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Article by DailyStocks_admin    (06-26-08 10:52 AM)

The Daily Magic Formula Stock for 06/26/2008 is Kinetic Concepts Inc. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

General

Kinetic Concepts, Inc. is a global medical technology company with leadership positions in advanced wound care and therapeutic support systems. We design, manufacture, market and service a wide range of proprietary products that can improve clinical outcomes and can help reduce the overall cost of patient care. Our advanced wound care systems incorporate our proprietary V.A.C. Therapy technology, which has been demonstrated clinically to promote wound healing through unique mechanisms of action and can help reduce the cost of treating patients with serious wounds. Our therapeutic support systems, including specialty hospital beds, mattress replacement systems and overlays, are designed to address pulmonary complications associated with immobility, to reduce skin breakdown and assist caregivers in the safe and dignified handling of obese patients. We have an infrastructure designed to meet the specific needs of medical professionals and patients across all health care settings, including acute care hospitals, extended care organizations and patients’ homes, both in the United States and abroad. Our strategy is to maximize global penetration of our existing V.A.C. and therapeutic support systems product lines, accelerate the development of new business opportunities through focused research and development activities, and expand our product portfolio through acquisition and licensing opportunities.

KCI was founded in 1976 and is incorporated in Texas. Our principal executive offices are located at 8023 Vantage Drive, San Antonio, Texas 78230. Our telephone number is (210) 524-9000. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act, as amended, are available free of charge on our website at www.kci1.com , as soon as reasonably practicable after we file or furnish such information with the SEC. Information contained on our website is not incorporated by reference to this report.

Clinical Applications

Our advanced wound care systems and therapeutic support systems address four principal clinical applications: advanced wound healing and tissue repair, pulmonary complications in the intensive care unit, bariatric care and wound treatment and prevention.

Advanced Wound Healing and Tissue Repair

In the acute care setting, serious trauma wounds, failed surgical closures, amputations (especially those resulting from complications of diabetes) and serious pressure ulcers present special challenges to the physician and to the patient. These are often complex and/or large wounds that are prone to serious infection and further complications due to the extent of tissue damage or the compromised state of the patient's health. These wounds are often difficult or in the worst cases, impossible to treat quickly and successfully with traditional treatments. Physicians and hospitals need a therapy that addresses the special needs of these wounds with high levels of clinical and cost effectiveness. Given the high cost and infection risk associated with treating these patients in health care organizations, the ability to create healthy wound beds and reduce bacterial levels in the wound is particularly important. Our InfoV.A.C. and V.A.C. ATS Therapy systems are designed to meet these needs by promoting the reduction in local edema, managing exudate, reducing infection risk, and stimulating the growth of healthy, vascularized granulation tissue.

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

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

Pulmonary Complications in the Intensive Care Unit

The most critically ill patient population is generally cared for in the intensive care unit, or ICU, of a hospital, where they can receive the most intense medical treatment and attention. Patients treated in the ICU usually suffer from serious acute or chronic diseases or severe traumatic injuries. These patients often have, or develop, pulmonary complications, such as Acute Respiratory Distress Syndrome, or ARDS, resulting directly from their conditions or stemming from their impaired mobility. Some ICU patients are in such acute distress that their organ systems are at risk of failure and many are on some type of life-support. For the fiscal year 2007, there were an estimated 1.4 million ICU patients in the United States with, or at risk of developing, pulmonary complications.

Treating pulmonary complications requires special equipment and treatment methods. Because of the aggressive and specialized treatments required to address these life-threatening conditions, daily patient-care costs in the ICU are high. Our critical care therapies consist of Kinetic Therapy, Prone Therapy and Kinetic Prone Therapy to provide mobility to patients who cannot mobilize themselves. Kinetic Therapy involves the side-to-side rotation of a patient to an angle of at least 40 degrees per side and has been shown in independent clinical studies to reduce the incidence of certain pulmonary complications and length of stay in the ICU. Prone Therapy involves turning a patient from the supine to prone position (180 degrees) and often is done manually by nurses in the ICU. Independent clinical studies have demonstrated that proning an ICU patient improves oxygenation in ARDS patients and reduces ventilator time and ICU length of stay, with more recent studies suggesting overall improved mortality rates. Kinetic Prone Therapy involves delivering Kinetic Therapy in the prone position.

Bariatric Care

In the U.S., the prevalence of obesity has doubled from 11.6% in 1990 to approximately 24.4% in 2006. In addition, obesity is now the second leading cause of preventable death in the U.S. According to statistics published by the Centers for Disease Control and Prevention, medical expenditures attributable to obesity were estimated at 5.7% of total medical spending based on data covering 1998 to 2000. Obese patients are often unable to fit into standard-sized beds and wheelchairs and pose an increased risk to caregivers. KCI's BariatricSupport, a comprehensive offering of therapy-driven, safety-focused products, education and training, provides obese patients with the surface therapies, accessories and support they need. In addition, our bariatric products enable caregivers to care for obese patients in a safe and dignified manner in all care settings. While our bariatric products are generally used for patients weighing from 300 to 600 pounds, most are expandable and can accommodate patients weighing from 850 to 1,000 pounds. Our most sophisticated bariatric products can serve as a chair, weight scale, and x-ray table; and they provide therapies like those in our wound treatment and prevention systems. Moreover, treating obese patients is a significant staffing issue for many health care organizations, causing several states and many organizations to adopt a "no lift" policy, because moving and handling obese patients increases the risk of injury to health care personnel. Our products and accessories assist organizations in complying with any applicable "no lift" policy and enable health care personnel to treat these patients in a manner that is safer for health care personnel and safer and more dignified for the patient.

Wound Treatment and Prevention

Our pressure relieving therapeutic support systems provide therapy for the treatment of pressure sores, burns, ulcers, skin grafts, and other skin conditions. They also help prevent the formation of pressure sores that can develop in immobile individuals. Our therapeutic support systems reduce the amount of pressure on a patient's intact skin surface (prevention) or an existing wound site (treatment) by redistributing forces away from the skin or wound site through immersion of the patient into a medium such as air, foam, silicon beads, or viscous fluid. Our products also help to reduce shear, a major factor in the development of pressure ulcers, by reducing the amount of friction between the skin surface and the surface of the bed. Many of our products also provide moisture control, a major cause of maceration of the skin, by flowing air through the support surface to the skin, keeping the skin dry and moisture free. In addition to providing pressure-relieving therapy, some of our products also provide for pulsing of air into the surface cushions, known as Pulsation Therapy, which helps improve blood and lymphatic flow to the skin. Some of our products further promote healing and reduce nursing time by providing an automated "wound care" turn of at least 20 degrees per side. Our therapeutic wound care surfaces are utilized by patients in hospitals, residents in nursing homes and individuals in the home.

Products

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

Advanced Wound Healing and Tissue Repair Products

Our wound healing and tissue repair systems incorporate our proprietary V.A.C. Therapy technology. The V.A.C. Therapy system consists of a therapy unit and four types of disposables: a foam dressing, an occlusive drape, a tubing system connecting the dressing to the therapy unit and a specialized canister. The therapy unit consists of a pump that generates controlled negative pressure and sophisticated internal software that controls and monitors the application of the therapy. The therapy can be programmed for individualized use. Additionally, all of our V.A.C. Therapy units include safety alarms that respond in real time to signal users of any tubing blockage, dressing leakage or other condition which may interfere with appropriate therapy delivery. The systems have a number of on screen user-assist features such as treatment guidelines.

Our negative pressure wound healing therapy is delivered to the wound bed through a proprietary foam dressing which can be customized to fit the size and shape of the wound. The dressing is connected to the therapy unit through tubing which both delivers the negative pressure and measures the pressure delivered to the wound surface, providing continuous feedback. An occlusive drape covers the dressing and secures the foam, thereby allowing negative pressure to be maintained at the wound site. Negative pressure can also be applied continuously or intermittently to the wound site. We believe intermittent therapy further accelerates granulation tissue growth. The canister collects the fluids, or exudates, helps reduce odors through the use of special filters and provides for safe disposal of medical waste. V.A.C. dressings are typically changed every 48 hours for non-infected wounds, versus traditional dressings which often require dressing changes one or more times per day. Our V.A.C. dressings are specially designed to address the unique physical characteristics of different wound types, such as large open wounds, surgical wounds, diabetic foot ulcers and open abdominal wounds, among others.

Our wound healing and tissue repair systems are targeted to meet the needs of specific care settings and wound or patient requirements, and consist of the following:

•

The InfoV.A.C. System was introduced at the end of the second quarter of 2007 to further meet acute care customer requirements. This therapy unit is 50% smaller and lighter than the V.A.C. ATS. It provides a new digital wound imaging feature that allows caregivers to monitor and document wound healing progress. Digital images can be reviewed on-screen or transferred electronically to help document patient progress, allowing for convenient sharing of wound information among caregivers and payers who require evidence of wound healing. Advancements also include SensaT.R.A.C. Technology and Seal Check that simplify the application, monitoring and documentation of wound therapy.

