary is a leading provider of therapy bed rentals and a manufacturer of hospital furniture. Hillenbrand has announced its intention to integrate MEDIQ’s operations into its Hill-Rom subsidiary.

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Our other competition consists of regional or local companies and some movable medical equipment manufacturers and dealers who provide equipment outsourcing to augment their movable medical equipment sales. Local and regional companies have a propensity to compete on price and can negatively impact our margins. We believe that our technology and inventory allow us to effectively compete with these entities.

Technical and Professional Services

We face significant and direct competition in the technical and professional services area from many national, regional and local service providers, as well as from manufacturers. In addition, many of our customers choose to perform these functions using their own personnel. We believe that with our network of trained technicians, strong customer relations and extensive equipment database, we offer customers an attractive alternative for performing biomedical repair services on their equipment.

Medical Equipment Sales, Remarketing and Disposables

In the area of medical equipment sales, remarketing and disposables, we face significant direct competition from a variety of manufacturers and distributors on a nationwide basis. As a result, we are selective in our pursuit of these opportunities. We believe our competition in the remarketing and asset recovery business is less intense. The equipment remarketing market is highly fragmented with low barriers to entry. In addition to manufacturers seeking to control the remarketing and disposal of their own products, we compete with a number of localized or more specialized providers of remarketing and disposal services.

EMPLOYEES

We had 971 employees as of December 31, 2003, including 892 full-time and 79 part-time employees. Of such employees, 153 are sales representatives, 190 are technical support personnel, 99 are employed in the areas of corporate and marketing, 150 are hospital service personnel and 379 are district office support personnel.

None of our employees is covered by a collective bargaining agreement, and we have experienced no work stoppages to date. We believe that our relations with our employees are good.

INTELLECTUAL PROPERTY

We use the “UHS” and “Universal Hospital Services” names as trade names and as service marks in connection with our rental of medical equipment. We have registered these and other marks as service marks with the United States Patent and Trademark Office.

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MARKETING

We market our programs primarily through our direct sales force, which consisted of 153 promotional sales representatives as of December 31, 2003. In our marketing efforts, we primarily target key decision makers, such as materials managers, department heads and directors of purchasing, nursing and central supply, as well as administrators, chief executive officers and chief financial officers. We also promote our programs and services to hospital and alternate care provider groups and associations. We develop and provide our direct sales force with a variety of materials designed to support our promotional efforts. We also use direct mail advertising, as well as targeted trade journal advertising to supplement this activity.

FORWARD LOOKING STATEMENTS

All statements, other than statements of historical fact, contained within this Annual Report on Form 10-K constitute forward-looking statements, which may include words such as “expect,” “anticipate,” “believe,” “may,” “should,” “could” or “estimate.” These statements involve risks and uncertainties that may cause actual results to differ materially from expectations.

Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, those described in “Risk Factors” below and the following:

We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future

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events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events included in this 10-K might not occur.

RISK FACTORS

If the census of our customers decreases, our costs as a percent of revenue could increase and the revenues generated by our business could decrease.

Our operating results are dependent in part upon the amount and types of equipment necessary to service our customers’ needs which are heavily influenced by the total number of patients our customers are serving at any time (which we refer to as patient census). At times of lower patient census, our customers have a decreased need for our services on a supplemental or peak needs basis. Our operating results can vary depending on the timing and severity of the cold and flu season and the impact of national catastrophes, as well as other factors affecting census. If our customers experience a census decrease, our costs as a percent of revenue could increase and the revenues generated by our business could decrease.

If we are unable to fund our significant cash needs, we will be unable to operate and expand our business as planned or to service our debt.

We require substantial cash to operate our Medical Equipment Outsourcing programs and service our debt. Our outsourcing programs require us to invest a significant amount of cash in movable medical equipment purchases. To the extent that such expenditures cannot be funded from our operating cash flow, borrowings under our new senior secured credit facility or other financing sources, we may not be able to conduct our business or to grow as currently planned. We currently expect that over the next 12 months we will invest approximately $38 million to $45 million in new equipment. In addition, a substantial portion of our cash flow from operations must be dedicated to servicing our debt and there will be significant restrictions on our ability to incur additional indebtedness under the indenture governing our 10.125% senior notes due 2011, which we refer to as the notes, and our new senior secured credit facility.

Primarily because of our debt service obligations, we have had a history of net losses. If we continue to incur net losses, this could result in our inability to finance our business in the future. We had net losses of $5.1 million, $5.1 million, $3.6 million, $0.2 million and $19.5 million for the years ended 1999, 2000, 2001, 2002 and 2003, respectively. Our debt service obligations will continue to be substantial under our new senior secured credit facility and the notes.

If we are unable to change the manner in which health care providers traditionally procure medical equipment, we may not be able to achieve significant revenue growth.

We believe that the strongest competition to our outsourcing programs is the traditional purchase or lease alternative for obtaining movable medical equipment. Currently, many acute care hospitals and alternate site providers view outsourcing primarily as a means of

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meeting short-term or peak supplemental needs, rather than as a long-term, effective, cost efficient alternative to purchase or leasing equipment. Many health care providers may continue to purchase or lease a substantial portion of their movable medical equipment. If health care providers do not change the manner in which they procure their medical equipment, we may not be able to achieve significant growth.

Our competitors may engage in significant price competition or liquidate significant amounts of surplus equipment, thereby decreasing the demand for outsourcing services and possibly causing us to reduce the rates we charge for our services.

In a number of our geographic and product markets, we compete with one principal competitor and various smaller equipment outsourcing companies that may compete primarily on the basis of price. These competitors may offer certain customers lower prices depending on utilization levels and other factors. Our largest outsourcing competitor, MEDIQ/PRN Life Support Services, Inc., is a subsidiary of MEDIQ Incorporated. On February 2, 2004, MEDIQ was acquired by Hillenbrand Industries. Hillenbrand is a publicly traded holding company serving the healthcare and funeral services industries. Hillenbrand’s Hill-Rom subsidiary is a leading provider of therapy bed rentals and a manufacturer of hospital furniture. Hillenbrand has announced its intention to integrate MEDIQ’s operations into its Hill-Rom subsidiary. MEDIQ/PRN may engage in competitive practices that may undercut our pricing. In addition, MEDIQ/PRN may liquidate significant amounts of surplus equipment, thereby decreasing the demand for outsourcing services and possibly causing us to reduce the rates we may charge for our services.

