10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission file number 001-09913

KINETIC CONCEPTS, INC.

(Exact name of registrant as specified in its charter)

Texas	74-1891727
(State of Incorporation)	(I.R.S. Employer Identification No.)
8023 Vantage Drive                 San Antonio, Texas	78230
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (210) 524-9000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common stock, par value $0.001	New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act:  NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

                                                                                                                                                                          Yes     X            No   ____    

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

                                                                                                                                                                          Yes   ____         No     X       

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                                                                                                                                                          Yes     X            No   ____    

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

               Large accelerated filer         X                       Accelerated filer       ____                      Non-accelerated filer      ____                 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                                                                                                                                                                          Yes   ____         No     X       

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2007 was $2,738,522,771 based upon the closing sales price for the registrant's common stock on the New York Stock Exchange.

As of February 21, 2008, there were 72,305,140 shares of the registrant's common stock outstanding.

Documents Incorporated by Reference:  Certain information called for by Part III of this Form 10-K is incorporated by reference to the definitive Proxy Statement for the 2007 Annual Meeting of Shareholders, which will be filed not later than 120 days after the close of the Company's fiscal year.

TABLE OF CONTENTS

KINETIC CONCEPTS, INC.

			Page No.
PART I.	Item 1.	Business	4
	Item 1A.	Risk Factors	23
	Item 1B.	Unresolved Staff Comments	34
	Item 2.	Properties	34
	Item 3.	Legal Proceedings	36
	Item 4.	Submission of Matters to a Vote of Security Holders	36
PART II.	Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	37
	Item 6.	Selected Financial Data	40
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risks	61
	Item 8.	Financial Statements and Supplementary Data	63
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	99
	Item 9A.	Controls and Procedures	99
	Item 9B.	Other Information	102
PART III.	Item 10.	Directors, Executive Officers and Corporate Governance	102
	Item 11.	Executive Compensation	102
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	103
	Item 13.	Certain Relationships and Related Transactions and Director Independence	103
	Item 14.	Principal Accountant Fees and Services	103
PART IV.	Item 15.	Exhibits and Financial Statement Schedules	104
SIGNATURES			106

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TRADEMARKS

The following terms are our trademarks and may be used in this report:  ActiV.A.C.®, AirMaxxis®, AtmosAir®, AtmosAir® with SATÔ, BariAir®, BariatricSupportÔ, BariKare®, BariMaxx® II, BioDyne®, Dri-Flo®, DynaPulse®, EZ LiftÔ, FirstStep®, FirstStep® AdvantageÔ, First Step All in One®, FirstStep® PlusÔ, FirstStep Select®, FirstStep Select® Heavy DutyÔ, FluidAir®, FluidAir Elite®, GranuFoam®, InterCell®, InfoV.A.C.®, InstaFlate®, KCI®, KCI The Clinical Advantage®, KinAir® IV, KinAir MedSurg®, KinAir MedSurg® PulseÔ, KCI Express®, Kinetic Concepts®, Kinetic TherapyÔ, MaxxAir ETS®, Maxxis® 400, ParaDyne®, PediDyne®, PlexiPulse®, RIK®, RotoProne®, RotoRest®, RotoRest® Delta, Seal Check®, SensaT.R.A.C.Ô, T.R.A.C.®, TheraKair®, TheraKair Visio®, TheraPulse® ATPÔ,  TheraRest®, TheraRest SMS®, TriaDyne® II, TriaDyne Proventa®, TriCell®, V.A.C.®, V.A.C. ATS®, V.A.C. Freedom®, V.A.C.® Therapy, The V.A.C.® System, V.A.C. GranuFoam Silver®, V.A.C. Instill®, V.A.C.® WhiteFoam, and V.A.C. ® WRNÔ.  All other trademarks appearing in this report are the property of their holders.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

·     projections of revenues, expenditures, earnings, or other financial items;

·     expectations for third-party and governmental audits, investigations, claims, product approvals and reimbursement;

·     the plans, strategies and objectives of management for future operations;

·     expectation of market size and market acceptance or penetration of the products and services we offer;

·     the effects of any patent litigation on our business;

·     dependence on new technology;

·     expectations for the outcomes of our clinical trials;

·     attracting and retaining customers;

·     competition in our markets;

·     inherent risks associated with our international business operations;

·     material changes or shortages in the sources of our supplies;

·     the timing and amount of future equity compensation expenses;

·     productivity of our sales force;

·     future economic conditions or performance, including seasonality;

·     fluctuations in foreign currency exchange rates;

·     changes in effective tax rates or tax audits;

·     changes in patient demographics;

·     estimated charges for compensation or otherwise; and

·     any statements of assumptions underlying any of the foregoing.

These forward-looking statements are only predictions, not historical facts, and involve certain risks and uncertainties, as well as assumptions. Actual results, levels of activity, performance, achievements and events could differ materially from those stated, anticipated or implied by such forward-looking statements. The factors that could contribute to such differences include those discussed under the caption "Risk Factors." You should consider each of the risk factors and uncertainties under the caption "Risk Factors" among other things, in evaluating our prospects and future financial performance. The occurrence of the events described in the risk factors could harm our business, results of operations and financial condition. These forward-looking statements are made as of the date of this report. We disclaim any obligation to update or alter these forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

ITEM 1.     BUSINESS

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.

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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.

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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.

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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.

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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.

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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.

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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.

The following table sets forth, for the periods indicated, the percentage of revenue derived from different types of payers:

	2007			2006			2005
Acute and extended care organizations		67.4	%		67.9	%		66.9	%
Third-party payers		32.6	%		32.1	%		33.1	%

Employees

As of January 31, 2008, we had approximately 6,400 employees.  Our corporate, manufacturing, finance, research and development and administrative functions are performed by approximately 1,000 employees who are located in San Antonio, Texas. Our USA division had approximately 3,500 employees, including approximately 1,300 employees located in San Antonio who perform functions associated with customer service and sales administration. As of December 31, 2007, we had approximately 2,000 employees in our International division. Approximately 85 employees in our France subsidiary are represented by a workers' council, pursuant to applicable industrial relations laws. Our employees are not otherwise represented by labor unions or workers' councils and we consider our employee relations to be good.

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Corporate Organization

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

With approximately 3,500 employees as of December 31, 2007, our USA division serves the domestic acute care, extended care and homecare markets with the full range of our products and services. The domestic division distributes our medical devices and therapeutic support systems to over 4,600 acute care hospitals and approximately 9,200 extended care organizations and also directly serves the homecare market through our service center network. Our USA division accounted for approximately 71.4%, 72.5% and 73.3% of our total revenue in the years ended December 31, 2007, 2006 and 2005, respectively.

As of December 31, 2007, our International division had direct operations in 18 foreign countries including Germany, Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland, Australia, Italy, Denmark, Sweden, Norway, Ireland, Belgium, Spain, New Zealand, Singapore and South Africa. The International division distributes our medical devices and therapeutic support systems through a network of 67 service centers to approximately 4,400 acute care hospitals. Our international corporate office is located in Amsterdam, the Netherlands. We have international manufacturing and engineering operations based in the United Kingdom, Ireland and Belgium.  We also have research and development personnel in Japan who oversee our clinical studies and developments in that country.  In addition, our International division serves the demands of a growing global market through relationships with approximately 40 independent distributors in Latin America, the Middle East, Eastern Europe and Asia. The International division consists of approximately 2,000 employees who are responsible for all sales, service and administrative functions within the various countries we serve. Our International division accounted for approximately 28.6%, 27.5% and 26.7% of our total revenue in the years ended December 31, 2007, 2006 and 2005, respectively.

Sales and Marketing Organization

Our worldwide sales organization consists of approximately 2,000 individuals and is organized by care setting. Since physicians and nurses are critical to the adoption and use of advanced medical systems, a major element of the sales force's responsibility is to educate and train these medical practitioners in the application of our products, including the specific knowledge necessary for optimal clinical outcomes and reducing the cost of patient care. We have approximately 600 clinical consultants, all of whom are health care professionals, whose principal responsibilities are to make product rounds, consult on complex cases and assist organizations and home health agencies in developing their patient-care protocols. Our clinicians educate the hospital, long-term care organization or home health agency staff on the use of our products. In addition, we employ approximately 200 specialists who consult with our customers regarding the often demanding and complex paperwork required by Medicare and private insurance companies. In fulfilling the paperwork requirements, these specialists enhance the overall productivity of our sales force.

Our domestic sales organization includes approximately 1,300 employees.  Effective February 2008, our domestic sales organization was realigned to provide for a dedicated sales force for our therapeutic support systems separate from our V.A.C. Therapy products.  Our international sales organization includes approximately 700 employees in 18 foreign countries. In each foreign market where we have a presence, we sell our products through our direct sales force or through local distributors with local expertise.

Selling, marketing and advertising expenses in each of the periods below were as follows (dollars in thousands):

	Year ended December 31,
	2007			2006			2005
Selling	$	273,127		$	237,440		$	197,040
Percentage of total revenue		17.0	%		17.3	%		16.3	%
Marketing	$	57,297		$	58,938		$	55,507
Percentage of total revenue		3.6	%		4.3	%		4.6	%
Advertising	$	8,090		$	7,406		$	9,574
Percentage of total revenue		0.5	%		0.5	%		0.8	%

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Service Organization

Our USA division has a national 24-hour, seven day-a-week customer service communications system, which allows us to quickly and efficiently respond to our customers' needs. In 2005, we launched KCI Express, our secure and encrypted website allowing customers in acute care, extended care and homecare to transact business with KCI directly on the web.  Our website, www.kciexpress.com, provides KCI’s customers self-service applications designed to meet the specific needs in their care setting.  Our USA division distributes our medical devices and therapeutic support systems through a network of 141 service centers.  Our USA division's network gives us the ability to deliver our products to any major Level I domestic trauma center within hours.  Our International division distributes our medical devices and therapeutic support systems through a network of 67 service centers.  These international service centers are strategically located within the regions and countries where we market our products and provide services similar to those provided in the U.S. market, but vary by country to ensure we meet the unique needs of our international customers.

In addition to delivery, pick-up and technical support services, our service organization cleans, disinfects and reconditions products between rentals.  To ensure availability when products are needed, the service organization manages our rental fleet of approximately 145,000 units, deploying units to meet individual service center demand patterns while maintaining high levels of rental asset utilization.  Services are provided by approximately 1,000 employees in the United States and 600 employees internationally.

Research and Development

We have a successful track record of pioneering advanced wound care and therapeutic support system technologies through new product introductions and significant enhancements to existing products. Our development and commercialization of V.A.C. Therapy systems, including proprietary disposable dressings, has established KCI as a leader in advanced wound care. Our therapeutic support systems technology originated with the introduction of the RotoRest bed over 30 years ago. Since that time, we have continued to develop and commercialize a broad spectrum of therapeutic support systems which have significantly enhanced patient care. More recently, we have developed a broad portfolio of bariatric surface products to improve the care of obese patients and have introduced two new sophisticated critical care therapies.  Additionally, we continue to strengthen our medical capabilities and commitments to clinical research that continues to demonstrate the benefits of our technologies.  Our research and development activities are managed by approximately 200 employees worldwide.

Our primary focus for innovation is to introduce new technologies that expand our current product portfolio into different clinical settings, explore novel opportunities across the entire spectrum of wound care, and evaluate opportunities that leverage our expertise in critical care and in a variety of other clinical disciplines to expand product offerings beyond wound care that address significant unmet needs of our customers and their patients.  In addition, we strive to improve the value proposition of our products by increasing their clinical and economic benefits and by improving their operational efficiency.  Significant investments in our 2007 research and development included:

·     new, advanced wound healing systems and dressings tailored to the needs of different wound types and care settings;

·     new technologies in wound healing and tissue repair;

·     new applications of V.A.C. Therapy technology and enhanced therapeutic effectiveness through improved understanding of the V.A.C. Therapy systems' various mechanisms of action; and

·     initiation, execution or support of a number of well-designed randomized-controlled clinical trials, registries, development studies, and investigator initiated trials.

Expenditures for research and development, including clinical trials, in each of the periods below, were as follows (dollars in thousands):

	Year ended December 31,
	2007			2006			2005
Research and development spending	$	50,532		$	36,694		$	30,614
Percentage of total revenue		3.1	%		2.7	%		2.5	%

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Patents, Trademarks and Licenses

To protect our proprietary rights in our products, new developments, improvements and inventions, we rely on a combination of patents, copyrights, trademarks, trade secrets and other laws, and contractual restrictions on disclosure, copying and transfer of title, including confidentiality agreements with vendors, strategic partners, co-developers, employees, consultants and other third parties.  We seek patent protection in the United States and abroad.  We have approximately 175 issued U.S. patents relating to our existing and prospective lines of therapeutic medical devices.  We also have approximately 135 pending U.S. patent applications.  Many of our specialized beds, medical devices and services are offered under proprietary trademarks and service marks.  We have approximately 70 trademarks and service marks registered with the United States Patent and Trademark Office.  We also have agreements with third parties that provide for the licensing of patented and proprietary technology.

We have patents relating to our current V.A.C. Therapy products, in the form of owned and licensed patents, including approximately 50 issued U.S. patents (including 14 design patents) and approximately 90 U.S. patent applications pending.  Our worldwide patent portfolio (including owned and licensed patent assets) relating to current and prospective technologies in the field of V.A.C. Therapy includes approximately 400 issued patents and more than 300 pending patent applications, including protection in Europe, Canada, Australia, Japan and the United States.  Most of the V.A.C. patents in our patent portfolio have a term of 20 years from their date of priority.  The V.A.C. Therapy utility patents, which relate to our basic V.A.C. Therapy, extend through late 2012 in certain international markets and through the middle of 2014 in the U.S.  We also have multiple longer-term patent filings directed to cover unique central systems, dressings and other improvements of the V.A.C. Therapy system.

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

We are subject to legal proceedings involving our patents that are significant to our business.  These proceedings are discussed subsequently in "Item 3: Legal Proceedings."

Manufacturing

Our manufacturing processes for V.A.C. Therapy systems and therapeutic support systems, including mattress replacement systems and overlays, involve producing final assemblies in accordance with a master production plan. Assembly of our products is accomplished using (1) metal parts that are fabricated, machined, and finished internally, (2) fabric that is cut and sewn internally and externally, and (3) plastics, electronics and other component parts that are purchased from outside suppliers. Component parts and materials are obtained from industrial distributors, original equipment manufacturers and contract manufacturers. The majority of parts and materials are readily available in the open market (steel, aluminum, plastics, fabric, etc.) for which price volatility is low. The manufacturing process and quality system are in compliance with the International Organization for Standardization, specifically ISO 13485:2003, and the United States Food and Drug Administration’s Quality System Regulation, 21 CFR 820.

We contract for the manufacture of V.A.C. disposable supplies through Avail Medical Products, Inc., a leading contract manufacturer of sterile medical products.  Effective November 30, 2007, we entered into a three-year Toll Manufacturing Agreement with Avail through November 2010, which is renewable annually for an additional twelve-month period in November of each year, unless either party gives notice to the contrary.  The Agreement replaces the Amended and Restated Manufacturing Agreement between KCI and Avail, dated December 18, 2002.  Under the new agreement, we will have title to the raw materials used to manufacture our disposable supplies and will retain title of all disposables inventory throughout the manufacturing process.  Under the previous agreement, title to the raw materials and work-in-process inventory was retained by Avail during the manufacturing process.  Approximately 24.1% of our total revenue for the year ended December 31, 2007 was generated from the sale of these disposable supplies.  The terms of the supply agreement provide that key indicators be provided to us that would alert us to Avail's inability to perform under the agreement.  We maintain an inventory of disposables sufficient to support our business for approximately seven weeks in the United States and nine weeks in Europe.  However, in the event that we are unable to replace a shortfall in supply, our revenue could be negatively impacted in the short term.

13

Working Capital Management

We maintain inventory parts, supplies and V.A.C. disposables to support customer needs in our service centers, manufacturing facilities and supplier distribution warehouses. We also maintain inventory for conversion to our surface and V.A.C. rental fleet in our manufacturing facilities. Our V.A.C. rental equipment cannot be used without the disposables that support the V.A.C. Therapy systems. As such, we generally ship disposable inventory directly from our supplier to the customer.

Our payment terms with acute care and extended care organizations are consistent with industry standards and generally provide for payment within 30 days of invoice.  Our payment terms with third-party payers, including Medicare and private insurance, are consistent with industry standards and are regulated by contract and state statute and generally vary from 30 to 45 days.  A portion of our receivables relate to unbilled revenues arising in the normal course of business.  A portion of our revenues remain unbilled for a period of time due to monthly billing cycles requested by our acute care or extended care organization customers or due to our internal paperwork processing and compliance procedures regarding billing third-party payers.

Competition

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

Historically, our V.A.C. Therapy systems have competed primarily with traditional wound care dressings, other advanced wound care dressings (hydrogels, hydrocolloids, alginates), skin substitutes, products containing growth factors and other medical devices used for wound care.  Many of these methods can be used to compete with V.A.C. Therapy or as adjunctive therapies which may complement V.A.C. Therapy.  For example, caregivers may use one of our V.A.C. Therapy systems in order to reduce the wound size and create a healthy wound bed, and then use a skin substitute to manage the wound to final closure.

We believe our V.A.C. Therapy system is well-positioned to compete effectively in advanced wound care, based on the clinical efficacy and superior outcomes of V.A.C. Therapy, as supported by the large body of evidence we have collected, our breadth and scope of customer relationships and our extensive sales and service infrastructure.  As a result of the success of our V.A.C. Therapy systems, a number of companies have announced or introduced products similar to or designed to mimic our V.A.C. Therapy systems and others may do so in the future.  If competitors are able to successfully develop technologies that do not infringe our intellectual property rights and obtain FDA clearance and reimbursement, we could face increasing competition in the advanced wound care business.   Over time, as our patents in the V.A.C. field begin to expire, we expect increased competition with products adopting the basic V.A.C. technologies.

In addition to direct competition from companies in the advanced wound care market, health care organizations may from time to time attempt to assemble NPWT devices from standard hospital supplies.  While we believe that many possible NPWT device configurations by competitors or health care organizations would infringe our intellectual property rights, we may be unable to enforce our rights against the sale or use of such potentially competing products, which could harm our ability to compete and could adversely affect our business.

With respect to therapeutic support systems for treatment of pulmonary complications in the ICU, wound treatment and prevention, our primary competitors are Hill-Rom Company, Huntleigh Healthcare and Stryker Corporation. In the bariatric market, our primary competitors are Hill-Rom Company, Sizewise Rentals, Stryker Corporation and Huntleigh Healthcare. We also compete on a regional, local and market segment level with a number of other companies.

Reimbursement

Our products are rented and sold principally to hospitals, extended care organizations and directly to patients in the home who receive payment coverage for the products and services they utilize from various public and private third-party payers, including government-funded programs, such as the Medicare and Medicaid programs in the U.S. and other publicly-funded health plans in foreign jurisdictions.  As a result, the demand and payment for our products are dependent, in part, on the reimbursement policies of these payers.  The manner in which reimbursement is sought and obtained for any of our products varies based upon the type of payer involved and the setting to which the product is furnished and in which it is utilized by patients.  We believe that government and private insurance efforts to contain or reduce health care costs are likely to continue. These trends may lead third-party payers to deny or limit reimbursement for our products, which could negatively impact the pricing and profitability of, or demand for, our products.

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Hospital Setting

Acute care hospitals in the U.S. and in most of the countries where we conduct business are generally reimbursed for the treatment of patients by governmental healthcare programs or private insurance.  In the U.S., Medicare reimburses acute care hospitals for inpatient operating costs based upon prospectively determined rates. Under the inpatient prospective payment system, or IPPS, acute care hospitals receive a predetermined payment rate for each hospital discharge.  The fixed payment amount is based upon each patient’s diagnosis-related group, or DRG.  Every DRG is assigned a payment rate based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis.  The DRG payment rates are based upon historic national average costs and do not consider the actual costs incurred by a hospital in providing care.  Certain additional or "outlier" payments may be made to a hospital for cases involving unusually high costs or lengths of stay. Accordingly, U.S. acute care hospitals generally do not receive direct Medicare reimbursement under the IPPS for the distinct costs incurred in purchasing or renting our products. Rather, reimbursement for these costs must come from within the DRG payments made to hospitals for the treatment of Medicare-eligible inpatients who utilize the products. U.S. long-term care and rehabilitation organizations are now also paid under a prospective payment system, or PPS, rate that does not directly account for all actual services rendered.  Because PPS payments are based on predetermined rates, and may be less than a facility’s actual costs in furnishing care, organizations have incentives to lower their inpatient operating costs by utilizing equipment and supplies, such as our products, that will reduce the length of inpatient stays, decrease labor or otherwise lower their costs. Such facilities are also incentivized to pay as little as possible to procure such beneficial equipment and supplies.  In the hospital setting, we generally contract directly with health care facilities, or group purchasing organizations representing such facilities, for the rental or sale of our products at rates which are negotiated independently of the reimbursement amounts the facilities receive for the treatment of patients using our products.

From time to time, U.S. and foreign governmental payers make changes to the way they reimburse hospitals and other facilities for the treatment of patients.  For example, in August 2006, CMS finalized new provisions for the hospital IPPS for the 2007 federal fiscal year, which included a significant change in the manner in which it determines the underlying relative weights used to calculate the DRG payment amount.  For federal fiscal year 2007, CMS began to phase-in the use of hospital costs rather than hospital charges for the DRG relative weight determination.  This change is to phase-in ratably over three years with the full phase-in to be completed in federal fiscal year 2009.  On August 1, 2007, CMS issued a final rule revising Medicare payment and policy under the hospital IPPS for federal fiscal year 2008.  These changes, which were first proposed in April 2007, will restructure the inpatient DRGs to account more fully for the severity of patient illness.  Specifically, the final rule creates 745 new severity-adjusted DRGs to replace the current 538 DRGs.  As a result, payments are expected to increase for hospitals serving more severely ill patients and decrease for those serving patients who are less severely ill.  These changes will be phased in over two years.  These changes or others that may be adopted in the U.S. or internationally could place downward pressure on prices paid by acute care hospitals to KCI and adversely affect the demand for our products used for inpatient services.

Skilled Nursing Facility Setting

We provide products to patients in skilled nursing facilities and long term care centers in the U.S. and in most of the countries where we conduct business.  In this care setting, KCI generally receives payment either directly from the facility pursuant to a negotiated agreement, from a patient’s private insurance carrier, or directly from the patient.  In many cases, these facilities are reimbursed directly by governmental healthcare programs or private insurance similar to acute care facilities, as described above.  In the U.S., Medicare reimbursement for skilled nursing facilities is conducted under a prospective payment system, where Medicare patients are assigned categories upon admission based upon the medical services and functional support the patient is expected to require.  The facility then receives a prospectively determined daily payment based upon the category assigned to each Medicare patient. These payments are intended generally to cover all inpatient services for Medicare patients, including routine nursing care, capital-related costs associated with the inpatient stay and ancillary services.  Many U.S. state Medicaid programs reimburse skilled nursing facilities in a similar manner, while some Medicaid programs may provide additional reimbursement to facilities based on the actual care provided to patients.  Because many skilled nursing facilities and other long term care centers receive fixed reimbursement amounts based on assigned patient categories, rather than the actual cost of care, these facilities face increasing cost pressures due to rising health care costs.

15

Home Setting

In the home care setting, we generally provide products directly to patients and receive direct reimbursement from governmental healthcare programs, private insurance, or the patient.  The demand for our products in the home is highly dependent upon the coverage and reimbursement determinations of governmental and private insurance payers.  In the U.S., we provide products to Medicare beneficiaries under the Part B program, which reimburses beneficiaries, or suppliers accepting an assignment of the beneficiary's Part B benefit, for the purchase or rental of DME for use in the beneficiary's home or a home for the aged.  As long as we continue to provide our products to Medicare beneficiaries for use in the homecare setting and the Medicare Part B coverage criteria are met, our homecare products are reimbursed under the Medicare DME benefit.  Pursuant to the fee schedule payment methodology for this category, Medicare pays a monthly rental fee equal to 80% of the established allowable charge for the item. The patient (or his or her supplemental insurer) is responsible for the remaining 20%.  In contrast to the hospital and skilled nursing facility settings where we bill and collect from the inpatient facilities, KCI generally bills the Medicare program and other insurers directly, on an assignment basis, for the covered homecare items we furnish.  This direct billing, including billing to federal health care programs, raises additional potential liabilities. See “Government Regulation –Fraud and Abuse Laws.”

