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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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Form 10-Q



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- | -------------------------------------------------------

| | SECURITIES EXCHANGE ACT OF 1934
| | -------------------------------



For the quarterly period ended March 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- | --------------------------------------------------------

| | SECURITIES EXCHANGE ACT OF 1934
| | -------------------------------



For the transition period from  to
.



Commission file number - 333-56097



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HUDSON RESPIRATORY CARE INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 95-1867330                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|27711 Diaz Road, P.O. Box 9020 Temecula, California            |  | 92589                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          



(909) 676-5611

(Registrants telephone number, including area code)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report).



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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 ̈Not Applicable  x



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



The number of shares of Common Stock, $0.01 par value, outstanding (the only class of common stock of the Company outstanding) was 10,654,293 on May 7, 2004.



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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES



QUARTER ENDED MARCH 31, 2004



TABLE OF CONTENTS



|          |  |                       |  |                                                                                                                        |  |     
|--------- |  | --------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----
|          |  |                       |  |                                                                                                                        |  | Page
|PART I    |  | FINANCIAL INFORMATION |  |                                                                                                                       
|          |  |                       | 
|          |  | Item 1.               |  | Unaudited Condensed Consolidated Financial Statements:                                                                 |  |     
|          |  |                       | 
|          |  |                       |  | Unaudited Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003                             |  | 1   
|          |  |                       | 
|          |  |                       |  | Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and March 31, 2003 |  | 3   
|          |  |                       | 
|          |  |                       |  | Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and March 31, 2003 |  | 4   
|          |  |                       | 
|          |  |                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                         |  | 6   
|          |  |                       | 
|          |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 12  
|          |  |                       | 
|          |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risks                                                            |  | 16  
|          |  |                       | 
|          |  | Item 4.               |  | Controls and Procedures                                                                                                |  | 16  
|          |  |                      
|PART II   |  | OTHER INFORMATION     |  |                                                                                                                       
|          |  |                       | 
|          |  | Item 1.               |  | Legal Proceedings                                                                                                      |  | 16  
|          |  |                       | 
|          |  | Item 2.               |  | Changes in Securities                                                                                                  |  | 16  
|          |  |                       | 
|          |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                        |  | 16  
|          |  |                       | 
|          |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                    |  | 16  
|          |  |                       | 
|          |  | Item 5.               |  | Other Information                                                                                                      |  | 16  
|          |  |                       | 
|          |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                                       |  | 16  
|          |  |                       | 
|SIGNATURE |  |                       |  |                                                                                                                        |  | 17  



i



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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS



ASSETS



(amounts in
thousands)



|                                                                                                                                               |  |                |         |                   |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ----------------- | - | -------
|                                                                                                                                               |  | March 31, 2004 |         | December 31, 2003
|CURRENT ASSETS:                                                                                                                                |  |                |         |                   |   |        
|Cash                                                                                                                                           |  | $              | 6,299   |                   | $ | 6,682  
|Accounts receivable, less allowance for doubtful accounts of $1,217 and $1,156 at March 31, 2004 and December 31, 2003,
respectively           |  |                | 27,319  |                   |   | 25,107 
|Inventories, net                                                                                                                               |  |                | 24,074  |                   |   | 23,829 
|Other current assets                                                                                                                           |  |                | 2,455   |                   |   | 2,505  
|                                                                                                                                               |  |                |         |                   |   |        
|Total current assets                                                                                                                           |  |                | 60,147  |                   |   | 58,123 
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                             |  |                | 37,927  |                   |   | 37,477 
|GOODWILL                                                                                                                                       |  |                | 39,822  |                   |   | 41,410 
|DEFERRED FINANCING AND OTHER COSTS, net of accumulated amortization of $5,457 and $5,188 at March 31, 2004 and December 31, 2003,
respectively |  |                | 6,169   |                   |   | 6,457  
|OTHER ASSETS                                                                                                                                   |  |                | 1,288   |                   |   | 1,243  
|                                                                                                                                               |  |                |         |                   |   |        
|Total other assets                                                                                                                             |  |                | 47,279  |                   |   | 49,110 
|                                                                                                                                               |  |                |         |                   |   |        
|Total assets                                                                                                                                   |  | $              | 145,353 |                   | $ | 144,710
|                                                                                                                                               |  |                |         |                   |   |        



See notes to condensed
consolidated statements



1



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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)



LIABILITIES AND STOCKHOLDERS DEFICIT



(amounts in thousands, except per share amounts)



|                                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                             |  | March 31, 2004 |          |   | December 31, 2003 |  
|CURRENT LIABILITIES:                                                                                                                                                                         |  |                |          |   |                   |   |          |  
|Current portion of bank notes payable                                                                                                                                                        |  | $              | 8,968    |   |                   | $ | 9,178    |  
|Accounts payable                                                                                                                                                                             |  |                | 10,652   |   |                   |   | 9,175    |  
|Accrued liabilities                                                                                                                                                                          |  |                | 17,714   |   |                   |   | 16,973   |  
|                                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                                    |  |                | 37,334   |   |                   |   | 35,326   |  
|INTEREST PAYABLE TO AFFILIATES                                                                                                                                                               |  |                | 11,161   |   |                   |   | 9,760    |  
|NOTES PAYABLE TO AFFILIATES                                                                                                                                                                  |  |                | 39,317   |   |                   |   | 39,317   |  
|BANK NOTES PAYABLE, net of current portion                                                                                                                                                   |  |                | 50,176   |   |                   |   | 54,377   |  
|SENIOR SUBORDINATED NOTES PAYABLE                                                                                                                                                            |  |                | 115,000  |   |                   |   | 115,000  |  
|MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares authorized; 556 shares issued and outstanding at March 31, 2004 and
December 31, 2003; liquidation preference, $58,550 |  |                | 55,166   |   |                   |   | 55,147   |  
|Accrued preferred stock dividend, payable in kind                                                                                                                                            |  |                | 2,932    |   |                   |   | 1,333    |  
|                                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|                                                                                                                                                                                             |  |                | 58,098   |   |                   |   | 56,480   |  
|OTHER NON-CURRENT LIABILITIES                                                                                                                                                                |  |                | 2,286    |   |                   |   | 2,365    |  
|                                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                                            |  |                | 313,372  |   |                   |   | 312,625  |  
|COMMITMENTS AND CONTINGENCIES (Note 4)                                                                                                                                                       |  |                |          |   |                   |   |          |  
|STOCKHOLDERS DEFICIT:                                                                                                                                                                       |  |                |          |   |                   |   |          |  
|Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares outstanding at March 31, 2004 and December 31, 2003                                                                  |  |                | 4,076    |   |                   |   | 3,960    |  
|Common stock, $0.01 par value; 42,000 shares authorized; 10,654 issued and outstanding at March 31, 2004 and December 31,
2003                                                               |  |                | 98,258   |   |                   |   | 98,258   |  
|Additional paid in capital                                                                                                                                                                   |  |                | 881      |   |                   |   | 881      |  
|Cumulative translation adjustment                                                                                                                                                            |  |                | 5,509    |   |                   |   | 6,848    |  
|Accumulated deficit                                                                                                                                                                          |  |                | (276,743 | ) |                   |   | (277,862 | )
|                                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Total stockholders deficit                                                                                                                                                                  |  |                | (168,019 | ) |                   |   | (167,915 | )
|                                                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Total liabilities and stockholders deficit                                                                                                                                                  |  | $              | 145,353  |   |                   | $ | 144,710  |  
|                                                                                                                                                                                             |  |                |          |   |                   |   |          |  