We have relationships with certain key suppliers, and adverse developments concerning these suppliers could delay our ability to procure equipment or increase our cost of purchasing equipment.

We purchased our movable medical equipment from approximately 106 manufacturers and our disposable medical supplies from approximately 121 suppliers in 2003. Our ten largest manufacturers of movable medical equipment, which supplied approximately 66% of our direct movable medical equipment purchases for 2003, were: Baxter Healthcare Corporation; Tyco International, Ltd. (Mallinckrodt and Kendall Healthcare Products Company); Alaris Medical Systems; Tri-Anim Health Services, Inc.; Datascope Corporation; Sims Deltec, Inc.; Respironics, Inc.; Sammons Preston Rolyan; Abbott Laboratories and Viasys Healthcare, Inc. Adverse developments concerning key suppliers or our relationships with them could force us to seek alternative sources for our movable medical equipment or to purchase such equipment on unfavorable terms. A delay in procuring equipment or an increase in the cost to purchase equipment could limit our ability to provide equipment to our customers on a timely and cost-effective basis.

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A substantial portion of our revenues come from customers with whom we do not have long-term commitments, and cancellations by or disputes with customers could decrease the amount of revenues we generate, thereby reducing our ability to operate and expand our business.

We derived approximately 62% of our outsourcing revenues for the year ended December 31, 2003 from customers with whom we do not have any formal long-term commitment to use our programs. Our customers are generally not obligated to outsource our equipment under long-term commitments. In addition, many of our customers do not sign written agreements with us fixing the rights and obligations of the parties regarding matters such as billing, liability, warranty or use. Therefore, we face risks such as fluctuations in usage, inaccurate or false reporting of usage by customers and disputes over liabilities related to equipment use. Some of our AMPP total outsourcing programs with customers, under which we own substantially all of the movable medical equipment that they use and provide substantial staffing resources, are not subject to a written contract and could be terminated by the healthcare provider without notice or payment of any termination fee. Any such termination would make it difficult for us to generate cash flows and revenues sufficient to support our business.

If we are unable to renew our contracts with GPOs or IDNs, we may lose existing customers, thereby reducing the amount of revenues we generate.

Our past revenue growth and our strategy for future growth depends, in part, on access to the new customers granted by our major contracts with GPOs or IDNs such as Premier, MedAssets, Novation, and AmeriNet. The Premier contract expires in 2004, MedAssets in 2005, Novation in 2006 and AmeriNet in 2006. In the past, we have been able to renew such contracts. If we are unable to renew or replace our current GPO contracts when they are up for renewal, we may lose the existing business with the customers who are members of such GPOs.

Although we do not manufacture any medical equipment, our business entails the risk of claims related to the medical equipment that we outsource and service. We may not have adequate insurance to cover a claim, and it may be more expensive or difficult for us to obtain adequate insurance in the future.

We may be liable for claims related to the use of our movable medical equipment. Any such claims, if made, could make our business more expensive to operate and therefore less profitable. We may be subject to claims exceeding our insurance coverage or we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage. In addition, litigation relating to a claim could adversely affect our existing and potential customer relationships, create adverse public relations and divert management’s time and resources from the operation of the business.

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Our growth strategy depends in part on our ability to successfully identify and manage our acquisitions and a failure to do so could impede our future revenue growth, thereby weakening our position in the industry with respect to our competitors.

As part of our growth strategy, we intend to pursue acquisitions or other strategic relationships within the health care industry that we believe will enable us to generate revenue growth and enhance our competitive position. Since July 1998, we have acquired six new businesses for an aggregate purchase price of $49.8 million. Future acquisitions may involve significant cash expenditures and operating losses that could impede our future revenue growth. In addition, our efforts to execute our acquisition strategy may be affected by our ability to identify suitable candidates and negotiate and close acquisitions. We regularly evaluate potential acquisitions, and we may be evaluating or engaging in acquisition negotiations at any time and from time to time. As of the date hereof, we have not entered into any agreements with respect to any material transactions. We may not be successful in acquiring other businesses, and the businesses we do acquire in the future may not ultimately produce returns that justify our related investment.

Acquisitions may involve numerous risks, including:

If we are unable to continue to grow through acquisitions, our ability to generate revenue growth and enhance our competitive position would be impaired.

We depend on our sales representatives and service specialists, and may lose customers when any of our sales representatives and service specialists leave us.

Our sales growth has been supported by hiring and developing new sales representatives and adding, through acquisitions, established sales representatives whose existing customers generally have become our customers. We have experienced and will continue to experience intense competition for managers and experienced sales representatives. The success of our programs depends on the relationships developed between our sales representatives and our customers.

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Our operating income as a percentage of revenue fluctuates with our quarterly operating results, leading to fluctuations in cash flow during the second and third quarters of each year.

Our results of operations have been and can be expected to be subject to quarterly fluctuations. We may experience increased revenues in the first and fourth quarter of the year, depending upon the timing and severity of the cold and flu season and the related increased hospital census and movable medical equipment usage during that season. Because a significant portion of our expenses are relatively fixed over these periods, our operating income as a percentage of revenue tends to increase during the first and fourth quarter of each year. If the cold and flu season is delayed by as little as one month, or is less severe than in prior periods, our quarterly operating results for a current period can vary significantly from prior periods. Our quarterly results can also fluctuate as a result of other factors such as the timing of acquisitions, new AMPP agreements or new office openings.

Changes in reimbursement rates and policies by third-party payors for medical equipment costs may reduce the rates that providers can pay for our services, requiring us to reduce our rates or putting our ability to collect payments at risk.