Our V.A.C. Therapy Systems received Medicare Part B reimbursement coverage in 2000.  Since that time, usage of V.A.C. Therapy Systems in the home has greatly increased as U.S. insurers have adopted coverage criteria similar to Medicare standards.  We have received governmental home care reimbursement in a number of countries outside the U.S. where we conduct business and we are actively seeking reimbursement and coverage in other countries.  Receiving and increasing reimbursement levels for our products is essential to maintain demand for our products.  Any adverse determinations or reductions in governmental reimbursement for our products in the U.S. or internationally could negatively affect the demand for our products.

In addition, governmental programs frequently adopt new reimbursement rules and practices that may affect our business.  In 2003, CMS issued a final rule implementing an "inherent reasonableness" authority, which allows CMS and its administrative contractors to adjust reimbursement amounts for durable medical equipment covered under Medicare Part B by up to 15% per year when the existing fee schedule payment amount for an item or service is determined to be grossly excessive or grossly deficient.  The regulation lists factors that may be used by CMS and the administrative contractors to determine whether an existing reimbursement rate is grossly excessive or grossly deficient and to determine what is a realistic and equitable payment amount.  CMS may make a larger adjustment each year if they undertake prescribed procedures for determining the appropriate payment amount for a particular service.  Using this authority, CMS and the administrative contractors could reduce KCI’s reimbursement levels for its home care products covered by Medicare Part B.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA, provides for revisions to the manner in which payment amounts are to be calculated over the next five years (and thereafter). The MMA contains revisions to payment methodologies and other standards for items of DME. These revisions could have a direct impact on our business. Under the MMA, the reimbursement amounts for DME, including V.A.C. Therapy systems, will no longer be increased on an annual basis through 2008.  In the MMA, Congress also directed CMS to establish a competitive bidding program to pay for certain items of durable medical equipment, prosthetics, orthotics and supply, or DMEPOS, beginning in 2007.  CMS formally launched the DMEPOS competitive bidding program through publication of a final rule in April 2007, under which suppliers will be required to be successful bidders and meet certain program standards in order to supply selected DMEPOS items to Medicare beneficiaries in certain designated geographic areas.  Competitive bidding is being phased in both by geographical area and by product category.  In 2008, CMS will operate competitive bidding areas, or CBAs, within 10 of the nation’s largest metropolitan areas, excluding New York, Los Angeles, and Chicago.  CMS has included Negative Pressure Wound Therapy, or NPWT, as one of the product categories in the first phase of competitive bidding.  Suppliers that bid to furnish a particular product category in a CBA must submit a bid for each item within the product category.  All bids submitted must be at or below the fee schedule amount for the item at the time the bid is made, thereby ensuring that the competitive bidding program will result in lower Medicare reimbursement levels for DMEPOS items furnished within the CBAs.  Once CMS selects the contract suppliers for a particular product category, CMS will establish single payment amounts for each item within the product category.  The single payment amount is based on the median of the winning suppliers’ bids for each of the selected items in the CBA.  Therefore, a winning supplier is not guaranteed reimbursement at its actual bid amount for an item; rather, approximately half of the winning suppliers who opt to become contract suppliers will be reimbursed at a lower rate than their bid to furnish a particular item, while the other half will receive reimbursement in excess of their bid amount.  Those bidders which are awarded contracts and agree to become contract suppliers must accept reimbursement from CMS at 80% of the item’s single payment amount for the CBA in which the beneficiary maintains a permanent residence; the beneficiary is responsible for the 20% copayment.  It is possible, however, that CMS will not award any contracts for certain product categories in one or more of the CBAs.  In such case, those products would continue to be reimbursed by Medicare at the current fee schedule pricing.

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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.

Market Outlook

Reimbursement of Healthcare Costs and Healthcare Reform

The demand for our products is highly dependent on the policies of third-party payers such as Medicare, Medicaid, private insurance and managed care organizations that reimburse us for the sale and rental of our products.  If coverage or payment policies of these third-party payers are revised in light of increased efforts to control health care spending or otherwise, the amount we may be reimbursed or the demand for our products may decrease.

The importance of payer coverage policies has been demonstrated by our experience with our V.A.C. technology in the homecare setting. On October 1, 2000, a Medicare Part B policy was approved, which provided for reimbursement codes, an associated coverage policy and allowable rates for the V.A.C. Therapy systems and V.A.C. disposable products in the homecare setting.  The policy facilitated claims processing, permitted electronic claims submissions and created a more uniform claims review process.  Because many payers look to Medicare for guidance in coverage, a specific Medicare policy is often relied upon by other payers.  In contrast with this United States-based experience, coverage in several European countries has been limited to case-by-case approvals until the appropriate approvals have been granted by the government-sponsored approval body.  Switzerland approved homecare reimbursement in 2004, which has opened the market for broad use in the home.  In February 2008, the German Ministry of Health approved a clinical study, including paid placements, which will allow selected patients to receive V.A.C. Therapy in the home.  During the study period, KCI will receive reimbursement from German health insurance funds for patients participating in this study.  In other countries, such as Austria and the Netherlands, coverage by insurance companies is widespread, even without formal government approval.

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

In the United States, health care reform legislation will most likely remain focused on reducing the cost of health care. We believe that efforts by private payers to contain costs through managed care and other methods will continue in the future as efforts to reform the health care system continue.  Current methods to contain health care costs include the MMA revisions that cease increases to DME fee schedule reimbursement through 2008 and the forthcoming Medicare DMEPOS competitive bidding program, each of which could impact reimbursement of our homecare products.

From time to time, CMS publishes reimbursement policies and rates that may unfavorably affect the reimbursement and market for our products. In the past, our V.A.C. Therapy systems and disposables were the only devices assigned to the CMS reimbursement codes for NPWT.  Beginning in 2005, CMS assigned the same NPWT reimbursement codes to other devices marketed to compete with V.A.C. Therapy systems.  Also, CMS may reduce reimbursement rates on NPWT or its various components, which would reduce revenue.  As a result of recent CMS decisions, there has been an increase in the development of products designed to compete with V.A.C. Therapy systems and inquiries from other third-party payers regarding reimbursement levels.  Both increased competition and/or reduced reimbursement could materially and adversely affect our operating results.

The assignment of CMS reimbursement codes to competing products also increases the likelihood of the NPWT product category being included in future rounds of the DMEPOS Medicare competitive bidding program, which could negatively impact KCI’s revenue from products that are reimbursed by Medicare in the homecare setting.  NPWT has been designated as a product category for the first two phases of the competitive bidding program.

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The reimbursement of our products is also subject to review by government contractors that administer payments under federal health care programs, including Durable Medical Equipment Medicare Administrative Contractors, or DMACs, and Program Safeguard Contractors, or PSCs. The DMACs have the authority to make local or regional determinations and policies for coverage and payment of DME used in the home.  The local coverage determinations published by the DMACs define coverage criteria, payment rules and documentation that will be applied to DMEPOS claims processed by the DMACs.  Adverse interpretation or application of DMAC coverage policies, adverse administrative coverage determinations or changes in coverage policies can lead to denials of our claims for payment and/or requests to recoup alleged overpayments made to us for our products. Such adverse determinations and changes can often be challenged only through an administrative appeals process.

Consolidation of Purchasing Entities

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

Government Regulation

United States

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

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

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

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Manufacturers of medical devices for marketing in the United States are required to adhere to applicable regulations, including the Quality System Regulation, or QSR, (formerly the Good Manufacturing Practice regulation), which imposes design, testing, control and documentation requirements. Manufacturers must also comply with the Medical Device Reporting, or MDR, regulation, which generally requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur. We are subject to routine inspection by the FDA and certain state agencies for compliance with QSR requirements, MDR requirements and other applicable regulations.  Recently, CMS announced that all DMEPOS suppliers need to be accredited by a nationally recognized accreditation body by September 30, 2009 in order to maintain Medicare billing privileges.  In December 2005, KCI received accreditation from the Joint Commission on Accreditation of Health Care Organizations, or Joint Commission.  Under this accreditation process, KCI will be reevaluated every three years and is subject to routine unannounced inspections by the Joint Commissionto ensure continued compliance with standards.

Fraud and Abuse Laws

There are numerous rules and requirements governing the submission of claims for payment to federal health care programs.  If we fail to adhere to these requirements, the government could allege that claims we have submitted for payment violate the federal False Claims Act, or FCA. The FCA generally prohibits the known filing of a false or fraudulent claim for payment to the United States government or the known use of a false record or statement to obtain payment on a false or fraudulent claim paid by conspiring to defraud the United States government by getting a false or fraudulent claim allowed or paid. There are both civil and criminal provisions of the FCA. Violation of the criminal FCA can result in imprisonment of up to five years, a fine of up to $250,000 for an individual or $500,000 for an organization, up to three times the amount of the improper payment and/or exclusion from participating in federal and state health care programs.

Under separate statutes, submission of claims for payment or causing such claims to be submitted that are "not provided as claimed" may lead to civil monetary penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded state health programs.  These false claims statutes include, but are not limited to, the federal FCA.  When an entity is determined to have violated the civil FCA, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim.  A private party may file a suit on behalf of the government under the Civil FCA, known as a “qui tam” or “whistle blower” lawsuit.  The ability of private individuals to collect damages under these lawsuits significantly increase the possibility that a health care provider may be challenged under the Civil FCA.  In addition, recently passed Federal legislation provides incentives for states to enact their own false claims statutes or strengthen their existing false claims statutes.  A significant number of states have enacted their own false claims statutes and several states have false claims legislation pending.

Qui tam actions have increased significantly in recent years causing greater numbers of health care companies to have to defend false claim actions, pay fines or be excluded from the Medicare, Medicaid or other federal or state health care programs as a result of an investigation arising out of such action.  Because we directly submit claims for payment for certain of our products to federal and state health care programs, we are subject to these false claims statutes, and, therefore, could become subject to "qui tam" or other false claims actions.  Imposition of such penalties or exclusions would result in a significant loss of reimbursement and could have a material adverse effect on our financial condition.

Recently, the federal government has significantly increased investigations of medical device manufacturers with regard to alleged kickbacks to physicians who use and prescribe their products.  The federal Anti-Kickback Statute is a criminal statute that prohibits the offering, payment, solicitation or receipt of remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, for (1) the referral of patients or arranging for the referral of patients to receive services for which payment may be made in whole or in part under a federal or state health care program; or (2) the purchase, lease, order, or arranging for the purchase, lease or order of any good, facility, service or item for which payment may be made under a federal or state health care program. Generally, courts have taken a broad interpretation of the scope of the Anti-Kickback Statute. The criminal sanctions for a conviction under the Anti-Kickback Statute are imprisonment for not more than five years, a fine of not more than $25,000 or both, for each incident or offense, although the fine may be increased to $250,000 for individuals and $500,000 for organizations. If a party is convicted of a criminal offense related to participation in the Medicare program or any state health care program, or is convicted of a felony relating to health care fraud, the secretary of the United States Department of Health and Human Services is required to bar the party from participation in federal health care programs and to notify the appropriate state agencies to bar the individual from participation in state health care programs. Imposition of such penalties or exclusions would result in a significant loss of reimbursement and could have a material adverse effect on our financial condition and results of operations.

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Federal authorities have also increased enforcement with regard to the federal physician self-referral and payment prohibitions, commonly referred to as the Stark Law. The Stark Law generally forbids, absent qualifying for one of a few named exceptions, a physician from making referrals for the furnishing of any "designated health services," for which payment may be made under the Medicare or Medicaid programs, to any "entity" with which the physician (or an immediate family member) has a "financial relationship." DME items, including our homecare products, are designated health services. Our arrangements with physicians who prescribe our products, including arrangements whereby physicians serve as speakers and consultants for KCI, our training programs and our sales and marketing events (including meals, travel and accommodations associated therewith), could be deemed to create a "financial relationship" under the Stark Law, in which case, unless an applicable exception is met, the physician may not order Medicare or Medicaid covered DME from us, and we may not present a claim for Medicare or Medicaid payment for such items. Penalties for Stark Law violations include denial of payment, civil monetary penalties of up to $15,000 for each illegal referral and up to $100,000 for any scheme designed to circumvent the Stark Law requirements. Prosecution under the Stark Law could have a material adverse impact on our financial condition and results of operations.

In some cases, Anti-Kickback Statute or Stark Law violations may also be prosecuted under the FCA, which increases potential liability. In these cases, federal authorities and whistleblowers have alleged that items and services that were furnished in furtherance of an Anti-Kickback Statute or Stark Law violation are not billable to federal or state health care programs and that, to the extent that such claims for payment are submitted, they are false claims within the meaning of the FCA. Even the assertion of a violation under any of these provisions could have a material adverse effect on our financial condition and results of operations.

Recent federal cuts to state administered health care programs, particularly Medicaid, have also increased enforcement activity at the state level under both federal and state laws.  In July 2006, CMS released its initial comprehensive Medicaid Integrity Plan, a national strategy to detect and prevent Medicaid fraud and abuse.  This new program will work to identify, recover and prevent inappropriate Medicaid payments through increased review of suppliers of Medicaid services.  KCI could be subjected to such reviews in any number of states.  Such reviews could result in demands for refunds or assessments of penalties against KCI, which could have a material adverse impact on our financial condition and results of operations.

In addition, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, defined two new federal crimes: (i) health care fraud and (ii) false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing or attempting to execute a scheme or artifice to defraud any health care benefit program, including private payers. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items or services. This statute applies to any health benefit plan, not just Medicare and Medicaid.  Violations of these statutes may result in fines, imprisonment, or exclusion from government health care programs.  Additionally, HIPAA granted expanded enforcement authority to the U.S. Department of Health and Human Services, or DHHS, and the U.S. Department of Justice, or DOJ, and provided enhanced resources to support the activities and responsibilities of the DHHS's Office of the Inspector General, or OIG, and the DOJ by authorizing large increases in funding for investigating fraud and abuse violations relating to health care delivery and payment.

The most recent publication of the OIG’s Work Plan for 2008 includes several projects that could affect our business. Specifically, the OIG indicated its initiation of a plan to compare acquisition prices for NPWT pumps and supplies by suppliers against the amount Medicare reimburses such suppliers for those items.  OIG has also reiterated that it plans to continue to review DME suppliers’ use of certain claims modifiers to determine whether the underlying claims made appropriate use of such modifiers when billing to Medicare. Under the Medicare program, a DME supplier may use these modifiers to indicate that it has the appropriate documentation on file to support its claim for payment. Upon request, the supplier may be required to provide this documentation; however, recent reviews by Medicare regional contractors have indicated that some suppliers have been unable to furnish this information. The OIG intends to continue its work to determine the appropriateness of Medicare payments for certain DME items, including wound care equipment, by assessing whether the suppliers’ documentation supports the claim, whether the item was medically necessary, and/or whether the beneficiary actually received the item.  The OIG also plans to review DME that is furnished to patients who are receiving home health services to determine whether the DME is properly billed separately from the home health agency’s reimbursement.  In the event that these initiatives result in any assessments respecting KCI claims, we could be subject to material refunds, recoupments or penalties.  Such initiatives could also lead to further changes to reimbursement or documentation requirements for our products, which could be costly to administer.

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

We are also subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay, or authorize the payment of anything of value to any foreign government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity.  Violations of the FCPA may result in significant fines and penalties.

Claims Audits

The industry in which we operate is generally characterized by long collection cycles for accounts receivable due to complex and time-consuming documentation requirements for obtaining reimbursement from private and governmental third-party payers. Such protracted collection cycles can lead to delays in obtaining reimbursement. Moreover, regional Medicare contractors periodically conduct pre-payment and post-payment reviews and other audits of paid claims, which can further lengthen the collection cycle.  Medicare and Medicaid contractors are under increasing pressure to scrutinize health care claims more closely. Reviews and/or similar audits or investigations of our claims and related documentation could result in denials of claims for payment submitted by us.

We are subject to periodic technology assessments and claims audits by governmental third-party payers in the U.S. and internationally.  In the U.S., the OIG has initiated various studies and technology assessments on NPWT efficacy and billing practices during 2006, 2007 and 2008.  The OIG regularly evaluates effectiveness and efficiency of a wide range of programs of DHHS pursuant to an annual work plan.  We routinely cooperate with requests for information from the OIG and other governmental agencies by supplying billing records and other relevant information.  In the event we are unable to satisfy inquiries by governmental payers in the U.S. or internationally in connection with ongoing or future assessments and studies, our billings could be subject to claims audits and recoupment actions, and the results of such studies could factor into future coverage and reimbursement determinations for our products by U.S. and international governmental payers.

In June 2007, the Medicare Region D contractor notified KCI of a post-payment audit of claims paid during 2006.  The DMAC requested information on 250 NPWT claims for patients treated with KCI’s V.A.C. Therapy.  In addition to KCI’s records, the DMAC requested relevant medical records supporting the medical necessity of the V.A.C. and related supplies and quantities being billed.  We submitted all of the requested documentation in a timely manner.  The DMAC subsequently made a minor recoupment for the exceptions noted during its review.

We are currently responding to requests from a Medicare Region A Recovery Audit Contractor (“RAC”) covering claims submitted between 2004 and 2005.  The RAC audits are part of a pilot program under the CMS Medicare Integrity Program, currently being conducted in California, Florida and New York.  At this time, we are awaiting additional information and it is not possible for KCI to determine the outcome of these requests.

While Medicare requires us to obtain a comprehensive physician order prior to providing products and services, we are not required to and do not as a matter of practice require or subsequently obtain the underlying medical records supporting the information included in such certificate.  Following a Medicare request for supporting documentation, we are obligated to procure and submit the underlying medical records retained by various medical facilities and physicians.  Obtaining these medical records in connection with a claims audit may be difficult or impossible and, in any event, all of these records are subject to further examination and dispute by an auditing authority.  In the event that a post-payment audit results in discrepancies in the records provided, Medicare may be entitled to extrapolate the results of the audit to make recoupment demands based on a wider population of claims than those provided in the audit.

We also routinely receive pre-payment reviews of claims we submit for Medicare reimbursement.  In December 2007, the Medicare Region B DMAC initiated a pre-payment review of all second and third cycle NPWT claims submitted by all providers, including KCI.  While we are actively responding to these ongoing requests, if a determination is 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.  The results of this or any pre-payment audit could also result in subsequent post-payment audits for claims previously paid by Medicare.  Under standard Medicare procedures, KCI is entitled to demonstrate the sufficiency of documentation and the establishment of medical necessity, and KCI has the right to appeal any adverse determinations.  If Medicare 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 could 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.

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Medical Record Confidentiality and Privacy Laws

HIPAA covers a variety of provisions which impact our business, including the privacy of patient health care information, the security of that information and the standardization of electronic data transactions for billing. Sanctions for violating HIPAA include criminal penalties and civil sanctions. HIPAA’s privacy regulations restrict the use and disclosure of certain individually identifiable protected health information, or PHI.  The HIPAA security standards require us to implement certain measures to protect the security and integrity of electronic PHI. HIPAA regulations regarding standardization of electronic data billing transactions also impact our business. We continue to work with all of our business associates with whom we share PHI and who process standardized transactions covered by the regulations in order to make the transition to standardized billing codes as smooth as possible. However, the health care industry’s continued transition to standardized billing codes may create billing difficulties or business interruptions for us.

ISO Certification

Due to the harmonization efforts of a variety of regulatory bodies worldwide, certification of compliance with International Quality System Standards (e.g., those issued by the ISO) has become particularly advantageous and, in certain circumstances, necessary for many companies in recent years.  We originally received ISO 9001 and EN 46001 certification in 1997, followed by certification in 2002 to ISO 13485:1996, a medical device-specific version of ISO 9001.  In 2005, we obtained certification to ISO 13485:2003, the latest version of that standard.  We are registered in the UK with the Medicines and Healthcare Products Regulatory Agency and our products are CE marked through AMTAC (notified body number 0473.)  Since 2002, we have obtained medical device licenses from Health Canada for our products.

Environmental Laws

We are subject to various environmental laws and regulations that govern our operations in the U.S. and internationally, including the handling and disposal of non-hazardous and hazardous substances and wastes, and emissions and discharges into the environment. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or operated properties, or properties to which substances or wastes were sent from current or former operations at our facilities. From time to time, we have incurred costs and obligations for correcting environmental noncompliance matters and for cleanup of certain of our properties and third-party sites.

Other Laws

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

International

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

We operate in multiple tax jurisdictions both inside and outside the United States. In the normal course of our business, we will undergo reviews by taxing authorities regarding the tariff classifications of our products and the amount of tariffs we pay on the importation and exportation of these products.

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ITEM 1A.     RISK FACTORS

Risks Related to Our Business

We face significant and increasing competition, which could adversely affect our operating results.

We face significant and increasing competition in our advanced wound care and therapeutic support systems businesses.  Our advanced wound care business primarily competes with Convatec, Johnson & Johnson, Molnycke, RecoverCare/Sten+Barr, Smith & Nephew, and 3M Company, in addition to several smaller companies that have introduced medical devices designed to compete with our V.A.C. Therapy Systems.  Our Therapeutic Support Systems business primarily competes with the Hill-Rom Company, Gaymar Industries, and Sizewise Rentals and in Europe with Huntleigh Healthcare/Gettinge.

Several competitors have obtained regulatory and/or reimbursement approvals for negative pressure wound therapy, or NPWT, products in the U.S. and internationally.  We expect competition to increase over time as competitors introduce additional products competitive with V.A.C. Therapy systems in the advanced wound care market.  Additionally, as our patents in the field of NPWT start to expire beginning in 2012, we expect increased competition with products adopting basic NPWT technologies.  Our advanced wound care systems also compete with traditional wound care dressings, other advanced wound care dressings, skin substitutes, products containing growth factors and other medical devices used for wound care in the U.S. and internationally.

In addition to direct competition from companies in the advanced wound care market, health care organizations may from time to time attempt to assemble drainage and/or negative pressure devices from standard hospital supplies.  While we believe that many possible device configurations by competitors or health care organizations would infringe our intellectual property rights, we may be unsuccessful in asserting our rights against the sale or use of any such products, which could harm our ability to compete and could adversely affect our business.

We also face the risk that innovation by our competitors in our markets may render our products less desirable or obsolete.  Additionally, V.A.C. Therapy and therapeutic support systems can be contracted under national tenders or with larger hospital group purchasing organizations, or GPOs.  In prior years, many GPO contracts were awarded as sole-source or dual-source agreements.  GPOs have come under public pressure to modify their membership requirements and contracting practices, including the award of multi-source contracts or the conversion of sole-source and dual-source agreements to agreements with multiple suppliers.  As GPO agreements come up for bid, it is likely that contract awards will result in dual or multi-source agreements with GPOs in the advanced wound care and therapeutic support systems categories, which could result in increased competition in the acute and extended care settings for all of our product offerings.  Additionally, renewals of agreements could result in no award to KCI.

We may not be able to enforce or protect our intellectual property rights, which may harm our ability to compete and adversely affect our business.  If we are unsuccessful in protecting and maintaining our intellectual property, particularly our rights under the Wake Forest patents, our competitive position would be harmed.