See notes to condensed
consolidated statements



2



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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



(amounts in thousands)



|                                                |  |                    |        |   |                |   |       
|----------------------------------------------- |  | ------------------ | ------ | - | -------------- | - | ------
|                                                |  | Three Months Ended
|                                                |  | March 31, 2004     |        |   | March 31, 2003
|NET SALES                                       |  | $                  | 50,183 |   |                | $ | 45,879
|COST OF SALES                                   |  |                    | 26,230 |   |                |   | 26,030
|                                                |  |                    |        |   |                |   |       
|Gross Profit                                    |  |                    | 23,953 |   |                |   | 19,849
|OPERATING EXPENSES:                             |  |                    |        |   |                |   |       
|Distribution, selling, general & administrative |  |                    | 14,106 |   |                |   | 12,757
|Research and development                        |  |                    | 859    |   |                |   | 640   
|                                                |  |                    |        |   |                |   |       
|                                                |  |                    | 14,965 |   |                |   | 13,397
|                                                |  |                    |        |   |                |   |       
|Income from operations                          |  |                    | 8,988  |   |                |   | 6,452 
|INTEREST EXPENSE AND OTHER, net                 |  |                    | 7,080  |   |                |   | 5,261 
|                                                |  |                    |        |   |                |   |       
|Net income before provision for income taxes    |  |                    | 1,908  |   |                |   | 1,191 
|PROVISION FOR INCOME TAXES                      |  |                    | 674    |   |                |   | 681   
|                                                |  |                    |        |   |                |   |       
|Net income                                      |  | $                  | 1,234  |   |                | $ | 510   
|                                                |  |                    |        |   |                |   |       
|OTHER COMPREHENSIVE INCOME (LOSS):              |  |                    |        |   |                |   |       
|Foreign currency translation (loss) gain        |  |                    | (1,339 | ) |                |   | 721   
|                                                |  |                    |        |   |                |   |       
|Comprehensive (loss) income                     |  | $                  | (105   | ) |                | $ | 1,231 
|                                                |  |                    |        |   |                |   |       



See notes to condensed
consolidated statements



3



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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



(amounts in thousands)



|                                                                                  |  |                    |        |   |                |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                                                                                  |  | Three Months Ended |       
|                                                                                  |  | March 31, 2004     |        |   | March 31, 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                    |        |   |                |   |        |  
|Net income                                                                        |  | $                  | 1,234  |   |                | $ | 510    |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                    |        |   |                |   |        |  
|Depreciation and amortization                                                     |  |                    | 2,481  |   |                |   | 2,405  |  
|Amortization of deferred financing costs                                          |  |                    | 269    |   |                |   | 464    |  
|Accrued mandatorily redeemable preferred stock dividends, payable in-kind         |  |                    | 1,618  |   |                |   |       |  
|Interest payable to affiliates                                                    |  |                    | 1,402  |   |                |   | 1,064  |  
|Provision for bad debts                                                           |  |                    | 88     |   |                |   | 197    |  
|Loss (gain) on disposal of property, plant and equipment                          |  |                    | 11     |   |                |   | (6     | )
|Changes in operating assets and liabilities:                                      |  |                    |        |   |                |   |        |  
|Accounts receivable                                                               |  |                    | (2,618 | ) |                |   | 342    |  
|Inventories                                                                       |  |                    | (422   | ) |                |   | 1,413  |  
|Other current assets                                                              |  |                    | 13     |   |                |   | (799   | )
|Other assets                                                                      |  |                    | (46    | ) |                |   | (19    | )
|Accounts payable                                                                  |  |                    | 1,543  |   |                |   | (625   | )
|Accrued liabilities                                                               |  |                    | 885    |   |                |   | 2,047  |  
|Other non-current liabilities                                                     |  |                    | 18     |   |                |   | 12     |  
|                                                                                  |  |                    |        |   |                |   |        |  
|Net cash provided by operating activities                                         |  |                    | 6,476  |   |                |   | 7,005  |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                    |        |   |                |   |        |  
|Purchases of property, plant and equipment                                        |  |                    | (3,024 | ) |                |   | (1,723 | )
|Proceeds from sales of property, plant and equipment                              |  |                    | 2      |   |                |   | 17     |  
|                                                                                  |  |                    |        |   |                |   |        |  
|Net cash used in investing activities                                             |  |                    | (3,022 | ) |                |   | (1,706 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                    |        |   |                |   |        |  
|Repayment of bank notes payable                                                   |  |                    | (4,317 | ) |                |   | (7,734 | )
|Proceeds from bank borrowings                                                     |  |                    | 408    |   |                |   | 1,582  |  
|Payment of capital lease obligations                                              |  |                    | (14    | ) |                |   | (13    | )
|                                                                                  |  |                    |        |   |                |   |        |  
|Net cash used in financing activities                                             |  |                    | (3,923 | ) |                |   | (6,165 | )
|Effect of exchange rate changes on cash                                           |  |                    | 86     |   |                |   | (292   | )
|                                                                                  |  |                    |        |   |                |   |        |  
|NET DECREASE IN CASH                                                              |  |                    | (383   | ) |                |   | (1,158 | )
|CASH, beginning of period                                                         |  |                    | 6,682  |   |                |   | 6,425  |  
|                                                                                  |  |                    |        |   |                |   |        |  
|CASH, end of period                                                               |  | $                  | 6,299  |   |                | $ | 5,267  |  
|                                                                                  |  |                    |        |   |                |   |        |  



See notes to condensed
consolidated statements



4



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|                                                  |  |                    |     |                |   |      
|------------------------------------------------- |  | ------------------ | --- | -------------- | - | -----
|                                                  |  | Three Months Ended
|                                                  |  | March 31, 2004     |     | March 31, 2003
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |  |                    |     |                |   |      
|Cash paid during the period for:                  |  |                    |     |                |   |      
|Interest                                          |  | $                  | 932 |                | $ | 1,076
|                                                  |  |                    |     |                |   |      
|Income taxes (primarily foreign)                  |  | $                  | 365 |                | $ | 1,138
|                                                  |  |                    |     |                |   |      
|NON-CASH FINANCING ACTIVITIES:                    |  |                    |     |                |   |      
|Preferred dividends accrued or paid-in-kind       |  | $                  | 116 |                | $ | 1,533
|                                                  |  |                    |     |                |   |      



See notes to condensed
consolidated statements



5



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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Financial Statements. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position at March 31, 2004, the results of operations for the three month periods ended March 31, 2004 and March 31, 2003 and statements of cash flows for the three month periods ended March 31,
2004 and March 31, 2003 pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are
adequate to make the information presented not misleading, the accompanying unaudited condensed, consolidated financial statements should be read in conjunction with the Companys 2003 audited financial statements and the notes thereto included
in its Form 10-K filed with the SEC. The results of operations for the three month period ended March 31, 2004 are not necessarily indicative of the results to be achieved for a full year.