•

The ActiV.A.C. System was introduced in the third quarter of 2007 in the home care market. It addresses the demand for a simpler, lighter, and lower profile design that enhances patient comfort and mobility. The ActiV.A.C. Therapy System features newly-developed technology that automatically documents the patient's therapy history and treatment times. Reports are electronically stored in the system and can be reviewed on-screen or downloaded to a computer. The ActiV.A.C. System incorporates SensaT.R.A.C. Technology and Seal Check that simplify the application, monitoring and documentation of wound therapy.

•

The V.A.C. Instill System was introduced in 2003 to add additional therapeutic capability to the V.A.C. Therapy system. The V.A.C. Instill combines the ability to instill fluids into the wound with V.A.C. Therapy. Fluids prescribed by physicians for topical use—including antibiotics, antiseptics and anesthetics—can be instilled, making the system particularly well suited for infected and painful wounds. Future uses could include cytokines, growth factors, or other agents to stimulate wound healing. Because the V.A.C. Instill is based on the V.A.C. ATS system, it also includes all the capabilities and features of the V.A.C. ATS.

•

The V.A.C. ATS System was introduced in 2002 and incorporates our proprietary T.R.A.C. technology, which enables the system to monitor pressure at the wound site and automatically adjust system operation to maintain the desired therapy protocol. As the InfoV.A.C. Therapy system, with SensaT.R.A.C. dressings, is introduced to the acute care market, the V.A.C. ATS will be transitioned solely into the long-term care market segment.

•

The V.A.C. Freedom System was introduced in 2002 to meet the requirements for a lightweight product suitable for ambulatory patients. The V.A.C. Freedom system also utilizes T.R.A.C. technology and T.R.A.C. dressings. As with the InfoV.A.C. system, as the ActiV.A.C. system is introduced to the post-acute market, the V.A.C. Freedom will be transitioned solely into the long-term care market.

The V.A.C. GranuFoam Silver Dressing was introduced into the wound care market in August 2005. Designed specifically for the V.A.C. Therapy system, V.A.C. GranuFoam Silver Dressing combines the proven benefits of negative pressure wound therapy, or NPWT, with the antimicrobial attributes of silver. The V.A.C. GranuFoam Silver Dressing is the only silver dressing that allows the GranuFoam dressing pores to come in direct contact with the wound, eliminating the need for additional silver dressing layers that may inhibit negative pressure and granulation. Micro-bonded metallic silver is uniformly distributed throughout the dressing, providing continuous delivery of silver even after dressing sizing. A single application of V.A.C. GranuFoam Silver Dressing eliminates the need for adjunct silver dressings. The dressing offers a protective barrier to reduce certain infection-producing bacteria, yeast and fungi, and may help reduce infections in the wound.

The superior clinical efficacy of our V.A.C. Therapy wound healing and tissue repair systems is supported by an extensive collection of published clinical studies. V.A.C. Therapy systems have been reviewed in at least 467 journal articles (405 peer-reviewed), 470 abstracts, 51 case studies and 61 textbook citations. Of these, the research for 66 articles, 98 abstracts and all case studies were funded by research grants from KCI. NPWT, as delivered by the V.A.C. Therapy system, has been granted a seal of approval by the American Podiatric Medical Association, the German Wound Healing Society and the Austrian Wound Healing Society. In addition, independent consensus conferences have issued guidelines for the use of NPWT for diabetic foot wounds, pressure ulcers, complex chest wounds, hospital-treated wounds and open abdominal wounds.

We are currently sponsoring multiple prospective, randomized and controlled multi-center clinical studies specifically designed to provide further evidence of V.A.C. Therapy's clinical efficacy for treating various targeted wound types. Our research and development team has also initiated pilot studies to evaluate the effect of V.A.C. Therapy at the cellular and molecular levels.

Products Treating Pulmonary Complications in the Intensive Care Unit

Our pulmonary care therapies include both Kinetic Therapy products and Prone Therapy products. In late 2004, we introduced the RotoProne Therapy System, an advanced patient-care system for the treatment and prevention of pulmonary complications associated with immobility. Providing Kinetic Therapy, Prone Therapy and Kinetic Prone Therapy, the RotoProne Therapy System enables caregivers to automatically rotate immobile patients with respiratory complications from the supine to the prone position and to also rotate them from side to side up to 62 degrees in both the supine and prone positions. The Rotoprone Therapy System can help improve patient outcomes by providing caregivers an easier way to deliver multiple intervals of Prone or Kinetic Prone Therapy over an extended period of time. It also has the capability of delivering Kinetic Therapy in the supine position. The RotoProne Therapy System features include programmable rotation, up to 62 degrees in either the prone or supine position, with an acclimation mode as well as pause and hold functions to suspend the patient in a side-lying position for ease of nursing care. Other features of the RotoProne Therapy System include a proprietary tube management system, electronically monitored buckles, an ergonomically-designed head positioning system and 40-second or less return to supine from the prone position for delivery of CPR.

Our other Kinetic Therapy products include the TriaDyne Proventa, TriaDyne II, RotoRest Delta, and PediDyne. The TriaDyne Therapy System is used primarily in acute care settings and provides patients with four distinct therapies on an air suspension surface. The TriaDyne Therapy System applies Kinetic Therapy by rotating the patient up to 45 degrees on each side. There are three different modes of rotation: upper body only, full body rotation, and counter rotation, simultaneously rotating the patient's torso and lower body in opposite directions to keep the patient centered on the patient surface. The TriaDyne Therapy System also provides percussion therapy to loosen mucous buildup in the lungs and pulsation therapy to promote capillary and lymphatic flow. The RotoRest Delta is a specialty bed that can rotate a patient up to 62 degrees on each side for the treatment of severe pulmonary complications and respiratory failure. The RotoRest Delta is also designed, and has been shown, to improve the care of patients suffering from multiple trauma and spinal cord injury. Kinetic Therapy has been clinically studied in at least 17 randomized clinical trials, 68 journal articles (56 peer-reviewed articles), 44 abstracts, 19 case studies and four textbook citations. Of these, the research for 17 articles, 32 abstracts and 19 case studies was funded by research grants from KCI.

Bariatric Care Products

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

The BariMaxx II bed provides a basic risk management platform for patients weighing up to 1,000 pounds for those customers looking for a set of features including built-in scales and an expandable frame at a lower cost. The BariMaxx II side-exit feature allows the caregiver to assist patients in a more traditional exit of the bed. This is an important factor in a patient's rehabilitation and prepares them for facility discharge. The MaxxAir ETS (Expandable Turning Surface) mattress replacement system is a low-air-loss, pressure relieving surface option for the BariMaxx II that also includes rotational therapy of up to 30 degrees on each side. In 2006, we launched a powered transport option that enables caregivers to safely and more easily transport patients on the BariMaxx II.

All of our bariatric beds can be combined with our EZ Lift patient transfer system, an Air Pal air assisted lateral transfer system, a Carechair combination chair / stretcher, and other accessories such as wheelchairs, walkers and commodes to create a complete bariatric suite offering. This complete suite offering helps caregivers in the day-to-day care of the bariatric patient and also assists with compliance to "no lift" policies being implemented in health care organizations.

Wound Treatment and Prevention Products

We offer a wide variety of therapeutic support systems for wound treatment and prevention, providing pressure reduction, pressure relief, pulsation, alternating pressure, and a continuous turn of a minimum of 20 degrees. Most of our therapy beds and surfaces incorporate the exclusive use of Gore Medical Fabric in the patient contact areas to provide an ideal microclimate for skin protection and moisture control. Our pressure relief products include framed beds and overlays such as the KinAir MedSurg and KinAir IV framed beds; the FluidAir Elite and FluidAir II bead beds; the FirstStep, FirstStep Plus, FirstStep Select, FirstStep Advantage, TheraKair, TheraKair Visio and TriCell overlays, the AtmosAir family of non-powered, dynamic mattress replacement and seating surfaces; and the RIK fluid mattress and overlay. Our pulsation products include the KinAir MedSurg Pulse and TheraPulse ATP framed beds and the DynaPulse mattress replacement system. Our alternating pressure or air cycling products include a powered model of the AtmosAir and the InterCell. Our turn assist products include the KinAir IV, Therapulse ATP and a powered AtmosAir model. During 2007, we obtained the rights from Hill-Rom Company to produce a mattress compatible with their VersaCare bed and launched the AtmosAir V series mattress. Internationally, the TheraKair Visio represents the next generation of our strong TheraKair brand, providing low-air-loss pressure relief with Pulsation Therapy.

The KinAir MedSurg and KinAir IV have been shown to provide effective skin care therapy in the treatment of pressure sores, burns and post-operative skin grafts and flaps and to help prevent the formation of pressure sores and certain other complications of immobility. The FluidAir Elite and FluidAir II support patients on a low-pressure surface of air-fluidized beads providing pressure relief and shear relief for skin grafts or flaps, burns and pressure sores. The TheraKair, TheraKair Visio, and FirstStep family of overlays and mattress replacement systems are designed to provide pressure relief and help prevent and treat pressure sores. The AtmosAir family consists primarily of for-sale mattress replacement products that have been shown to be effective for the prevention and treatment of pressure sores in a series of hospital-based case studies. The proprietary AtmosAir with Self Adjusting Technology (SAT) utilizes atmospheric pressure and gravity to deliver non-powered dynamic pressure relief.