Our ability to enforce our patents and those licensed to us, together with our other intellectual property is subject to general litigation risks, as well as uncertainty as to the enforceability of our intellectual property rights in various countries.  We have numerous patents on our existing products and processes, and we file applications as appropriate for patents covering new technologies as they are developed.  However, the patents we own, or in which we have rights, may not be sufficiently broad to protect our technology position against competitors, or may not otherwise provide us with competitive advantages.  Our patents may not prevent other companies from developing functionally equivalent products or from challenging the validity or enforceability of our patents.  When we seek to enforce our rights, we may be subject to claims that the intellectual property right is invalid, is otherwise not enforceable or is licensed to the party against whom we are asserting a claim.  When we assert our intellectual property rights, it is likely that the other party will seek to assert alleged intellectual property rights of its own against us, which may adversely impact our business as discussed in the following risk factor.  All patents are subject to requests for reexamination by third parties.  When such requests for reexamination are granted, some or all claims may require amendment or cancellation.  In 2007, requests for ex-parte reexamination of five patents owned and licensed by KCI were granted by the U.S. Patent and Trademark Office, including the base V.A.C. Therapy patents licensed from Wake Forest.  If we are unable to enforce our intellectual property rights, or patent claims related to V.A.C. Therapy are altered or cancelled through reexamination, our competitive position would be harmed.

We have agreements with third parties pursuant to which we license patented or proprietary technologies, including our exclusive license of the base V.A.C. patents from Wake Forest.  These agreements commonly include royalty-bearing licenses.  If we lose the right to license technologies essential to our business, or our costs to license these technologies materially increase, our business would suffer.

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KCI and its affiliates are involved in multiple patent litigation suits in the U.S. and Europe involving patents owned or licensed by KCI, as described in Item 3: “Legal Proceedings.”  If any of our key patent claims were narrowed in scope or found to be invalid or unenforceable, or we otherwise do not prevail, our share of the advanced wound care market for our V.A.C. Therapy systems could be significantly reduced in the U.S. or Europe, due to increased competition, and pricing of V.A.C. Therapy systems could decline significantly, either of which would materially and adversely affect our financial condition and results of operations.  We derived $950.1 million in revenue, or 59.0% of total revenue for the year ended December 31, 2007 and $808.3 million in revenue, or 58.9% of total revenue for the year ended December 31, 2006 from our domestic V.A.C. Therapy products relating to the U.S. patents at issue.  In continental Europe, we derived $199.5 million in revenue, or 12.4% of total revenue for the year ended December 31, 2007 and $158.9 million, or 11.6% of total revenue for the year ended December 31, 2006 in V.A.C. revenue relating to the patents at issue in the ongoing German litigation.

We may be subject to claims of infringement of third-party intellectual property rights, which could adversely affect our business.

From time to time, third parties may assert against us or our customers alleged patent or other intellectual property rights to technologies that are important to our business.  We may be subject to intellectual property infringement claims from individuals and companies who have acquired or developed patent portfolios in the fields of advanced wound care or therapeutic support systems for the purpose of developing competing products, or for the sole purpose of asserting claims against us.  Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may divert the efforts and attention of our management and technical personnel away from our business.  As a result of any such intellectual property infringement claims, we could be required to:

·     pay material damages for third-party infringement claims;

·     discontinue manufacturing, using or selling the infringing products, technology or processes;

·     develop non-infringing technology or modify infringing technology so that it is non-infringing, which could be time consuming and costly or may not be possible; or

·     license technology from the third-party claiming infringement for which the license may not be available on commercially reasonable terms or at all.

The occurrence of any of the foregoing could result in unexpected expenses or require us to recognize an impairment of our assets, which would reduce the value of our assets and increase expenses.  In addition, if we alter or discontinue our production of affected items, our revenue could be negatively impacted.

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

Our success is dependent upon the successful development, introduction and commercialization of new generations of products and enhancements to existing products. Innovation in developing new product lines and in developing enhancements to our existing V.A.C. Therapy and therapeutic support systems products is required for us to grow and compete effectively.  Over time, our existing foreign and domestic patent protection in both the V.A.C. Therapy and Therapeutic Support Systems businesses will begin to expire, which could allow competitors to adopt our older unprotected technology into competing product lines.  Most of the V.A.C. patents in our patent portfolio have a term of 20 years from their date of priority. The V.A.C. Therapy utility patents, which relate to our basic V.A.C. Therapy, extend through late 2012 in certain international markets and through the middle of 2014 in the U.S. We also have multiple longer-term patent filings directed to cover unique features and improvements of V.A.C. Therapy systems and related dressings.  If we are unable to continue developing proprietary product enhancements to V.A.C. Therapy systems and therapeutic support systems products that effectively make older products obsolete, we may lose market share in our existing lines of business.  Also, any failure to obtain regulatory clearances for such new products or enhancements could limit our ability to market new generations of products.  Innovation through enhancements and new products requires significant capital commitments and investments on our part, which we may be unable to recover.

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Changes in U.S. and international reimbursement regulations, policies and rules, or their interpretation, could reduce the reimbursement we receive for and adversely affect the demand for our products.

The demand for our products is highly dependent on the regulations, policies and rules of third-party payers in the U.S. and internationally, including the U.S. Medicare and Medicaid programs, as well as private insurance and managed care organizations that reimburse us for the sale and rental of our products.  If coverage or payment regulations, policies or rules of existing third-party payers are revised in any material way in light of increased efforts to control health care spending or otherwise, the amount we may be reimbursed or the demand for our products may decrease, or the costs of furnishing or renting our products could increase.

In the U.S., the reimbursement of our products by Medicare is subject to review by government contractors that administer payments under federal health care programs.  These contractors are delegated certain authority to make local or regional determinations and policies for coverage and payment of durable medical equipment, or DME, and related supplies in the home.  Adverse interpretation or application of Medicare contractor coverage policies, adverse administrative coverage determinations or changes in coverage policies can lead to denials of our claims for payment and/or requests to recoup alleged overpayments made to us for our products. Such adverse determinations and changes can often be challenged only through an administrative appeals process.

From time to time, we have been engaged in dialogue with the medical directors of the various Medicare contractors in order to clarify the local coverage policy for NPWT which has been adopted in each of the Medicare DME regions. In some instances the medical directors have indicated that their interpretation of the NPWT coverage policy differs from ours. Although we have informed the contractors and medical directors of our positions and billing practices, our dialogue has yet to resolve all open issues.  In the event that our interpretations of NPWT coverage policies in effect at any given time do not prevail, we could be subject to recoupment or refund of all or a portion of any disputed amounts as well as penalties, which could exceed our related revenue realization reserves, and could negatively impact our V.A.C. Medicare revenue.

In addition, the current Medicare NPWT coverage policy instructs the regional contractors to initially deny payment for any V.A.C. placements that have extended beyond four months in the home; however, the policy allows for us to appeal such non-payment on a claim-by-claim basis. We currently have approximately $21.5 million in outstanding receivables from the Centers for Medicare and Medicaid Services, or CMS, relating to Medicare V.A.C. placements that have extended beyond four months in the home, including both unbilled items and claims where coverage or payment was initially denied. We are in the process of submitting all unbilled claims for payment and appealing the remaining claims through the appropriate administrative appeals processes necessary to obtain payment. We may not be successful in collecting these amounts. Further changes in policy or adverse determinations may result in increases in denied claims and outstanding receivables. In addition, if our appeals are unsuccessful and/or there are further policy changes, we may be unable to continue to provide the same types of services that are represented by these disputed types of claims in the future.

U.S. Medicare reimbursement of competitive products and the implementation of the Medicare competitive bidding program could reduce the reimbursement we receive and could adversely affect the demand for our V.A.C. Therapy systems in the U.S.

From time to time, Medicare publishes reimbursement policies and rates that may unfavorably affect the reimbursement and market for our products.  Since 2005, Medicare has assigned NPWT reimbursement codes to several devices being marketed to compete with V.A.C. Therapy systems.  Due to the introduction of new competitive products, CMS and other third-party payers could attempt to reduce reimbursement rates on NPWT or its various components, which may reduce our revenue. Increased competition and any resulting reduction in reimbursement could materially and adversely affect our business and operating results.

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CMS formally launched the DMEPOS competitive bidding program through publication of a final rule in April 2007, under which suppliers will be required to be successful bidders and meet certain program standards in order to supply selected DMEPOS items to Medicare beneficiaries in certain designated geographic areas. Competitive bidding is being phased in both by geographical area and by product category. In 2008, CMS will operate competitive bidding areas, or CBAs, within 10 of the nation’s largest metropolitan areas, excluding New York, Los Angeles, and Chicago.  CMS has included Negative Pressure Wound Therapy, or NPWT, as one of the product categories in the first phase of competitive bidding.  Suppliers that bid to furnish a particular product category in a CBA must submit a bid for each item within the product category.  All bids submitted must be at or below the fee schedule amount for the item at the time the bid is made, thereby ensuring that the competitive bidding program will result in lower Medicare reimbursement levels for DMEPOS items furnished within the CBAs.  Once CMS selects the contract suppliers for a particular product category, CMS will establish single payment amounts for each item within the product category.  The single payment amount is based on the median of the winning suppliers’ bids for each of the selected items in the CBA.  Therefore, a winning supplier is not guaranteed reimbursement at its actual bid amount for an item; rather, approximately half of the winning suppliers who opt to become contract suppliers will be reimbursed at a lower rate than their bid to furnish a particular item, while the other half will receive reimbursement in excess of their bid amount.  Those bidders which are awarded contracts and agree to become contract suppliers must accept reimbursement from CMS at 80% of the item’s single payment amount for the CBA in which the beneficiary maintains a permanent residence; the beneficiary is responsible for the 20% copayment.  It is possible, however, that CMS will not award any contracts for certain product categories in one or more of the CBAs.  In such case, those products would continue to be reimbursed by Medicare at the current fee schedule pricing.  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 process could also limit customer access to KCI’s homecare products in the CBAs.  If KCI’s products are no longer available in certain metropolitan areas, the physician prescribing patterns for non-Medicare patients in these areas may also be negatively impacted.  We estimate the V.A.C. rentals and sales to Medicare beneficiaries in the ten designated metropolitan areas included in phase one of the DMEPOS competitive bidding 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.  We cannot predict the outcome of the Medicare competitive bidding program on our business nor the Medicare payment rates that will be in effect in 2008 and beyond for the items subject to competitive bidding.

U.S. Medicare reimbursement changes applicable to facilities that use our products, such as hospitals and skilled nursing facilities, could reduce the reimbursement we receive for and adversely affect the demand for our products.

In August 2006, CMS finalized new provisions for the hospital IPPS for the 2007 federal fiscal year, which included a significant change in the manner in which it determines the underlying relative weights used to calculate the DRG payment amount.  For federal fiscal year 2007, CMS began to phase-in the use of hospital costs rather than hospital charges for the DRG relative weight determination.  This change is to phase-in ratably over three years with the full phase-in to be completed in federal fiscal year 2009.  On August 1, 2007, CMS issued a final rule revising Medicare payment and policy under the hospital IPPS for federal fiscal year 2008.  These changes, which were first proposed in April 2007, will restructure the inpatient DRGs to account more fully for the severity of patient illness.  Specifically, the final rule creates 745 new severity-adjusted DRGs to replace the current 538 DRGs.  As a result, payments are expected to increase for hospitals serving more severely ill patients and decrease for those serving patients who are less severely ill.  These changes will be phased in over two years.  The changes to IPPS reimbursement procedures could place downward pressure on prices paid by acute care hospitals to KCI and adversely affect the demand for our products used for inpatient services.

The initiation by U.S. and foreign healthcare, safety and reimbursement agencies of periodic inspections, assessments or studies of the products, services and billing practices we provide could lead to reduced public reimbursement or the inability to obtain reimbursement and could result in reduced demand for our products.

Due to the increased scrutiny and publicity of rising health care costs, we may be subject to future assessments or studies by U.S. and foreign healthcare, safety and reimbursement agencies, which could lead to changes in reimbursement policies that adversely affect our business. For example, we were informed in November 2004 that CMS intended to evaluate the clinical efficacy, functionality and relative cost of the V.A.C. Therapy system.  We are also currently subject to multiple technology assessments related to our V.A.C. Therapy systems in foreign countries where we conduct business.  Any unfavorable results from these evaluations or technology assessments could result in reduced reimbursement or prevent us from obtaining reimbursement from third-party payers and could reduce the demand or acceptance of our V.A.C. Therapy systems.

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The U.S. Department of Health and Human Services Office of Inspector General, or OIG, initiated a study on NPWT in 2005.  As part of the 2005 study, KCI provided OIG with requested copies of our billing records for Medicare V.A.C. placements.  In June 2007, the OIG issued a report on the NPWT study including a number of findings and recommendations to CMS.  The OIG determined that substantially all V.A.C. claims met supplier documentation requirements; however, they were unable to conclude that the underlying patient medical records fully supported the supplier documentation in 44% of the claims, which resulted in an OIG estimate that approximately $27 million in improper payments may have been made on NPWT claims in 2004.  The purpose of the OIG report is to make 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 Medicare, its regional contractors and other third-party payers for refunds or recoupments of amounts previously paid to us which could have a material adverse effect on our financial condition and results of operations.

The most recent publication of the OIG’s Work Plan for 2008 includes several projects that could affect our business. Specifically, the OIG indicated its initiation of a plan to compare acquisition prices for NPWT pumps and supplies by suppliers against the amount Medicare reimburses such suppliers for those items.  OIG has also reiterated that it plans to continue to review DME suppliers’ use of certain claims modifiers to determine whether the underlying claims made appropriate use of such modifiers when billing to Medicare. Under the Medicare program, a DME supplier may use these modifiers to indicate that it has the appropriate documentation on file to support its claim for payment. Upon request, the supplier may be required to provide this documentation; however, recent reviews by Medicare regional contractors have indicated that some suppliers have been unable to furnish this information. The OIG intends to continue its work to determine the appropriateness of Medicare payments for certain DME items, including wound care equipment, by assessing whether the suppliers’ documentation supports the claim, whether the item was medically necessary, and/or whether the beneficiary actually received the item.  The OIG also plans to review DME that is furnished to patients who are receiving home health services to determine whether the DME is properly billed separately from the home health agency’s reimbursement.  In the event that these initiatives result in any assessments respecting KCI claims, we could be subject to material refunds, recoupments or penalties.  Such initiatives could also lead to further changes to reimbursement or documentation requirements for our products, which could be costly to administer. The results of U.S. or foreign government agency studies could factor into governmental or private reimbursement or coverage determinations for our products, and could result in changes to coverage or reimbursement rules which could reduce the amounts we collect for our products and have a material adverse effect on our business.

We may be subject to claims audits that could harm our business and financial results.

As a health care supplier, we are subject to claims audits by government regulators, contractors and private payers.  We are subject to extensive government regulation, including laws regulating reimbursement under various government programs.  Our documentation, billing and other practices are subject to scrutiny by regulators, including claims audits.  To ensure compliance with U.S. reimbursement regulations, the Medicare regional contractors and other government contractors periodically conduct audits of billing practices and request medical records and other documents to support claims submitted by us for payment of services rendered to our customers.  Such audits may also be spurred by recommendations made by government agencies, such as those in the June 2007 OIG report.

We are currently responding to requests from a Medicare Region A Recovery Audit Contractor (“RAC”) covering claims submitted between 2004 and 2005.  The RAC audits are part of a pilot program under the CMS Medicare Integrity Program, currently being conducted in California, Florida and New York.  At this time, we are awaiting additional information and it is not possible for KCI to determine the outcome of these requests.  

While Medicare requires us to obtain a comprehensive physician order prior to providing products and services, we are not required to and do not as a matter of practice require or subsequently obtain the underlying medical records supporting the information included in such certificate.  Following a Medicare request for supporting documentation, we are obligated to procure and submit the underlying medical records retained by various medical facilities and physicians.  Obtaining these medical records in connection with a claims audit may be difficult or impossible and, in any event, all of these records are subject to further examination and dispute by an auditing authority.  In the event that a post-payment audit results in discrepancies in the records provided, Medicare may be entitled to extrapolate the results of the audit to make recoupment demands based on a wider population of claims than those provided in the audit which could have a material adverse effect on our financial condition and results of operations.

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We also routinely receive pre-payment reviews of claims we submit for Medicare reimbursement.  In December 2007, the Medicare Region B DMAC initiated a pre-payment review of all second and third cycle NPWT claims submitted by all providers, including KCI.  While we are actively responding to these ongoing requests, if a determination is 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, Medicare or its contractors could place KCI on extended pre-payment review, which could slow our collections process for these claims.  The results of this or any pre-payment audit could also result in subsequent post-payment audits for claims previously paid by Medicare.  Under standard Medicare procedures, KCI is entitled to demonstrate the sufficiency of documentation and the establishment of medical necessity, and KCI has the right to appeal any adverse determinations.  If Medicare 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 could 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 have a material adverse effect on our financial condition and results of operations.

In addition, our agreements with private payers commonly provide that payers may conduct claims audits to ensure that our billing practices comply with their policies. These audits can result in delays in obtaining reimbursement, denials of claims, or demands for significant refunds or recoupments of amounts previously paid to us.

We could be subject to governmental investigations regarding the submission of claims for payment for items and services furnished to federal and state health care program beneficiaries.

There are numerous rules and requirements governing the submission of claims for payment to federal and state health care programs.  In many cases, these rules and regulations are not very clear and have not been interpreted on any official basis by government authorities.  If we fail to adhere to these requirements, the government could allege we are not entitled to payment for certain claims, and may seek to recoup past payments made.  Governmental authorities could also take the position that claims we have submitted for payment violate the federal False Claims Act.  The recoupment of alleged overpayments and/or the imposition of penalties or exclusions under the federal False Claims Act or similar state provisions could result in a significant loss of reimbursement and/or the payment of significant fines and may have a material adverse effect on our operating results.  Even if we were ultimately to prevail, an investigation by governmental authorities of the submission of widespread claims in non-compliance with applicable rules and requirements could have a material adverse impact on our business as the costs of addressing such investigations could be significant.

We could be subject to governmental investigations under the Anti-Kickback Statute, the Stark Law, the federal False Claims Act or similar state laws with respect to our business arrangements with prescribing physicians and other health care professionals.

The U.S. federal government has significantly increased investigations of medical device manufacturers with regard to alleged kickbacks and other forms of remuneration to health care professionals who use and prescribe their products.  Such investigations often arise based on allegations of violations of the federal Anti-Kickback Statute, which prohibits the offer, payment solicitation or receipt of remuneration of any kind if even one purpose of such remuneration is to induce the recipient to use, order, refer, or recommend or arrange for the use, order or referral of any items or services for which payment may be made in whole or in part under a federal or state health care program.  A number of states have passed similar laws, some of which apply even more broadly than the federal Anti-Kickback Statute because they are not limited to federal or state reimbursed items or services and apply to items and services that may be reimbursed by any payer.

Federal authorities have also increased enforcement with regard to the federal physician self-referral and payment prohibitions, commonly referred to as the Stark Law.  If any of our business arrangements with physicians who prescribe our DME homecare products for Medicare or Medicaid beneficiaries are found not to comply with the Stark Law, the physician is prohibited from ordering Medicare or Medicaid covered DME from us, and we may not present a claim for Medicare or Medicaid payment for such items.  Reimbursement for past orders from such a physician could also be subject to recoupment.

We have numerous business arrangements with physicians and other potential referral sources, including but not limited to arrangements whereby physicians provide clinical research services to KCI, serve as consultants to KCI, or serve as speakers for training, educational and marketing programs provided by KCI.  Many of these arrangements involve payment for services or coverage of, or reimbursement for, common business expenses (such as meals, travel and accommodations) associated with the arrangement.  Governmental authorities could attempt to take the position that one or more of these arrangements, or the payments or other remuneration provided thereunder, violates the Anti-Kickback Statute, the Stark Law or similar state laws.  In addition, if any of our arrangements were found to violate such laws, federal authorities or whistleblowers could take the position that our submission of claims for payment to a federal health care program for items or services realized as a result of such violations also violate the federal False Claims Act.  Imposition of penalties or exclusions for violations of the Anti-Kickback Statute, the Stark Law or similar state laws could result in a significant loss of reimbursement and may have a material adverse effect on our financial condition and results of operations.  Even the assertion of a violation under any of these provisions could have a material adverse effect on our financial condition and results of operations.

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We could be subject to increased scrutiny in states where we furnish items and services to Medicaid beneficiaries that may result in refunds or penalties.

Recent federal cuts to state administered health care programs, particularly Medicaid, have also increased enforcement activity at the state level under both federal and state laws.  In 2006, CMS released its initial comprehensive Medicaid Integrity Plan, a national strategy to detect and prevent Medicaid fraud and abuse.  This new program will work to identify, recover and prevent inappropriate Medicaid payments through increased review of suppliers of Medicaid services.  KCI could be subjected to such reviews in any number of states.  Such reviews could result in demands for refunds or assessments of penalties against KCI, which could have a material adverse impact on our financial condition and results of operations.

Failure of any of our randomized and controlled studies or a third-party study or assessment to demonstrate V.A.C. Therapy's clinical efficacy may reduce physician usage or put pricing pressures on V.A.C. and cause our V.A.C. Therapy revenue to decline.

For the past several years, we have been conducting a number of clinical studies designed to test the efficacy of V.A.C. Therapy across targeted wound types.  A successful clinical trial program is necessary to maintain and increase rentals and sales of V.A.C. Therapy products, in addition to supporting and maintaining third-party reimbursement of these products in the United States and abroad, particularly in Europe and Canada.  If, as a result of poor design, implementation or otherwise, a clinical trial conducted by us or others fails to demonstrate statistically significant results supporting the efficacy or cost effectiveness of V.A.C. Therapy, physicians may elect not to use V.A.C. Therapy as a treatment in general, or for the type of wound in question.  Furthermore, in the event of an adverse clinical trial outcome, V.A.C. Therapy may not achieve “standard-of-care” designations for the wound types in question, which could deter the adoption of V.A.C. Therapy in those wound types or others.  If we are unable to develop a body of statistically significant evidence from our clinical trial program, whether due to adverse results or the inability to complete properly designed studies, domestic and international public and private payers could refuse to cover V.A.C. Therapy, limit the manner in which they cover V.A.C. Therapy, or reduce the price they are willing to pay or reimburse for V.A.C. Therapy.

Because we depend upon a limited group of suppliers and, in some cases, exclusive suppliers for products essential to our business, we may incur significant product development costs and experience material delivery delays if we lose any significant supplier, which could materially impact our rental of surfaces products and rental and sales of V.A.C. Therapy systems and related disposables.

We obtain some of our finished products and components from a limited group of suppliers.  In particular, we have an exclusive supply agreement with Avail Medical Products, Inc., a subsidiary of Flextronics International Ltd. for the manufacture and packaging of our V.A.C. disposables.  V.A.C. Therapy cannot be administered without the appropriate use of our V.A.C. units in conjunction with the related V.A.C. disposables.  Total V.A.C. rental and sales revenue represented approximately 79.5% of our total revenue for the year ended December 31, 2007, of which sales of V.A.C. disposables represented approximately 24.1% of total revenue for the same period.  While we have the flexibility under our agreement with Avail to manufacture and package V.A.C. disposables internally, any disruption in Avail’s supply of V.A.C. disposables resulting in a shortage of disposables would inevitably cause our revenue to decline and, if material or continued, a shortage may also reduce our market position.

In November 2007, we entered into a new three-year supply agreement with Avail through November 2010, which is renewable annually for an additional twelve-month period in November of each year, unless either party gives notice to the contrary.  We require Avail to maintain duplicate manufacturing facilities, tooling and raw material resources for the production of our disposables in different locations to decrease the risk of supply interruptions from any single Avail manufacturing facility.  However, should Avail or Avail’s suppliers fail to perform in accordance with their agreements and our expectations, our supply of V.A.C. disposables could be jeopardized, which could negatively impact our V.A.C. revenue.  The terms of the supply agreement provide that key indicators be provided to us that would alert us to Avail's inability to perform under the agreement. Should Avail have any difficulty performing under the agreement, we have increased flexibility to manufacture and package V.A.C. disposables.  However, any down time between manufacturing cycles could cause a shortfall in supply.  We maintain an inventory of disposables sufficient to support our business for approximately seven weeks in the United States and nine weeks in Europe.  In the event that we are unable to replace a shortfall in supply, our revenue could be negatively impacted in the short term.