Significant Accounting Estimates



The preparation of 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 as of the date
of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



The significant estimates made in the preparation of the Companys consolidated financial statements relate to
allowance for bad debts, rebate reserve, and inventory reserve.



Stock Based Compensation



The Company accounts
for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion (APB) 25, Accounting for Stock Issued to Employees, and related interpretations. The Company has
adopted the disclosure provisions of Statement Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement No. 123. No stock-based employee compensation expense is recognized in net income for any of the periods presented. Had compensation expense for the Companys stock-based compensation
awards been recognized based on the fair value recognition provisions of SFAS 123, the Companys net income would have been adjusted to the pro forma amounts indicated below (amounts in thousands):



|                                                                                                                    |  |                              |       |      |   |    
|------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----- | ---- | - | ---
|                                                                                                                    |  | Three Months Ended March 31,
|                                                                                                                    |  | 2004                         |       | 2003
|Net income, as reported                                                                                             |  | $                            | 1,234 |      | $ | 510
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards |  |                              | 33    |      |   | 3  
|                                                                                                                    |  |                              |       |      |   |    
|Pro forma net income                                                                                                |  | $                            | 1,201 |      | $ | 507
|                                                                                                                    |  |                              |       |      |   |    



Under the fair-value
method, compensation expense is measured at the grant date based on the fair value of the award using an option-pricing model. Compensation expense is recognized on a straight-line basis over the



6



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vesting period. The fair value of employee stock options was estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 2003 and 2002: risk-free interest rates of 2.00% and 2.83%, respectively; dividend yield of 0% for all years; expected lives of three years and four years, respectively, and volatility of
50% for both years.



Reclassifications



Certain amounts from prior periods have been reclassified to conform to the
current period presentation.



2. Inventories. Inventories consisted of
the following (amounts in thousands):



|                |  |                |        |                   |   |       
|--------------- |  | -------------- | ------ | ----------------- | - | ------
|                |  | March 31, 2004 |        | December 31, 2003
|Raw materials   |  | $              | 4,587  |                   | $ | 4,558 
|Work-in-process |  |                | 5,113  |                   |   | 4,955 
|Finished goods  |  |                | 14,374 |                   |   | 14,316
|                |  |                |        |                   |   |       
|                |  | $              | 24,074 |                   | $ | 23,829
|                |  |                |        |                   |   |       



3. Geographic and Segment
Information. The Company presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance. The Company has two operating segments: guarantor, primarily the United
States and non-guarantor, primarily international. The non-guarantor subsidiaries consist principally of Hudson AB and subsidiaries (whose operations are principally international). Under SFAS 131, Disclosures about Segments of an Enterprise
and Related Information, the Companys operating segments are the same as its reporting segments.



The Company sells respiratory care and anesthesia products to distributors and medical facilities throughout the United States and internationally.
Operating results of the Companys various product groups have been aggregated because of their common characteristics and their reliance on shared operating functions. The Company operates primarily in the United States and in Europe.



The Companys sales and percentage of sales by geographic
region for the three months ending March 31, 2004 and 2003 are as follows (amounts in thousands):



|                                                           |  |                    |        |  |                |   |  |   |        |  |       |  
|---------------------------------------------------------- |  | ------------------ | ------ |  | -------------- | - |  | - | ------ |  | ----- | -
|                                                           |  | Three Months Ended |       
|                                                           |  | March 31, 2004     |        |  | March 31, 2003 |  
|United States                                              |  | $                  | 34,454 |  | 68.6           | % |  | $ | 33,573 |  | 73.2  | %
|Europe                                                     |  |                    | 9,824  |  | 19.6           |   |  |   | 7,052  |  | 15.4  |  
|Pacific Rim (Japan, Southeast Asia, Australia/New Zealand) |  |                    | 3,140  |  | 6.3            |   |  |   | 3,355  |  | 7.3   |  
|Canada                                                     |  |                    | 794    |  | 1.6            |   |  |   | 564    |  | 1.2   |  
|Other international                                        |  |                    | 1,971  |  | 3.9            |   |  |   | 1,335  |  | 2.9   |  
|                                                           |  |                    |        |  |                |   |  |   |        |  |       |  
|                                                           |  | $                  | 50,183 |  | 100.0          | % |  | $ | 45,879 |  | 100.0 | %
|                                                           |  |                    |        |  |                |   |  |   |        |  |       |  



The Companys
sales and percentage of sales by product group for the three months ending March 31, 2004, and 2003 are as follows (amounts in thousands):



|                  |  |                    |        |  |                |   |  |   |        |  |       |  
|----------------- |  | ------------------ | ------ |  | -------------- | - |  | - | ------ |  | ----- | -
|                  |  | Three Months Ended |       
|                  |  | March 31, 2004     |        |  | March 31, 2003 |  
|Oxygen Therapy    |  | $                  | 14,897 |  | 29.7           | % |  | $ | 13,264 |  | 28.9  | %
|Airway Management |  |                    | 11,834 |  | 23.6           |   |  |   | 11,803 |  | 25.7  |  
|Humidification    |  |                    | 11,464 |  | 22.8           |   |  |   | 10,676 |  | 23.3  |  
|Aerosol Therapy   |  |                    | 11,987 |  | 23.9           |   |  |   | 10,136 |  | 22.1  |  
|                  |  |                    |        |  |                |   |  |   |        |  |       |  
|                  |  | $                  | 50,183 |  | 100.0          | % |  | $ | 45,879 |  | 100.0 | %
|                  |  |                    |        |  |                |   |  |   |        |  |       |  



7



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The Company is the 100% owner of certain subsidiaries that do not guarantee the Companys senior
subordinated notes and certain bank debt. The following tables disclose required consolidating financial information for guarantor and non-guarantor subsidiaries (amounts in thousands):



HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET





|                                                  |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|------------------------------------------------- |  | -------------- | -------- | - | ------------- | - | ------------ |  | - | ------- | - |  | - | -------- | -
|ASSETS                                            | 
|                                                  | 
|                                                  |  | March 31, 2004 |         
|                                                  |  | Guarantor      |          |   | Non-Guarantor |   | Eliminations |  |   | Total   |  
|CURRENT ASSETS:                                   |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|Cash                                              |  | $              | 3,887    |   |               | $ | 2,412        |  | $ |        |   |  | $ | 6,299    |  
|Accounts receivable                               |  |                | 18,897   |   |               |   | 8,422        |  |   |        |   |  |   | 27,319   |  
|Intercompany receivables, net                     |  |                |         |   |               |   | 1,169        |  |   | (1,169  | ) |  |   |         |  
|Inventories                                       |  |                | 20,946   |   |               |   | 4,432        |  |   | (1,304  | ) |  |   | 24,074   |  
|Other current assets                              |  |                | 1,499    |   |               |   | 956          |  |   |        |   |  |   | 2,455    |  
|                                                  |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|Total current assets                              |  |                | 45,229   |   |               |   | 17,391       |  |   | (2,473  | ) |  |   | 60,147   |  
|                                                  |  |                |          |  
|PROPERTY, PLANT AND EQUIPMENT, NET                |  |                | 35,841   |   |               |   | 2,086        |  |   |        |   |  |   | 37,927   |  
|                                                  |  |                |          |  
|GOODWILL                                          |  |                |         |   |               |   | 39,822       |  |   |        |   |  |   | 39,822   |  
|DEFERRED FINANCING COSTS, net                     |  |                | 6,169    |   |               |   |             |  |   |        |   |  |   | 6,169    |  
|INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost |  |                | 28,636   |   |               |   | 4,000        |  |   | (32,636 | ) |  |   |         |  
|OTHER ASSETS                                      |  |                | 1,262    |   |               |   | 26           |  |   |        |   |  |   | 1,288    |  
|                                                  |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|Total other assets                                |  |                | 36,067   |   |               |   | 43,848       |  |   | (32,636 | ) |  |   | 47,279   |  
|                                                  |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|                                                  |  | $              | 117,137  |   |               | $ | 63,325       |  | $ | (35,109 | ) |  | $ | 145,353  |  
|                                                  |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)    | 
|                                                  |  |                |          |  
|CURRENT LIABILITIES:                              |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|Current portion of bank notes payable             |  | $              | 3,680    |   |               | $ | 5,288        |  | $ |        |   |  | $ | 8,968    |  
|Accounts payable                                  |  |                | 9,098    |   |               |   | 1,554        |  |   |        |   |  |   | 10,652   |  
|Intercompany payables, net                        |  |                | 1,169    |   |               |   |             |  |   | (1,169  | ) |  |   |         |  
|Accrued liabilities                               |  |                | 13,995   |   |               |   | 3,719        |  |   |        |   |  |   | 17,714   |  
|                                                  |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|Total current liabilities                         |  |                | 27,942   |   |               |   | 10,561       |  |   | (1,169  | ) |  |   | 37,334   |  
|                                                  |  |                |          |  
|INTEREST PAYABLE TO AFFILIATES                    |  |                | 7,612    |   |               |   | 3,549        |  |   |        |   |  |   | 11,161   |  
|NOTES PAYABLE TO AFFILIATES                       |  |                | 26,951   |   |               |   | 12,366       |  |   |        |   |  |   | 39,317   |  
|BANK NOTES PAYABLE, net of current portion        |  |                | 43,576   |   |               |   | 6,600        |  |   |        |   |  |   | 50,176   |  
|SENIOR SUBORDINATED NOTES PAYABLE                 |  |                | 115,000  |   |               |   |             |  |   |        |   |  |   | 115,000  |  
|MANDATORILY REDEEMBABLE PREFERRED STOCK           |  |                | 58,098   |   |               |   |             |  |   |        |   |  |   | 58,098   |  
|OTHER NON-CURRENT LIABILITIES                     |  |                | 215      |   |               |   | 2,071        |  |   |        |   |  |   | 2,286    |  
|                                                  |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|Total liabilities                                 |  |                | 279,394  |   |               |   | 35,147       |  |   | (1,169  | ) |  |   | 313,372  |  
|                                                  |  |                |          |  
|STOCKHOLDERS EQUITY (DEFICIT)                    |  |                | (162,257 | ) |               |   | 28,178       |  |   | (33,940 | ) |  |   | (168,019 | )
|                                                  |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  
|                                                  |  | $              | 117,137  |   |               | $ | 63,325       |  | $ | (35,109 | ) |  | $ | 145,353  |  
|                                                  |  |                |          |   |               |   |              |  |   |         |   |  |   |          |  