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

The KinAir IV, Therapulse ATP and a powered AtmosAir model all provide turn assist of a minimum of 20 degrees to each side. Turn assist helps the caregiver reposition and/or turn a patient in order to provide patient care and pressure relief.

In 2006, we launched the next generation platform of mattress replacement systems, the FirstStep All in One. The FirstStep All in One is the only mattress replacement system that combines multiple therapy levels (low-air-loss, pulsation, and rotation) at different price points with a higher weight capacity to allow maximum flexibility to help organizations in optimizing patient care and nursing efficiency.

Competitive Strengths

We believe we have the following competitive strengths:

Innovation and commercialization. KCI has a successful track record spanning over 30 years in commercializing novel technologies in advanced wound care and therapeutic support systems. We leverage our competencies in innovation, product development and commercialization to bring solutions to the market that address the critical unmet needs of clinicians and their patients and can help reduce the overall cost of patient care. We continue to support an active research and development program to advance our understanding of the science of wound healing and the physical and biologic processes that can be influenced to treat a variety of wounds. Through such efforts, we seek to provide novel, clinically efficacious, therapeutic solutions and treatment alternatives that increase patient compliance, enhance clinician ease of use and ultimately improve healthcare outcomes. Recent innovations include the launch of the next-generation InfoV.A.C. and ActiV.A.C. therapy systems.

Product differentiation and superior clinical efficacy. We differentiate our portfolio of products by providing effective therapies, supported by a clinically-focused and highly-trained sales and service organization, which combine to produce clinically-proven superior outcomes. The superior clinical efficacy of our V.A.C. Therapy systems and our therapeutic support systems is supported by an extensive collection of published clinical studies, peer-reviewed journal articles and textbook citations, which aid adoption by clinicians. In February 2008, we announced the final efficacy results of a large, multi-center randomized controlled clinical trial utilizing V.A.C. Therapy compared to advanced moist wound therapy, or AMWT, in the treatment of diabetic foot ulcers, which resulted in the following statistically significant results:

•

a greater proportion of foot ulcers achieved complete ulcer closure with V.A.C. Therapy versus AMWT;
•

time to wound closure was less with V.A.C. Therapy than with AMWT; and
•

patients on V.A.C. Therapy experienced significantly fewer amputations than with AMWT.

This study adds to KCI's significant body of clinical data that clearly shows that our V.A.C. Therapy system, including its unique foam dressing, provides clinical advantage for treatment of diabetic foot ulcers, including limb salvage.

KCI also continues to successfully distinguish its products from competitive offerings through unique FDA-approved marketing and labeling claims such as the V.A.C. Therapy System is intended to create an environment that promotes wound healing by preparing the wound bed for closure, reducing edema and promoting granulation tissue formation and perfusion. Following a review of requested clinical data, new claims were approved by the Food and Drug Administration, or FDA, in 2007 which now specify the use of V.A.C. systems in all care settings, including in the home. These newly-issued claims are unique to KCI’s V.A.C. systems in the field of NPWT.

Broad reach and customer relationships. Our worldwide sales team, consisting of approximately 2,000 team members, has fostered strong relationships with our prescribers, payers and caregivers over the past three decades by providing a high degree of clinical support and consultation along with our extensive education and training programs. Because our products address the critical needs of patients who may seek treatment in various care settings, we have built a broad and diverse reach across all health care settings. We have relationships with approximately 9,000 acute care hospitals worldwide. In the United States, we have relationships with approximately 9,200 extended care organizations and over 10,500 home health care agencies and wound care clinics, in addition to numerous clinicians in these facilities with whom we have long-established relationships.

Reimbursement expertise. A significant portion of our V.A.C. revenue is derived from home placements, which are reimbursed by third-party payers such as private insurance, managed care and governmental payers. We have dedicated significant time and resources to develop a core competency in third-party reimbursement, which enables us to efficiently manage our collections and accounts receivable with third-party payers. We have over 375 contracts with some of the largest private insurance payers in the U.S.

Extensive service center network. With a network of 141 U.S. and 67 international service centers, we are able to rapidly deliver our products to major hospitals in the United States, Canada, Australia, Singapore, South Africa, and most major European countries. Our network gives us the ability to deliver our products to any major Level I domestic trauma center within hours. This extensive network is critical to securing contracts with national group purchasing organizations, or GPOs, and the network allows us to efficiently serve the homecare market directly. Our network also provides a platform for the introduction of additional products in one or more care settings.

Customers

We have a broad reach across all health care settings. We have relationships with approximately 9,000 acute care hospitals worldwide. In the United States, we have relationships with approximately 9,200 extended care organizations and over 10,500 home health care agencies and wound care clinics. As of December 31, 2007, we served over 2,700 medium-to-large hospitals in the United States. Through our network of 141 U.S. and 67 international service centers, we are able to rapidly deliver our products to major hospitals in the United States, Canada, Australia, New Zealand, Singapore, South Africa and most major European countries. This extensive network is critical to securing national contracts with GPOs, and allows us to efficiently serve the homecare market directly. Our network also provides a platform for the introduction of additional products. Our International division also serves the demands of a growing global market through relationships with independent distributors in Latin America, the Middle East, Eastern Europe and Asia. Additionally, operations have been established in Japan and we are actively pursuing the regulatory approvals required to enter the Japanese market.

Our agreements with GPOs, reimbursement under Medicare Part B, and our contractual relationships with third-party private payers account for a significant portion of our revenues. We have agreements with numerous GPOs which negotiate rental and purchase terms on behalf of large groups of acute care and extended care organizations. Our largest GPO relationship is with Novation, LLC. Under our agreements with Novation, we provide products and therapies to over 1,800 acute care and extended care organizations. Rentals and sales to Novation participants in the years ended December 31, 2007, 2006 and 2005, accounted for $193.6 million, or 12.0% of total revenue, $179.2 million, or 13.1% of total revenue, and $159.6 million, or 13.2% of total revenue, respectively. Medicare, which reimburses KCI for placement of our products and therapies with Medicare participants, accounted for $181.5 million, or 11.3% of total revenue, $165.4 million, or 12.1% of total revenue, and $148.6 million, or 12.3% of total revenue for the years ended December 31, 2007, 2006 and 2005, respectively. No other individual customer or payer accounted for 10% or more of total revenues for the years ended December 31, 2007, 2006 and 2005, respectively.

Our customers typically prefer to rent our V.A.C. Therapy systems and therapeutic support systems and purchase the related disposable products, such as V.A.C. dressings. We believe that some of our customers, who tend to be our larger customers, desire alternatives to rental for at least some of their business. We expect this trend may continue as V.A.C. penetration increases, and we are evaluating and developing alternative models that will meet our customers' needs now and into the future.

Billing and Reimbursement

We have extensive contractual relationships and reimbursement coverage for our products in the United States. We have contracts with nearly all major acute care hospital organizations and most major extended care organizations. Generally, these acute and extended care organizations pay us directly for our products and services. In the homecare market, we provide our products and services directly to patients and bill third-party payers, including Medicare, Medicaid and private insurance. We currently have V.A.C. contracts with private and governmental payer organizations covering over 200 million member lives in the United States as of December 31, 2007. This represents more than 10 times the number of member lives we had under contract as of mid-2000.

CEO BACKGROUND

Catherine M. Burzik joined KCI as Director, President and Chief Executive Officer in November of 2006. Ms. Burzik previously served as the President of Applied Biosystems Group, a unit of Applera Corporation and a provider of tools for the life sciences, from August 2004, and Executive Vice President of Applied Biosystems Group from September 2003 to August 2004. Ms. Burzik also served as Senior Vice President of Applera Corporation from August 2004 to October 2006. Prior to Applied Biosystems, Ms. Burzik was President of Ortho-Clinical Diagnostics, Inc., a subsidiary of Johnson & Johnson that provides instruments, assays and consumables to the clinical laboratory and transfusion medicine markets, from 1998 to 2003, and General Manager of Johnson & Johnson’s Critikon business, a provider of medical equipment, from 1997 to 1998. Prior to that, Ms. Burzik was employed by Eastman Kodak Company, a leading international provider of imaging products and services, where she held various operations and marketing positions over 20 years. Ms. Burzik currently serves on the boards of trustees of Canisius College and Keck Graduate Institute of Applied Life Sciences.

John P. Byrnes became a director in 2003. He has served as Chief Executive Officer of Lincare Holdings Inc., a home health care company, since January 1997 and as a director of Lincare since May 1997. Mr. Byrnes was appointed Chairman of the Board of Lincare Holdings Inc. in March 2000. Mr. Byrnes has been President of Lincare since June 1996. Prior to becoming President, Mr. Byrnes served Lincare in a number of capacities over a ten-year period. Mr. Byrnes currently serves on the board of U.S. Renal Care.

Ronald W. Dollens became a director in 2000 and currently serves as Chairman of the Board. Mr. Dollens is retired as President and Chief Executive Officer of Guidant Corporation, a corporation that pioneers lifesaving technology for millions of cardiac and vascular patients worldwide. He served in that capacity from 1994 to 2005. Previously, he served as President of Eli Lilly and Company’s Medical Devices and Diagnostics Division from 1991 until 1994. Mr. Dollens currently serves on the boards of ABIOMED, Inc., Eiteljorg Museum, Regenstrief Foundation, Alliance for Aging Research and Butler University.