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Avail relies exclusively on Foamex International, Inc. for the supply of foam used in the V.A.C. disposable dressings.  We also contract exclusively with Noble Fiber Technologies, LLC for the supply of specialized silver-coated foam for use in our line of silver dressings.  In the event that Foamex or Noble experiences manufacturing interruptions, our supply of foam or silver V.A.C. dressings could be jeopardized.  If we are required but unable to timely procure alternate sources for these components at an appropriate cost, our ability to obtain the raw material resources required for our V.A.C. disposables could be compromised, which would have a material adverse effect on our entire V.A.C. Therapy business.

In prior years, Stryker Medical was our sole supplier of frames used to manufacture our KinAir IV, TheraPulse and TriaDyne Proventa framed surface products.  Stryker Medical ceased supplying frames to us in December 2007.  We estimate that our current inventory levels will provide sufficient frames for the next 2-3 years.  Management is currently exploring various supply alternatives to address our future supply requirements.

Our international business operations are subject to risks that could adversely affect our operating results.

Our operations outside the United States, which represented approximately $459.7 million, or 28.6%, of our total revenue for the year ended December 31, 2007, $377.9 million, or 27.5%, of our total revenue for the year ended December 31, 2006 and $322.4 million, or 26.7%, of our total revenue for the year ended December 31, 2005, are subject to certain legal, regulatory, social, political, and economic risks inherent in international business operations, including, but not limited to:

·     less stringent protection of intellectual property in some countries outside the U.S.;

·     trade protection measures and import and export licensing requirements;

·     changes in foreign regulatory requirements and tax laws;

·     violations of the Foreign Corrupt Practices Act of 1977, and similar local commercial bribery and anti-corruption laws in the foreign jurisdictions in which we do business;

·     changes in foreign medical reimbursement programs and policies, and other health care reforms;

·     political and economic instability;

·     complex tax and cash management issues;

·     potential tax costs associated with repatriating cash from our non-U.S. subsidiaries; and

·     longer-term receivables than are typical in the U.S., and greater difficulty of collecting receivables in certain foreign jurisdictions.

We are exposed to fluctuations in currency exchange rates that could negatively affect our operating results.

Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates related to the value of the U.S. dollar. While we enter into foreign exchange forward contracts designed to reduce the short-term impact of foreign currency fluctuations, we cannot eliminate the risk, which may adversely affect our expected results.

Changes in effective tax rates or tax audits could adversely affect our results.

Our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof.  In addition, we are subject to the routine examination of our income tax returns by the Internal Revenue Service and other tax authorities, which, if adversely determined could negatively impact our operating results.

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If we fail to comply with the extensive array of laws and regulations that apply to our business, we could suffer civil or criminal penalties or be required to make significant changes to our operations that could reduce our revenue and profitability.

We are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to among other things:

·     billing practices;

·     product pricing and price reporting;

·     quality of medical equipment and services and qualifications of personnel;

·     confidentiality, maintenance and security of patient medical records;

·     marketing and advertising, and related fees and expenses paid; and

·     business arrangements with other providers and suppliers of health care services.

In this regard, HIPAA defines two new federal crimes: (i) healthcare fraud and (ii) false statements relating to healthcare matters, the violation of which may result in fines, imprisonment, or exclusion from government health care programs.  Further, under separate statutes, submission of claims for payment or causing such claims to be submitted that are “not provided as claimed” may lead to civil monetary penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded state health programs.  We are subject to numerous other laws and regulations, the application of which could have a material adverse impact on our operating results.

We are subject to regulation by the Food and Drug Administration, or FDA, and its foreign counterparts that could materially reduce the demand for and limit our ability to distribute our products and could cause us to incur significant compliance costs.

The production and marketing of substantially all of our products and our ongoing research and development activities are subject to regulation by the FDA and its foreign counterparts. Complying with FDA requirements and other applicable regulations imposes significant costs on our operations. If we fail to comply with applicable regulations or if postmarket safety issues arise, we could be subject to enforcement sanctions, our promotional practices may be restricted, and our marketed products could be subject to recall or otherwise impacted. Each of these potential actions could result in a material adverse effect on our operating results. In addition, new FDA guidance and new and amended regulations that regulate the way we do business may occasionally result in increased compliance costs. In 2006, the FDA published notice of its intent to implement new dimensional requirements for hospital bed side rails that may require us to change the size of openings in new side rails for some of our surface products. Over time, related market demands might also require us to retrofit products in our existing rental fleet, and more extensive product modifications might be required if FDA decides to eliminate certain exemptions in their proposed guidelines. In 2007, standardization agencies in Europe and Canada adopted the revised standard, IEC 60601, requiring labeling and electro-magnetic compatibility modifications to several product lines in order for them to remain state-of-the-art. Listing bodies in the U.S. are expected to adopt similar revised standards in 2010. Each of these revised standards will entail increased costs relating to compliance with the new mandatory requirements that could adversely affect our operating results.

We may be unable to consummate acquisitions or divestitures in accordance with our plans or as necessary to meet our objectives.

KCI’s growth is dependent upon our ability to enhance our existing products and to introduce new products on a timely basis.  KCI has decided to pursue new products through acquisitions of other companies and technologies.  Acquisitions involve numerous risks, including the following:

·     inability to identify acquisition opportunities;

·     inability to complete an acquisition at commercially acceptable terms;

·     difficulties in integrating the operations, technologies, products and personnel of the acquired businesses;

·     diversion of management’s attention from normal daily operations of the business;

·     difficulties in entering markets in which KCI has no or limited direct prior experience and where competitors in such markets have stronger market positions;

·     an acquisition may not further our business strategy as we expected, or we may pay more than the acquired company or assets are worth;

·     our relationship with current and new employees, customers, partners and distributors could be impaired; and

·     inadequate internal control procedures and disclosure controls to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or poor integration of a target company’s or businesses’ procedures and controls.

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Acquisitions may also cause KCI to:

·     issue common stock that would dilute KCI’s current shareholders’ percentage ownership or earnings per share;

·     incur additional debt, including senior debt, which may impact KCI’s ability to service its debt;

·     assume liabilities, some of which may be unknown at the time of such acquisitions;

·     record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges;

·     incur amortization expenses related to certain intangible assets;

·     incur large and immediate write-offs of in-process research and development costs; or

·     become subject to litigation.

Mergers and acquisitions of medical technology companies inherently entail significant risk.  Any acquisition we pursue may not be successful or may have a material adverse affect on our business and operating results.  Similar issues may arise in connection with any disposition we may elect to pursue.

If our future operating results do not meet our expectations or those of our investors or the equity research analysts covering us, the trading price of our common stock could fall dramatically.

We have experienced and expect to continue to experience fluctuations in revenue and earnings for a number of reasons, including:

·     the level of acceptance of our V.A.C. Therapy systems by customers and physicians;

·     the type of indications that are appropriate for V.A.C. Therapy and the percentages of wounds that are considered good candidates for V.A.C. Therapy;

·     third-party government or private reimbursement policies with respect to V.A.C. Therapy and competing products;

·     clinical studies that may be published regarding the efficacy of V.A.C. Therapy, including studies published by our competitors in an effort to challenge the efficacy of the V.A.C.;

·     changes in the status of GPO contracts or national tenders for our therapeutic support systems;

·     developments or any adverse determination in litigation; and

·     new or enhanced competition in our primary markets.

We believe that the trading price of our common stock is based, among other factors, on our expected rates of growth in revenue and earnings per share. If we are unable to realize growth rates consistent with our expectations or those of our investors or the analysts covering us, we would expect to realize a decline in the trading price of our stock. Historically, domestic V.A.C. unit growth has been somewhat seasonal with a slowdown in V.A.C. rentals beginning in the fourth quarter and continuing into the first quarter, which we believe is caused by year-end clinical treatment patterns. The adverse effects on our business arising from seasonality may become more pronounced in future periods as the market for V.A.C. Therapy systems matures and V.A.C. Therapy growth rates decrease.

Because our staffing and operating expenses are based on anticipated revenue levels, and because a high percentage of our costs are fixed, decreases in revenue or delays in the recognition of revenue could cause significant variations in our operating results from quarter to quarter. In the short term, we do not have the ability to adjust spending in a time-effective manner to compensate for any unexpected revenue shortfall, which also could cause a significant decline in the trading price of our stock.

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Risks Related to Our Capital Structure

Restrictive covenants in the senior credit agreement may restrict our ability to pursue our business strategies.

The senior credit agreement limits our ability, among other things, to:

·     incur additional indebtedness or contingent obligations;

·     pay dividends or make distributions to our shareholders;

·     repurchase or redeem our stock;

·     make investments;

·     grant liens;

·     enter into transactions with our shareholders and affiliates;

·     sell assets; and

·     acquire the assets of, or merge or consolidate with, other companies.

The senior credit agreement contains financial covenants requiring us to meet certain leverage and interest coverage ratios.

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

If we default under the senior credit agreement, the lenders under this facility could require immediate repayment of the entire principal. If those lenders require immediate repayment, we may not be able to repay them. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments under the senior credit facility, or if we are unable to maintain the financial ratios under the senior credit facility, we will be in default under the credit agreement, which could, in turn, cause a default under any other debt obligations that we may incur from time to time.

Despite our existing debt, we may incur additional indebtedness, including senior debt, which would increase the risks described above.

We may be able to incur additional debt, including senior debt, in the future which may impact KCI’s ability to service its debt.  As of December 31, 2007, we had $423.3 million (net of outstanding letters of credit of $8.7 million) of total availability for potential borrowing under our revolving credit facility, subject to our compliance with the financial and other covenants included in our revolving credit facility.

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

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

·     authorization of the issuance of preferred stock, the terms of which may be determined at the sole discretion of the Board of Directors;

·     establishment of a classified Board of Directors with staggered, three-year terms;

·     provisions giving the Board of Directors sole power to set the number of directors;

·     limitations on the ability of shareholders to remove directors;

·     requirements for the approval of the holders of at least two-thirds of our outstanding common stock to amend our articles of incorporation;

·     authorization for our Board of Directors to adopt, amend or repeal our by-laws;

·     limitations on the ability of shareholders to call special meetings of shareholders; and

·     establishment of advance notice requirements for presentation of new business and nominations for election to the Board of Directors at shareholder meetings.

In addition, under Texas law and our articles of incorporation and our by-laws, action may not be taken by less than unanimous written consent of our shareholders unless the Board of Directors has recommended that the shareholders approve such action.  The limitation on the ability of shareholders to call a special meeting, to act by written consent and to remove directors may make it difficult for shareholders to remove or replace the Board of Directors should they desire to do so.  These provisions could also delay or prevent a third-party from acquiring us, which could cause the market price of our common stock to decline.

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ITEM 1B.     UNRESOLVED STAFF COMMENTS

None.

ITEM 2.     PROPERTIES

We lease approximately 156,400 square feet at our corporate headquarters building in San Antonio, Texas, the majority of which is leased under a 10-year lease that expires in 2012.  We also lease approximately 35,900 square feet in adjacent buildings that are used for general corporate purposes, and approximately 88,500 square feet of office space in San Antonio for our customer service center.  In addition, in February 2004 and February 2005, we entered into 99-month leases for approximately 80,400 and 80,200 square feet of office space in San Antonio to be used as our research and development and medical facility and for general corporate purposes, respectively.  In 2007, we entered into a lease agreement expiring in 2018 for 58,200 square feet of space with a projected construction completion and occupancy to occur in March 2008.  The space will be used as general office space for Information Technology personnel and training.

We conduct domestic manufacturing, shipping, receiving, engineering and storage activities in a 171,100 square foot facility in San Antonio, Texas, which we purchased in January 1988, and an adjacent 32,600 square foot facility purchased in 1993.  During 2007, our operations were conducted with approximately 75% cumulative utilization of plant and equipment. We also lease two storage facilities in San Antonio.  We lease approximately 141 domestic service centers, including each of our five regional headquarters.

Internationally, we lease 67 service centers. Our international corporate office is located in Amsterdam, the Netherlands.  International manufacturing and engineering operations are based in the United Kingdom, Ireland and Belgium.  The United Kingdom, Ireland and Belgium plants are approximately 24,800, 55,000 and 19,600 square feet, respectively.  During 2007, the plants in the United Kingdom and Belgium operated with 100% cumulative utilization of plant and equipment.  The plant in Ireland will manufacture our V.A.C. Therapy units for our global markets which had previously been manufactured in our San Antonio, Texas and United Kingdom plants.  In addition, the Ireland plant will manage the third party manufacturers, global purchasing, supplier agreements and distribution of our V.A.C. products.

We believe that our current facilities will be adequate to meet our needs for 2008.

34

The following is a summary of our primary facilities:

			Owned
Location	Description	Segment	or Leased
KCI Tower	Corporate Headquarters	Corporate	Leased
8023 Vantage Drive San Antonio, TX
KCI Plaza	Corporate Offices	Corporate	Leased
8000 Vantage Drive San Antonio, TX
KCI Manufacturing	Manufacturing Plant	Corporate	100% Owned
4958 Stout Drive San Antonio, TX
KCI North IV	Customer Service Center	KCI USA	Leased
5800 Farinon Drive San Antonio, TX
KCI North V	R&D and Medical Facility	Corporate	Leased
6203 Farinon Drive San Antonio, TX
KCI North VI	Patient Financial Services/Training	KCI USA	Leased
6103 Farinon Drive San Antonio, TX
Parktoren, 6th Floor	International Corporate Headquarters	KCI International	Leased
van Heuven Goedhartlaan 11 1181 LE Amstelveen The Netherlands
KCII Manufacturing, Unit 12	Manufacturing Plant	KCI International	Leased
11 Nimrod Way, Wimborne Dorset, United Kingdom
KCII Manufacturing	Manufacturing Plant	KCI International	Leased
Advance Technology Unit A IDA Athlone Business & Technology Park,  Dublin Road Athlone, Ireland
KCII Manufacturing	Manufacturing Plant	KCI International	Leased
Ambachtslaan 1031 3990 Peer, Belgium

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ITEM 3.     LEGAL PROCEEDINGS

KCI and its affiliates, together with Wake Forest University Health Sciences, are involved in multiple patent infringement suits involving patents licensed exclusively to KCI by Wake Forest.  The 2003 case filed against BlueSky Medical Group, Inc., Medela, Inc. and Medela AG is currently on appeal before the Federal Circuit Court of Appeals in Washington, D.C.  In 2006, the District Court jury found that the Wake Forest patents involved in the litigation were valid and enforceable, but that the patent claims at issue were not infringed by the device marketed by BlueSky.  In 2007, BlueSky Medical was acquired by Smith & Nephew plc, which is now a party to the appeal.  Initial appellate briefs have been filed by all parties to the appeal.  As a result of the appeal, the District Court’s final judgment could be modified, set aside or reversed, or the case could be remanded to District Court for retrial.

In May 2007, KCI, its affiliates and Wake Forest filed two related patent infringement suits; one case against Smith & Nephew and BlueSky and a second case against Medela, for the manufacture, use and sale of negative pressure devices which we believe infringe a Wake Forest continuation patent issued in 2007 relating to our V.A.C. technology.  Also, in June 2007, Medela filed patent nullity suits in the German Federal Patent Court against two of Wake Forest’s German patents licensed to KCI.  These patents were originally issued by the German Patent Office in 1998 and 2000, upon granting of the corresponding European patents.  The European patents were upheld as amended and corrected during Opposition Proceedings before the European Patent Office in 2003.

In September 2007, KCI and two affiliates were named in a declaratory judgment action filed in the Federal District Court for the District of Delaware by Innovative Therapies, Inc. (“ITI”).  In that case, the plaintiff has alleged the invalidity or unenforceability of four patents licensed to KCI by Wake Forest University Health Sciences and one patent owned by KCI relating to V.A.C. Therapy, and has requested a finding that products made by the plaintiff do not infringe the patents at issue.

In January 2008, KCI, its affiliates and Wake Forest filed a patent infringement lawsuit against ITI in the U.S. District Court for the Middle District of North Carolina. The federal complaint alleges that a negative pressure wound therapy device recently introduced by ITI infringes three Wake Forest patents which are exclusively licensed to KCI.  We are seeking damages and injunctive relief in the case. Also in January 2008, in a separate action, KCI and its affiliates filed suit in state District Court in Bexar County, Texas, against ITI and three of its principals, all of whom were former employees of KCI. The claims in the suit include breach of confidentiality agreements, conversion of KCI technology, theft of trade secrets and conspiracy. We are seeking damages and injunctive relief in the case.

Although it is not possible to reliably predict the outcome of the lawsuits described above, we believe that each of the patents involved in litigation are valid and enforceable, and that our patent infringement claims are meritorious.  However, if any of our key patent claims were narrowed in scope or found to be invalid or unenforceable, or we otherwise do not prevail, our share of the advanced wound care market for our V.A.C. Therapy systems could be significantly reduced in the U.S. or Europe, due to increased competition, and pricing of V.A.C. Therapy systems could decline significantly, either of which would materially and adversely affect our financial condition and results of operations.  We derived $950.1 million in revenue, or 59.0% of total revenue for the year ended December 31, 2007 and $808.3 million in revenue, or 58.9% of total revenue for the year ended December 31, 2006 from our domestic V.A.C. Therapy products relating to the U.S. patents at issue.  In continental Europe, we derived $199.5 million in revenue, or 12.4% of total revenue for the year ended December 31, 2007 and $158.9 million, or 11.6% of total revenue for the year ended December 31, 2006 in V.A.C. revenue relating to the patents at issue in the ongoing German litigation.

We are party to several additional lawsuits arising in the ordinary course of our business.  Additionally, the manufacturing and marketing of medical products necessarily entails an inherent risk of product liability claims.

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

None.

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PART II

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)     Our common stock has traded on the New York Stock Exchange under the symbol "KCI" since February 24, 2004, the date of our initial public offering. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the New York Stock Exchange:

2007	High		Low
First Quarter	$	52.55	$	39.13
Second Quarter	$	56.23	$	44.90
Third Quarter	$	66.77	$	51.19
Fourth Quarter	$	65.23	$	47.18
2006	High		Low
First Quarter	$	43.10	$	35.14
Second Quarter	$	44.74	$	38.29
Third Quarter	$	49.10	$	22.50
Fourth Quarter	$	41.22	$	30.80

On February 21, 2008, the last reported sale price of our common stock on the New York Stock Exchange was $51.11 per share.  As of February 21, 2008, there were approximately 146 shareholders of record of our common stock.

We do not currently pay cash dividends on our common stock. Any future payment of cash dividends on our common stock will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our board.  Our Board of Directors currently intends to retain any future earnings to support our operations and to finance the growth and development of our business and does not intend to declare or pay cash dividends on our common stock for the foreseeable future.  In addition, our senior credit agreement limits our ability to declare or pay dividends on, or repurchase or redeem, any of our outstanding equity securities.  For more information regarding the restrictions under our Senior Credit Agreement, see "Management’s Discussion & Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Service."

(b)     None

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(c)     Purchases of Equity Securities by KCI (dollars in thousands, except per share amounts)

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (2)		Approximate Dollar Value of Shares That May Yet be Purchased Under the Program (2)
October 1, 2007 to
October 31, 2007		1,018	$	61.56		1,018	$	87,470
November 1, 2007 to
November 30, 2007		221	$	59.32		221	$	87,457
December 1, 2007 to
December 31, 2007		331	$	54.47		331	$	87,439
Total		1,570	$	59.75		1,570	$	87,439
(1)   During the fourth quarter of 2007, KCI purchased and retired approximately 1,570 shares in connection with the withholding of shares to satisfy the minimum tax withholdings on the vesting of restricted stock.
(2)   In August 2006, KCI’s Board of Directors authorized a share repurchase program for the repurchase of up to $200 million in market value of common stock through the third quarter of 2007. In August 2007, KCI's Board of Directors authorized a one-year extension to this program. During 2007, KCI repurchased shares for minimum tax withholdings and exercise price of employee stock option exercises and minimum tax withholdings on the vesting of restricted stock. No open-market repurchases were made under this program during 2007. As of December 31, 2007, the remaining authorized amount for share repurchases under this program was $87.4 million.

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STOCK PERFORMANCE GRAPH

The following graph shows the change in our cumulative total shareholder return since our common stock began trading on the New York Stock Exchange on February 24, 2004 based upon the market price of our common stock, compared with: (a) the cumulative total return on the Standard & Poor’s 500 Large Cap Index and (b) the Standard & Poor’s Healthcare Equipment Index. The graph assumes a total initial investment of $100 as of February 24, 2004, and shows a "Total Return" that assumes reinvestment of dividends, if any, and is based on market capitalization at the beginning of each period. The performance on the following graph is not necessarily indicative of future stock price performance.

	2/24/04	3/04	6/04	9/04	12/04	3/05	6/05	9/05	12/05	3/06	6/06	9/06	12/06	3/07	6/07	9/07	12/07
KCI	100.00	149.50	166.33	175.17	254.33	198.83	200.00	189.33	132.53	137.23	147.17	104.87	131.83	168.80	173.23	187.60	178.53
S&P 500	100.00	99.86	101.58	99.68	108.88	106.54	108.00	111.89	114.23	119.04	117.32	123.97	132.28	133.12	141.48	144.35	139.54
S&P Health Care Equipment	100.00	100.05	106.40	105.26	106.60	101.63	102.88	104.29	106.66	104.49	94.73	100.55	111.06	113.48	117.08	120.80	116.76

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ITEM 6.     SELECTED FINANCIAL DATA

The following tables summarize our consolidated financial data for the periods presented. You should read the following financial information together with the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this report. The selected consolidated balance sheet data for fiscal years 2007 and 2006 and the selected consolidated statement of earnings data for fiscal years 2007, 2006 and 2005 are derived from our audited consolidated financial statements included elsewhere in this report. The selected consolidated statement of earnings data for fiscal years 2004 and 2003 and the selected consolidated balance sheet data for fiscal years 2005, 2004 and 2003 are derived from our audited consolidated financial statements not included in this report.  Reclassifications have been made to our results from prior years to conform to our current presentation (in thousands, except per share data).