8



---

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE
SHEET



ASSETS



|                                                  |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|------------------------------------------------- |  | ----------------- | -------- | - | ------------- | - | ------------ |  | - | ------- | - |  | - | -------- | -
|                                                  |  | December 31, 2003 |         
|                                                  |  | Guarantor         |          |   | Non-Guarantor |   | Eliminations |  |   | Total   |  
|CURRENT ASSETS:                                   |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|Cash                                              |  | $                 | 3,690    |   |               | $ | 2,992        |  | $ |        |   |  | $ | 6,682    |  
|Accounts receivable                               |  |                   | 17,938   |   |               |   | 7,169        |  |   |        |   |  |   | 25,107   |  
|Intercompany receivables, net                     |  |                   |         |   |               |   | 1,694        |  |   | (1,694  | ) |  |   |         |  
|Inventories                                       |  |                   | 20,419   |   |               |   | 4,605        |  |   | (1,195  | ) |  |   | 23,829   |  
|Other current assets                              |  |                   | 1,587    |   |               |   | 918          |  |   |        |   |  |   | 2,505    |  
|                                                  |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|Total current assets                              |  |                   | 43,634   |   |               |   | 17,378       |  |   | (2,889  | ) |  |   | 58,123   |  
|                                                  |  |                   |          |  
|PROPERTY, PLANT AND EQUIPMENT, NET                |  |                   | 35,480   |   |               |   | 1,997        |  |   |        |   |  |   | 37,477   |  
|                                                  |  |                   |          |  
|GOODWILL                                          |  |                   |         |   |               |   | 41,410       |  |   |        |   |  |   | 41,410   |  
|DEFERRED FINANCING COSTS, net                     |  |                   | 6,457    |   |               |   |             |  |   |        |   |  |   | 6,457    |  
|INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost |  |                   | 28,636   |   |               |   | 4,000        |  |   | (32,636 | ) |  |   |         |  
|OTHER ASSETS                                      |  |                   | 1,216    |   |               |   | 27           |  |   |        |   |  |   | 1,243    |  
|                                                  |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|Total other assets                                |  |                   | 36,309   |   |               |   | 45,437       |  |   | (32,636 | ) |  |   | 49,110   |  
|                                                  |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|                                                  |  | $                 | 115,423  |   |               | $ | 64,812       |  | $ | (35,525 | ) |  | $ | 144,710  |  
|                                                  |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)    | 
|                                                  |  |                   |          |  
|CURRENT LIABILITIES:                              |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|Current portion of bank notes payable             |  | $                 | 3,680    |   |               | $ | 5,498        |  | $ |        |   |  | $ | 9,178    |  
|Accounts payable                                  |  |                   | 7,170    |   |               |   | 2,005        |  |   |        |   |  |   | 9,175    |  
|Intercompany payables, net                        |  |                   | 1,694    |   |               |   |             |  |   | (1,694  | ) |  |   |         |  
|Accrued liabilities                               |  |                   | 13,459   |   |               |   | 3,514        |  |   |        |   |  |   | 16,973   |  
|                                                  |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|Total current liabilities                         |  |                   | 26,003   |   |               |   | 11,017       |  |   | (1,694  | ) |  |   | 35,326   |  
|                                                  |  |                   |          |  
|INTEREST PAYABLE TO AFFILIATES                    |  |                   | 6,720    |   |               |   | 3,040        |  |   |        |   |  |   | 9,760    |  
|NOTES PAYABLE TO AFFILIATES                       |  |                   | 26,951   |   |               |   | 12,366       |  |   |        |   |  |   | 39,317   |  
|BANK NOTES PAYABLE, net of current portion        |  |                   | 46,552   |   |               |   | 7,825        |  |   |        |   |  |   | 54,377   |  
|SENIOR SUBORDINATED NOTES PAYABLE                 |  |                   | 115,000  |   |               |   |             |  |   |        |   |  |   | 115,000  |  
|MANDATORILY REDEEMABLE PREFERRED STOCK            |  |                   | 56,480   |   |               |   |             |  |   |        |   |  |   | 56,480   |  
|OTHER NON-CURRENT LIABILITIES                     |  |                   | 229      |   |               |   | 2,136        |  |   |        |   |  |   | 2,365    |  
|                                                  |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|Total liabilities                                 |  |                   | 277,935  |   |               |   | 36,384       |  |   | (1,694  | ) |  |   | 312,625  |  
|                                                  |  |                   |          |  
|STOCKHOLDERS EQUITY (DEFICIT)                    |  |                   | (162,512 | ) |               |   | 28,428       |  |   | (33,831 | ) |  |   | (167,915 | )
|                                                  |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  
|                                                  |  | $                 | 115,423  |   |               | $ | 64,812       |  | $ | (35,525 | ) |  | $ | 144,710  |  
|                                                  |  |                   |          |   |               |   |              |  |   |         |   |  |   |          |  



9



---

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS



|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|------------------------------------------------- |  | --------------------------------- | ------ | - | ------------- | - | ------------ |  | - | ------ | - |  | - | ------
|                                                  |  | Three Months Ended March 31, 2004
|                                                  |  | Guarantor                         |        |   | Non-Guarantor |   | Eliminations |  |   | Total 
|NET SALES                                         |  | $                                 | 42,514 |   |               | $ | 12,399       |  | $ | (4,730 | ) |  | $ | 50,183
|COST OF SALES                                     |  |                                   | 25,289 |   |               |   | 5,562        |  |   | (4,621 | ) |  |   | 26,230
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|Gross Profit                                      |  |                                   | 17,225 |   |               |   | 6,837        |  |   | (109   | ) |  |   | 23,953
|OPERATING EXPENSES:                               |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|Distribution, selling, general and administrative |  |                                   | 10,159 |   |               |   | 3,947        |  |   |       |   |  |   | 14,106
|Research and development                          |  |                                   | 536    |   |               |   | 323          |  |   |       |   |  |   | 859   
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|                                                  |  |                                   | 10,695 |   |               |   | 4,270        |  |   |       |   |  |   | 14,965
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|Income from operations                            |  |                                   | 6,530  |   |               |   | 2,567        |  |   | (109   | ) |  |   | 8,988 
|                                                  |  |                                   |        |  
|INTEREST EXPENSE AND OTHER, net:                  |  |                                   | 6,295  |   |               |   | 785          |  |   |        |   |  |   | 7,080 
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|                                                  |  |                                   |        |  
|Income before provision for income taxes          |  |                                   | 235    |   |               |   | 1,782        |  |   | (109   | ) |  |   | 1,908 
|(BENEFIT) PROVISION FOR INCOME TAXES              |  |                                   | (32    | ) |               |   | 706          |  |   |       |   |  |   | 674   
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|                                                  |  |                                   |        |  
|Net income                                        |  | $                                 | 267    |   |               | $ | 1,076        |  | $ | (109   | ) |  | $ | 1,234 
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|                                                  | 
|                                                  |  | Three Months Ended March 31, 2003
|                                                  |  | Guarantor                         |        |   | NonGuarantor  |   | Eliminations |  |   | Total 
|NET SALES                                         |  | $                                 | 40,320 |   |               | $ | 10,009       |  | $ | (4,450 | ) |  | $ | 45,879
|COST OF SALES                                     |  |                                   | 25,540 |   |               |   | 4,892        |  |   | (4,402 | ) |  |   | 26,030
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|Gross Profit                                      |  |                                   | 14,780 |   |               |   | 5,117        |  |   | (48    | ) |  |   | 19,849
|OPERATING EXPENSES:                               |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|Distribution, selling, general and administrative |  |                                   | 9,744  |   |               |   | 3,013        |  |   |       |   |  |   | 12,757
|Research and development                          |  |                                   | 358    |   |               |   | 282          |  |   |       |   |  |   | 640   
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|                                                  |  |                                   | 10,102 |   |               |   | 3,295        |  |   |       |   |  |   | 13,397
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|                                                  |  |                                   |        |  
|Income from operations                            |  |                                   | 4,678  |   |               |   | 1,822        |  |   | (48    | ) |  |   | 6,452 
|                                                  |  |                                   |        |  
|INTEREST EXPENSE AND OTHER, net:                  |  |                                   | 4,605  |   |               |   | 656          |  |   |        |   |  |   | 5,261 
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|                                                  |  |                                   |        |  
|Income before provision for income taxes          |  |                                   | 73     |   |               |   | 1,166        |  |   | (48    | ) |  |   | 1,191 
|PROVISION FOR INCOME TAXES                        |  |                                   | 165    |   |               |   | 516          |  |   |       |   |  |   | 681   
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       
|                                                  |  |                                   |        |  
|Net (loss) income                                 |  | $                                 | (92    | ) |               | $ | 650          |  | $ | (48    | ) |  | $ | 510   
|                                                  |  |                                   |        |   |               |   |              |  |   |        |   |  |   |       