Woodrin Grossman became a director in November of 2005. In June 2005, Mr. Grossman retired as partner and health care practice leader of PricewaterhouseCoopers after 37 years of service with the firm. With PricewaterhouseCoopers, Mr. Grossman served as the audit partner of audits of Fortune 500 and other companies. Mr. Grossman currently serves on the board of IPC The Hospitalist Company, Inc. Mr. Grossman served as Senior Vice President—Strategy and Development of Odyssey HealthCare Inc. from January 2006 to December 2007.

Harry R. Jacobson, M.D. became a director in June 2003. Dr. Jacobson is Vice Chancellor for Health Affairs of Vanderbilt University, Nashville, Tennessee, a position he has held since 1997. He served as a director of Renal Care Group from 1995 to March 2006 and was Chairman of the Board of Renal Care from 1995 to 1997. Dr. Jacobson currently serves as a director of Health Gate Data Corp. and Merck & Co., Inc. He also currently serves as Professor of Medicine at Vanderbilt University Medical Center, a position he has held since 1985.

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

N. Colin Lind became a director in November 1997 pursuant to a voting agreement between KCI and various stockholders, including Blum Capital Partners, L.P., as a representative of Blum Capital Partners. Mr. Lind is the Managing Partner of Blum Capital Partners, L.P., a public strategic block and private equity investment firm he joined in 1986. Mr. Lind is currently a director of PRG-Schultz International and has previously been a director of three other public and seven venture capital-backed companies.

David J. Simpson became a director in June 2003. Mr. Simpson served as Vice President, Chief Financial Officer and Secretary of Stryker Corporation, a worldwide medical products and services company from 1987 to 2002, and as Executive Vice President until his retirement in 2007. He had previously been Vice President and Treasurer of Rexnord Inc., a manufacturer of industrial and aerospace products and is currently a director of RTI Biologics, Inc.

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

Donald E. Steen became a director in 1998. Mr. Steen founded United Surgical Partners International, Inc. in February 1998 and served as its Chief Executive Officer until April 2004 and currently serves as Chairman of the board of United Surgical Partners. Mr. Steen served as Chairman of the board of AmeriPath, Inc. from April 2004 and as its Chief Executive Officer from July 2004 until June 2007. Mr. Steen served as President of the International Group of HCA from 1995 until 1997 and as President of the Western Group of HCA from 1994 until 1995. Mr. Steen founded Medical Care International, Inc., a pioneer in the surgery center business, in 1982.

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

Stephen D. Seidel joined KCI in April 2005 as Senior Vice President, General Counsel and Secretary. Prior to joining KCI, Mr. Seidel served for eight years as Managing Director of Cox Smith Matthews Incorporated, a business and litigation law firm based in San Antonio, Texas. Mr. Seidel is a former chair and a member of the board of directors of the Greater San Antonio Chamber of Commerce. Mr. Seidel currently serves on the board of governors of the Cancer Therapy and Research Center and on the board of directors of the San Antonio March of Dimes.

Lynne D. Sly joined KCI in July 2001 as Vice President, KCI USA Marketing and was promoted to President, Therapeutic Surfaces in December 2005. Effective May 1, 2007, Ms. Sly began to serve as interim President, KCI International. Effective December 2007, Ms. Sly oversees the Global Therapeutic Support Systems business. Prior to KCI, Ms. Sly was employed with Roche Diagnostics for 19 years in various sales and marketing roles. She serves on the board of directors for Girls Inc., a nonprofit corporation and sits on the Advisory Board of the San Antonio chapter of the Healthcare Business Women’s Association.

Todd M. Fruchterman, M.D., Ph.D. joined KCI in July 2006 as Senior Vice President, Research & Development. In March 2007, Dr. Fruchterman was appointed Chief Technology Officer in addition to his role as Senior Vice President, Research and Development. Prior to joining KCI, Dr. Fruchterman served in a number of roles for Johnson & Johnson, where he most recently was responsible for the worldwide biosurgical development portfolio and directed worldwide biosurgical research and development for Johnson & Johnson’s Ethicon division. Prior to Johnson & Johnson, from June 2003 to July 2004, Dr. Fruchterman directed medical and strategic marketing at Schering-Plough Corporation for the worldwide hepatitis business. From May 2000 to March 2003, Dr. Fruchterman worked for Response Genetics, Inc., where, during his tenure, he held positions of President, Chief Executive Officer, and Chief Operating Officer.

Daniel G. Ciaburri joined KCI in May 2007 as Senior Vice President and Chief Medical Officer. Dr. Ciaburri was Attending Cardiothoracic Surgeon at New York Presbyterian Hospital from December 2005 through May 2007. Prior to that, he was Director of Cardiothoracic Surgery at Vassar Brothers Medical Center in Poughkeepsie, New York.

R. James Cravens joined KCI in July 2004 as Vice President, Human Resources. Prior to joining KCI, Mr. Cravens was Senior Vice President, Human Resources for VNU, Inc., a global media and information company. From 1995 to 2002, he held a number of roles with ACNielsen, where he most recently served as Senior Vice President and Chief Human Resources Officer. Mr. Cravens serves on the board of directors of the YMCA of Greater San Antonio.

Rohit Kashyap, Ph.D. joined KCI in 1998 and was promoted to Senior Vice President, Corporate Development in October 2007. Before that he has served in different roles within the R&D, Licensing and Acquisition and Corporate Development groups within KCI, most recently as Vice President of Corporate Development responsible for developing the global strategic plans and execution of all licensing and acquisition activities.

TLV Kumar joined KCI in November 2007 as President, Europe, Middle East and Africa. Mr. Kumar comes to KCI from Applied Biosytems, Inc., where he was President—Asia Pacific, a region made up of 17 countries. Mr. Kumar’s business career began at Blue Star Limited, a maker and distributor of electronics and industrial systems, where he spent nearly 20 years in positions of increasing responsibility that included Vice President with responsibility for India. From Blue Star Limited, Mr. Kumar went to Royal Philips Electronics, where held such positions as Chief Operations Officer—Asia Pacific for Philips Medical Systems, overseeing marketing, product management, customer service and supply chain. In other roles with Philips Medical Systems, he served as Vice President and Regional Director—Middle East and Africa, Managing Director—India, and Vice President—Sales and Marketing for India.

Patrick Loh joined KCI in January 2008 as President, Asia Pacific. Prior to joining KCI, Mr. Loh served as General Manager, Greater China for Fisher Scientific International before becoming Vice President, Asia Pacific at Thermo Fisher Scientific, a world leader in life sciences. Mr. Loh began his career at B. Braun Medical AG, a German healthcare company with projects in both the hospital and home patient care market, where he spent 11 years in positions of increasing responsibility, including Sales Executive for the Intravenous Therapy Division in Kuala Lumpur, Malaysia; Regional Group Product Manager for the Medical Division in the Asia Pacific Region; Head of the Outpatient Market Division for China and Hong Kong; and Head of the Medical Division for the China and Hong Kong regions.

David H. Ramsey joined KCI in July 2007 as Senior Vice President and Chief Information Officer. Prior to his appointment as KCI’s Chief Information Officer, Mr. Ramsey was the Chief Information Officer at PSS Medical from 1998 to 2007. Mr. Ramsey holds a Bachelor of Science from Montana State University.

Michael Schneider joined KCI in September 2007 as Senior Vice President, Global Operations. Prior to joining KCI, Mr. Schneider was President, Global Service & Operations for Applied Biosystems, Inc., a global life science equipment manufacturer from 2004 to 2007. From 1996 to 2003 he held a number of roles with ChromaVision Medical Systems, where he most recently served and Chief Operating Officer and Acting Chief Executive Officer.

Linwood A. Staub joined KCI in July 2007 as President, Global V.A.C. Therapy. Mr. Staub held a number of roles with the Ethicon Division of Johnson & Johnson since 1985. Prior to joining KCI, Mr. Staub was the Vice President of U.S. Sales and Marketing, where he led the sales and marketing operations for Johnson & Johnson’s global wound management business.

MANAGEMENT DISCUSSION FROM LATEST 10K

General

Kinetic Concepts, Inc. is a global medical technology company with leadership positions in advanced wound care and therapeutic support systems. We design, manufacture, market and service a wide range of proprietary products that can improve clinical outcomes and can help reduce the overall cost of patient care. Our advanced wound care systems incorporate our proprietary V.A.C. Therapy technology, which has been demonstrated clinically to promote wound healing through unique mechanisms of action and can help reduce the cost of treating patients with serious wounds. Our therapeutic support systems, including specialty hospital beds, mattress replacement systems and overlays, are designed to address pulmonary complications associated with immobility, to reduce skin breakdown and assist caregivers in the safe and dignified handling of obese patients. We have an infrastructure designed to meet the specific needs of medical professionals and patients across all health care settings, including acute care hospitals, extended care organizations and patients’ homes, both in the United States and abroad.

We have direct operations in the United States, Canada, Western Europe, Australia, New Zealand, Singapore and South Africa, and we conduct additional business through distributors in Latin America, the Middle East, Eastern Europe and Asia. We manage our business in two geographical segments: the United States, or domestic, and International. Operations in the United States accounted for approximately 71.4%, 72.5% and 73.3% of our total revenue for the years ended December 31, 2007, 2006 and 2005, respectively.