	Year Ended December 31,
	2007			2006			2005			2004			2003
Consolidated Statement of Earnings Data:
Revenue:
Rental	$	1,146,544		$	979,669		$	858,098		$	726,783		$	582,801
Sales		463,400			391,967			350,458			265,853			181,035
Total revenue		1,609,944			1,371,636			1,208,556			992,636			763,836
Rental expenses (1)		684,935			607,132			528,000			447,765			351,070
Cost of sales (1)		145,611			120,492			115,069			90,961			77,316
Gross profit		779,398			644,012			565,487			453,910			335,450
Selling, general and administrative expenses (1)		356,560			298,076			253,869			212,800			162,421
Research and development expenses		50,532			36,694			30,614			31,312			23,044
Litigation settlement expense (gain) (2)		-			-			72,000			-			(75,000	)
Initial public offering expenses (3)		-			-			-			19,836			-
Secondary offering expenses (4)		-			-			-			2,219			-
Recapitalization expenses (5)		-			-			-			-			70,085
Operating earnings		372,306			309,242			209,004			187,743			154,900
Interest income and other		6,154			4,717			4,189			1,133			1,065
Interest expense (6)		(19,883	)		(20,333	)		(25,152	)		(44,635	)		(52,098	)
Foreign currency gain (loss)		(624	)		(1,580	)		(2,958	)		5,353			7,566
Earnings before income taxes		357,953			292,046			185,083			149,594			111,433
Income taxes		120,809			96,578			62,928			53,106			41,787
Net earnings	$	237,144		$	195,468		$	122,155		$	96,488		$	69,646
Series A convertible preferred stock dividends (7)		-			-			-			(65,604	)		(9,496	)
Net earnings available to common shareholders	$	237,144		$	195,468		$	122,155		$	30,884		$	60,150
Net earnings per share available to common shareholders:
Basic	$	3.34		$	2.76		$	1.76		$	0.49		$	1.03
Diluted	$	3.31		$	2.69		$	1.67		$	0.45		$	0.93
Weighted average shares outstanding:
Basic		70,975			70,732			69,404			62,599			58,599
Diluted (8)(9)		71,674			72,652			73,024			67,918			64,493

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	As of December 31,
	2007		2006		2005		2004		2003
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	265,993	$	107,146	$	123,383	$	124,366	$	156,064
Working capital		482,301		280,940		242,121		233,723		227,596
Total assets		1,057,585		842,442		762,111		732,465		667,323
Total debt (10)		68,592		208,249		295,934		446,186		685,827
Series A convertible preferred stock		-		-		-		-		261,719
Total shareholders' equity (deficit)		677,020		356,213		191,466		50,801		(507,254	)
(1)  Amounts for fiscal years 2007 and 2006 include share-based compensation expense recorded as a result of the adoption of Statement of Financial Accounting Standards No. 123 Revised. See Note 1(q) to our consolidated financial statements.
(2)  Amounts for fiscal year 2003 include the second and final payment of $75.0 million as part of an anti-trust settlement. Amounts for 2005 include the litigation settlement with Novamedix Limited of $72.0 million, net of recorded reserves of $3.0 million. See Note 13 to our consolidated financial statements.
(3)  Amounts for fiscal year 2004 include bonuses paid of $19.3 million, including related payroll taxes, and approximately $562,000 of professional fees and other miscellaneous expenses in connection with our initial public offering.
(4)  Amounts for fiscal year 2004 include $2.2 million of professional fees and other miscellaneous expenses in connection with our secondary offering.
(5)  Recapitalization expenses include non-interest related expenses incurred in connection with our 2003 recapitalization.
(6)  Amounts for fiscal year 2003 include an aggregate of $16.3 million in expense for the redemption premium and consent fee paid in connection with the redemption of our previously-existing 9 5/8% senior subordinated notes combined with the write off of unamortized debt issuance costs associated with the previously-existing senior credit facility. Amounts for fiscal year 2004 include an aggregate of $11.7 million in expense incurred in connection with our offerings, including bond call premiums totaling $7.7 million incurred in connection with the redemption of $107.2 million of our previously-existing senior subordinated notes and $4.0 million of debt issuance costs that we wrote off related to the retirement of debt. Amounts for fiscal year 2007 include an aggregate of $7.6 million in expense for the redemption premium paid in connection with the redemption of our previously-existing 7 ⅜% senior subordinated notes combined with the write off of unamortized debt issuance costs associated with the previously-existing senior credit facility.
(7)  Amounts for fiscal year 2004 include cumulative preferred dividends paid-in-kind through December 31, 2005 and beneficial conversion feature in connection with our initial public offering. Amounts for fiscal year 2003 include dividends-in-kind.
(8)  Potentially dilutive stock options and restricted stock totaling 1,779 shares, 3,241 shares, 595 shares, 72 shares and 117 shares for fiscal years 2007, 2006, 2005, 2004 and 2003, respectively, were excluded from the computation of diluted weighted average shares outstanding due to their antidilutive effect.
(9)  Due to their antidilutive effect, 2,990 and 7,522 dilutive potential common shares from the preferred stock conversion were excluded from the diluted weighted average shares calculation for the years ended December 31, 2004 and 2003, respectively.
(10)  Total debt equals current and long-term debt and capital lease obligations.

41

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Kinetic Concepts, Inc. is a global medical technology company with leadership positions in advanced wound care and therapeutic 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.

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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.

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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.

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

·     increasing V.A.C. Therapy awareness and adoption among customers and physicians by increasing the number of regular users and prescribers and the extent of use by each customer or physician;

·     market expansion by identifying new wound type indications for V.A.C. Therapy and increasing the percentage of wounds that are considered good candidates for V.A.C. Therapy; and

·     strengthening our contractual relationships with third-party payers.

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.

We continue to focus our marketing and selling efforts on increasing physician awareness and adoption of the benefits of V.A.C. Therapy.  These efforts are targeted at physician specialties that provide care to the majority of patients with wounds in our target categories.  Within these specialties, we focus on those clinicians who serve the largest number of wound care patients.  Our ongoing clinical experience and studies have increased the market acceptance of V.A.C. Therapy and expanded the range of wounds considered to be good candidates for V.A.C. Therapy.  We believe this growing base of data and clinical experience has driven the trend toward use of V.A.C. Therapy on a routine basis for appropriate wounds.  We recently obtained FDA clearance for expanded indications for use of V.A.C. Therapy systems, which permit KCI to market and label the unique mechanisms of action of V.A.C. Therapy.  The new FDA clearance further substantiates the unique mechanisms of action of V.A.C. Therapy while clearly differentiating V.A.C. Therapy from other offerings in wound care.  We will continue to seek additional indications for use as the body of evidence supporting V.A.C. Therapy grows.

Our intellectual property is very important to maintaining our competitive position.  With respect to our V.A.C. Therapy business, we rely on our rights under the Wake Forest patents licensed to us and a number of KCI patents in the U.S. and internationally.  Continuous enhancements in our product portfolio and positioning are also important to our continued growth and market penetration.  We believe superior outcomes derived from the use of our advanced V.A.C. Therapy systems have increased customer acceptance and the perceived value of V.A.C. Therapy.  We have benefited from the introduction of specialized dressing systems designed to improve ease-of-use and effectiveness in treating a variety of wounds.

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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):

	Year ended December 31,
					%
	2007		2006		Change
Domestic Revenue:
Rental	$	878,259	$	760,232		15.5	%
Sales		271,951		233,540		16.4
Total - USA Revenue		1,150,210		993,772		15.7
International Revenue:
Rental		268,285		219,437		22.3
Sales		191,449		158,427		20.8
Total - International Revenue		459,734		377,864		21.7
Total rental revenue		1,146,544		979,669		17.0
Total sales revenue		463,400		391,967		18.2
Total Revenue	$	1,609,944	$	1,371,636		17.4	%

Revenue by Product Line

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

	Year ended December 31,
					%
	2007		2006		Change
V.A.C. Revenue:
Rental	$	872,769	$	732,308		19.2	%
Sales		406,854		336,781		20.8
Total V.A.C.	$	1,279,623	$	1,069,089		19.7	%
Therapeutic Support Systems Revenue:
Rental		273,775		247,361		10.7	%
Sales		56,546		55,186		2.5
Total Therapeutic Support Systems	$	330,321	$	302,547		9.2	%
Total Revenue	$	1,609,944	$	1,371,636		17.4	%

The growth in total revenue over the prior-year period was due primarily to increased rental and sales volumes for V.A.C. Therapy systems and related disposables and increased rental volumes of therapeutic support systems.  Foreign currency exchange rate movements favorably impacted total revenue by 2.5% compared to the prior year.

For additional discussion on segment and geographical information, see Note 16 to our consolidated financial statements.

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Revenue Relationship

The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue in the period, as well as the changes in each line item, comparing 2007 to 2006:

	Year ended December 31,
	2007			2006			Change
Domestic revenue		71.4	%		72.5	%	(110 bps)
International revenue		28.6			27.5		110 bps
Total Revenue		100.0	%		100.0	%
V.A.C. revenue		79.5	%		77.9	%	160 bps
Therapeutic Support Systems revenue		20.5			22.1		(160 bps)
Total Revenue		100.0	%		100.0	%
Rental revenue		71.2	%		71.4	%	(20 bps)
Sales revenue		28.8			28.6		20 bps
Total Revenue		100.0	%		100.0	%

Domestic Revenue

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

	Year ended December 31,
					%
	2007		2006		Change
V.A.C. Revenue:
Rental	$	707,755	$	603,558		17.3	%
Sales		242,341		204,703		18.4
Total V.A.C.		950,096		808,261		17.5
Therapeutic Support Systems Revenue:
Rental		170,504		156,674		8.8
Sales		29,610		28,837		2.7
Total Therapeutic Support Systems		200,114		185,511		7.9
Total rental revenue		878,259		760,232		15.5
Total sales revenue		271,951		233,540		16.4
Total Domestic Revenue	$	1,150,210	$	993,772		15.7	%

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

Total domestic V.A.C. revenue increased over the prior year primarily due to higher rental and sales unit volume, resulting from increased market penetration.  Growth in rental unit volume was reported across all care settings.  The increase in domestic V.A.C. rental revenue was primarily due to a 17.8% increase in rental unit volume compared to the prior-year period.  The increase in domestic V.A.C. sales revenue over the prior year was due primarily to higher sales volumes for V.A.C. disposables associated with the increase in V.A.C. rental unit volume.

Domestic Therapeutic Support Systems revenue increased over the prior year primarily due to a 7.8% increase in rental unit volume.

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International Revenue

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

	Year ended December 31,
					%
	2007		2006		Change
V.A.C. Revenue:
Rental	$	165,014	$	128,750		28.2	%
Sales		164,513		132,078		24.6
Total V.A.C.		329,527		260,828		26.3
Therapeutic Support Systems Revenue:
Rental		103,271		90,687		13.9
Sales		26,936		26,349		2.2
Total Therapeutic Support Systems		130,207		117,036		11.3
Total rental revenue		268,285		219,437		22.3
Total sales revenue		191,449		158,427		20.8
Total International Revenue	$	459,734	$	377,864		21.7	%

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

The following table presents rental expenses and the percentage relationship to total revenue comparing 2007 to 2006 (dollars in thousands):

	Year ended December 31,
	2007			2006			Change
Rental expenses	$	684,935		$	607,132			12.8	%
As a percent of total revenue		42.5	%		44.3	%	(180		bps)

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.

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Cost of Sales

The following table presents cost of sales and the sales margin comparing 2007 to 2006 (dollars in thousands):

	Year ended December 31,
	2007			2006			Change
Cost of sales	$	145,611		$	120,492			20.8	%
Sales margin		68.6	%		69.3	%	(70		bps)

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

The following table presents the gross profit margin comparing 2007 to 2006:

	Year ended December 31,
	2007			2006			Change
Gross profit margin		48.4	%		47.0	%	140	bps

The increase in gross profit margin is due primarily to increased market penetration, improved revenue realization levels, increased sales force and service productivity and lower marketing expenditures during 2007 compared to the prior year.

Selling, General and Administrative Expenses

The following table presents selling, general and administrative expenses and the percentage relationship to total revenue comparing 2007 to 2006 (dollars in thousands):

	Year ended December 31,
	2007			2006			Change
Selling, general and administrative expenses	$	356,560		$	298,076			19.6	%
As a percent of total revenue		22.1	%		21.7	%	40		bps

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.

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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.  Share-based compensation expense was recognized in the consolidated statements of earnings as follows (dollars in thousands, except per share data):

	Year ended December 31,
	2007			2006
Rental expenses	$	5,322		$	4,285
Cost of sales		623			487
Selling, general and administrative expenses		17,769			12,335
Pre-tax share-based compensation expense		23,714			17,107
Less:  Income tax benefit		(6,933	)		(5,071	)
Total share-based compensation expense, net of tax	$	16,781		$	12,036
Diluted net earnings per share impact	$	0.23		$	0.17

Research and Development Expenses

The following table presents research and development expenses and the percentage relationship to total revenue comparing 2007 to 2006 (dollars in thousands):

	Year ended December 31,
	2007			2006			Change
Research and development expenses	$	50,532		$	36,694			37.7	%
As a percent of total revenue		3.1	%		2.7	%	40		bps

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 following table presents the operating margin comparing 2007 to 2006:

	Year ended December 31,
	2007			2006			Change
Operating margin		23.1	%		22.5	%	60	bps

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.

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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.

Year ended December 31, 2006 Compared to Year ended December 31, 2005

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 2006 to 2005 (dollars in thousands):

	Year ended December 31,
					%
	2006		2005		Change
Domestic Revenue:
Rental	$	760,232	$	671,864		13.2	%
Sales		233,540		214,329		9.0
Total - USA Revenue		993,772		886,193		12.1
International Revenue:
Rental		219,437		186,234		17.8
Sales		158,427		136,129		16.4
Total - International Revenue		377,864		322,363		17.2
Total rental revenue		979,669		858,098		14.2
Total sales revenue		391,967		350,458		11.8
Total Revenue	$	1,371,636	$	1,208,556		13.5	%

Revenue by Product Line

The following table sets forth, for the periods indicated, rental and sales revenue by product line, as well as the percentage change in each line item, comparing 2006 to 2005 (dollars in thousands):

	Year ended December 31,
					%
	2006		2005		Change
V.A.C. Revenue:
Rental	$	732,308	$	615,579		19.0	%
Sales		336,781		291,964		15.4
Total V.A.C.	$	1,069,089	$	907,543		17.8	%
Therapeutic Support Systems Revenue:
Rental	$	247,361	$	242,519		2.0	%
Sales		55,186		58,494		(5.7	)
Total Therapeutic Support Systems	$	302,547	$	301,013		0.5	%
Total Revenue	$	1,371,636	$	1,208,556		13.5	%

The growth in total revenue over the prior year was due primarily to increased rental and sales volumes for V.A.C. Therapy systems and related disposables, partially offset by lower domestic realized pricing.  Domestic V.A.C. pricing for 2006 was unfavorably impacted by a number of factors including lower canister reimbursement under Medicare Part B, lower contracted prices, payer mix changes and reductions in cash realization estimates.  Foreign currency exchange movements accounted for 0.9% of the increase in total revenue in 2006 compared to the prior year.

For additional discussion on segment and geographical information, see Note 16 to our consolidated financial statements.

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Revenue Relationship

The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue in the period, as well as the changes in each line item, comparing 2006 to 2005:

	Year ended December 31,
	2006			2005			Change
Domestic revenue		72.5	%		73.3	%	(80 bps)
International revenue		27.5			26.7		80 bps
Total Revenue		100.0	%		100.0	%
V.A.C. revenue		77.9	%		75.1	%	280 bps
Therapeutic Support Systems revenue		22.1			24.9		(280 bps)
Total Revenue		100.0	%		100.0	%
Rental revenue		71.4	%		71.0	%	40 bps
Sales revenue		28.6			29.0		(40 bps)
Total Revenue		100.0	%		100.0	%

Domestic Revenue

The following table sets forth, for the periods indicated, domestic rental and sales revenue by product line, as well as the percentage change in each line item, comparing 2006 to 2005 (dollars in thousands):

	Year ended December 31,
					%
	2006		2005		Change
V.A.C. Revenue:
Rental	$	603,558	$	519,570		16.2	%
Sales		204,703		186,476		9.8
Total V.A.C.		808,261		706,046		14.5
Therapeutic Support Systems Revenue:
Rental		156,674		152,294		2.9
Sales		28,837		27,853		3.5
Total Therapeutic Support Systems		185,511		180,147		3.0
Total rental revenue		760,232		671,864		13.2
Total sales revenue		233,540		214,329		9.0
Total Domestic Revenue	$	993,772	$	886,193		12.1	%

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

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Total domestic V.A.C. revenue increased over the prior year due primarily to higher rental unit volumes across all care settings, partly offset by lower realized pricing.  The increase in domestic V.A.C. rental revenue was due primarily to a 21.9% increase in unit volume compared to the prior year.  For 2006, higher domestic rental unit volume was partially offset by lower realized pricing due to a number of factors including lower contracted prices, payer mix changes and reductions in cash realization estimates.  The increase in domestic V.A.C. sales revenue over the prior year was due primarily to higher sales volumes for V.A.C. disposables associated with the increase in V.A.C. rental unit volume, partially offset by lower canister reimbursement.

Domestic Therapeutic Support Systems revenue increased over the prior year primarily due to an increase in rental unit volume, partially offset by lower pricing, which resulted from competitive pressures in certain markets.

International Revenue

The following table sets forth, for the periods indicated, international rental and sales revenue by product line, as well as  the percentage change in each line item, comparing 2006 to 2005 (dollars in thousands):

	Year ended December 31,
					%
	2006		2005		Change
V.A.C. Revenue:
Rental	$	128,750	$	96,009		34.1	%
Sales		132,078		105,488		25.2
Total V.A.C.		260,828		201,497		29.4
Therapeutic Support Systems Revenue:
Rental		90,687		90,225		0.5
Sales		26,349		30,641		(14.0	)
Total Therapeutic Support Systems		117,036		120,866		(3.2	)
Total rental revenue		219,437		186,234		17.8
Total sales revenue		158,427		136,129		16.4
Total International Revenue	$	377,864	$	322,363		17.2	%

The growth in total international revenue is due primarily to increased rental volumes for V.A.C. Therapy systems and related disposables and favorable foreign currency exchange rate variances.  Foreign currency exchange rate movements accounted for 3.5% of the increase in total international revenue in 2006 compared to the prior year.

The increase in total international V.A.C. revenue over the prior year was due to higher V.A.C. rental unit volume and favorable foreign currency exchange variances.  Foreign currency exchange rate movements accounted for 4.5% of the increase in international V.A.C. revenue in 2006 compared to the prior year.  The growth in international V.A.C. rental revenue over the prior year was due primarily to a 30.1% increase in rental unit volume.  The average rental price for 2006 was comparable to the prior year period.  Foreign currency exchange rate movements accounted for 5.2% of the increase in international V.A.C. rental revenue in 2006 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.  During 2005, we completed a $2.6 million V.A.C. sale to the Canadian government, which unfavorably impacted international V.A.C. sales revenue growth by 3.2% for 2006 compared to the prior year.  Foreign currency exchange rate movements accounted for 3.9% of the increase in international V.A.C. sales revenue in 2006 compared to the prior year.

International Therapeutic Support Systems revenue decreased from the prior year.  During the first quarter of 2005, we completed a significant $5.1 million sale of therapeutic support systems to the Canadian government, which unfavorably impacted revenue growth by 4.3% for 2006.  Foreign currency exchange rate movements favorably impacted international Therapeutic Support Systems revenue by 1.7% for 2006 compared to the prior year.

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Rental Expenses

The following table presents rental expenses and the percentage relationship to total revenue comparing 2006 to 2005 (dollars in thousands):

	Year ended December 31,
	2006			2005			Change
Rental expenses	$	607,132		$	528,000			15.0	%
As a percent of total revenue		44.3	%		43.7	%	60		bps

Rental, or field, expenses are comprised of both fixed and variable costs.  The expense associated with our sales headcount increase in 2006 slightly outpaced our rental revenue growth for the same period compared to the prior year due to lower price realization of our V.A.C. rentals, as discussed above.  Additionally, 2006 included an increase in share-based compensation expense of $4.3 million, before taxes, resulting from the January 1, 2006 adoption of SFAS 123R compared to the prior year.  Our sales and service headcount increased to 3,520 at December 31, 2006 from approximately 3,160 at December 31, 2005.

Cost of Sales

The following table presents cost of sales and the sales margin comparing 2006 to 2005 (dollars in thousands):

	Year ended December 31,
	2006			2005			Change
Cost of sales	$	120,492		$	115,069			4.7	%
Sales margin		69.3	%		67.2	%	210		bps

Cost of sales includes manufacturing costs, product costs and royalties associated with our “for sale” products.  The increased margin was due to continued cost reductions resulting from our global supply contract for V.A.C. disposables, including a volume purchase discount received in the second quarter of 2006 relating to a large purchase of V.A.C. disposables which was fully recognized in 2006.

Gross Profit Margin

The following table presents the gross profit margin comparing 2006 to 2005:

	Year ended December 31,
	2006			2005			Change
Gross profit margin		47.0	%		46.8	%	20	bps

Increased revenue combined with productivity improvements in our service operations and continued cost reductions from our global supply contract for V.A.C. disposables contributed to the margin expansion for 2006, partially offset by the impact of our January 1, 2006 adoption of SFAS 123R.

Selling, General and Administrative Expenses

The following table presents selling, general and administrative expenses and the percentage relationship to total revenue comparing 2006 to 2005 (dollars in thousands):

	Year ended December 31,
	2006			2005			Change
Selling, general and administrative expenses	$	298,076		$	253,869			17.4	%
As a percent of total revenue		21.7	%		21.0	%	70		bps

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.  In 2006, we recorded share-based compensation expenses of approximately $12.3 million, before income taxes, compared to $1.9 million recorded in the prior year.  Selling, general and administrative expenses for 2006 also include an additional $3.7 million expense over the prior year related to the patent litigation case, $2.7 million in CEO transition costs and $3.0 million related to the reduction of the carrying value of our assets subject to leveraged lease.

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Research and Development Expenses

The following table presents research and development expenses and the percentage relationship to total revenue comparing 2006 to 2005 (dollars in thousands):

	Year ended December 31,
	2006			2005			Change
Research and development expenses	$	36,694		$	30,614			19.9	%
As a percent of total revenue		2.7	%		2.5	%	20		bps

Research and development expenses relate to our investments in clinical studies and the development of new advanced wound healing systems and dressings, new technologies in wound healing and tissue repair, new applications of V.A.C. Therapy technology and upgrading and expanding our surface technologies.

Litigation Settlement Expense

On September 30, 2005, we reached an agreement to settle our litigation with Novamedix Limited, a subsidiary of Orthofix International NV.  Under the terms of the settlement, we paid Novamedix $75.0 million.  The settlement payment resulted in a charge of $72.0 million, net of recorded reserves of $3.0 million, in 2005.

Operating Margin

The following table presents the operating margin comparing 2006 to 2005:

	Year ended December 31,
	2006			2005			Change
Operating margin		22.5	%		17.3	%	520	bps

Share-based compensation recorded under SFAS 123R unfavorably impacted our operating margin by 1.3% in 2006 compared to 0.2% in the prior year.  Prior to January 1, 2006, we accounted for share-based compensation under Accounting Principles Board, or APB, Opinion No. 25, or APB 25, “Accounting for Stock Issued to Employees.”  The prior-year litigation settlement unfavorably impacted our operating margins for 2005 by 6.0%.

Interest Expense

Interest expense was $20.3 million in 2006 compared to $25.2 million in the prior year.  Interest expense in 2006 and 2005 includes write-offs of capitalized debt issuance costs totaling $1.5 million and $2.9 million, respectively, and open-market premium payments of $490,000 and $510,000, respectively, related to the purchase 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 from the prior year.

Net Earnings

Net earnings for 2006 were $195.5 million compared to $122.2 million in the prior year, an increase of 60.0%.  Net earnings for 2005 were unfavorably impacted by the litigation settlement of $47.4 million, net of taxes.  The effective income tax rate for 2006 was 33.1% compared to 34.0% for the prior year.  The income tax reduction was primarily attributable to the favorable resolution of certain tax contingencies in 2006.

Net Earnings per Diluted Share

Net earnings per diluted share for 2006 were $2.69 compared to net earnings per diluted share of $1.67 in the prior year.  The litigation settlement charge unfavorably impacted the prior year by $0.65 per share.  The open-market repurchases of common stock in 2006 favorably impacted reported earnings per share by $0.03 per share.

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Liquidity and Capital Resources

General

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

Sources of Capital

Based upon the current level of operations, we believe our existing cash resources, as well as cash flows from operating activities and availability under our revolving credit facility, will be adequate to meet our anticipated cash requirements for at least the next twelve months.  During 2007, 2006 and 2005, our primary source of capital was cash from operations.  The following table summarizes the net cash provided and used by operating activities, investing activities and financing activities for the years ended December 31, 2007, 2006 and 2005 (dollars in thousands):

	Year ended December 31,
	2007				2006				2005
Net cash provided by operating activities	$	348,938			$	236,263			$	238,198		(3)
Net cash used by investing activities		(101,685	)			(99,775	)			(89,834	)
Net cash used by financing activities		(97,659	)	(1)		(156,425	)	(2)		(144,452	)	(4)
Effect of exchange rates changes on cash and cash equivalents		9,253				3,700				(4,895	)
Net increase (decrease) in cash and cash equivalents	$	158,847			$	(16,237	)		$	(983	)
(1)     This amount for 2007 includes debt prepayments and regularly scheduled debt payments totaling $120.0 million on our revolving credit facility, $139.5 million on our previous senior credit facility and $68.1 million for redemption of our subordinated notes; partially offset by proceeds of $188.0 million from our new revolving credit facility.
(2)     This amount for 2006 includes debt prepayments and regularly scheduled debt payments totaling $70.4 million on our previous senior credit facility and $16.3 million for the repurchase of our previously-existing subordinated notes. In addition, the amount for 2006 includes $109.8 million related to the repurchase and retirement of 3.5 million shares of KCI common stock.
(3)     This amount for 2005 is reduced by the litigation settlement charge of $72.0 million, which impacted net earnings by $47.4 million, net of the related tax benefit of $24.6 million.
(4)     This amount for 2005 includes debt prepayments and regularly scheduled payments totaling $137.7 million on our previous senior credit facility and $13.4 million on our previously-existing senior subordinated notes.