Our health care provider customers, who pay us directly for the services we provide to them, rely on reimbursement from third party payors for a substantial portion of their operating revenue. These third party payors include both governmental payors, such as Medicare and Medicaid, and private payors, such as insurance companies and managed care organizations. There are widespread efforts to control health care costs in the United States by all of these payor groups. These cost containment initiatives have resulted in reimbursement policies based on fixed rates for a particular patient treatment that are unrelated to the provider’s actual costs or require health care providers to provide services on a discounted basis. Consequently, these reimbursement policies have a direct effect on health care providers’ ability to pay us for our services and an indirect effect on our level of charges. Ongoing concerns about rising health care costs may cause more restrictive reimbursement policies to be implemented in the future. Restrictions on the amounts or manner of reimbursements to health care providers may affect their willingness and ability to pay for the services we provide and may adversely affect our customers. Such restrictions could require us to reduce the rates we charge or could put at risk our ability to collect payments owed to us.

In periods when significant health care reform initiatives were under consideration and uncertainty remained as to their likely outcome, our profits have decreased as the cost of doing business has increased. If other significant health care reform initiatives occur, they may have a similar, negative effect.

Because the regulatory and political environment for health care significantly influences the capital equipment procurement decisions of health care providers, our ability to generate profits has historically been adversely affected in periods when significant

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health care reform initiatives were under consideration and uncertainty remained as to their likely outcome. To the extent general cost containment pressures on health care spending and reimbursement reform, or uncertainty as to possible reform, causes acute care hospitals and alternate site providers to defer the procurement of medical equipment, reduce their capital expenditures or change significantly their utilization of medical equipment, we could experience an increase in the cost of doing business, thereby leading to difficulty generating profits sufficient to support our business.

A portion of our revenues are derived from home care providers and nursing homes, and these health care providers may pose additional credit risks.

We may incur losses in the future due to the bankruptcy filings of our nursing home and home care customers. We derived approximately 17% of our revenues for each of the years ended December 31, 2002 and December 31, 2003 from alternate site providers such as home care providers and nursing homes. We expect that we will continue to derive a portion of our revenues from alternative care providers. Such providers may pose additional credit risks, since they are generally less financially sound than hospitals. Nursing homes in particular have experienced significant financial problems since the implementation of Balanced Budget Act of 1997.

The interests of our major stockholders may conflict with your interests and these stockholders could cause us to take action that would be against your interests.

J.W. Childs Equity Partners, L.P., or JWC Fund I, J.W. Childs Equity Partners III, L.P., or JWC Fund III, and Halifax Capital Partners, L.P., or Halifax, and their respective affiliates beneficially own shares representing approximately 91.1% of our fully diluted common equity. Accordingly, these stockholders have the power to elect our board of directors, appoint new management and approve any action requiring a stockholder vote, including amendments to our certificate of incorporation and approving mergers or sales of substantially all of our assets. Such concentration of voting power could have the effect of deterring and preventing a change of control of our company that might otherwise be beneficial to our security holders. The directors so elected will have the authority to make decisions affecting our capital structure, including the issuance of additional indebtedness and the declaration of dividends. Circumstances may occur in which the interests of equity holders could be in conflict with your interests.

A part of our future growth strategy involves growing our Technical and Professional Services and Medical Equipment Sales, Remarketing and Disposables businesses, both areas where we have significant competitors which could reduce our ability to achieve this strategy and affect our planned growth.

Approximately 18% of our revenues in 2003 came from our Technical and Professional Services and Medical Equipment Sales, Remarketing and Disposables areas. We may not be able to continue to grow these areas, and even if we do so, we expect to encounter increased and significant competition which could reduce our ability to achieve this strategy and affect our planned growth.

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Consolidation in the health care industry may lead to a reduction in the outsourcing rates we charge, thereby decreasing our revenues.

In recent years, many acute care hospitals and alternate site providers have consolidated to create larger health care organizations. We believe that this consolidation trend may continue. Any resulting consolidated health care organization may have greater bargaining power over us, which could lead to a reduction in the outsourcing rates that we are able to charge. A reduction in our outsourcing rates will decrease our revenues.

Our customers operate in a highly regulated environment and the regulations affecting them could lead to additional expenses associated with compliance and licensing, along with penalties resulting from possible violations, thereby increasing our costs and reducing income.

The healthcare industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels. While the majority of these regulations do not directly apply to us, there are some that do, including the Food, Drug and Cosmetics Act, or FDCA, and certain state pharmaceutical licensing requirements. Although we believe we are in compliance with the FDCA, if the FDA expands the reporting requirements under the FDCA, we may be required to comply with the expanded requirements and may incur substantial additional expenses in doing so. With respect to state pharmaceutical licensing requirements, we are currently licensed in 11 states and may be required to be licensed in additional states. Our failure to possess such licenses for our existing operations may subject us to certain additional expenses.

Given that our industry is heavily regulated, we may be subject to additional regulatory requirements. If our operations are found to be in violation of any governmental regulations to which we or our customers are subject, we may be subject to the applicable penalty associated with the violation. Any penalties, damages, fines or curtailment of our operations would significantly increase our costs of doing business, thereby leading to difficulty generating sufficient income to support our business.

REGULATORY MATTERS

Regulation of Medical Equipment. Our customers are subject to documentation and safety reporting standards with respect to the movable medical equipment they use, as established by the following organizations and laws: JCAHO; the Association for Advancement of Medical Instrumentation; and the FDCA. Some states and municipalities also have similar regulations. Our REDS and OEIS programs are specifically designed to help customers meet their documentation and reporting needs under such standards and laws. We also monitor changes in law and accommodate the needs of customers by providing specific product information, manufacturers’ addresses and contacts to these customers upon their request. Manufacturers of our movable medical equipment are subject to regulation by agencies and organizations such as the FDA, Underwriters Laboratories, the National Fire Protection Association and the CSA. We believe that all movable medical equipment we outsource conforms to these regulations.