For the last several years, our growth has been driven primarily by increased revenue from V.A.C. Therapy systems and related supplies, which accounted for approximately 79.5% of total revenue for the year ended December 31, 2007, up from 77.9% and 75.1% for the same periods in 2006 and 2005, respectively. We derive our revenue from both the rental and sale of our products. In the U.S. acute care and extended care settings, which accounted for more than half of our U.S. revenue for the year ended December 31, 2007, we bill our customers directly, such as hospitals and extended care organizations. In the U.S. homecare setting, where our revenue comes predominantly from V.A.C. Therapy systems, we provide products and services directly to patients and bill third-party payers directly, such as Medicare and private insurance. Internationally, most of our revenue is generated in the acute care setting on a direct billing basis.

Historically, we have experienced a seasonal slowing of domestic V.A.C. unit growth beginning in the fourth quarter and continuing into the first quarter, which we believe has been caused by year-end clinical treatment patterns, such as the postponement of elective surgeries and increased discharges of individuals from the acute care setting around the winter holidays. Although we do not know if our historical experience will prove to be indicative of future periods, a similar slow-down may occur in subsequent periods.

We believe the growth in our domestic V.A.C. Therapy revenue has substantially benefited from the availability of Medicare reimbursement for our products in the home. Beginning in 2005, an increasing number of devices being marketed to compete with V.A.C. Therapy systems have obtained similar reimbursement codes. Also, in April 2007, the Centers for Medicare and Medicaid Services, or CMS, released final rules on competitive bidding for certain Medicare covered durable medical equipment, including negative pressure wound therapy, or NPWT, which establish procedures to set competitively-bid reimbursement amounts for such items in ten designated metropolitan areas. In the first phase of the program, new competitively-bid reimbursement amounts would be paid to winning bidders beginning in July 2008 in the designated metropolitan areas. Recently, CMS announced the 70 metropolitan areas included in the second phase of the competitive bidding process. CMS has included NPWT as a product category in this second phase of competitive bidding. In the second phase of the program, CMS has indicated that new single payment amounts would be established and paid to winning bidders that opt to become contract suppliers beginning in mid-2009 in the designated metropolitan areas. Non-winning bidders generally would be unable to furnish Medicare-covered NPWT in a CBA, except in limited circumstances. The Medicare DMEPOS competitive bidding program could have a negative impact on our Medicare reimbursement levels, and could result in increased price pressure from other third-party payers. The competitive bidding program could also limit customer access to KCI’s homecare products in the designated CBAs. We estimate the V.A.C. rentals and sales to Medicare beneficiaries in the ten designated metropolitan areas included in phase one of the program represented approximately $16.6 million, or 1.5% of our total U.S. V.A.C. revenue, or 1.0% of KCI’s total revenue for the year ended December 31, 2007. We estimate the V.A.C. rentals and sales to Medicare beneficiaries in the 80 designated metropolitan areas represented less than 7% of our total U.S. V.A.C. revenue, or less than 5% of KCI’s total revenue for the year ended December 31, 2007.

As a health care supplier, we are subject to extensive government regulation directed at ascertaining the appropriateness of reimbursement and preventing fraud and abuse under various government programs. Periodically, we receive inquiries from various government agencies requesting customer records and other documents. In June 2007, the U.S. Department of Health and Human Services Office of the Inspector General, or OIG, issued a report on a study it conducted with regard to NPWT claims submitted to CMS for reimbursement during 2004. The OIG report made a number of recommendations for potential Medicare program savings to CMS, but it does not constitute a formal recoupment action. This report may result in increased audits and/or demands by CMS, its regional contractors and other third-party payers for refunds or recoupments of amounts previously paid to us. We are currently participating in a post-payment claims audit by a CMS regional contractor. If a determination were made that our records or the patients’ medical records are insufficient to meet medical necessity or Medicare reimbursement requirements, we could be subject to denial, recoupment or refund demands for claims submitted for Medicare reimbursement. In addition, CMS or its contractors could place KCI on extended pre-payment review, which could slow our collections process and increase our administrative costs for providing V.A.C. Therapy. If CMS were to deny a significant number of claims in any pre-payment audit, or make any recoupment demands based on any post-payment audit, our business and operating results would be materially and adversely affected. Going forward, it is likely that we will be subject to periodic inspections, assessments and audits of our billing and collections practices, which could also adversely affect our business and operating results.

Competitive Strengths

We believe we have the following competitive strengths:

Innovation and commercialization. KCI has a successful track record spanning over 30 years in commercializing novel technologies in advanced wound care and therapeutic support systems. We leverage our competencies in innovation, product development and commercialization to bring solutions to the market that address the critical unmet needs of clinicians and their patients and can help reduce the overall cost of patient care. We continue to support an active research and development program to advance our understanding of the science of wound healing and the physical and biologic processes that can be influenced to treat a variety of wounds. Through such efforts, we seek to provide novel, clinically efficacious, therapeutic solutions and treatment alternatives that increase patient compliance, enhance clinician ease of use and ultimately improve healthcare outcomes. Recent innovations include the launch of the next-generation InfoV.A.C. and ActiV.A.C. therapy systems.

Product differentiation and superior clinical efficacy. We differentiate our portfolio of products by providing effective therapies, supported by a clinically-focused and highly-trained sales and service organization, which combine to produce clinically-proven superior outcomes. The superior clinical efficacy of our V.A.C. Therapy systems and our therapeutic support systems is supported by an extensive collection of published clinical studies, peer-reviewed journal articles and textbook citations, which aid adoption by clinicians. In February 2008, we announced the final efficacy results of a large, multi-center randomized controlled clinical trial utilizing V.A.C. Therapy compared to advanced moist wound therapy, or AMWT, in the treatment of diabetic foot ulcers, which resulted in the following statistically significant results:

•

a greater proportion of foot ulcers achieved complete ulcer closure with V.A.C. Therapy versus AMWT;
•

time to wound closure was less with V.A.C. Therapy than with AMWT; and
•

patients on V.A.C. Therapy experienced significantly fewer amputations than with AMWT.

This study adds to KCI's significant body of clinical data that clearly shows that our V.A.C. Therapy system, including its unique foam dressing, provides clinical advantage for treatment of diabetic foot ulcers, including limb salvage.

KCI also continues to successfully distinguish its products from competitive offerings through unique FDA-approved marketing and labeling claims such as the V.A.C. Therapy System is intended to create an environment that promotes wound healing by preparing the wound bed for closure, reducing edema and promoting granulation tissue formation and perfusion. Following a review of requested clinical data, new claims were approved by the Food and Drug Administration, or FDA, in 2007 which now specify the use of V.A.C. systems in all care settings, including in the home. These newly-issued claims are unique to KCI’s V.A.C. systems in the field of NPWT.

Broad reach and customer relationships. Our worldwide sales team, consisting of approximately 2,000 team members, has fostered strong relationships with our prescribers, payers and caregivers over the past three decades by providing a high degree of clinical support and consultation along with our extensive education and training programs. Because our products address the critical needs of patients who may seek treatment in various care settings, we have built a broad and diverse reach across all health care settings. We have relationships with approximately 9,000 acute care hospitals worldwide. In the United States, we have relationships with approximately 9,200 extended care organizations and over 10,500 home health care agencies and wound care clinics, in addition to numerous clinicians in these facilities with whom we have long-established relationships.

As a health care supplier, we are subject to extensive government regulation directed at ascertaining the appropriateness of reimbursement and preventing fraud and abuse under various government programs. Periodically, we receive inquiries from various government agencies requesting customer records and other documents. In June 2007, the U.S. Department of Health and Human Services Office of the Inspector General, or OIG, issued a report on a study it conducted with regard to NPWT claims submitted to CMS for reimbursement during 2004. The OIG report made a number of recommendations for potential Medicare program savings to CMS, but it does not constitute a formal recoupment action. This report may result in increased audits and/or demands by CMS, its regional contractors and other third-party payers for refunds or recoupments of amounts previously paid to us. We are currently participating in a post-payment claims audit by a CMS regional contractor. If a determination were made that our records or the patients’ medical records are insufficient to meet medical necessity or Medicare reimbursement requirements, we could be subject to denial, recoupment or refund demands for claims submitted for Medicare reimbursement. In addition, CMS or its contractors could place KCI on extended pre-payment review, which could slow our collections process and increase our administrative costs for providing V.A.C. Therapy. If CMS were to deny a significant number of claims in any pre-payment audit, or make any recoupment demands based on any post-payment audit, our business and operating results would be materially and adversely affected. Going forward, it is likely that we will be subject to periodic inspections, assessments and audits of our billing and collections practices, which could also adversely affect our business and operating results.