At December 31, 2007, our principal sources of liquidity consisted of approximately $266.0 million of cash and cash equivalents and $423.3 million available under our revolving credit facility.  The revolving credit facility makes available to us up to $500.0 million over a five-year period.  This limit may be increased at any time up to $650.0 million upon satisfaction of certain conditions.  At December 31, 2007, there were $68.0 million of borrowings and $8.7 million in undrawn letters of credit under our revolving credit facility.

Working Capital

At December 31, 2007, we had current assets of $746.0 million, including $357.0 million in net accounts receivable and $50.3 million in inventory, and current liabilities of $263.7 million resulting in a working capital surplus of $482.3 million compared to a surplus of $280.9 million at December 31, 2006.  The increase in our working capital surplus of $201.4 million was primarily due to increased cash from operations associated with revenue growth in 2007, partially offset by capital expenditures and the debt repayments made during the current year.  The increase in working capital is also attributable to a reclassification of tax liabilities totaling $31.3 million to long-term in the current year resulting from our January 1, 2007 adoption of Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which was issued by the Financial Accounting Standards Board (“FASB”).

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At December 31, 2006, we had current assets of $531.8 million, including $43.5 million in inventory, and current liabilities of $250.8 million resulting in a working capital surplus of approximately $280.9 million, compared to a surplus of $242.1 million at December 31, 2005.  The increase in our working capital surplus of $38.8 million was due primarily to increases in cash from operations and increased cash and accounts receivable associated with revenue growth in the current year, partially offset by debt prepayments, capital expenditures and the repurchase of KCI common stock through our share repurchase program.

If rental and sales volumes for V.A.C. Therapy systems and related disposables continue to increase, we believe that a significant portion of this increase could occur in the homecare market, which could have the effect of increasing accounts receivable due to the extended payment cycles we experience with most third-party payers. We have adopted a number of policies and procedures to reduce these extended payment cycles. As of December 31, 2007, we had $357.0 million of receivables outstanding, net of realization reserves of $96.8 million.  During 2007, domestic receivables were outstanding for an average of 72 days, a decline from 75 days in 2006.  International receivable days were down from 90 days in 2006 to 79 days in 2007.  The decrease in receivable days for domestic and international were due to efforts aimed at improving the efficiency of our order-to-cash process.

Capital Expenditures

During 2007, 2006 and 2005, we made capital expenditures of $95.8 million, $92.2 million and $94.2 million, respectively, due primarily to expanding the rental fleet and information technology purchases.

Debt Service

As of December 31, 2007, we had $68.0 million in debt outstanding under our senior revolving credit facility due July 2012.  To the extent that we have excess cash, we may use it to reduce our outstanding debt obligations.

Senior Credit Facility

Our senior credit facility consists of a $500.0 million revolving credit facility due July 2012. The following table sets forth the amount owed under the revolving credit facility, the effective interest rate on such outstanding amount, and amount available for additional borrowing thereunder, as of December 31, 2007 (dollars in thousands):

Senior Credit Facility	Maturity Date	Effective Interest Rate			Amount Outstanding		Amount Available For Additional Borrowing
Revolving credit facility	July 2012		5.84	%	$	68,000	$	423,286	(1)
Total					$	68,000	$	423,286
(1)      At December 31, 2007, amount available under the revolving portion of our credit facility reflected a reduction of $8.7 million for letters of credit issued on our behalf, none of which have been drawn upon by the beneficiaries thereunder.

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

We are permitted to effect unlimited repurchases of our capital stock when our leverage ratio is less than or equal to 3.0 to 1.0 and there is no default under the senior credit agreement.  In the event the leverage ratio is greater than 3.0 to 1.0, open-market repurchases of our common stock are limited to $300.0 million until such time as the leverage ratio has been restored.  In addition, we have the unlimited ability to pay dividends on our capital stock if our pro forma leverage ratio, as defined in the senior credit agreement, is less than 3.0 to 1.0.  As of December 31, 2007, our leverage ratio was 0.2 to 1.0.

Our senior credit facility contains financial covenants requiring us to meet certain leverage and interest coverage ratios.  It will be an event of default if we permit any of the following:

·     as of the last day of any fiscal quarter, our leverage ratio of debt to EBITDA, as defined in the senior credit agreement, to be greater than 4.0 to 1.0, or

·     as of the last day of any fiscal quarter, our ratio of EBITDA to consolidated cash interest expense, as defined in the senior credit agreement, to be less than 2.5 to 1.0.

As of December 31, 2007, we were in compliance with all covenants under the senior credit agreement.

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Interest Rate Protection

At December 31, 2007, we did not have any interest rate protection agreements in place.  As of December 31, 2006, the fair value of our interest rate protection agreement was negative and recorded as a liability of approximately $54,000.  As of December 31, 2005, the fair value of our interest rate swap agreements was positive in the aggregate and was recorded as an asset of approximately $1.8 million.  If our previously-existing interest rate protection agreements were not in place, interest expense would have been approximately $51,000 lower for the year ended December 31, 2007, while $2.0 million and $1.3 million higher for the years ended December 31, 2006 and 2005, respectively.

Contractual Obligations

We are committed to making cash payments in the future on long-term debt, capital leases, operating leases and purchase commitments. We have not guaranteed the debt of any other party.  The following table summarizes our contractual cash obligations as of December 31, 2007 for each of the periods indicated (dollars in thousands):

	Less Than		1 - 3		4 - 5		After 5
	1 Year		Years		Years		Years		Total (1)
Long-Term Debt Obligations	$	-	$	-	$	68,000	$	-	$	68,000
Interest on Long-Term Debt Obligations (2)		3,972		7,944		6,289		-		18,205
Capital Lease Obligations		318		361		48		-		727
Operating Lease Obligations		34,502		56,386		34,158		30,561		155,607
Purchase Obligations		39,860		-		-		-		39,860
Total	$	78,652	$	64,691	$	108,495	$	30,561	$	282,399
(1)   This excludes our liability of $31.3 million for unrecognized tax benefits. We cannot make a reasonably reliable estimate of the amount and period of related future payments for such liability.
(2)   Amounts and timing may be different from our estimated interest payments due to potential voluntary prepayments, borrowings and interest rate fluctuations.

Effective November 30, 2007, we entered into a three-year Toll Manufacturing Agreement (the "Agreement") with Avail Medical Products, Inc. ("Avail") for our V.A.C. related disposable supplies.  The Agreement replaces the Amended and Restated Manufacturing Agreement between KCI and Avail, dated December 18, 2002.  The Agreement retains the material provisions of the prior agreement, including an initial thirty-six month term, through November 2010, with automatic extension thereafter for additional twelve-month periods unless either party gives notice to the contrary (the "Exclusivity Period").  Pursuant to the Agreement, Avail will continue as KCI's exclusive supplier for sterile disposable products for use with KCI's V.A.C. Therapy systems throughout the Exclusivity Period.  The Agreement also provides that during the Exclusivity Period and thereafter for an additional thirty-six months, Avail will not manufacture or sell similar products for or to any customer other than KCI.  In the event of termination, we would have been committed to purchase from Avail approximately $13.7 million of inventory as of December 31, 2007, which is included within Purchase Obligations in the table above.

Critical Accounting Estimates

The SEC defines critical accounting estimates as those that are, in management's opinion, very important to the portrayal of our financial condition and results of operations and require our management's most difficult, subjective or complex judgments.  In preparing our financial statements in accordance with U.S. generally accepted accounting principles, we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period.  Some of those judgments can be subjective and complex.  Consequently, actual results could differ from our estimates.  The accounting policies that are most subject to important estimates or assumptions are described below.  See Note 1 to our consolidated financial statements.

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Revenue Recognition and Accounts Receivable Realization

We recognize revenue in accordance with Staff Accounting Bulletin No. 104,“Revenue Recognition,” when each of the following four criteria are met:

1)   a contract or sales arrangement exists;

2)   products have been shipped and title has transferred or services have been rendered;

3)   the price of the products or services is fixed or determinable; and

4)   collectibility is reasonably assured.

We recognize rental revenue based on the number of days a product is used by the patient/organization, at the contracted rental rate for contracted customers and generally, retail price for non-contracted customers.  Sales revenue is recognized when products are shipped and title has transferred.  In addition, we establish realization reserves against revenue to provide for adjustments including capitation agreements, credit memos, volume discounts, pricing adjustments, utilization adjustments, product returns, cancellations, estimated uncollectible amounts and payer adjustments based on historical experience.

Domestic trade accounts receivable consist of amounts due directly from acute and extended care organizations, third-party payers, or TPP, both governmental and non-governmental, and patient pay accounts.  Included within the TPP accounts receivable balances are amounts that have been or will be billed to patients once the primary payer portion of the claim has been settled by the TPP.  International trade accounts receivable consist of amounts due primarily from acute care organizations.

The domestic TPP reimbursement process requires extensive documentation, which has had the effect of slowing both the billing and cash collection cycles relative to the rest of the business, and therefore, increasing total accounts receivable.  Because of the extensive documentation required and the requirement to settle a claim with the primary payer prior to billing the secondary and/or patient portion of the claim, the collection period for a claim in our homecare business may, in some cases, extend beyond one year prior to full settlement of the claim.

We utilize a combination of factors in evaluating the collectibility of our accounts receivable. For unbilled receivables, we establish reserves against revenue to allow for expected denied or uncollectible items.  In addition, items that remain unbilled for more than a specified period of time, or beyond an established billing window, are reserved against revenue.  For billed receivables, we generally establish reserves against revenue and bad debt using a combination of factors including historic adjustment rates for credit memos and cancelled transactions, historical collection experience, and the length of time receivables have been outstanding.  The reserve rates vary by payer group.  In addition, we record specific reserves for bad debt when we become aware of a customer's inability or refusal to satisfy its debt obligations, such as in the event of a bankruptcy filing.  If circumstances change, such as higher than expected claims denials, post-payment claim recoupments, a material change in the interpretation of reimbursement criteria by a major customer or payer, or payment defaults or an unexpected material adverse change in a major customer's or payer's ability to meet its obligations, our estimates of the realizability of trade receivables could be reduced by a material amount.  A hypothetical 1% change in the collectibility of our billed receivables at December 31, 2007 would impact pre-tax earnings by an estimated $7.6 million.

Inventory

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

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Long-Lived Assets

Property, plant and equipment are stated at cost. Betterments, which extend the useful life of the equipment, are capitalized. Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful lives (20 to 30 years for buildings and between three and seven years for most of our other property and equipment) of the assets.  If an event were to occur that indicates the carrying value of long lived assets might not be recoverable, we would review property, plant and equipment for impairment using an undiscounted cash flow analysis and if an impairment had occurred on an undiscounted basis, we would compute the fair market value of the applicable assets on a discounted cash flow basis and adjust the carrying value accordingly.

Goodwill and Other Intangible Assets

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

Goodwill and other indefinite lived intangible assets were initially tested for impairment during 2002, and determined that there was no impairment.  The most recent annual test completed in the fourth quarter of 2007 reconfirmed the lack of impairment.  The goodwill of a reporting unit will be tested annually or if an event occurs or circumstances change that would likely reduce the fair value of a reporting unit below its carrying amount.  Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition.

Income Taxes

Deferred income taxes are accounted for in accordance with SFAS No. 109 (“SFAS 109”), “Accounting for Income Taxes,” as amended.  SFAS 109 requires the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statements and the tax bases of assets and liabilities, as measured by current enacted tax rates.  When appropriate, in accordance with SFAS 109, we evaluate the need for a valuation allowance to reduce our deferred tax assets.

We account for uncertain tax positions in accordance with the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.”Accordingly, a liability is recorded for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.  We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

At December 31, 2007, deferred tax assets recorded by KCI increased from 2006. We have established a valuation allowance to reduce deferred tax assets associated with foreign NOLs, certain foreign deferred tax assets and state research and development credits to an amount whose realization is more likely than not.  We anticipate that the reversal of existing taxable temporary differences and future income will provide sufficient taxable income to realize the tax benefit of the remaining deferred tax assets; therefore we have not provided a valuation allowance.

Income taxes increased $24.2 million, or 25.1%, in 2007, $33.7 million, or 53.5%, in 2006 and $9.8 million, or 18.5%, in 2005.  The increases in income taxes in these years were due primarily to increases in income before income tax.  Our effective tax rate in 2007 was 33.8% compared to 33.1% and 34.0% in 2006 and 2005, respectively.  The income tax rate was lower in 2006 primarily due to the favorable resolution of certain tax contingencies.

Legal Proceedings and Other Loss Contingencies

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

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New Accounting Pronouncements

In June 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-3 (“EITF 06-3”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).”  The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer.  This Issue provides that a company may adopt a policy of presenting taxes within revenue either on a gross basis or on a net basis.  If taxes subject to this Issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amount of such taxes that are recognized on a gross basis.  EITF 06-3 was effective for KCI beginning January 1, 2007, and the adoption of EITF 06-3 did not have an impact on our consolidated financial statements.  We present sales tax on a net basis in our consolidated financial statements.

In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.”  FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition and is effective for fiscal years beginning after December 15, 2006.  We adopted FIN 48 as of January 1, 2007.  The adoption of this standard did not have an impact on our results of operations or our financial position, but did impact the balance sheet classification of certain tax liabilities.

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements.  SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  The adoption of this standard on January 1, 2008, did not have a material impact on our results of operations or our financial position.

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value of Financial Assets and Financial Liabilities,” which permits entities to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  This election is irrevocable.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The adoption of this standard on January 1, 2008, did not have a material impact on our results of operations or our financial position.

In May 2007, the FASB issued FASB Staff Position FIN 48-1 (“FSP FIN 48-1”), “Definition of Settlement in FASB Interpretation No. 48.”  FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.  FSP FIN 48-1 is effective retroactively to January 1, 2007.  The adoption of this standard did not have an impact on our results of operations or our financial position.

In June 2007, the FASB ratified EITF Issue No. 07-3 (“EITF 07-3”), “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities.”  The scope of EITF 07-3 is limited to nonrefundable advance payments for goods and services to be used or rendered in future research and development activities pursuant to an executory contractual arrangement.  This Issue provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized.  Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed.  EITF 07-3 is effective for fiscal years beginning after December 15, 2007.  Earlier application is not permitted.  Companies should report the effects of applying this Issue prospectively for new contracts entered into on or after the effective date of this Issue.  The adoption of this standard on January 1, 2008, did not have a material impact on our results of operations or our financial position.

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ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

We have variable interest rate debt and other financial instruments, which are subject to interest rate risk and could have a negative impact on our business if not managed properly. We have a risk management policy which is designed to reduce the potential negative earnings effect arising from the impact of fluctuating interest rates. Through the second quarter of 2007, we managed our interest rate risk on our borrowings through an interest rate swap agreement which effectively converted a portion of our variable-rate borrowings to a fixed rate basis through June 29, 2007, thus reducing the impact of changes in interest rates on interest expenses.  Based on our debt balance and our evaluation of the interest rate risk associated with the debt, we did not enter into any interest rate swap agreements during the third and fourth quarters of 2007.  We do not use financial instruments for speculative or trading purposes.

The tables below provide information about our long-term debt and interest rate swaps, both of which are sensitive to changes in interest rates, as of December 31, 2007 and 2006.  For long-term debt, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date (dollars in thousands):

	Expected Maturity Date as of December 31, 2007
	2008		2009		2010		2011		Thereafter			Total			Fair Value
Long-term debt
Variable rate	$	—	$	—	$	—	$	—	$	68,000		$	68,000		$	68,000
Weighted average interest rate (1)		—		—		—		—		5.84	%		5.84	%

	Expected Maturity Date as of December 31, 2006
	2007			2008			2009			2010			Thereafter			Total			Fair Value
Long-term debt
Fixed rate	$	—		$	—		$	—		$	—		$	68,127		$	68,127		$	69,490
Average interest rate		—			—			—			—			7.375	%		7.375	%
Variable rate	$	1,446		$	1,446		$	1,446		$	135,156		$	—		$	139,494		$	139,494
Weighted average interest rate (1)		6.870	%		6.870	%		6.870	%		6.870	%		6.870	%		6.870	%
Interest rate swap (2)
Variable to fixed-notional amount	$	60,000		$	—		$	—		$	—		$	—		$	60,000		$	(54	)
Average pay rate		5.550	%		—			—			—			—			5.550	%
Average receive rate		5.364	%		—			—			—			—			5.364	%
(1)     The weighted average interest rates for future periods were based on the nominal interest rates as of the specified date.
(2)     Interest rate swaps relate to the variable rate debt under long-term debt. The fair value of our interest rate swap agreement was negative and was recorded as a liability at December 31, 2006.

Foreign Currency and Market Risk

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

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KCI faces transactional currency exposures when its foreign subsidiaries enter into transactions denominated in currencies other than their local currency.  These nonfunctional currency exposures relate primarily to intercompany receivables and payables arising from intercompany purchases of manufactured products.  KCI enters into forward currency exchange contracts to mitigate the impact of currency fluctuations on transactions denominated in nonfunctional currencies, thereby limiting risk that would otherwise result from changes in exchange rates.  The periods of the forward currency exchange contracts correspond to the periods of the exposed transactions.

At December 31, 2007 we had outstanding forward currency exchange contracts to sell approximately $27.2 million of various currencies.  Based on our overall transactional currency rate exposure, movements in the currency rates will not materially affect our financial condition.  We are exposed to credit loss in the event of nonperformance by counterparties on their outstanding forward currency exchange contracts, but do not anticipate nonperformance by any of the counterparties.

International operations reported operating profit of $67.3 million for the year ended December 31, 2007.  We estimate that a 10% fluctuation in the value of the U.S. dollar relative to these foreign currencies at December 31, 2007 would change our net earnings for the year ended December 31, 2007 by approximately $3.0 million.  Our analysis does not consider the implications that such fluctuations could have on the overall economic activity that could exist in such an environment in the U.S. or the foreign countries or on the results of operations of these foreign entities.

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ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Kinetic Concepts, Inc.

We have audited the accompanying consolidated balance sheets of Kinetic Concepts, Inc. and subsidiaries (“the Company”) as of December 31, 2007 and 2006, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the index at Item 15(a)2.  These financial statements and the schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kinetic Concepts, Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2007, the Company changed its method of accounting for income taxes, and in 2006, changed its method of accounting for share-based compensation.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

ERNST & YOUNG LLP

San Antonio, Texas

February 22, 2008

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
	December 31,			December 31,
	2007			2006
Assets:
Current assets:
Cash and cash equivalents	$	265,993		$	107,146
Accounts receivable, net		356,965			327,573
Inventories, net		50,341			43,489
Deferred income taxes		41,504			35,978
Prepaid expenses and other		31,176			17,602
Total current assets		745,979			531,788
Net property, plant and equipment		228,471			217,471
Debt issuance costs, less accumulated amortization of $218 at 2007 and $15,406 at 2006		2,456			4,848
Deferred income taxes		8,743			7,903
Goodwill		48,897			49,369
Other non-current assets, less accumulated amortization of $10,678 at 2007 and $9,757 at 2006		23,039			31,063
	$	1,057,585		$	842,442
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable	$	50,804		$	38,543
Accrued expenses and other		212,874			189,801
Current installments of long-term debt		-			1,446
Income taxes payable		-			21,058
Total current liabilities		263,678			250,848
Long-term debt, net of current installments		68,000			206,175
Non-current tax liabilities		31,313			-
Deferred income taxes		9,921			19,627
Other non-current liabilities		7,653			9,579
		380,565			486,229
Shareholders' equity:
Common stock; authorized 225,000 at 2007 and 2006,issued and outstanding 72,153 at 2007 and 70,461 at 2006		72			70
Preferred stock; authorized 50,000 at 2007 and 2006; issued and outstanding 0 at 2007 and 2006		-			-
Additional paid-in capital		644,347			575,539
Retained deficit		(7,181	)		(244,325	)
Accumulated other comprehensive income		39,782			24,929
Shareholders' equity		677,020			356,213
	$	1,057,585		$	842,442
See accompanying notes to consolidated financial statements.

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share data)
	Year Ended December 31,
	2007			2006			2005
Revenue:
Rental	$	1,146,544		$	979,669		$	858,098
Sales		463,400			391,967			350,458
Total revenue		1,609,944			1,371,636			1,208,556
Rental expenses		684,935			607,132			528,000
Cost of sales		145,611			120,492			115,069
Gross profit		779,398			644,012			565,487
Selling, general and administrative expenses		356,560			298,076			253,869
Research and development expenses		50,532			36,694			30,614
Litigation settlement expense		-			-			72,000
Operating earnings		372,306			309,242			209,004
Interest income and other		6,154			4,717			4,189
Interest expense		(19,883	)		(20,333	)		(25,152	)
Foreign currency loss		(624	)		(1,580	)		(2,958	)
Earnings before income taxes		357,953			292,046			185,083
Income taxes		120,809			96,578			62,928
Net earnings	$	237,144		$	195,468		$	122,155
Net earnings per share:
Basic	$	3.34		$	2.76		$	1.76
Diluted	$	3.31		$	2.69		$	1.67
Weighted average shares outstanding:
Basic		70,975			70,732			69,404
Diluted		71,674			72,652			73,024
See accompanying notes to consolidated financial statements.

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(in thousands)
	Common Stock						Additional Paid-in			Deferred			Retained			Accumulated Other Comprehensive			Total Shareholders’
	Shares			Par			Capital			Compensation			Deficit			Income			Equity
Balances at December 31, 2004		68,694		$	69		$	517,354		$	(1,906	)	$	(488,071	)	$	23,355		$	50,801
Net earnings		-			-			-			-			122,155			-			122,155
Foreign currency translation adjustment, net of taxes of $(2,164)		-			-			-			-			-			(16,746	)		(16,746	)
Net derivative gain, net of taxes of $530		-			-			-			-			-			983			983
Reclassification adjustment for gains included in income, net of taxes of $(468)		-			-			-			-			-			(868	)		(868	)
Exercise of stock options		1,414			1			29,152			-			-			-			29,153
Shares purchased under ESPP		106			-			4,113			-			-			-			4,113
Restricted stock issued, net of forfeitures		93			-			6,849			(6,849	)		-			-			-
Amortization of deferred compensation		-			-			-			1,875			-			-			1,875
Balances at December 31, 2005		70,307		$	70		$	557,468		$	(6,880	)	$	(365,916	)	$	6,724		$	191,466
Net earnings		-			-			-			-			195,468			-			195,468
Foreign currency translation adjustment, net of taxes of $880		-			-			-			-			-			19,431			19,431
Net derivative gain, net of taxes of $41		-			-			-			-			-			75			75
Reclassification adjustment for gains included in income, net of taxes of $(701)		-			-			-			-			-			(1,301	)		(1,301	)
Repurchase of common stock in open-market transactions		(3,254	)		(3	)		(26,120	)		-			(73,877	)		-			(100,000	)
Exercise of stock options and other		2,951			3			30,134			-			-			-			30,137
Shares purchased under ESPP		124			-			3,830			-			-			-			3,830
Restricted stock issued, net of forfeitures		333			-			-			-			-			-			-
Share based compensation expense		-			-			17,107			-			-			-			17,107
Reclassification as a result of SFAS 123R adoption		-			-			(6,880	)		6,880			-			-			-
Balances at December 31, 2006		70,461		$	70		$	575,539		$	-		$	(244,325	)	$	24,929		$	356,213
Net earnings		-			-			-			-			237,144			-			237,144
Foreign currency translation adjustment, net of taxes of $353		-			-			-			-			-			14,819			14,819
Net derivative gain, net of taxes of $1		-			-			-			-			-			1			1
Reclassification adjustment for losses included in income, net of taxes of $18		-			-			-			-			-			33			33
Exercise of stock options and other		1,459			2			42,738			-			-			-			42,740
Shares purchased under ESPP		119			-			4,083			-			-			-			4,083
Restricted stock issued, net of forfeitures and shares withheld for minimum tax withholdings		114			-			(1,097	)		-			-			-			(1,097	)
Share based compensation expense		-			-			23,084			-			-			-			23,084
Balances at December 31, 2007		72,153		$	72		$	644,347		$	-		$	(7,181	)	$	39,782		$	677,020
See accompanying notes to consolidated financial statements.