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The Safe Medical Devices Act of 1980, or SMDA, which amended the FDCA, requires manufacturers, user facilities, and importers of medical devices to report deaths and serious injuries to which a device has or may have caused or contributed; establish and maintain adverse event files; and submit to the FDA follow-up and summary reports. Manufacturers and importers are also required to report certain device malfunctions. We work with our customers to assist them in meeting their reporting obligations under the FDCA, including those requirements added by the SMDA. As a distributor of medical devices, we are required by the FDCA to maintain device complaint records containing any incident information regarding the identity, quality, durability, reliability, safety, effectiveness or performance of a device. We are required to retain copies of these records for a period of two years from the date of inclusion of the record in the file or for a period of time equivalent to the expected life of the device, whichever is greater, even if we cease to distribute the device. Finally, we are required to provide authorized FDA employees access to copy and verify these records upon their request. We have current compliance records regarding maintenance, repairs, modification, and user-error, with respect to all of the equipment.

Besides the FDA, a number of states regulate medical device distributors and wholesalers either through pharmacy or device distributor licensure. Currently, we hold licenses in 11 states. Some licensure regulations and statutes in additional states may apply to our activities. We are currently in the process of obtaining distributor licenses in approximately five other states in which we believe we may be required to be licensed. Although our failure to possess such licenses in these states for our existing operations may subject us to certain monetary fines, we do not believe the extent of such fines, in the aggregate, will be material to our liquidity, financial condition or results of operation.

In addition, we are required to provide information to the manufacturer regarding the permanent disposal of movable medical outsourcing equipment and notification of any change in ownership of certain categories of devices. We believe our medical tracking systems are in substantial compliance with these regulations.

We may be subject to recent regulation regarding the use of medical records and information. The Health Insurance Portability and Accountability Act of 1996, commonly known as HIPAA, authorized the Secretary of the Department of Health and Human Services, or HHS, to promulgate federal standards for the privacy of individually identifiable health information and certain electronic transactions. On December 28, 2000, HHS published a final regulation to protect such individually identifiable health information, setting forth specific standards under which such information may be used and disclosed, furnishing new patient rights to obtain and amend their health information and establishing certain administrative requirements for covered entities. This was subsequently modified on August 14, 2002. The deadline for compliance with the new regulations for most covered entities was April 14, 2002. On August 17, 2000, HHS published standards for electronic transactions, which subsequently were modified on February 20, 2003. The general compliance date for most covered entities was October 16, 2002, but all covered entities could receive a one-year extension for compliance until October 16, 2003. On February 20, 2003, HHS published security standards addressing

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the security of electronic protected health information. The general deadline for compliance with the security standards is April 21, 2005.

HIPAA applies to certain covered entities, including health plans, health care clearinghouses and health care providers who transmit health information electronically in connection with any of eleven specified transactions. Although we are not likely to be directly regulated as a covered entity under the new HIPPA regulations, we may be obligated contractually to comply with certain HIPPA requirements as a business associate of various health care providers. In addition, various state legislatures may enact additional privacy legislation that is not preempted by the federal law, which may impose additional burdens on us. Accordingly, we have made and expect to continue to make administrative, operational and information infrastructure changes in order to comply with the new rules.

Third Party Reimbursement

Our fees are paid directly by our customers rather than through reimbursement from private insurers or governmental entities, such as Medicare or Medicaid. We do not bill the patient, the insurer or other third party payors directly for services provided for hospital inpatients or outpatients. Payment to health care providers by third party payors for our services depends substantially upon such payors’ reimbursement policies. Consequently, those policies have a direct effect on health care providers’ ability to pay for our services and an indirect effect on our level of charges.

Hospitals and alternate site providers are facing increased cost containment pressures from public and private insurers and other managed care providers, such as health maintenance organizations, preferred provider organizations and managed fee-for-service plans, as these organizations attempt to reduce the cost and utilization of healthcare services. We believe that these payors have followed or will follow the federal government in limiting reimbursement through preferred provider contracts, discounted fee arrangements and capitated (fixed patient care reimbursement) managed care arrangements. In addition to promoting managed care plans, employers are increasingly self funding their benefit programs and shifting costs to employees through increased deductibles, co-payments and employee contributions. We believe that these cost reduction efforts will place additional pressures on health care providers’ operating margins and will encourage efficient equipment management practices, such as use of our Pay-Per-Use^™ outsourcing and AMPP.

Liability and Insurance

Although we do not manufacture any movable medical equipment, our business entails the risk of claims related to the outsourcing and sale of movable medical equipment. In addition, our servicing and repair activity with respect to our equipment and our instruction of hospital employees with respect to the equipment’s use are additional sources of potential claims. We have not suffered a material loss due to a claim; however, any such claim, if made, could have a material adverse effect on our business.

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We maintain general liability coverage, including product liability insurance and excess liability coverage. Both policies are subject to annual renewal. We believe that our current insurance coverage is adequate. Claims exceeding such coverage may be made and we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage.

As of December 31, 2003, we operate 69 full service district offices and 13 regional service centers. We own our Minneapolis, Minnesota district office facility, consisting of approximately 24,000 square feet of office, warehouse, processing and technical repair space. We lease our other district offices, averaging 4,800 square feet, and our regional service centers. We lease our corporate offices, approximately 17,000 square feet, in Bloomington, Minnesota as well as a 17,700 square foot facility in Edina, Minnesota that houses certain corporate functions.

From time to time, we may become involved in litigation arising out of operations in the normal course of business. As of December 31, 2003, we are not a party to any pending legal proceedings the adverse outcome of which could reasonably be expected to have a material adverse effect on our operating results, financial position, or cash flows.

On October 11, 2003, we held a special meeting of stockholders to approve amendments to our Certificate of Incorporation and to approve our Amended and Restated Bylaws. 121,337,472 votes were cast for approval of the amendments to our Certificate of Incorporation and no votes were cast against: there were no votes withheld and no abstentions. 121,337,472 votes were cast for the approval of our Amended and Restated Bylaws and no votes were cast against; there were no votes withheld and no abstentions.

Effective December 8, 2003 our stockholders, acting by written consent, approved the adoption of our 2003 Stock Option Plan. Stockholders holding 119, 784, 065 shares executed the written consent.