Competitive Strengths

We believe we have the following competitive strengths:

Innovation and commercialization. KCI has a successful track record spanning over 30 years in commercializing novel technologies in advanced wound care and therapeutic support systems. We leverage our competencies in innovation, product development and commercialization to bring solutions to the market that address the critical unmet needs of clinicians and their patients and can help reduce the overall cost of patient care. We continue to support an active research and development program to advance our understanding of the science of wound healing and the physical and biologic processes that can be influenced to treat a variety of wounds. Through such efforts, we seek to provide novel, clinically efficacious, therapeutic solutions and treatment alternatives that increase patient compliance, enhance clinician ease of use and ultimately improve healthcare outcomes. Recent innovations include the launch of the next-generation InfoV.A.C. and ActiV.A.C. therapy systems.

Product differentiation and superior clinical efficacy. We differentiate our portfolio of products by providing effective therapies, supported by a clinically-focused and highly-trained sales and service organization, which combine to produce clinically-proven superior outcomes. The superior clinical efficacy of our V.A.C. Therapy systems and our therapeutic support systems is supported by an extensive collection of published clinical studies, peer-reviewed journal articles and textbook citations, which aid adoption by clinicians. In February 2008, we announced the final efficacy results of a large, multi-center randomized controlled clinical trial utilizing V.A.C. Therapy compared to advanced moist wound therapy, or AMWT, in the treatment of diabetic foot ulcers, which resulted in the following statistically significant results:

•

a greater proportion of foot ulcers achieved complete ulcer closure with V.A.C. Therapy versus AMWT;
•

time to wound closure was less with V.A.C. Therapy than with AMWT; and
•

patients on V.A.C. Therapy experienced significantly fewer amputations than with AMWT.

This study adds to KCI's significant body of clinical data that clearly shows that our V.A.C. Therapy system, including its unique foam dressing, provides clinical advantage for treatment of diabetic foot ulcers, including limb salvage.

KCI also continues to successfully distinguish its products from competitive offerings through unique FDA-approved marketing and labeling claims such as the V.A.C. Therapy System is intended to create an environment that promotes wound healing by preparing the wound bed for closure, reducing edema and promoting granulation tissue formation and perfusion. Following a review of requested clinical data, new claims were approved by the Food and Drug Administration, or FDA, in 2007 which now specify the use of V.A.C. systems in all care settings, including in the home. These newly-issued claims are unique to KCI’s V.A.C. systems in the field of NPWT.

Broad reach and customer relationships. Our worldwide sales team, consisting of approximately 2,000 team members, has fostered strong relationships with our prescribers, payers and caregivers over the past three decades by providing a high degree of clinical support and consultation along with our extensive education and training programs. Because our products address the critical needs of patients who may seek treatment in various care settings, we have built a broad and diverse reach across all health care settings. We have relationships with approximately 9,000 acute care hospitals worldwide. In the United States, we have relationships with approximately 9,200 extended care organizations and over 10,500 home health care agencies and wound care clinics, in addition to numerous clinicians in these facilities with whom we have long-established relationships.

Results of Operations

Year ended December 31, 2007 Compared to Year ended December 31, 2006

Revenue by Geographical Segment

The following table sets forth, for the periods indicated, rental and sales revenue by geographical segment, as well as the percentage change in each line item, comparing 2007 to 2006 (dollars in thousands):

Growth in total international revenue is due primarily to increased rental and sales volumes for V.A.C. Therapy systems and related disposables and favorable foreign currency exchange rate variances. Foreign currency exchange rate movements accounted for 9.2% of the increase in total international revenue in 2007 compared to the prior year.

The increase in international V.A.C. revenue over the prior year was primarily due to higher V.A.C. rental and sales unit volume and favorable foreign currency exchange variances. Foreign currency exchange rate movements favorably impacted international V.A.C revenue by 9.5% in 2007 compared to the prior year. The growth in international V.A.C. rental revenue over the prior year was due primarily to a 23.2% increase in rental unit volume. Higher international unit volume was partially offset by lower realized pricing due primarily to lower contracted pricing. Foreign currency exchange rate movements favorably impacted international V.A.C. rental revenue by 9.7% in 2007 compared to the prior year. The increase in international V.A.C. sales revenue over the prior year was primarily due to overall increased sales of V.A.C. disposables associated with the increase in V.A.C. rental unit volume. Foreign currency exchange rate movements favorably impacted international V.A.C. sales revenue by 9.3% in 2007 compared to the prior year.

The increase in international Therapeutic Support Systems revenue over the prior year was primarily due to a 3.9% increase in rental unit volume and foreign currency exchange rate movements which favorably impacted international Therapeutic Support Systems revenue by 8.6% for 2007 compared to the prior year.

Rental Expenses

Rental, or field, expenses are comprised of both fixed and variable costs. This decrease in rental expenses as a percent of total revenue was primarily due to increased sales force and service productivity and lower marketing expenditures during 2007 compared to the prior year. Our sales and service headcount increased to approximately 3,560 at December 31, 2007 from 3,520 at December 31, 2006, which resulted in a slower growth rate in expenses associated with our sales and service headcount than the rate of revenue growth.

Cost of sales includes manufacturing costs, product costs and royalties associated with our “for sale” products. The decreased sales margin was due primarily to a volume purchase discount received in 2006 relating to a large purchase of V.A.C. disposables which was fully recognized in that year.

Gross Profit Margin

Selling, general and administrative expenses include administrative labor, incentive and sales commission compensation costs, insurance costs, professional fees, depreciation, bad debt expense and information systems costs. The increase in selling, general and administrative expenses, as a percent of total revenue, is due primarily to increased management transition costs, costs associated with our global alignment efforts, share-based compensation and reserve provisions associated with the portfolio rationalization of selected therapeutic support systems inventory and rental assets compared to the prior year.

Share-Based Compensation Expense

KCI recognizes share-based compensation expense under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 Revised (“SFAS 123R”), “Share-Based Payment,” which was adopted on January 1, 2006 and requires the measurement and recognition of compensation expense over the estimated service period for all share-based payment awards, including stock options, restricted stock awards and restricted stock units based on estimated fair values on the date of grant.

As SFAS 123R requires the expensing of equity awards over the estimated service period, we have experienced an increase in share-based compensation expense as additional equity grants are made, compared to the prior year.

Research and development expenses relate to our investments in clinical studies and the development of new advanced wound healing systems and dressings, new and synergistic technologies across the continuum of wound care, including tissue healing, preservation and repair, new applications of negative pressure technology, as well as upgrading and expanding our surface technologies in our Therapeutic Support Systems business.

Operating Margin

The increase in operating margin is due primarily to increased market penetration, improved revenue realization levels and increased sales force and service productivity, partially offset by increased management transition costs, costs associated with our global alignment efforts, share-based compensation and reserve provisions associated with the portfolio rationalization of selected therapeutic support systems inventory and rental assets compared to the prior year. Share-based compensation expense under SFAS 123R unfavorably impacted our operating margin by 1.5% in 2007 compared to 1.3% in the prior-year.

Interest Expense

Interest expense was $19.9 million in 2007 compared to $20.3 million in the prior year. Interest expense in 2007 and 2006 includes write-offs of capitalized debt issuance costs totaling $3.9 million and $1.5 million, respectively. During 2007 and 2006, early redemption premium payments of approximately $3.6 million and $490,000, respectively, were recorded as interest expense related to the redemption of our previously-existing senior subordinated notes. The remaining decrease in interest expense from the prior year is due to a reduction in our outstanding debt balance and a lower interest rate compared to the prior year.

Net Earnings

Net earnings for 2007 were $237.1 million compared to $195.5 million in the prior year, an increase of 21.3%. The effective income tax rate for 2007 was 33.8% compared to 33.1% for the prior year. The lower effective income tax rate in 2006 resulted from the favorable resolution of certain tax contingencies in that year.

Net Earnings per Diluted Share

Net earnings per diluted share for 2007 were $3.31 compared to net earnings per diluted share of $2.69 in the prior year. This increase resulted from higher net earnings in 2007 and the favorable impact of our open-market repurchases of common stock made during the second half of 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

Revenue by Geographical Segment

The following table sets forth, for the periods indicated, rental and sales revenue by geographical segment, as well as the percentage change in each line item, comparing the first quarter of 2008 to the first quarter of 2007

The growth in North America revenue over the prior-year period was due primarily to increased rental and sales volumes for V.A.C. Therapy systems and related disposables.

Total V.A.C. revenue in North America increased over the prior-year period primarily due to increased rental and sales unit volume due to continued market penetration. The increase in North America V.A.C. rental revenue was primarily due to a 7.9% increase in rental unit volume compared to the prior-year period. The increase in North America V.A.C. sales revenue over the prior-year period was due primarily to higher sales volumes for V.A.C. disposables associated with the increase in V.A.C. rental unit volume and the shift in pricing from V.A.C. rental units to V.A.C. disposables associated with our value-pricing offering. However, the year-over-year growth rate was negatively impacted due to the realignment of our domestic sales force combined with increased competitive activities. Growth in rental unit volume was reported across all care settings.

Therapeutic Support Systems revenue in North America increased over the prior-year quarter primarily due to higher rental volumes in the acute care setting partially offset by lower surfaces sales in the period due in part to the realignment of our domestic sales force.

Growth in total EMEA/APAC revenue is due primarily to increased rental and sales volumes for V.A.C. Therapy systems and related disposables and favorable foreign currency exchange rate variances. Foreign currency exchange rate movements accounted for 13.9% of the increase in total EMEA/APAC revenue in the first quarter of 2008 compared to the prior-year period.