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
	Year ended December 31,
	2007			2006			2005
Cash flows from operating activities:
Net earnings	$	237,144		$	195,468		$	122,155
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and other		93,823			83,407			68,852
Provision for bad debt		7,567			13,744			17,435
Amortization of deferred gain on sale of headquarters facility		(1,070	)		(1,070	)		(1,070	)
Write-off of deferred debt issuance costs		3,922			1,515			2,941
Share-based compensation expense		23,714			17,107			1,874
Tax benefit related to exercise of stock options		-			-			27,459
Excess tax benefit from share-based payment arrangements		(14,318	)		(43,152	)		(27,459	)
Change in assets and liabilities:
Increase in accounts receivable, net		(33,534	)		(55,986	)		(45,554	)
Decrease (increase) in inventories, net		(8,731	)		(14,505	)		7,352
Decrease (increase) in deferred income taxes, net		(16,091	)		(20,875	)		16,796
Increase in prepaid expenses and other		(5,592	)		(2,527	)		(3,432	)
Increase (decrease) in accounts payable		12,793			(4,850	)		720
Increase in accrued expenses and other		23,409			19,769			24,872
Increase in tax liabilities, net		25,902			48,218			25,257
Net cash provided by operating activities		348,938			236,263			238,198
Cash flows from investing activities:
Additions to property, plant and equipment		(95,847	)		(92,178	)		(94,225	)
Decrease (increase) in inventory to be converted into equipment for short-term rental		(5,000	)		(4,000	)		2,300
Dispositions of property, plant and equipment		2,528			1,894			2,508
Purchase of investments		(36,425	)		-			-
Maturities of investments		36,425			-			-
Increase in other non-current assets		(3,366	)		(5,491	)		(417	)
Net cash used by investing activities		(101,685	)		(99,775	)		(89,834	)
Cash flows from financing activities:
Proceeds from revolving credit facility		188,000			-			-
Repayments of long-term debt, capital lease and other obligations		(327,659	)		(87,684	)		(150,252	)
Payments of debt issuance costs		(2,359	)		-			-
Repurchase of common stock in open-market transactions		-			(100,000	)		-
Excess tax benefit from share-based payment arrangements		14,318			43,152			-
Proceeds from exercise of stock options		28,372			11,937			9,276
Purchase of immature shares for minimum tax withholdings		(2,414	)		(27,660	)		(7,589	)
Proceeds from purchase of stock in ESPP and other		4,083			3,830			4,113
Net cash used by financing activities		(97,659	)		(156,425	)		(144,452	)
Effect of exchange rate changes on cash and cash equivalents		9,253			3,700			(4,895	)
Net increase (decrease) in cash and cash equivalents		158,847			(16,237	)		(983	)
Cash and cash equivalents, beginning of year		107,146			123,383			124,366
Cash and cash equivalents, end of year	$	265,993		$	107,146		$	123,383
See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

NOTE 1.     Summary of Significant Accounting Policies

(a)   Principles of Consolidation

The consolidated financial statements presented herein include the accounts of Kinetic Concepts, Inc., together with its consolidated subsidiaries. All inter-company balances and transactions have been eliminated in consolidation. The consolidated entity is referred to herein as "KCI."  Certain prior period amounts have been reclassified to conform to the 2007 presentation.

(b)   Nature of Operations and Customer Concentration

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.

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 in 2007, we directly bill our customers, such as hospitals and extended care organizations.  Also in the U.S. acute and extended care settings, we contract with both proprietary hospital groups and voluntary group purchasing organizations, or GPOs.  Proprietary hospital groups own all of the hospitals which they represent and, as a result, can ensure complete compliance with an executed national agreement.  Voluntary GPOs negotiate contracts on behalf of member hospital organizations, but cannot ensure that their members will comply with the terms of an executed national agreement.  Approximately 36.9%, 37.6% and 37.4% of our total revenue during 2007, 2006 and 2005, respectively, was generated under national agreements with GPOs.  During 2007, 2006 and 2005, we recorded approximately $193.6 million, $179.2 million and $159.6 million, respectively, in V.A.C. and Therapeutic Support Systems revenues under contracts with Novation, LLC, our largest single GPO relationship.

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 we directly bill third-party payers, such as Medicare and private insurance.  During 2007, 2006 and 2005, we submitted claims for approximately $181.5 million, $165.4 million and $148.6 million, respectively, to Medicare.  Internationally, most of our revenue is generated from the acute care setting.

(c)   Use of Estimates

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

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(d)   Revenue Recognition

We recognize revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition,” when each of the following four criteria are met:

1)   a contract or sales arrangement exists;

2)   products have been shipped and title has transferred or services have been rendered;

3)   the price of the products or services is fixed or determinable; and

4)   collectibility is reasonably assured.

We recognize rental revenue based on the number of days a product is used by the patient or organization, at the contracted rental rate for contracted customers and generally, retail price for non-contracted customers.  Sales revenue is recognized when products are shipped and title has transferred.  In addition, we establish realization reserves against revenue to provide for adjustments including capitation agreements, credit memos, volume discounts, pricing adjustments, utilization adjustments, product returns, cancellations, estimated uncollectible amounts and payer adjustments based on historical experience.

(e)   Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of ninety days or less to be cash equivalents.  We maintain cash and cash equivalents with several financial institutions.  Deposits held with banks may exceed the amount of insurance provided on such deposits.  Generally, these deposits may be redeemed upon demand and are maintained at financial institutions of reputable credit and therefore bear minimal credit risk.

(f)   Fair Value of Financial Instruments

The carrying amount reported in the balance sheet for cash and cash equivalents, accounts receivable, accounts payable and long-term obligations, excluding our previously-existing 7 ⅜% Senior Subordinated Notes due 2013, or the Notes, approximates fair value. We estimate the fair value of long-term obligations, excluding the Notes, by discounting the future cash flows of the respective instrument, using our incremental rate of borrowing for a similar instrument.  The fair value of the Notes is estimated based upon open-market trades at or near year-end.  The carrying value of the Notes as of December 31, 2006 was $68.1 million, with a corresponding fair value of approximately $69.5 million.  During 2007, we redeemed the remaining notes using proceeds from our debt refinancing.  (See Note 2)

(g)   Accounts Receivable

Domestic trade accounts receivable consist of amounts due directly from acute and extended care organizations, third-party payers, or TPP, both governmental and non-governmental, and patient pay accounts. Included within the TPP accounts receivable balances are amounts that have been or will be billed to patients once the primary payer portion of the claim has been settled by the TPP.  International trade accounts receivable consist of amounts due primarily from acute care organizations.

Significant concentrations of accounts receivable include:

	2007		2006
Acute and extended care organizations		50%		50%
Managed care, insurance and other		34%		33%
Medicare/Medicaid		15%		16%
Other		1%		1%

The domestic TPP reimbursement process requires extensive documentation, which has had the effect of slowing both the billing and cash collection cycles relative to the rest of the business, and therefore, increasing total accounts receivable.  Because of the extensive documentation required and the requirement to settle a claim with the primary payer prior to billing the secondary and/or patient portion of the claim, the collection period for a claim in our homecare business may, in some cases, extend beyond one year prior to full settlement of the claim.

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We utilize a combination of factors in evaluating the collectibility of our accounts receivable. For unbilled receivables, we establish reserves against revenue to allow for expected denied or uncollectible items.  In addition, items that remain unbilled for more than a specified period of time, or beyond an established billing window, are reserved against revenue.  For billed receivables, we generally establish reserves against revenue and bad debt using a combination of factors including historic adjustment rates for credit memos and cancelled transactions, historical collection experience, and the length of time receivables have been outstanding.  The reserve rates vary by payer group.  In addition, we record specific reserves for bad debt when we become aware of a customer's inability or refusal to satisfy its debt obligations, such as in the event of a bankruptcy filing.  If circumstances change, such as higher than expected claims denials, post-payment claim recoupments, payment defaults, a material change in the interpretation of reimbursement criteria by a major customer or payer, or an unexpected material adverse change in a major customer's or payer's ability to meet its obligations, our estimates of the realizability of trade receivables could be reduced by a material amount.  

(h)   Inventories

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

Effective November 30, 2007, we entered into a three-year Toll Manufacturing Agreement (the "Agreement") with Avail Medical Products, Inc. ("Avail") to continue supplying the majority of our inventory which generates V.A.C. sales revenue.  The Agreement replaces the Amended and Restated Manufacturing Agreement between KCI and Avail, dated December 18, 2002, and has a term through November 2010, which is renewable annually for an additional twelve-month period in November of each year, unless either party gives notice to the contrary.  We maintain an inventory of disposables sufficient to support our business for approximately seven weeks in the United States and nine weeks in our international locations.

(i)   Vendor Rebates

We may receive consideration from vendors in the normal course of business in the form of rebates of purchase price paid.  Our policy for accounting for these funds is in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.”  The funds are recognized as a reduction of cost of sales and inventory if the funds are a reduction of the price of the vendor’s products.

(j)   Long-Lived Assets

Property, plant and equipment are stated at cost. Betterments, which extend the useful life of the equipment, are capitalized. Software development costs for internal use are capitalized pursuant to Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use."  Debt issuance costs as of December 31, 2007, include costs incurred in connection with the issuance of debt under our 2007 senior revolving credit facility, net of amounts written off related to our 2007, 2006 and 2005 redemptions and purchases of our subordinated notes and repayment of our previously-existing senior credit facility. The costs associated with our senior credit facility are amortized on a straight line basis over the respective term of debt to which they relate.  Costs associated with our previous debt were amortized over the respective term of the debt using the effective interest method.  Other assets consist principally of patents, trademarks, long-term investments and our investment in assets subject to leveraged leases. Patents and trademarks are amortized over the estimated useful life of the respective asset using the straight-line method.  Patent and trademark costs associated with products for which we are no longer pursuing development are written-off to expense.

Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful lives (20 to 30 years for buildings and between three and seven years for most of our other property and equipment) of the assets. Amortization for leasehold improvements is taken over the shorter of the estimated useful life of the asset or over the remaining lease term. Depreciation expense for 2007, 2006 and 2005 was $84.4 million, $78.8 million and $66.7 million, respectively.

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(k)   Goodwill and Other Intangible Assets

Goodwill represents the excess purchase price over the fair value of net assets acquired. Effective January 1, 2002, we have applied the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142 (“SFAS 142”), "Goodwill and Other Intangible Assets," in our accounting for goodwill. SFAS 142 requires that goodwill and other intangible assets that have indefinite lives not be amortized but instead be tested at least annually by reporting unit for impairment, or more frequently when events or changes in circumstances indicate that the asset might be impaired. For indefinite lived intangible assets, impairment is tested by comparing the carrying value of the asset to the fair value of the reporting unit. KCI defines its reporting units at the same level as our segments disclosed in Note 16: USA and International. Goodwill and other indefinite lived intangible assets were tested for impairment during the fourth quarter of 2007 and we determined no impairment write down was required.

(l)   Income Taxes

Deferred income taxes are accounted for in accordance with SFAS No. 109 (“SFAS 109”), “Accounting for Income Taxes,” as amended.  SFAS 109 requires the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statements and the tax bases of assets and liabilities, as measured by current enacted tax rates.  When appropriate, in accordance with SFAS 109, we evaluate the need for a valuation allowance to reduce our deferred tax assets.

During 2007, our effective income tax rate is lower than our statutory rate due to the impact of the domestic production deduction, research and development credit and earnings in lower-tax foreign jurisdictions.  In addition, the lower effective income tax rate for the prior year resulted from the favorable resolution of tax contingencies.

We account for uncertain tax positions in accordance with the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.”Accordingly, a liability is recorded for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.  We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

KCI has established a valuation allowance to reduce deferred tax assets associated with foreign net operating losses, certain foreign deferred tax assets and state research and development credits to an amount whose realization is more likely than not.  An increase to net income would occur if we were to determine that we were able to utilize more of these deferred tax assets than currently expected.

(m)   Net Earnings Per Share

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

(n)   Royalties

We pay royalties for the right to market our medical devices.  Royalties are based on applicable revenue and recognized in the period that the related revenue is earned.  Royalties related to rental revenue are included in rental expense.  Royalties on sales revenue are included in cost of sales.

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(o)   Self-Insurance

We self-insure certain employee benefit and casualty insurance risks.  Our group medical plan for U.S. employees is a qualified self-insured plan subject to both specific and aggregate stop loss insurance coverage. Our short-term disability plan for U.S. based employees is self-insured. The Texas Employee Injury Benefit Plan is self-insured subject to a $500,000 per occurrence deductible. Our general and product liability insurance coverage is subject to a $750,000 per occurrence self-insured retention.  Our workers’ compensation and auto liability insurance coverages are subject to $750,000 per occurrence deductibles.  Our group life and accidental death and dismemberment plan along with our long-term disability plan are all fully insured. We fully accrue our self-insurance liabilities, including claims incurred but not reported. These liabilities are not discounted.

(p)   Foreign Currency Translation and Transaction Gains and Losses

The functional currency for the majority of our foreign operations is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Gains and losses resulting from the foreign currency translations are included in accumulated other comprehensive income.  Transaction gains and losses, such as those resulting from the settlement of nonfunctional currency receivables or payables, including intercompany balances, are included in foreign currency loss in our consolidated statements of earnings.  Additionally, payable and receivable balances denominated in nonfunctional currencies are marked-to-market at month-end, and the gain or loss is recognized in our consolidated statements of earnings.  (See Note 1(t))

(q)   Stock Options

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 Revised (“SFAS 123R”), "Share-Based Payment," which is effective for fiscal years beginning after June 15, 2005.  SFAS 123R eliminated the alternative to account for share-based compensation using the intrinsic-value method prescribed under APB 25, "Accounting for Stock Issued to Employees," and required such transactions be recognized, based on their fair values on the date of grant, as compensation expense in the statement of earnings, with the compensation expense recognized on a straight-line basis over the period in which an employee is required to provide service in exchange for the entire stock award.  We adopted SFAS 123R on January 1, 2006 using the modified prospective transition method.  As such, the compensation expense recognition provisions of SFAS 123R apply to new awards and to any awards modified, repurchased or cancelled after the adoption date.  Additionally, for any unvested awards outstanding at the adoption date, we are recognizing compensation expense over the remaining vesting period.  Also, prior to the adoption of SFAS 123R, we presented all benefits of income tax deductions resulting from the exercise of stock options as operating cash flows in the statement of cash flows, as required.  In accordance with SFAS 123R, we now present cash flows related to the tax benefit resulting from exercises of share-based payment arrangements in excess of the tax benefit recorded on compensation cost recognized for those options (excess tax benefit) as financing cash flows.

KCI has elected to use the Black-Scholes model to estimate the fair value of option grants under SFAS 123R.  We believe that the use of the Black-Scholes model meets the fair value measurement objective of SFAS 123R and reflects all substantive characteristics of the instruments being valued.  Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive share-based compensation awards, and subsequent events will not affect the original estimates of fair value made by us under SFAS 123R.

During 2007 and 2006, we recorded share-based compensation expense under SFAS 123R which reduced net earnings by approximately $16.8 million and $12.0 million, respectively, or $0.23 and $0.17 per diluted share, respectively.  Additionally, for the years ended 2007 and 2006, we recorded an actual tax benefit from share-based payment arrangements of $18.4 million and $45.8 million, respectively, of which $14.3 million and $43.2 million, respectively, is reflected as a financing cash inflow, representing the excess tax benefit from share-based payment arrangements, as required under SFAS 123R.  Prior to the adoption of SFAS 123R, these amounts would have been classified as an operating cash inflow.

As prescribed by SFAS 123R, KCI estimates forfeitures when recognizing compensation costs.  We will adjust our estimate of forfeitures as actual forfeitures differ from our estimates, resulting in the recognition of compensation cost only for those awards that actually vest.  Prior to the adoption of SFAS 123R, we recorded forfeitures of share-based compensation awards as they occurred.  As a result of this change, we recorded a cumulative effect of a change in accounting principle of approximately $114,000 as a reduction in share-based compensation expense in our condensed consolidated statement of earnings in the first quarter of 2006.

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The weighted-average estimated fair value of stock options granted during 2007, 2006 and 2005 was $24.30, $17.63 and $21.04, respectively, using the Black-Scholes option pricing model with the following weighted average assumptions (annualized percentages):

	2007	2006	2005
Expected stock volatility	39.6%	39.2%	35.0%
Expected dividend yield	-	-	-
Risk-free interest rate	4.5%	4.8%	4.2%
Expected life (years)	6.2	6.2	5.0

The expected stock volatility is based on historical volatilities of KCI and other similar entities.  The expected dividend yield is 0% as we have historically not paid cash dividends on our common stock.  The risk-free interest rates for periods within the contractual life of the option are based on the U.S. Treasury yield curve in effect at the time of grant.  We have chosen to estimate expected life using the simplified method as defined in Staff Accounting Bulletin No. 107, “Share-Based Payment,” rather than using our own historical expected life as there has not been sufficient history since we completed our initial public offering to allow us to better estimate this variable.

Share-based compensation expense was recognized in the consolidated statements of earnings as follows (dollars in thousands):

	Year ended December 31,
	2007			2006
Rental expenses	$	5,322		$	4,285
Cost of sales		623			487
Selling, general and administrative expenses		17,769			12,335
Pre-tax share-based compensation expense		23,714			17,107
Less:  Income tax benefit		(6,933	)		(5,071	)
Total share-based compensation expense, net of tax	$	16,781		$	12,036
Diluted net earnings per share impact	$	0.23		$	0.17

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Prior to 2006, as permitted by SFAS No. 123 (“SFAS 123”), "Accounting for Stock-Based Compensation," we used the intrinsic-value method to account for our share-based compensation plans. In 2005, compensation costs of approximately $1.2 million, net of estimated taxes, have been recognized in the financial statements related to our plans. The 2005 expense relates to restricted stock awards, which are expensed on a straight-line basis over the vesting period.  If the compensation cost for our share-based employee compensation plans had been determined based upon a fair value method consistent with SFAS 123, our net earnings and net earnings per share would have been adjusted to the pro forma amounts indicated below. For 2005, the impact of adopting SFAS 123R approximates the SFAS 123 disclosure of pro-forma net earnings and net earnings per share as follows (dollars in thousands, except per share data):

	Year ended
	December 31, 2005
Net earnings, as reported	$	122,155
Pro forma net earnings:
Net earnings, as reported	$	122,155
Compensation expense under intrinsic method, after tax		1,237
Compensation expense under fair value method, after tax		(6,707	)
Pro forma net earnings	$	116,685
Net earnings per share, as reported:
Basic	$	1.76
Diluted	$	1.67
Pro forma net earnings per share:
Basic	$	1.68
Diluted	$	1.60

(r)   Research and Development

The focus of our research and development program has been to invest in clinical studies and the development of new advanced wound healing systems and dressings, new and synergistic technologies across the entire 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.  The types of costs classified as research and development expense include salaries of technical staff, consultant costs, facilities and utilities costs related to offices occupied by technical staff, depreciation on equipment and facilities used by technical staff, supplies and materials for research and development and outside services such as prototype development and testing and third-party research and development costs. Expenditures for research and development, including expenses related to clinical studies, are expensed as incurred.

(s)   Interest Rate Protection Agreements

KCI follows the provisions of SFAS No. 133 (“SFAS 133”), "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 (“SFAS 137”), “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133 – An Amendment of FASB Statement No. 133” and SFAS No. 138 (“SFAS 138”), “Accounting for Certain Derivative Instruments and Certain Hedging Activities – An Amendment of FASB Statement No. 133” in accounting for our derivative financial instruments.  We use derivative financial instruments to manage the economic impact of fluctuations in interest rates.  Periodically, we enter into interest rate protection agreements to modify the interest characteristics of our outstanding debt.  Each interest rate swap is designated as a hedge of interest payments associated with specific principal balances and terms of our debt obligations.  These agreements involve the exchange of amounts based on variable interest rates for amounts based on fixed interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based.  The differential to be paid or received, as interest rates change, is accrued and recognized as an adjustment to interest expense related to the debt.  At December 31, 2007, we did not have any interest rate protection agreements in place.  The value of our contracts at December 31, 2006 was determined using quoted prices in active markets for equivalent contracts. (See Note 5)

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(t)   Foreign Exchange Protection Contracts

In late 2005, we began using derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on our intercompany balances.  We enter into forward currency exchange contracts to manage these economic risks.  As required, KCI recognizes all derivative instruments on the balance sheet at fair value.  Gains and losses resulting from the foreign currency fluctuations impact to transactional exposures are included in foreign currency gain (loss) in our statements of earnings.  (See Note 5)

(u)   Shipping and Handling

We include shipping and handling costs in rental expense and cost of sales, as appropriate.  Shipping and handling costs on sales products recovered from customers of $2.8 million, $2.1 million and $2.0 million for the years ended December 31, 2007, 2006 and 2005, respectively, are included in sales revenue for these periods.

(v)   Taxes Collected from Customers and Remitted to Governmental Units

Taxes assessed by a government authority that are directly imposed on a revenue producing transaction between KCI and its customers, including but not limited to sales taxes, use taxes and value added taxes, are accounted for on a net (excluded from revenues and costs) basis.

(w)   Advertising Expenses

Advertising costs are expensed as incurred.  Advertising expenses were $7.9 million, $7.4 million and $9.6 million for the years ended December 31, 2007, 2006 and 2005, respectively.

(x)   Seasonality

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.  Historically, we have experienced a seasonal slowing of V.A.C. revenue growth beginning late 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.

(y)   Other Recently Adopted Accounting Pronouncements

In June 2006, the FASB ratified EITF Issue No. 06-3 (“EITF 06-3”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).”  The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer.  This Issue provides that a company may adopt a policy of presenting taxes within revenue either on a gross basis or on a net basis.  If taxes subject to this Issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amount of such taxes that are recognized on a gross basis.  EITF 06-3 was effective for KCI beginning January 1, 2007, and the adoption of EITF 06-3 did not have an impact on our consolidated financial statements.  We present sales tax on a net basis in our consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”  FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition and is effective for fiscal years beginning after December 15, 2006.  We adopted FIN 48 as of January 1, 2007.  The adoption of this standard did not have an impact on our results of operations or our financial position, but did impact the balance sheet classification of certain tax liabilities.  (See Note 7)

In May 2007, the FASB issued Staff Position FIN 48-1 (“FSP FIN 48-1”), “Definition of Settlement in FASB Interpretation No. 48.”  FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.  FSP FIN 48-1 is effective retroactively to January 1, 2007.  The adoption of this standard did not have an impact on our results of operations or our financial position.

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(z)   Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements.  SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  The adoption of this standard on January 1, 2008, did not have a material impact on our results of operations or our financial position.

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value of Financial Assets and Financial Liabilities,” which permits entities to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  This election is irrevocable.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The adoption of this standard on January 1, 2008, did not have a material impact on our results of operations or our financial position.

In June 2007, the FASB ratified EITF Issue No. 07-3 (“EITF 07-3”), “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities.”  The scope of EITF 07-3 is limited to nonrefundable advance payments for goods and services to be used or rendered in future research and development activities pursuant to an executory contractual arrangement.  This Issue provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized.  Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed.  EITF 07-3 is effective for fiscal years beginning after December 15, 2007.  Earlier application is not permitted.  Companies should report the effects of applying this Issue prospectively for new contracts entered into on or after the effective date of this Issue.  The adoption of this standard on January 1, 2008, did not have a material impact on our results of operations or our financial position.