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PART II

As of December 31, 2003 there were 37 holders of our common stock, par value $.01 per share. There is no established public trading market for our common stock and we have never declared or paid a cash dividend on any class of our common stock. We intend to retain earnings for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. Our debt instruments contain certain restrictions on our ability to pay cash dividends on our common stock (See Note 8, (“Long Term Debt”), in the audited financial statements included elsewhere herein).

On October 17, 2003, we sold an aggregate of 55,750,000 shares of our common stock to JWC Fund III, JWC Co-invest III LLC (an affiliate of JWC Fund III), Halifax and our Chief Executive Officer for aggregate consideration of $55,750,000. On October 28, 2003, we sold an aggregate of 397,200 shares of our common stock to certain other members of our senior management, including John A. Gappa, Samuel B. Humphries, Walter T. Chesley, David G. Lawson, Joseph P. Schiesl and Timothy R. Travis, for aggregate consideration of $397,200. These offers and sales were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof by reason of their offer and sale in transactions not involving any public offering.

Also on October 17, 2003, we issued $260,000,000 aggregate principal amount of 10.125% senior notes due 2011. The initial purchasers were Goldman, Sachs & Co., Credite Suisse First Boston LLC, CIBC World Markets Corp. and Jefferies & Company, Inc., which purchased the notes for 100% of their principal amount. The aggregate gross proceeds to us were $260,000,000 and the initial purchasers received aggregate purchase discounts or commissions of $7,800,000. The offer and sale of the notes to the initial purchasers was exempt from the registration requirements of the Securities Act pursuant to Rule 506 thereunder. The initial purchasers resold the notes to qualified institutional buyers in reliance on Rule 144 A under the Securities Act and to non-U.S. persons in reliance on Regulation S under the Securities Act.

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The selected financial data presented below under the captions “Statement of Operations Data,” “Other Financial Data” and “Balance Sheet Data” for and as of each of the years in the five-year period ended December 31, 2003 are derived from our audited financial statements. The selected financial data presented below are qualified in their entirety by, and should be read in conjunction with, the financial statements and notes thereto and other financial and statistical information included elsewhere in this Form 10-K, including the information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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OVERVIEW

We are a leading, nationwide provider of medical equipment outsourcing and services to the health care industry, including national, regional and local acute care hospitals and alternate site providers, such as nursing homes and home care providers. We service customers across the spectrum of the equipment life cycle as a result of our position as the industry’s largest purchaser, outsourcer and reseller of movable medical equipment. Our diverse customer base includes more than 2,900 acute care hospitals and approximately 3,050 alternate site providers. We also have extensive and long-standing relationships with over 300 major medical equipment manufacturers and the nation’s largest GPOs and IDNs. Our service offerings fall into three general categories: Medical Equipment Outsourcing, Technical and Professional Services, and Medical Equipment Sales, Remarketing and Disposables. All of our services leverage our nationwide logistics network and our more than 60 years of experience managing and servicing all aspects of movable medical equipment. These services are paid for by our customers and not through reimbursement from governmental or other third-party payors.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain 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. Management bases these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. However, actual results could differ from these estimates. Management believes the critical accounting policies and areas that require more significant judgments and estimates used in the preparation of our consolidated financial statements to be:

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Depreciation and amortization are recognized using the straight-line method over the estimated useful life of the long-lived asset and intangible asset. We estimate useful lives based on historical data and industry trends. We periodically reassess the estimated useful lives of our long-lived and intangible assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in the earnings and potentially require us to record an impairment charge.

We review long-lived and intangible assets, including goodwill, for impairment annually, or at any time events or circumstances indicate that the carrying value of such assets may not be fully recoverable. For long-lived assets and amortizable intangible assets, an impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to its carrying value. For goodwill, an impairment is evaluated based on the fair value of our entire company. Currently, we have identified one reporting unit when we test for goodwill impairment because that is where we believe goodwill naturally resides. If an impairment is recognized, the carrying value of the impaired asset is reduced to its fair value based on discounted estimated future cash flows. For goodwill, an impairment is evaluated based on the fair value of our entire company.

We estimate the allowance for doubtful accounts considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable and (3) specific information obtained by us on the condition and the current creditworthiness of our customers. If the financial conditions of our customers were to deteriorate and affect the ability of our customers to make payments on their accounts, we may be required to increase our allowance by recording additional bad debt expense. Likewise, should the financial condition of our customers improve and result in payments or settlements of previously reserved amounts, we may be required to record a reduction in bad debt expense to reverse the recorded allowance.

In the normal course of business, we make estimates of potential future loss accruals related to legal, tax, self-insurance medical and pension matters. These accruals require the use of management’s judgment on the outcome of various issues. Management’s estimates for these items are based on the best available evidence but due to changes in facts and circumstances, the ultimate outcomes of these accruals could be different than management estimates.

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FINANCING AND OTHER TRANSACTIONS

Effective December 8, 2003, our Board of Directors approved a 12-for-1 stock split in the form of a dividend, pursuant to which stockholders received a dividend of 11 shares for each share held as of such date. All share and per share information in this Annual Report on Form 10-K has been restated to reflect this stock dividend.

In October 2003, we completed our previously announced recapitalization. We issued $260,000,000 10.125% senior notes due 2011 and entered into a new five-year revolving credit facility with a bank group led by General Electric Capital Corporation. The new credit facility replaced our previous bank facility and provides us with up to $100 million in available revolving borrowings, subject to borrowing base availability. In October 2003, JWC Fund III, JWC Co-invest III LLC (an affiliate of JWC Fund III), Halifax, and certain members of management purchased an aggregate of approximately $56.0 million of our stock at a purchase price of $1.00 per share. In connection with the recapitalization, we purchased all of our outstanding 10-1/4% senior notes due 2008, repurchased all outstanding preferred stock and repurchased an aggregate of 69,965,844 shares of common stock and options and warrants to purchase an aggregate of 40,710,672 shares of common stock from equityholders.

On December 29, 2003, we authorized the repurchase of 494,769.6 shares of our common stock from certain departed employees at a repurchase price of $1.00 per share for an aggregate price of $494,796.60 and also authorized a total amount not to exceed 494,770 shares to be offered at a price of $1.00 per share to certain members of our senior management for purchase in January 2004. We completed the repurchase on December 30, 2003.