The increase in EMEA/APAC V.A.C. revenue over the prior year was primarily due to higher V.A.C. rental and sales unit volume and favorable foreign currency exchange variances. Foreign currency exchange rate movements favorably impacted EMEA/APAC V.A.C revenue by 14.3% in the first quarter of 2008 compared to the prior-year period. The growth in EMEA/APAC V.A.C. rental revenue over the prior-year period was due primarily to a 29.8% increase in rental unit volume. Higher EMEA/APAC unit volume was partially offset by lower realized pricing due primarily to lower contracted pricing resulting from an increase in long-term rental contracts, GPO pricing pressures and increased competition. The increase in EMEA/APAC V.A.C. sales revenue over the prior-year period was primarily due to overall increased sales of V.A.C. disposables associated with the increase in V.A.C. rental unit volume.

The increase in EMEA/APAC Therapeutic Support Systems revenue over the prior-year period was primarily due to a 7.7% increase in rental unit volume and foreign currency exchange rate movements which favorably impacted EMEA/APAC Therapeutic Support Systems revenue by 12.7% for the first quarter of 2008 compared to the prior-year period.

Rental, or field, expenses are comprised of both fixed and variable costs. This decrease in rental expenses as a percent of total revenue was primarily due to a reduced rate of sales force growth, increased service team productivity and lower marketing expenditures and depreciation expense during the first quarter of 2008 compared to the prior-year period. Our sales and service headcount increased to approximately 3,580 at March 31, 2008 from 3,560 at March 31, 2007, which resulted in a slower growth rate in expenses associated with our sales and service headcount than the rate of revenue growth.

Cost of Sales

Cost of sales includes manufacturing costs, product costs and royalties associated with our “for sale” products. The increased sales margin was due to favorable changes in our product mix, the shift in pricing from V.A.C. rental units to V.A.C. disposables associated with our value-pricing offering and favorable manufacturing-related variances in the first quarter of 2008 as compared to the prior-year period.

As a percent of total revenue, lower selling costs, field service expenses, product depreciation, cost of sales and marketing costs made up the majority of the increase in gross profit margin.

CONF CALL

David Holmes

Thank you, Shaquanna, and welcome to the KCI first quarter 2008 conference call. Today we will review the results that were announced in our press release earlier this morning. Our conference call will include prepared remarks by Catherine Burzik, our President and Chief Executive Officer, and Marty Landon, our Chief Financial Officer. We are also joined by other selected members of our senior leadership team. Following our prepared remarks we will open the call for questions.

Our conference call this morning will include forward-looking statements about our business, including guidance on future plans, revenues and earnings. These statements are based on our current expectations and are subject to a number of risks and uncertainties which could cause actual results to differ from our expectations. More information about potential risk factors may be found in our filings with the SEC.

I would now like to turn the call over to Catherine Burzik, President and Chief Executive Officer of Kinetic Concepts.

Catherine Burzik

Thank you, David, and good morning everyone. Today's call will begin with general comments and key takeaways from the earnings release that we posted earlier this morning. I will then provide updates on a range of topics, including the status of our plans for the strategic acquisition of LifeCell Corporation which we announced on April 7.

This morning we released our results for the first quarter of 2008, which showed continued strength in the fundamentals of our business. Total revenue for the period was $420 million, up 14% from the same period last year. V.A.C. revenue continues to fuel our growth, increasing $44 million or over 15% from last year. Our Therapeutic Support Systems business also demonstrated strong performance, up 8% over the same period in 2007.

Net earnings for the period were $68 million, which is an increase of 27% over last year. Diluted earnings per share were also strong at $0.94, which is a 25% increase over the same period in 2007.

Marty will provide a more detailed review of our financial performance at the conclusion of my remarks.

I would now like to discuss our plans to acquire LifeCell, and I'm very pleased to report that yesterday we launched our tender offer. This opportunity represents an important step in advancing the strategic priorities that were set out when I joined the company in the fall of 2006.

In making this decision, senior management undertook a disciplined and thorough approach to identify an innovative growth company with leading technologies that are complimentary to KCI and a business that is penetrating markets with large potential. LifeCell clearly meets these criteria, but we believe it also provides additional opportunities due to the synergistic nature of the two company's products, the strength of their management teams, and the extraordinary cultural fit.

The combined entity will create a strong commercial enterprise that will continue to grow revenue while credibly establishing a third platform that diversifies our core businesses.

We are very excited about this opportunity and the combined capabilities it will create. Both KCI and LifeCell have reached leadership positions by bringing to market best in class gold standard therapies that leverage a scientific understanding of the mechanisms of action around healing, tissue regeneration and repair. Together we expect to create revenue synergies and innovative products that will enable our plan for consistent and sustained double-digit revenue growth.

We have now commenced our tender offer and have also completed our meetings with the lenders that will finance this combination of our company. And as we have stated before, we plan to close this transaction in the second quarter.

I will now move on to review KCI's results for the quarter. In our last conference call, we announced plans to realign our U.S. sales force. This more is an important part of our plan to increase penetration of the underserved V.A.C. wound care market and provide profitable growth in our Therapeutic Support Systems product line. We believe that this new dedicated structure will also simplify and improve our interaction with the patients and caregivers that we serve since the [inaudible] are unique to each business.

I am pleased to report that the transition process is substantially complete. We are highly focused on realizing the benefits of this new structure to enhance sales execution and strengthen revenue momentum. In addition to these activities, we also expect to drive revenue synergies to the V.A.C. and LifeCell sales forces in the near future.

Last quarter we reported that we continued to see competitive activity in the United States and Europe. New market entrants are behaving as we expected. They are providing evaluation units free of charge or at substantial discount. While these actions are having a short-term disruptive impact, the very positive news is that consistent with past experience the overwhelming majority of customers continue to utilize KCI products post the evaluation. This is true in both the United States and internationally. We believe that this result is due to the superior outcomes achieved with KCI's V.A.C. therapy, and we anticipate that KCI's V.A.C. therapy will be the negative pressure wound therapy product of choice for the foreseeable future. KCI remains very confident in the sustainability of our V.A.C. therapy franchise.

Looking forward to 2009, we are providing preliminary guidance of sustained double-digit V.A.C. revenue growth for calendar year 2009. We continue to monitor developments with respect to reimbursement, and I want to update you on our progress in a few of these areas.

In late March, CMS notified bidders regarding round one of competitive bidding. The reduction in price for NPWT ranged from 7% to 23% across the 10 CBAs. It remains to be proven whether CMS can guarantee access to NPWT at these discounted levels for the nation's elderly and disabled.

It is important to remember that KCI's NPWT market leadership position is the result of a unique therapeutic offering that combines proprietary technology, skilled clinical support, and a full-service infrastructure that patients and caregivers have come to rely upon. The patient outcomes that we are able to achieve with V.A.C. therapy are well documented and are unmatched by any other product in the NPWT space. Outcomes from V.A.C. therapy are not easily duplicated.

From what we know today it is unlikely that KCI will be able to provide V.A.C. therapy, with its clinically proven superior outcomes, at the bid prices offered to us by CMS in round one. We remind you that if KCI chooses to not participate in this round, the total impact would be approximately one-half of 1% of KCI's total estimated revenue for 2008 or approximately $9 million.

Looking forward, KCI is committed to finding an economically feasible way to provide our life and limb saving V.A.C. therapy to the nation's elderly and disabled. Therefore, if we move into round two of competitive bidding, KCI is analyzing NPWT business alternatives that would allow us to participate. We are currently developing this strategy and for competitive reasons we will not disclose it. As previously communicated, the total potential 2009 revenue impact for competitive bidding would represent less than 5% of KCI's total revenue.

On the international reimbursement front we are seeing real progress. In February we announced that we have reached an important milestone with respect to home care reimbursement in Germany and efforts are under way to initiate the study that was approved by the Ministry of Health. The study provides full reimbursement for V.A.C. placement, and it's limited to KCI proprietary back system. The study will be conducted over a maximum period of three years and will target patients that are transitioning from receiving therapy in the acute care setting to receiving care in the post-acute setting as well as patients who initiate treatment in the home.

This is a very important development for KCI and is an initiative that has been under way for several years. V.A.C. therapy is widely accepted in the German acute care setting, and this development will enable KCI to significantly expand our presence in the home. Remember that Germany is our second-largest market outside the United States.

We also continue to monitor reimbursement developments in other geographies, including the Netherlands and the U.K. We have focused on demonstrating the role that V.A.C. therapy plays in reducing the overall cost of patient care, and we are optimistic that these persistent efforts will result in a continued favorable reimbursement pattern.

With regard to global geographic expansion of V.A.C. therapy, we continued to make progress in Japan, where we have completed our clinical trial. We submitted our regulatory dossier at the end of the first quarter. Every effort is being made to accelerate this process, and we hope to have V.A.C. therapy available in the acute care setting in Japan before the end of 2009. We estimate this market at approximately 200,000 V.A.C.-able wounds per year.

On the innovation front we invested over $15 million in research and development during the quarter as we continued to develop our new product pipeline and support the clinical adoption of our current products.