10



---

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF
CASH FLOWS



|                                          |  |                                   |        |   |                |   |       |       |  |   |        |  
|----------------------------------------- |  | --------------------------------- | ------ | - | -------------- | - | ----- | ----- |  | - | ------ | -
|                                          |  | Three Months Ended March 31, 2004 |       
|                                          |  | Guarantor                         |        |   | Non- Guarantor |   |       | Total | 
|Net cash provided by operating activities |  | $                                 | 5,808  |   |                | $ | 668   |       |  | $ | 6,476  |  
|Net cash used in investing activities     |  |                                   | (2,628 | ) |                |   | (394  | )     |  |   | (3,022 | )
|Net cash used in financing activities     |  |                                   | (2,971 | ) |                |   | (952  | )     |  |   | (3,923 | )
|Effect of exchange rate changes on cash   |  |                                   | (12    | ) |                |   | 98    |       |  |   | 86     |  
|                                          |  |                                   |        |   |                |   |       |       |  |   |        |  
|NET INCREASE (DECREASE) IN CASH           |  |                                   | 197    |   |                |   | (580  | )     |  |   | (383   | )
|CASH, beginning of period                 |  |                                   | 3,690  |   |                |   | 2,992 |       |  |   | 6,682  |  
|                                          |  |                                   |        |   |                |   |       |       |  |   |        |  
|CASH, end of period                       |  | $                                 | 3,887  |   |                | $ | 2,412 |       |  | $ | 6,299  |  
|                                          |  |                                   |        |   |                |   |       |       |  |   |        |  



|                                          |  |                                   |        |   |                |   |       |       |  |   |        |  
|----------------------------------------- |  | --------------------------------- | ------ | - | -------------- | - | ----- | ----- |  | - | ------ | -
|                                          |  | Three Months Ended March 31, 2003 |       
|                                          |  | Guarantor                         |        |   | Non- Guarantor |   |       | Total | 
|Net cash provided by operating activities |  | $                                 | 6,485  |   |                | $ | 520   |       |  | $ | 7,005  |  
|Net cash used in investing activities     |  |                                   | (1,566 | ) |                |   | (140  | )     |  |   | (1,706 | )
|Net cash used in financing activities     |  |                                   | (5,563 | ) |                |   | (602  | )     |  |   | (6,165 | )
|Effect of exchange rate changes on cash   |  |                                   | 6      |   |                |   | (298  | )     |  |   | (292   | )
|                                          |  |                                   |        |   |                |   |       |       |  |   |        |  
|NET DECREASE IN CASH                      |  |                                   | (638   | ) |                |   | (520  | )     |  |   | (1,158 | )
|CASH, beginning of period                 |  |                                   | 3,568  |   |                |   | 2,857 |       |  |   | 6,425  |  
|                                          |  |                                   |        |   |                |   |       |       |  |   |        |  
|CASH, end of period                       |  | $                                 | 2,930  |   |                | $ | 2,337 |       |  | $ | 5,267  |  
|                                          |  |                                   |        |   |                |   |       |       |  |   |        |  



4. Commitments and
Contingencies. The Company is not a party to any material lawsuits or other proceedings. While the result of the Companys other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the
ultimate resolution of these matters will have a material adverse effect on the financial position or results of operations of the Company.



Self Insurance. The Company self-insures the majority of its medical benefit programs and workers compensation whereby the Company directly
assumes the liability for employee medical and dental claims presented, subject to per-claim and aggregate maximums. Reserves for medical claim losses (including retiree benefits) totaling approximately $0.9 million and $1.1 million at March 31,
2004 and December 31, 2003, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets. The Company maintains excess coverage on an
aggregate claim basis. Additionally, the Company is self-insured for workers compensation. Reserves for workers compensation claim losses totaling approximately $0.9 million and $0.8 million at March 31, 2004 and December 31, 2003,
respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets. The Company maintains excess coverage on an individual and aggregate claim
basis. A third-party administrator processes all employee medical claims and requires the Company to collateralize a portion of its potential payment liability through the use of standby letters of credit. The standby letters of credit are issued
for one-year periods with automatic annual extensions until such time the third-party administrator determines all outstanding claims for the policy period have been paid. As of March 31, 2004, the Company had issued three such standby letters of
credit totaling approximately $1.6 million.



5. Bank Notes Payable.
Total borrowings as of March 31, 2004 were $59.1 million, which consisted of $17.2 million under the Revolving A Facility, $30.0 million under the Term B Facility and $11.9 million under the HRCI AB Facility. As of March 31, 2004, $11.7 million was
available for borrowing. As of March 31, 2004, the fair value of the bank notes payable approximated the face value.



At March 31, 2004, the Company was in compliance with all provisions of its debt securities.



11



---

6. Mandatorily Redeemable Preferred Stock. At March 31, 2004, the redemption amount was $58.5 million, of which
$55.6 million relates to issued shares and $2.9 million to accrued but not issued shares. The maximum amount the Company will pay on April 15, 2010, the mandatory redemption date, will be $115.0 million and will be accreted at a rate per annum of 11
1⁄2% with dividends being paid in kind and not in cash.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



The following discussion of Hudson Respiratory Care Inc.s (the Company or Hudson RCI)
consolidated historical results of operations and financial condition should be read in conjunction with the consolidated condensed financial statements of the Company and the notes thereto included elsewhere in this Form 10-Q and the 2003 Form
10-K.



Forward-Looking Statements



This Managements Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements relating to future events and financial performance are forward-looking statements
involving risks and uncertainties that are detailed from time to time in the Companys Securities and Exchange Commission filings.



General



The Company manufactures and markets products for use in respiratory care and anesthesia. The products for each market are similar and often overlap, as do the distribution channels. The Company categorizes its
products into four clinical product groups: (i) oxygen therapy; (ii) airway management; (iii) humidification; and (iv) aerosol therapy. Although the Companys sales efforts differ depending on the clinical use of its products, management
focuses on geographic segments for strategic decision making.



|                  |  |                                                                                                                                                                                                                                                       
|----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Category          |  | Examples of Products                                                                                                                                                                                                                                  
|Oxygen Therapy    |  | Oxygen masks, cannulae, oxygen tubing, prefilled and refillable humidifiers, oxygen regulators, cylinder carts and bases, oxygen analyzers/monitors, oxygen sensors, and adaptors and
connectors                                                      
|                  | 
|Airway Management |  | Oral airways, SHERIDAN® endotracheal tubes, Voldyne® incentive breathing exercisers (IBEs), disposable and re-useable resuscitation bags, hyperinflation bags, breathing bags, air cushion masks, anesthesia circuits, filters and Ventilarm® monitors
|                  | 
|Humidification    |  | ConchaTherm® heated humidifiers and accessories, Humid-Heat® system and accessories, Concha® water, ConchaPak®,
Aqua+® and Humid-Vent® HMEs, volume ventilator circuits, heated wire circuits, neonatal CPAP and CPAP
heated humidifiers              
|                  | 
|Aerosol Therapy   |  | AquaTherm® and ThermaGard®
nebulizer heaters, aerosol masks, prefilled and refillable large volume nebulizers, aerosol tubing, unit dose solutions, small volume nebulizers, peak flow meters, spacers/changers and compressor accessories            



12



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The Companys results of operations may fluctuate significantly from quarter to quarter as a result
of a number of factors, including, among others, (i) the buying patterns of the Companys distributors, group purchasing organizations (GPOs) and other purchasers of the Companys products, (ii) forecasts regarding the severity
of the annual cold and flu season, (iii) announcements of new product introductions by the Company or its competitors, (iv) changes in the Companys pricing of its products and the prices offered by the Companys competitors and (v)
variability in the number of shipping days in a given quarter.