The indenture governing our notes and our new credit facility each contain restrictions on our ability to engage in certain activities and limitations on capital expenditures. See “COVENANTS UNDER NEW SENIOR SECURED CREDIT FACILITY” below.

ACQUISITIONS

As part of our growth strategy, we regularly review and evaluate potential acquisition opportunities. On October 25, 2001, we consummated the acquisition of all of the outstanding stock of Narco Medical Services, Inc., for a purchase price of $7.8 million in cash. Narco Medical Services, Inc. outsourced medical equipment and services primarily to rural, acute healthcare providers in seven locations in the Midwest. As of the date hereof, we have not entered into any agreements with respect to any material transactions.

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RESULTS OF OPERATIONS

Fiscal year ended December 31, 2003 compared to fiscal year ended December 31, 2002

The following table provides information on the percentages of certain items of selected financial data compared to total revenues and also indicates the percentage increase or decrease of this information over the prior comparable period.

Medical Equipment Outsourcing and Service

Medical equipment outsourcing revenues for the year ended December 31, 2003 were $140.2 million, representing a $9.5 million, or 7.3%, increase from medical equipment outsourcing revenues of $130.7 million for the same period of 2002. Penetration of existing customers, an increase in total customers by 6.3% and revenue generated from our ten new AMPP customers accounted for the growth in total revenues. Service revenues for the year ended December 31, 2003 were $14.7 million, representing a $3.5 million, or 31.2%, increase from service revenues of $11.2 million for the same period of 2002. This growth relates to our increased focus on providing additional services to our existing customers.

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Sales of Supplies and Equipment and Other

Sales of supplies and equipment, and other revenues for the year ended December 31, 2003 were $16.1 million, representing a $4.2 million, or 35.8%, increase from sales of supplies and equipment, and other of $11.9 million for the same period of 2002. Of this increase, $4.0 million is attributable to equipment sales, $0.7 million to sales of specialty infant protection systems and $0.3 million to parts sales, offset by a reduction in disposable sales of $0.8 million.

Cost of Medical Equipment Outsourcing and Service

Cost of medical equipment outsourcing and service for the year ended December 31, 2003 was $52.4 million, representing a $7.5 million, or 16.7%, increase from cost of medical equipment outsourcing and service of $44.9 million for the same period of 2002. This increase was the result of technical service personnel expenses and repair costs of $3.3 million, equipment delivery and processing costs of $1.5 million, the costs incurred to service our new AMPP and Equipment Lifecycle Services (ELS) customers of $1.4 million, increased rent expense from new office openings of $0.4 million and other costs incurred due to outsourcing and service revenue growth. For 2003, cost of equipment outsourcing and service, as a percentage of equipment outsourcing and service revenues, increased to 33.8% from 31.6% for the same period of 2002.

Movable Medical Equipment Depreciation

Movable medical equipment depreciation for the year ended December 31, 2003 was $32.1 million, representing a $2.6 million, or 9.0%, increase from movable medical equipment depreciation of $29.5 million for the same period of 2002. This increase was a result of current year movable medical equipment additions of $39.1 million. For the year 2003, movable medical equipment depreciation, as a percentage of equipment outsourcing revenues, increased to 22.9% from 22.5% for the same period of 2002.

Gross Profit

Total gross profit for the year ended December 31, 2003 was $75.6 million, representing a $4.4 million, or 6.3%, increase from total gross profit of $71.2 million for the same period of 2002. For the year of 2003, total gross profit, as a percentage of total revenues, decreased to 44.2% from 46.3% for the same period of 2002. Gross margin declined as a result of higher service and repair costs as well as the revenue mix shift toward non-capital revenue sources.

Gross profit on equipment outsourcing and service revenue represents equipment outsourcing and service revenues reduced by the cost of equipment outsourcing and service and movable medical equipment depreciation. Gross profit on outsourcing and service revenue for the year of 2003 decreased to 45.4% from 47.6% for the same period of 2002.

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Gross margin on sales of supplies and equipment and for the year of 2003 increased to 32.5% from 30.5% for the same period of 2002. The increase is a result of the increased focus on selling capital equipment rather than lower margin disposable sales.

Selling, General and Administrative Expenses

Other selling, general and administrative expenses for the year ended December 31, 2003 were $47.0 million, representing a $3.9 million, or 9.1%, increase from $43.1 million for the same period of 2002. The increase consists of $1.6 million for employee benefit costs, customer service and support costs of $0.8 million, expenses related to maintaining and improving our information technology systems of $0.8 million, additional management to support outsourcing and service businesses of $0.4 million and marketing expenses incurred of $0.4 million. Other selling, general and administrative expenses as a percentage of total revenue decreased to 27.5% from 28.0% for the same period of 2002 as a result of increased efficiencies.

In 2003, we recorded a $14.4 million charge related to the recapitalization. Recapitalization expenses consisted primarily of compensation expenses associated with the purchase of vested stock options of $11.3 million and miscellaneous fees and expenses of approximately $2.5 million and severance expense of $0.6 million.

We recorded a $10.1 million pretax charge in 2002 related to severance and stock compensation expenses associated with extension of the term of outstanding stock options for an executive and three departed executives. Of the $10.1 million total pretax charge, $9.4 million is stock compensation expense. Additional retirement benefits were $1.6 million for 2001, inclusive of $1.2 million of stock compensation primarily related to the extension of existing stock options to a retiring employee below the estimated fair market value.

Interest Expense

Interest expense for the year ended December 31, 2003 was $20.2 million, representing a $2.1 million, or 11.7%, increase from interest expense of $18.1 million for the same period of 2002. The increase is attributable to the recapitalization. Average borrowings increased from $206.0 million for the year of 2002 to $218.9 million for the year of 2003.

Loss on Early Retirement of Debt

In connection with the 2003 recapitalization we incurred a $13.3 million loss on early retirement of debt. Of this $13.3 million, $6.9 million related to the call premium associated with the early redemption of 10-1/4% senior notes due 2008 and $6.4 million for the write-off of unamortized deferred financing costs associated with the retired debt.