In our earnings call one year ago, I announced our renewed commitment to our robust R&D pipeline based on our belief that innovation and advancing our understanding of the science of wound healing will play very important roles in KCI's future. We continue to execute on this initiative, and today we see advances in our product portfolio that will create new opportunities to address unmet clinical needs utilizing our proprietary negative pressure technology platform.

The LifeCell acquisition represents an important strategic step in enabling the launch of two of the products in our R&D pipeline that are aimed at the surgical suite. Our Surgical Wound Management System will target an annual addressable market of over 2 million high-risk surgical procedures and is being designed to reduce the incidence of post-surgical infections and complications, accelerate the healing process, and improve cogenesis. In addition, the product may provide synergistic benefits to LifeCell's AlloDerm and Strattice products.

We are also making continued progress with our vacuum-assisted tissue regeneration technology aimed at hard tissue applications. Once again, we see the potential for both development and commercialization opportunities from the LifeCell acquisition. One of the key advantages of the LifeCell acquisition will be the ability to leverage their strong presence in the operating room to deliver these new product platforms to the market.

Our Therapeutic Support Systems business posted a solid quarter as we continue in our efforts to focus on profitable market share gains in this business. In February, we were pleased to announce the introduction of our AtmosAir V-Series Mattress Replacement System that is designed to assist hospitals in the treatment and prevention of pressure ulcers. This new system enhances the AtmosAir family of surfaces which already accommodates a wide range of hospital bed frames and stretchers and is now compatible with the Hill-Rom VersaCare frame.

In summary, this was a very important quarter in terms of positioning KCI for long-term growth and value creation. We continue to be very proud of the strength of our business fundamentals, and we look forward with confidence to the future.

At this time I will turn the call over to Marty to review our financial results for the period.

Marty Landon

Thank you, Cathy. Good morning, everyone. This morning I'll first focus on our financial results for the quarter, and then I'll briefly summarize the terms of our recently announced financing transaction in connection with our acquisition of LifeCell Corporation. Then after that we'll open the floor for questions.

Our quarterly results were essentially in line with our expectations, and we think that they reflect the strength of this business in terms of both revenue growth through V.A.C. and TSS and our operating leverage.

Q1 is historically a weak sequential comp for us, but we grew revenue, earnings and margins versus the same period last year. In this morning's press release we reported total revenue for the first quarter of 2008 of $420 million, up $51.2 million or 14% over the same period last year.

Foreign currency exchange rate movements favorably impacted first quarter revenue by 4% compared to the prior year period.

Like prior first quarters, on a sequential basis total revenue for the first quarter was down $13.6 million or 3% from the first quarter of 2007, driven primarily by normal seasonality in our V.A.C. business and the impact of our U.S. sales force realignment as well as the increased competitive activity that Cathy described in her earlier remarks.

Net earnings for the first quarter were $68 million, up $14.4 million or 27% over the same period last year.

Net earnings per diluted share increased to $0.94, up $0.19 or 25% over the first quarter of the prior year.

Net earnings growth in the first quarter outpaced our revenue growth, consistent with our expectations as we continue to create leverage in the business model while investing in key development areas such as R&D.

During 2007, we took steps to structure KCI as a true global company, which included the alignment of key leadership positions for specific geographic regions. Beginning this quarter and I'm sure you saw in the press release, we're reporting financial results consistent with this new structure as follows: North America will include our operations in the U.S., Canada and Puerto Rico, EMEA or EMEA will cover Europe, the Middle East and Africa, and APAC will cover our operations in the Asia Pacific region. Today's press release as well as releases going forward will track current and prior period amounts under this revised reporting structure to enable investors and other interested parties to adjust their financial models accordingly.

Looking now at first quarter revenue for North America, total revenue was $309.5 million, an increase of $25.8 million or 9% over Q1 2007. Total revenue for EMEA and APAC was $110.6 million for the first quarter, up $25.4 million or 30% over the year ago period.

Turning to revenue by product line, global V.A.C. revenue was $333 million for the quarter, up 15% over the same period last year, driven by continued demand for our V.A.C. therapy systems both in the U.S. and abroad.

V.A.C. revenue for North America was $250.2 million for the period, an increase of $23.3 million or 10% over the same period last year. First quarter V.A.C. revenue growth in North America was primarily unit driven, as rental volumes increased across all care settings. As expected growth rates in the home care setting slightly exceeded growth rates in the institutional settings, and pricing remained stable.

As noted, [inaudible] V.A.C. revenue growth slowed early in the first quarter of 2008 as we completed work on the redeployment of our domestic sales force. The final steps in completing this transition were accomplished during the first quarter, and all team members are trained and operational in their new roles. We have seen some reacceleration of rental unit volume as the sales team gains traction under this new structure.

Internationally V.A.C. revenue in the EMEA and APAC regions for the first quarter was $82.7 million, an increase of $21.1 million or 34% over the year ago period. Higher V.A.C. revenue from increased rental unit volume accounted for the majority of the period-over-period increase combined with favorable foreign currency exchange rate movements. Virtually offsetting the unit gains was lower overall pricing. As in North America, we continue to see increased competitive selling efforts internationally related to less-sophisticated gauze-based devices. This activity is generally in the form of free trials and evaluations.

Worldwide revenue from our Therapeutic Support Systems or TSS business was solid for the quarter, totaling $87.1 million, up $6.8 million or 8% over the same period last year. TSS revenue for North America was $59.2 million for the first quarter, up $2.5 million or 4% over the same period last year due to higher rental volumes and increases in average rental prices. EMEA and APAC Support Systems revenue increased to $27.8 million for the quarter, up $4.3 million or 18% over the same period in 2007. Favorable foreign currency exchange rate variances accounted for 13% of the year-over-year TSS increase.

Gross profit for the first quarter was $209 million, an increase of $37.8 million or 22% over the prior year period.

Gross margin for the period was strong at 49.8%, improving by 335 basis points over the first quarter of 2007. Favorable variances in field service expenses, product depreciation, cost of sales and marketing expenses accounted for the majority of the margin improvement.

Below the gross profit line we saw increases in our SG&A expenses due primarily to costs associated with our U.S. sales force realignment. There were also additional costs associated with the transition of V.A.C. unit production to our Ireland manufacturing facility as well as increases in share-based compensation expense. All that contributed to the increase.

We continued to increase our R&D investment in the quarter, which was up $4.9 million or 50% yearonyear. Our total R&D investment of $14.7 million represented 3.5% of total revenue for the quarter and it reflects our continued commitment to investing in a robust R&D pipeline that leverages our capabilities and knowledge around our proprietary negative pressure technology platform.

Operating earnings for the quarter were $98.9 million, up 19% over the previous year.

Below the operating line our results for the quarter reflect increased liquidity and reduced leverage. Interest income increased to $2 million in the first quarter, and interest expense again declined for the period due to the active deleveraging that took place in 2007.

Total long-term debt outstanding at the end of the period was $68 million.

Our effective income tax rate was 33.5% for the quarter, which is comparable to the tax rate from the same period a year ago.

Free cash flow year-to-date was year-to-date was strong at $38.9 million, up $5.1 million or 15% from the prior year. Increases in free cash flow versus the same period last year resulted primarily from higher net earnings and strong working capital management.

KCI's balance sheet remained strong and liquid, reflecting impressive cash generation capabilities and low leverage. Our cash balance of $305.2 million reflects favorable collection patterns during the quarter. Our cash balance is also net of the licensing fee payments made to Wake Forest University during the period. Those licensing fee payments take place in the first and third quarters of each year.

Our quarter end net accounts receivable balance of $355.4 million reflects the continued efforts of our order to cash process improvement.

Total days revenue outstanding for the period declined slightly by just under two days when compared to the same period in 2007 due to continued focus on the proactive management of [inaudible] relationships.

As I mentioned previously, our long-term debt balance at the quarter was just under $70 million and significantly less than our trailing 12-month EBITDA, which is now approximately $483 million.

In connection with our planned acquisition of LifeCell Corporation, we made an announcement on April 16 regarding the issuance of $600 million in senior convertible notes which are due 2015. The notes bear interest at 3.25%, and we also granted an option to the initial purchasers to purchase up to an additional $90 million in aggregate principal amount of notes to cover over allotments. The notes call for an initial conversion price of $51.34 per share of common stock, but we also entered into a convertible note hedge and warrant transaction which effectively increases the conversion price of the notes to over $60 per share, which is approximately a 50% premium over KCI's closing price on April 15. Our intent is to settle the principal amount of these notes in cash. This debt issuance was part of a synchronized financing strategy that we think gives us an opportunity to finance this transaction at reasonable rates while providing an opportunity for rapid deleveraging without significant prepayment penalties.

In this morning's press release we reaffirmed our guidance for 2008, which calls for revenue of $1.77 to $1.82 billion and earnings per diluted share of $3.85 to $3.95 per share to exclude any impact on the anticipated acquisition of LifeCell. This guidance of course reflects our continued confidence in the business fundamentals and our ability to further penetrate the global V.A.C. market despite the short-term distractions associated with additional competitive entrants and the Medicare competitive bidding program. As Cathy mentioned, our very early look at 2009 calls for sustained double-digit growth of our V.A.C. franchise.

Finally, we expect to file our quarterly report on Form 10Q with the SEC in early May 2008.

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