Results of
Operations



The following tables set forth, for the
periods indicated, certain income and expense items expressed in dollars and as a percentage of the Companys net sales.



|                                             |  |                             |        |   |      |   |        |  
|-------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                             |  | Three Months EndedMarch 31, |       
|                                             |  | 2004                        |        |   | 2003 |  
|                                             |  | (dollars in thousands)      |       
|Net sales                                    |  | $                           | 50,183 |   |      | $ | 45,879 |  
|Cost of sales                                |  |                             | 26,230 |   |      |   | 26,030 |  
|                                             |  |                             |        |   |      |   |        |  
|Gross profit                                 |  |                             | 23,953 |   |      |   | 19,849 |  
|                                             |  |                             |        |   |      |   |        |  
|Distribution expenses                        |  |                             | 3,047  |   |      |   | 2,356  |  
|Selling expenses                             |  |                             | 5,890  |   |      |   | 5,458  |  
|General and administrative expenses          |  |                             | 5,169  |   |      |   | 4,943  |  
|Research and development expenses            |  |                             | 859    |   |      |   | 640    |  
|                                             |  |                             |        |   |      |   |        |  
|Total operating expenses                     |  |                             | 14,965 |   |      |   | 13,397 |  
|                                             |  |                             |        |   |      |   |        |  
|Income from operations                       |  |                             | 8,988  |   |      |   | 6,452  |  
|Interest expense and other, net              |  |                             | 7,080  |   |      |   | 5,261  |  
|                                             |  |                             |        |   |      |   |        |  
|Net income before provision for income taxes |  |                             | 1,908  |   |      |   | 1,191  |  
|Provision for income taxes                   |  |                             | 674    |   |      |   | 681    |  
|                                             |  |                             |        |   |      |   |        |  
|Net income                                   |  | $                           | 1,234  |   |      | $ | 510    |  
|                                             |  |                             |        |   |      |   |        |  
|                                             | 
|                                             |  | Three Months EndedMarch 31, |       
|                                             |  | 2004                        |        |   | 2003 |  
|Net sales                                    |  |                             | 100.0  | % |      |   | 100.0  | %
|Cost of sales                                |  |                             | 52.3   |   |      |   | 56.7   |  
|                                             |  |                             |        |   |      |   |        |  
|Gross profit                                 |  |                             | 47.7   |   |      |   | 43.3   |  
|                                             |  |                             |        |   |      |   |        |  
|Distribution expenses                        |  |                             | 6.1    |   |      |   | 5.1    |  
|Selling expenses                             |  |                             | 11.7   |   |      |   | 11.9   |  
|General and administrative expenses          |  |                             | 10.3   |   |      |   | 10.8   |  
|Research and development expenses            |  |                             | 1.7    |   |      |   | 1.4    |  
|                                             |  |                             |        |   |      |   |        |  
|Total operating expenses                     |  |                             | 29.8   |   |      |   | 29.2   |  
|                                             |  |                             |        |   |      |   |        |  
|Income from operations                       |  |                             | 17.9   |   |      |   | 14.1   |  
|Interest expense and other, net              |  |                             | 14.1   |   |      |   | 11.5   |  
|                                             |  |                             |        |   |      |   |        |  
|Net income before provision for income taxes |  |                             | 3.8    |   |      |   | 2.6    |  
|Provision for income taxes                   |  |                             | 1.3    |   |      |   | 1.5    |  
|                                             |  |                             |        |   |      |   |        |  
|Net income                                   |  |                             | 2.5    | % |      |   | 1.1    | %
|                                             |  |                             |        |   |      |   |        |  



13



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Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003



Net sales were $50.2 million in the first quarter of 2004 as compared to
$45.9 million in the first quarter of 2003, representing an increase of $4.3 million or 9.4%. This increase was driven by sales into the European market which increased by $2.8 million equally attributable to favorable changes in exchange rates and
greater volume; sales into the U.S. which were up $0.9 million primarily due to greater volume; and sales into Latin America which increased by $0.6 million primarily due to greater volume. Overall, sales increased from greater unit volume of $2.9
million, the impact of favorable changes in exchange rates resulting from a weakened U.S. dollar of $1.2 million and increases in prices of $0.2 million.



Sales of Aerosol Therapy products increased by $1.9 million due to greater volume into the U.S and Europe and favorable changes in exchange rates from
sales into Europe ($0.2 million). Sales of Oxygen Therapy products increased by $1.6 million due to greater volume into Europe and the U.S and favorable changes in exchange rates from sales into Europe ($0.4 million). Sales of Humidification
products increased by $0.8 million equally attributable to greater volume into Latin America and favorable changes in exchange rates from sales into Europe. Sales of Airway Management products were relatively unchanged with the impact of favorable
changes in exchange rates of $0.2 million from sales into Europe, offset by a slight decrease in volume of $0.2 million.



The Companys gross profit for the first quarter of 2004 was $24.0 million, an increase of $4.1 million or 20.7% from the first quarter of 2003. As a
percentage of sales, the gross profit was 47.7% and 43.3% for the first quarter of 2004 and 2003, respectively. The increase in gross profit was attributable to greater sales volume of $1.1 million primarily in the European market, the favorable
impact of the weakening value of the U.S. Dollar as compared to other countries currencies in which the Company distributes its products ($1.0 million or 0.6 margin points) and lower manufacturing costs ($2.0 million or 3.8 margin points). The
$2.0 million reduction in manufacturing costs was driven by reduced spending associated with transition expenses related to the move of the Argyle, New York facility to Tecate, Mexico ($1.1 million or 2.0 margin points) and improvements in plant
utilization ($0.9 million or 1.7 margin points). Other improvements contributed 0.1 margin point.



Distribution expenses were $3.0 million for the first quarter of 2004 as compared to $2.4 million in the first quarter of 2003, representing an increase
of $0.6 million or 29.3%. The increase was primarily attributable to higher transportation expenses of $0.3 million, greater volume of $0.2 million and unfavorable changes in exchange rates of $0.1 million. As a percentage of sales, distribution
expense was 6.1% in the first quarter of 2004 as compared to 5.1% in the first quarter of 2003.