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Income Taxes

Tax expense for 2003 consists of minimum state taxes. We did not have any federal tax or benefit for the year, as net operating losses generated for 2003 were offset by a valuation allowance.

Net Loss

We incurred a net loss of $19.5 million in 2003, representing a $19.3 million decrease from the net loss of $0.2 million in 2002. The current year net loss relates primarily to the recapitalization expenses (See “Other Selling, General and Administrative Expenses” above).

Fiscal year ended December 31, 2002 compared to fiscal year ended December 31, 2001

Medical Equipment Outsourcing and Service Revenues

Medical Equipment Outsourcing revenues for the year ended December 31, 2002 were $130.7 million, representing a $19.8 million, or 17.8%, increase from outsourcing revenues of $110.9 million for the same period of 2001. Penetration of existing customers, an increase in total customers by 5.6%, and the Narco Medical Services, Inc. acquisition in late 2001 accounted for the growth in total revenues. Service revenue grew to $11.2 million, representing a $7.8 million, or 227.0%, increase from service revenues of $3.4 million for the same period of 2001. Of this increase, $6.4 million is attributable to the service revenue generated from the Narco Medical Services, Inc. acquisition in October 2001 and $1.4 million relates to our increased focus on providing additional services to our existing customers.

Sales of Supplies and Equipment

Sales of supplies and equipment for the year ended December 31, 2002 were $11.9 million, representing a $0.6 million, or 5.2%, increase from sales of supplies and equipment, and service of $11.3 million for the same period of 2001. Sales of new and used equipment generated the growth in revenue.

Cost of Equipment Outsourcing and Service

Cost of equipment outsourcing and service for the year ended December 31, 2002 was $44.9 million, representing an $11.3 million, or 33.8%, increase from cost of equipment outsourcing and service of $33.6 million for the same period of 2001. This increase was the result of the cost of performing services of $5.6 million, delivery expenses for payroll, insurance, leases and gasoline of $2.2 million, equipment repair and maintenance related expenses of $2.0 million, additional district support personnel costs of $0.8 million, increased rent expense from new office openings of $0.4 million, and other costs

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incurred to generate revenue growth. For 2002, cost of equipment outsourcing and service, as a percentage of equipment outsourcing and service revenues, increased to 31.6% from 29.4% for the same period of 2001 as a result of the increase in higher cost service business.

Movable Medical Equipment Depreciation

Movable medical equipment depreciation for the year ended December 31, 2002 was $29.5 million, representing a $3.1 million, or 11.4%, increase from movable medical equipment depreciation of $26.4 million for the same period of 2001. This increase was a result of movable medical equipment additions of $37.8 million in 2002. For the year 2002, movable medical equipment depreciation, as a percentage of equipment outsourcing revenues, decreased to 22.5% from 23.8% for the same period of 2001.

Gross Profit

Total gross profit for the year ended December 31, 2002 was $71.2 million, representing a $13.4 million, or 23.2%, increase from total gross profit of $57.8 million for the same period of 2001. For the year of 2002, total gross profit, as a percentage of total revenues, increased to 46.3% from 46.0% for the same period of 2001. The increase in gross profit was due to outsourcing revenue growth offset by the increase in cost of equipment outsourcing discussed above. Gross profit on equipment outsourcing and service revenue represents equipment outsourcing revenues and service reduced by the cost of equipment outsourcing and service and movable medical equipment depreciation.

Gross profit on outsourcing revenue for the year of 2002 increased to 47.6% from 47.5% for the same period of 2001. Gross profit margin improved as a result of depreciation expense as a percent of outsourcing revenue decreasing from 23.8% to 22.5%.

Gross margin on sales of supplies and equipment for the year of 2002 decreased slightly from 30.5% to 30.4% for the same period of 2001.

Selling, General and Administrative Expenses

Other selling, general and administrative expenses for the year ended December 31, 2002 were $43.1 million, representing a $4.3 million, or 10.9%, increase from $38.8 million for the same period of 2001. The increase consists of $2.0 million for the addition of two departments to support specific growth initiatives, $1.7 million relating to the hiring of additional staff for customer service and support, $1.3 million for general, medical and workers compensation insurance expenses, $0.8 million associated with hiring several executive managers, increased pension costs of $0.3 million, costs related to maintaining and improving company computer technologies of $0.5 million, offset by the elimination of goodwill amortization expense due to a change in accounting practice of $2.6 million as well as a reduction in bad debt expense of $0.8 million along with other increases to support the continued growth of the business. Other selling, general and administrative

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expenses as a percentage of total revenue decreased to 28.0% from 30.9% for the same period of 2001 as a result of increased efficiencies.

We recorded a $10.1 million pretax charge in 2002 related to severance and stock compensation expenses associated with extension of the term of outstanding stock options for an executive and three departed executives. Of the $10.1 million total pretax charge, $9.4 million is non-cash stock compensation expense. Additional retirement benefits were $1.6 million for 2001, inclusive of $1.2 million of stock compensation primarily related to the extension of existing stock options to a retiring employee below the estimated fair market value.

In July 2001, we filed a registration statement relating to an initial public offering of our common stock. In the fourth quarter of 2001, we withdrew the registration statement as a result of the September 11 attacks and their impact on the initial public offering market. In connection with the filing of the registration statement, we incurred expenses of $1.2 million.

Interest Expense

Interest expense for the year ended December 31, 2002 was $18.1 million, representing a $1.5 million, or 7.7%, decrease from interest expense of $19.6 million for the same period of 2001. This decrease primarily reflects lower interest rates in 2002 over 2001 offset by an increase in average borrowings outstanding. Average borrowings increased from $200.8 million for the year of 2001 to $206.0 million for the year of 2002.

Income Taxes

Tax expense for 2002 consisted of minimum state taxes. We did not have any federal tax or benefit for the year, as net operating losses generated for 2002 were offset by a valuation allowance.

Net Loss

We incurred a net loss of $0.2 million in 2002, representing a $3.4 million decrease from a net loss of $3.6 million in 2001. The current year net loss relates primarily to the stock compensation and severance expenses (see “Other Selling, General and Administrative Expenses” above).

EBITDA

EBITDA for the year ended December 31, 2003 was $36.5 million, representing a $14.3 million, or 28.1%, decrease from $50.8 million for the same period of 2002. EBITDA for the year ended December 31, 2002 was $50.8 million, representing a $2.7 million, or 5.6%, increase from $48.1 million for the year ended December 31, 2001.

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EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Management understands that some industry analysts and investors consider EBITDA as a supplementary non-GAAP financial measure useful in analyzing a company’s ability to service debt. EBITDA, however, is not a measure of financial performance under GAAP and should not be considered as an alternative to, or more meaningful than, net income as a measure of operating performance or to cash flows from operating, investing or financing activities or as a measure of liquidity. Since EBITDA is not a measure determined in accordance with GAAP and is thus susceptible to varying interpretations and calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. EBITDA does not represent an amount of funds that is available for management’s discretionary use.

For a reconciliation of EBITDA to net cash provided by operating activities, see note (2) under “Item 6 -Selected financial data.”

Seasonality

Quarterly operating results are typically affected by seasonal factors. Historically, our first and fourth quarters are the strongest, reflecting increased hospital utilization during the fall and winter months.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are expected to be cash flows from operating activities and borrowings under our new senior secured credit facility. It is anticipated that our principal uses of liquidity will be to fund capital expenditures related to purchases of movable medical equipment, provide working capital, meet debt service requirements and finance our strategic plans.

We require substantial cash to operate our Medical Equipment Outsourcing programs and service our debt. Our outsourcing programs require us to invest a significant amount of cash in movable medical equipment purchases. To the extent that such expenditures cannot be funded from our operating cash flow, borrowings under our new senior secured credit facility or other financing sources, we may not be able to conduct our business or grow as currently planned. We currently expect that over the next 12 months, we will invest approximately $38 million to $45 million in new equipment. See “Risk Factors — “If we are unable to fund our significant cash needs, we will be unable to operate and expand our business as planned or to service our debt.”

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The following table sets forth selected historical information regarding our cash flows:

Net cash provided by operating activities during the year ended December 31, 2003 was $16.0 million compared to $40.2 million in the same period in 2002. This decrease was primarily attributable to decreased net income due to the $14.4 million recapitalization and severance expense and $13.3 million loss on early retirement of debt that we incurred in 2003. Net cash used in investing activities during the year ended December 31, 2003 was $36.8 million, compared to $39.0 million in the same period in 2002. This decrease was primarily attributable to the increase of movable medical equipment purchases at December 31, 2003. Net cash provided by (used in) financing activities during the year ended December 31, 2003 was $20.8 million, compared to ($1.2) million in the same period in 2002. This increase was primarily attributable to an increase in debt offset by the repurchase of common stock and options during the recapitalization.

Net cash provided by operating activities was $40.2 million in 2002, compared to $31.7 million in 2001. This increase was primarily attributable to a reduction in net loss, partially offset by a decrease in accounts payable. Net cash used in investing activities in 2002 was $39.0 million, compared to $41.5 million in 2001. This decrease was primarily due to higher capital expenditures associated with our acquisition of Narco Medical Services, Inc. in 2001, partially offset by higher capital expenditures for movable medical equipment in 2002. Net cash used in financing activities was ($1.2) million in 2002, compared to $9.8 million in net cash provided by financing activities in 2001. This decrease was primarily due to reductions in debt due to strong cash flows, and borrowings to finance our acquisition of Narco Medical Services, Inc. in 2001.

In connection with our 2003 recapitalization, we issued $260.0 million of our senior notes. The notes accrue interest at a rate of 10.125% per year, payable on May 1 and November 1 of each year. In October 2003, we entered into a new senior secured credit facility, consisting of up to $100,000,000 (subject to borrowing base availability) revolving credit facility with General Electric Capital Corporation and other lenders. Interest on loans outstanding under our revolving credit facility is payable at a rate per annum, selected at our option, equal to the base rate margin (which is the banks’ base rate plus 1.75%) or the adjusted LIBOR rate (which is the LIBOR rate plus 3.00%). The revolving credit facility, which terminates on October 17, 2008, contains certain covenants including restriction and limitations on dividends, capital expenditures, liens, leases, incurrence of debt, transactions with affiliates, investments and certain payments, and on mergers, acquisitions, consolidations and asset sales. As of December 31, 2003,

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we had outstanding $260.0 million of our senior notes and had borrowed $10.5 million under our revolving credit facility.

Our substantial indebtedness could:

If we are unable to generate sufficient cash flow from operations in order to service our debt, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to repay our debt at maturity, we may have to obtain alternative financing, which may not be available to us.

Off-Balance Sheet Arrangements and Contractual Obligations

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPE”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2003, we are not involved in any material unconsolidated SPE transactions.

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The following is a summary, on a pro forma basis, as of December 31, 2003, of our future contractual obligations (in thousands):

Based on the level of operating performance expected in 2004, we believe our cash from operations, together with expected additional borrowings under our new senior secured credit facility in 2004, will meet our liquidity needs during 2004, exclusive of any borrowings that we may make to finance potential acquisitions. Availability under our new senior secured credit facility as of December 31, 2003 was approximately $72 million, representing our borrowing base of $83.8 million and borrowings of $11 million at that date. At our expected level of borrowing for 2004, the current availability under our new senior secured credit facility would be sufficient to meet our liquidity needs for the next four years, exclusive of any expenditures made for acquisitions. However, our levels of borrowing may be further restricted by the financial covenants set forth in our new senior secured credit facility and the indenture governing the notes.

Our expansion and acquisition strategy may require substantial capital. Sufficient funding for such acquisitions may not be available under our existing revolving credit facility, and we may not be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to us, if at all.

COVENANTS UNDER NEW SENIOR SECURED CREDIT FACILITY

Our new senior secured credit facility contains covenants which restrict and limit our ability and the ability of our future subsidiaries, if any, with respect to, among other things:

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