Selling expenses were $5.9 million for the first quarter of 2004 as compared to $5.5 million in the first quarter of 2003, representing an increase of
$0.4 million or 7.9%. The increase was primarily attributable to unfavorable changes in exchange rates of $0.3 million and other increases of $0.1 million to support the growth in sales. As a percentage of net sales, selling expenses were 11.7% in
the first quarter of 2004 as compared to 11.9% in the first quarter of 2003.



General and administrative expenses were $5.2 million in the first quarter of 2004 as compared to $4.9 million in the first quarter of 2003, representing an increase of $0.3 million or 4.6%. The increase was
attributable to unfavorable changes in exchange rates of $0.1 million and other expenses of $0.2 million. As a percentage of net sales, general and administrative expenses were 10.3% in the first quarter of 2004 as compared to 10.8% in the first
quarter of 2003.



Interest and other expense was $7.1 million
for the first quarter of 2004 as compared to $5.3 million in the first quarter of 2003, representing an increase of $1.8 million or 34.6%. The increase was primarily due to the treatment of preferred stock dividends as interest expense during 2004
(See footnote 1 on the Companys adoption of SFAS 150).



Income tax provision was $0.7 million for the first quarter of 2004, unchanged from the first quarter of 2003 and related primarily to foreign income taxes.



Financial Condition, Liquidity and Capital Resources



14



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The Company had working capital of $22.8 million at March 31, 2004 and December 31, 2003. Net cash
provided by operating activities was $6.5 million for the three months ended March 31, 2004 as compared to $7.0 million for the three months ended March 31, 2003. The decrease in cash provided by operating activities for the current three month
period was primarily due to an increase in accounts receivable and inventories compared to the prior year period.



Net cash used by investing activities was $3.0 million for the three months ended March 31, 2004 as compared to $1.7 million for the three months ended
March 31, 2003. Cash used by investing activities for both periods includes capital expenditures, which include the purchase of leasehold improvements, production equipment, computer hardware, office equipment and the cost of equipment leased to
customers.



Net cash used by financing activities was $3.9
million for the three months ended March 31, 2004 as compared to $6.2 million for the three months ended March 31, 2003. Cash used by financing activities for both periods resulted from repayments of long-term obligations.



As of March 31, 2004, the Company has issued to Holding 556,176 shares
(including shares issued as payment in kind dividends) of Company Preferred Stock with an aggregate liquidation preference of $58.5 million. At the election of the Company, dividends may be paid in kind until April 15, 2005 and thereafter must be
paid in cash. On April 15, 2004 the Company declared and issued 31,975 shares of Company Preferred Stock to Holding. The Revolving Facility currently prohibits the Company from paying cash dividends on Company Preferred Stock.



The Company believes that its sources of funding, consisting of projected
positive cash flow from operating activities, the availability of additional funds under its revolving credit facility (totaling approximately $11.7 million at March 31, 2004), and its accumulated cash (totaling $6.3 million at March 31, 2004) will
be sufficient to meet its current and presently anticipated short-term and long-term future needs for operating activities, investing activities, and financing activities (primarily consisting of scheduled payments on long-term debt).



Contractual Obligations



The Company has contractual financial obligations consisting primarily of long-term debt, mandatorily redeemable preferred
stock, capital lease obligations and non-cancelable operating leases. As of March 31, 2004, the Company had outstanding $282.7 million of indebtedness, consisting of $115.0 million of 9 1/8% Senior Subordinated Notes due 2008, mandatorily redeemable
preferred stock of $58.1 million, borrowings of $47.3 million under the Companys Revolving Facility, $11.2 million in interest payable to affiliates, $39.3 million in notes payable to affiliates and $11.8 million in outstanding borrowings
under the bank facility of Hudson RCI AB, its Swedish subsidiary.



At March 31, 2004, the Company was in compliance with all provisions of its debt securities and preferred stock.



The following is a summary of the Companys consolidated contractual obligations as of March 31, 2004 (amounts in thousands):



|                              |  |                        |         |                  |   |           |  |           |       |               |   |         |  |   |       
|----------------------------- |  | ---------------------- | ------- | ---------------- | - | --------- |  | --------- | ----- | ------------- | - | ------- |  | - | ------
|                              |  | Payments Due by Period
|                              |  | Total                  |         | Less Than 1 Year |   | 1-3 Years |  | 3-5 Years |       | After 5 Years
|Long-term debt                |  | $                      | 282,719 |                  | $ | 8,968     |  | $         | 6,482 |               | $ | 203,894 |  | $ | 63,375
|Lease commitments             |  |                        | 9,618   |                  |   | 3,011     |  |           | 3,086 |               |   | 2,224   |  |   | 1,297 
|                              |  |                        |         |                  |   |           |  |           |       |               |   |         |  |   |       
|Total contractual obligations |  | $                      | 292,337 |                  | $ | 11,979    |  | $         | 9,568 |               | $ | 206,118 |  | $ | 64,672
|                              |  |                        |         |                  |   |           |  |           |       |               |   |         |  |   |       



For additional
information regarding the Companys debt securities and preferred stock, reference is made to Item 7 of the Companys Annual Report on Form 10-K, for the year ended December 31, 2003.



15



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|------- | -----------------------------------------------------------



There have been no material changes in the Companys market risk exposure from that reported in the Companys 10-K for the fiscal year ended
December 31, 2003.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



The Companys Chief Executive Officer and Chief Financial Officer have concluded, based on an evaluation of the Companys disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(c)), during the period covered by this report, that such disclosure controls and procedures were effective as of the end of the period covered by this
report. No changes in the Companys internal control over financial reporting occurred during the period covered by this report that have materially affected, or is reasonably likely to material affect, the Companys internal control over
financial reporting.



PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



None.



|ITEM 2. | CHANGES IN SECURITIES
|------- | ---------------------



None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------



Not applicable.



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



Not applicable.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



None.



|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K
|------- | --------------------------------



(a) Exhibits



|     |  |                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|32.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



(b) Current Reports on
Form 8-K.



None.



16



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SIGNATURE



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



|            |  |  |  |                                                        |  |                      |  |                                                                                                   
|----------- |  |  |  | ------------------------------------------------------ |  | -------------------- |  | --------------------------------------------------------------------------------------------------
|            |  |  |  | HUDSON RESPIRATORY CARE INC., a California corporation
|            |  |  | 
|May 7, 2004 |  |  |  | by:                                                    |  | /s/ Patrick G. Yount
|            |  |  |  |                                                        |  |                     
|            |  |  |  |                                                        |  |                      |  | Patrick G. Yount Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)