NOTE 2.     Refinancing

Senior Credit Facility.  On July 31, 2007, we entered into a new $500.0 million senior secured revolving credit facility due July 30, 2012, with Citibank, N.A. as administrative agent for the lenders thereunder.  We used proceeds from borrowings under the new credit facility primarily to repay the remaining outstanding balance of $114.1 million under our previously-existing senior credit facility due 2010 and to redeem the remaining $68.1 million outstanding on our 7 ⅜% Senior Subordinated Notes due 2013.  Borrowings under the new senior credit facility are secured by a first-priority security interest in substantially all of our existing and hereafter acquired assets, including substantially all of the capital stock or membership interests of all of our subsidiaries that are guarantors under the new credit facility and 65% of the capital stock or membership interests of certain of our foreign subsidiaries.  (See Note 5)

Redemption of 7 ⅜% Senior Subordinated Notes.  As of August 1, 2007, we had $68.1 million outstanding in 7 ⅜% Senior Subordinated Notes due 2013.  On that date, we notified the holders of these notes that, pursuant to their terms, we would redeem all such outstanding notes for a purchase price of 100.0% of their principal amount plus accrued but unpaid interest to the date of redemption plus an early redemption premium based on a reference treasury yield chosen in accordance with the senior credit agreement plus 0.5%. The redemption was completed on August 31, 2007.  The total early redemption premium paid was $3.6 million and is included within interest expense on our consolidated statement of earnings. 

The repayment of our previously-existing senior credit facility and the redemption of our senior subordinated notes using proceeds from our current senior revolving credit facility are referred to herein collectively as the "Refinancing."  We recorded Refinancing expenses associated with these transactions of $4.5 million, net of income taxes, or $0.06 per diluted share, in the third quarter of 2007.  These expenses included the write-off of capitalized debt issuance costs associated with the repayment of our previous debt and the payment of an early redemption premium due to the holders of our senior subordinated notes.  These Refinancing expenses are included within interest expense on our consolidated statement of earnings. 

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The following sets forth the sources and uses of funds in connection with the Refinancing (dollars in thousands):

	Amount
Source of funds:
Borrowings under new senior revolving credit facility	$	188,000
Cash on hand		2,507
	$	190,507
Use of funds:
Repayment of debt under previous senior credit facility	$	114,133
Redemption of 7 ⅜% Senior Subordinated Notes (1)		71,775
Payment of accrued interest		2,241
Transaction fees and expenses for the Refinancing (2)		2,358
	$	190,507
(1)   Includes early redemption premium of 5.355% of the aggregate principal amount of our 7 ⅜% Senior Subordinated Notes due 2013 pursuant to the terms of our previously-existing credit agreement.
(2)   Transaction fees and expenses for the Refinancing have been deferred and will be amortized over the life of the senior revolving credit facility.

NOTE 3.     Supplemental Balance Sheet Data

(a)   Accounts Receivable

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

	December 31,			December 31,
	2007			2006
Gross trade accounts receivable:
USA:
Acute and extended care organizations	$	108,053		$	102,212
Managed care, insurance and other		153,612			136,506
Medicare / Medicaid		66,922			65,727
USA - Trade accounts receivable		328,587			304,445
International		118,272			104,804
Total trade accounts receivable		446,859			409,249
Less:  Allowance for revenue adjustments		(90,095	)		(81,160	)
Gross trade accounts receivable		356,764			328,089
Less:  Allowance for bad debt		(6,695	)		(7,328	)
Net trade accounts receivable		350,069			320,761
Employee and other receivables		6,896			6,812
	$	356,965		$	327,573

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(b)   Inventories

Inventories consist of the following (dollars in thousands):

	December 31,			December 31,
	2007			2006
Finished goods	$	34,647		$	22,975
Work in process		1,341			2,104
Raw materials, supplies and parts		34,551			32,299
		70,539			57,378
Less:   Amounts expected to be converted into equipment for short-term rental		(15,800	)		(10,800	)
Reserve for excess and obsolete inventory		(4,398	)		(3,089	)
	$	50,341		$	43,489

(c)   Net property, plant and equipment

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

	December 31,			December 31,
	2007			2006
Land	$	599		$	549
Buildings		15,753			13,240
Equipment for short-term rental		340,634			298,496
Machinery, equipment and furniture (1)		214,692			187,823
Leasehold improvements		31,614			27,501
Inventory to be converted to equipment		15,800			10,800
		619,092			538,409
Less accumulated depreciation (1)		(390,621	)		(320,938	)
	$	228,471		$	217,471
(1)   Net property, plant and equipment as of December 31, 2007 and 2006 includes approximately $1.5 million and $1.3 million, respectively, in machinery, equipment and furniture under various capital leases.

(d)   Accrued expenses and other

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

	December 31,		December 31,
	2007		2006
Payroll, benefits, commissions, bonuses and related taxes	$	79,346	$	66,910
Royalty accrual		61,661		51,517
Deferred compensation		7,129		8,241
Insurance accruals		7,239		6,174
Other accrued expenses		57,499		56,959
	$	212,874	$	189,801

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NOTE 4.     Accounting for Goodwill and Other Non-current Assets

(a)   Goodwill

Goodwill represented 4.6% and 5.9% of total assets at December 31, 2007 and 2006, respectively.

The components of goodwill by geographical segment are listed below (dollars in thousands):

	December 31,		December 31,
	2007		2006
USA	$	25,303	$	25,303
International		23,594		24,066
	$	48,897	$	49,369

(b)   Other non-current assets

We have recorded amortizable intangible assets in other non-current assets on our consolidated balance sheets. Other non-current assets include the following (dollars in thousands):

	December 31,			December 31,
	2007			2006
Patents, trademarks and other	$	17,874		$	15,721
Accumulated amortization		(10,678	)		(9,757	)
		7,196			5,964
Investment in assets subject to leveraged leases		11,200			13,460
Life insurance policies and other (See Note 10)		4,643			11,639
Other tangible, non-current assets, net		15,843			25,099
	$	23,039		$	31,063

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

We evaluate the potential for impairment annually or more frequently when events or changes in circumstances indicate an asset might be impaired.  The current market analysis of these assets includes the commercial airline industry, which has suffered diminished market values.  During 2007 and 2006, based on our analysis of the current market conditions, we decreased our net investment in these aircraft by $2.3 million and $3.0 million, respectively, which was expensed to selling, general and administrative expenses.  These assets are under long-term lease to FedEx.  If FedEx were to terminate the existing leases prior to expiration, the lease agreement would require FedEx to make a stated termination payment.  At December 31, 2007, the termination payment would cover the remaining debt and the residual value recorded by KCI.  We believe the current asset balance represents the residual value we expect to realize upon lease expiration.

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Amortization expense, related to definite-lived intangibles, was approximately $1.3 million, $415,000 and $700,000 for 2007, 2006 and 2005, respectively.  We amortize these intangible assets over 5 to 17 years, depending on the estimated economic or contractual life of the individual asset.  The following table shows the estimated amortization expense, in total, to be incurred over the next five years for all definite-lived intangible assets as of December 31, 2007 (dollars in thousands):

	Estimated
Year ended	Amortization
December 31,	Expense
2008	$    675
2009	666
2010	633
2011	594
2012	561

As of December 31, 2007, unamortized debt issuance costs related to our current senior credit facility were $2.5 million and unamortized debt issuance costs related to our previously-existing senior credit facility and subordinated notes were $2.7 million and $2.1 million, respectively, as of December 31, 2006.  Amortization of debt issuance costs recorded for the years ended December 31, 2007, 2006 and 2005 were $4.8 million, $2.7 million and $4.4 million, respectively.  The amortization for 2007, 2006 and 2005 includes approximately $3.9 million, $1.5 million and $2.9 million, respectively, of debt issuance costs written off in connection with our redemptions of our subordinated notes and prepayments on our previously-existing senior credit facility.  The remaining costs are being amortized on a straight-line basis for the current senior credit facility and were amortized using the effective interest method for the previously-existing debt over the respective term of debt to which they specifically relate.

NOTE 5.     Long-Term Debt and Derivative Financial Instruments

Long-term debt consists of the following (dollars in thousands):

	December 31,		December 31,
	2007		2006
Senior Revolving Credit Facility – due 2012	$	68,000	$	-
Senior Credit Facility – Term loan B2 due 2010 (1)		-		139,494
7 ⅜% Senior Subordinated Notes due 2013 (1)		-		68,127
		68,000		207,621
Less:  current installments		-		(1,446	)
	$	68,000	$	206,175
(1)   Outstanding amounts were repaid in connection with the Refinancing completed during the third quarter of 2007. (See Note 2)

Senior Credit Facility

On July 31, 2007, we entered into a new $500.0 million senior secured revolving credit facility due July 30, 2012.

Loans. The senior credit facility consists of a $500.0 million revolving credit facility increasable, at any time, up to $650.0 million upon satisfaction of certain conditions.  Amounts available under the new senior credit facility are available for borrowing and reborrowing until maturity and up to $60.0 million of the revolving credit facility is available for letters of credit.  At December 31, 2007, $68.0 million was outstanding under the revolving credit facility.  In addition, we had outstanding letters of credit in the aggregate amount of $8.7 million, none of which have been drawn upon by the beneficiaries thereunder.  The resulting availability under the revolving credit facility was $423.3 million at December 31, 2007.

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Interest. Amounts outstanding under the senior credit facility bear interest at a rate equal to the Base Rate, as defined in the senior credit agreement, or the Eurocurrency Rate (the LIBOR rate), in each case plus an applicable margin.  The applicable margin varies in reference to Moody’s and Standard and Poor’s credit rating of the senior credit facility and ranges from 0.40% to 1.25% in the case of loans based on the Eurocurrency Rate and 0.0% to 0.25% in the case of loans based on the Base Rate.  The weighted average interest rate on amounts outstanding under the revolving credit facility was 5.84% at December 31, 2007.

We may choose Base Rate or Eurocurrency Rate pricing and may elect interest periods of 1, 2, 3 or 6 months for the Eurocurrency borrowings. Interest on Base Rate borrowings is payable quarterly in arrears.  Interest on Eurocurrency borrowings is payable at the end of each applicable interest period or every three months in the case of interest periods in excess of three months.  Interest on all past due amounts will accrue at 2.0% over the applicable rate.

Collateral. The senior credit facility is secured by a first-priority security interest in (a) substantially all shares of capital stock and intercompany receivables of each of our present and future subsidiaries (limited in the case of certain foreign subsidiaries to 65% of the capital stock or membership interests of such entity) and (b) substantially all of our present and future real property (with a value in excess of $10 million individually), and the present and future assets of our subsidiaries that are or will be guarantors under the senior credit facility.  The security interest is subject to certain exceptions and permitted liens.

Guarantors. Our obligations under the senior credit facility are guaranteed by each of our direct and indirect 100% owned subsidiaries, other than foreign subsidiaries or subsidiaries whose only assets are investments in foreign subsidiaries.

Maturity. The senior credit facility matures on July 30, 2012.

Prepayments. We may prepay, in full or in part, borrowings under the senior credit facility without premium or penalty, subject to a minimum prepayment amount and increment limitations.

Representations. The senior credit facility contains representations generally customary for similar facilities and transactions.

Covenants. The senior credit facility contains affirmative and negative covenants customary for similar facilities and transactions.  The material covenants and other restrictive covenants in the senior credit agreement are summarized as follows:

·     limitations on other debt, with unlimited permission to incur unsecured indebtedness and up to $60.0 million of secured indebtedness (subject to compliance with financial covenants) and with baskets for, among other things, debt used to acquire fixed or capital assets, debt of foreign subsidiaries for working-capital purposes, certain intercompany debt, debt of newly-acquired subsidiaries, debt under certain nonspeculative interest rate and foreign currency swaps, certain ordinary-course debt, and certain sale-leaseback transactions;

·     limitations on other liens, with baskets for certain ordinary-course liens, liens under allowed sale-leaseback transactions and liens securing debt that may be allowed as described above;

·     limitations on mergers or consolidations and on sales of assets with baskets for certain ordinary course asset sales and certain asset sales for fair market value;

·     limitations on investments, with baskets for certain ordinary-course extensions of trade credit, investments in cash equivalents, certain intercompany investments, interest rate and foreign currency swaps otherwise permitted, and certain acquisitions; and

·     limitations on changes in the nature of the business, on changes in KCI’s fiscal year, and on changes in organizational documents.

We are permitted to effect unlimited repurchases of our capital stock when our leverage ratio is less than or equal to 3.0 to 1.0 and there is no default under the senior credit agreement.  In the event the leverage ratio is greater than 3.0 to 1.0, open-market repurchases of our common stock are limited to $300.0 million until such time as the leverage ratio has been restored.  In addition, we have the unlimited ability to pay dividends on our capital stock if our pro forma leverage ratio, as defined in the senior credit agreement, is less than 3.0 to 1.0.  As of December 31, 2007, our leverage ratio was 0.2 to 1.0.

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The senior credit facility contains financial covenants requiring us to meet certain leverage and interest coverage ratios.  It will be an event of default if we permit any of the following:

·     as of the last day of any fiscal quarter, our leverage ratio of debt to EBITDA, as defined in the senior credit agreement, to be greater than 4.0 to 1.0, or

·     as of the last day of any fiscal quarter, our ratio of EBITDA to consolidated cash interest expense, as defined in the senior credit agreement, to be less than 2.5 to 1.0.

As of December 31, 2007, we were in compliance with all covenants under the senior credit agreement.

Events of Default. The senior credit facility contains events of default including, but not limited to, failure to pay principal or interest, breaches of representations and warranties, violations of affirmative,  negative or financial covenants, cross-defaults to other indebtedness, a bankruptcy or similar proceeding being instituted by or against us, rendering of certain monetary judgments against us, impairments of loan documentation or security, changes of ownership or operating control, defaults with respect to certain Employee Retirement Income Security Act (ERISA) obligations and termination of the license agreement with Wake Forest University Health Sciences relating to our negative pressure wound therapy, or NPWT, line of products.

Interest Rate Protection

We follow SFAS 133 and its amendments, SFAS 137 and SFAS 138, in accounting for our derivative financial instruments. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. We designated our interest rate swap agreements as cash flow hedge instruments. The swap agreements were used to manage exposure to interest rate movements by effectively changing the variable interest rate to a fixed rate. We do not use financial instruments for speculative or trading purposes. The critical terms of the interest rate swap agreements and the interest-bearing debt associated with the swap agreements must be the same to qualify for the shortcut method of accounting. Changes in the effective portion of the fair value of the remaining interest rate swap agreement will be recognized in other comprehensive income, net of tax effects, until the hedged item is recognized into earnings.

The following chart summarizes interest rate hedge transactions effective during 2007 (dollars in thousands):

		Notional		Fixed
Accounting Method	Effective Dates	Amount		Interest Rate			Status
Shortcut	08/21/06-06/29/07	$	60,000		5.550	%	Matured 06/29/07

At December 31, 2007, we did not have any interest rate protection agreements in place.  As a result of the interest rate protection agreements that were in place during 2007, 2006 and 2005, interest expense was approximately $51,000 higher in 2007, but $2.0 million and $1.3 million lower in 2006 and 2005, respectively.

Foreign Currency Exchange Fluctuation Protection

KCI enters into forward currency exchange contracts to mitigate the impact of currency fluctuations on transactions denominated in nonfunctional currencies, thereby limiting risk that would otherwise result from changes in exchange rates.  These nonfunctional currency exposures relate primarily to intercompany receivables and payables arising from intercompany purchases of manufactured products.  The periods of the forward currency exchange contracts correspond to the periods of the exposed transactions, with realized gains and losses included in the measurement and recording of transactions denominated in the nonfunctional currencies.  All forward currency exchange contracts are marked-to-market each period and resulting gains or losses are included in foreign currency loss in the consolidated statements of earnings.  Additionally, payable and receivable balances denominated in nonfunctional currencies are marked-to-market at month-end, and the gain or loss is recognized in our consolidated statements of earnings.  (See Note 1(t))

At December 31, 2007 and 2006, we had outstanding forward currency exchange contracts to sell approximately $27.2 million and $26.1 million, respectively, of various currencies.  We are exposed to credit loss in the event of nonperformance by counterparties on their outstanding forward currency exchange contracts, but do not anticipate nonperformance by any of the counterparties.  We have designated our forward currency exchange contracts as cash flow hedge instruments.

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Interest and Future Maturities

Interest paid, net of cash received from interest rate swap agreements, during 2007, 2006 and 2005 was $15.6 million, $17.6 million and $21.0 million, respectively.  These amounts include any early redemption premium payments associated with the purchase or redemption of our senior subordinated notes.

Future maturities of long-term debt at December 31, 2007 were (dollars in thousands):

Year	Amount
2008	$	-
2009	$	-
2010	$	-
2011	$	-
2012	$	68,000
Thereafter	$	-

NOTE 6.     Leasing Obligations

We are obligated for equipment under various capital leases, which expire at various dates during the next four years. At December 31, 2007 and 2006, the gross amount of equipment under capital leases totaled $2.6 million and $2.2 million and related accumulated depreciation was approximately $1.1 million and $900,000, respectively.

In August 2002, we sold our corporate headquarters facility and adjacent land and buildings under a 10-year sale-leaseback arrangement.  The properties were sold for $17.9 million, net of selling costs, resulting in a deferred gain of approximately $10.7 million.  The deferred gain is being amortized over the term of the lease.  In 2007, 2006 and 2005, approximately $1.1 million of gain was recognized annually as a reduction of selling, general and administrative expenses.  The initial lease term is 10 years, expiring in 2012.  We have two consecutive options to renew the lease for a term of three or five years each at our option.  If we exercise either renewal option, the terms of the renewal lease will be on prevailing market rental terms, including the lease rate and any improvement allowance or other inducements available to renewing tenants on prevailing market terms.  In order to exercise our renewal options, we must give notice at least six months prior to the expiration of the then-existing term.  Rental expense for our corporate headquarters totaled $4.2 million, $4.1 million and $4.2 million for the years ended 2007, 2006 and 2005, respectively.  The following table indicates the estimated future cash lease payments of our corporate headquarters, inclusive of executory costs, for the years set forth below (dollars in thousands):

Year ended December 31,	Estimated Cash Lease Payments
2008	$	4,138
2009		4,210
2010		3,865
2011		3,900
2012		2,330
Thereafter		-
	$	18,443

In addition to leasing our headquarters facility, we lease computer and telecommunications equipment, service vehicles, office space, various storage spaces and manufacturing facilities under non-cancelable operating leases, which expire at various dates over the next nine years. Total rental expense for operating leases, including our headquarters facility, was $35.8 million, $32.4 million and $29.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.

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Future minimum lease payments under capital and non-cancelable operating leases, including our headquarters facility (with initial or remaining lease terms in excess of one year) as of December 31, 2007 are as follows (dollars in thousands):

	Capital			Operating
	Leases			Leases
2008	$	318		$	34,502
2009		216			31,295
2010		145			25,091
2011		48			19,320
2012		-			14,838
Thereafter		-			30,561
Total minimum lease payments	$	727		$	155,607
Less amount representing interest		(135	)
Present value of net minimum capital lease payments		592
Less current portion		(259	)
Obligations under capital leases, excluding current installments	$	333

NOTE 7.     Income Taxes

The following table summarizes earnings before income taxes of U.S. and foreign operations (dollars in thousands):

	Year Ended December 31,
	2007		2006		2005
Domestic	$	288,796	$	233,391	$	144,096
Foreign		69,157		58,655		40,987
	$	357,953	$	292,046	$	185,083

The following table summarizes the composition of income taxes (dollars in thousands):

	Year Ended December 31,
	2007			2006			2005
Current
Federal	$	106,541		$	92,315		$	52,030
State		14,279			14,778			5,336
International		11,799			11,010			8,829
Total current expense		132,619			118,103			66,195
Deferred
Federal		(9,462	)		(17,620	)		(4,345	)
State		(1,181	)		(1,623	)		2,568
International		(1,167	)		(2,282	)		(1,490	)
Total deferred tax benefit		(11,810	)		(21,525	)		(3,267	)
Income taxes	$	120,809		$	96,578		$	62,928

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The reconciliation of the U.S. federal statutory rate to the consolidated effective tax rate is as follows:

	Year Ended December 31,
	2007			2006			2005
Computed "expected" tax expense		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit		2.8			2.9			2.8
Nondeductible meals and entertainment		0.3			0.4			0.5
Foreign income taxed at other than U.S. rates		(3.1	)		(3.9	)		(3.8	)
Foreign tax refund		(0.3	)		(0.9	)		-
Section 199 production deduction		(0.9	)		(0.3	)		(0.3	)
Research and development credit		(0.5	)		(0.3	)		-
Non-deductible Stock Options		0.5			-			-
Other, net		-			0.2			(0.2	)
		33.8	%		33.1	%		34.0	%

The tax effects of temporary differences which give rise to significant portions of the deferred tax assets and liabilities consist of the following (dollars in thousands):

	Year Ended December 31,
	2007			2006
Deferred Tax Assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	29,783		$	26,924
Foreign net operating loss carry forwards		12,448			14,018
Deferred state tax asset		4,553			1,157
Tax credits, primarily research and development		1,576			1,382
Accrued liabilities		6,528			6,927
Compensation		2,220			2,753
Deferred foreign tax asset		11,559			8,568
Deferred gain on sale of headquarters facility		1,717			2,091
Inventories, principally due to additional costs capitalized for tax purposes pursuant to the Tax Reform Act of 1986		1,691			1,005
Intangible assets, deducted for book purposes but capitalized and amortized for tax purposes		288			318
Share based compensation as a result of adoption of SFAS 123R		8,216			4,505
Accrued Interest		1,933			-
Other		3,973			4,305
Total gross deferred tax assets		86,485			73,953
Less: valuation allowances		(14,673	)		(14,872	)
Net deferred tax assets		71,812			59,081
Deferred Tax Liabilities:
Plant and equipment, principally due to differences in depreciation and basis		(22,072	)		(27,795	)
Net intangible assets, deducted for book purposes over a longer life than for tax purposes		(6,833	)		(5,805	)
Other		(2,581	)		(1,227	)
Total gross deferred tax liabilities		(31,486	)		(34,827	)
Net deferred tax asset		40,326			24,254
Less: current deferred tax asset		(41,504	)		(35,978	)
Less: non-current deferred tax asset		(8,743	)		(7,903	)
Non-current deferred tax liability	$	(9,921	)	$	(19,627	)

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At December 31, 2007, $1.6 million of state research and development credits and $12.5 million of foreign tax losses were available for carryforward.  The losses and credits generally expire within a period of 3 to 20 years, with some foreign losses available indefinitely.  We have valuation allowances of $1.6 million associated with our state research and development credit carryforwards, $12.5 million associated with foreign loss carryforwards, and approximately $600,000 associated with certain foreign deferred tax assets due to uncertainties regarding their realizability.  The net valuation allowance decreased by $199,000 for the year ended December 31, 2007.  For the years ended December 31, 2006 and 2005, the net valuation allowance increased by $3.3 million and $4.7 million, respectively, due primarily to increased foreign net operating losses.  We believe that the remaining deferred income tax assets will be realized based upon historical pre-tax earnings, adjusted for reversals of existing taxable temporary differences.  Certain tax planning or other strategies will be implemented, if necessary, to supplement income from operations to fully realize these remaining deferred tax assets.  Accordingly, we believe that no additional valuation allowances are necessary.

KCI operates in multiple tax jurisdictions with varying rates, both inside and outside the United States and is routinely under audit by federal, state and foreign tax authorities.  These reviews can involve complex matters that may require an extended period of time for resolution.  KCI's U.S. Federal income tax returns have been examined and settled through fiscal year 2004.  However, KCI has filed amended returns for increased Research and Development Credits for 2003 and 2004 that are being reviewed by the Internal Revenue Service.  In addition, KCI has ongoing audits in various state and local jurisdictions, as well as audits in various foreign jurisdictions.  We provide tax reserves for federal, state, local and international uncertain tax positions.  The development of these tax positions requires subjective, critical estimates and judgments about tax matters, potential outcomes and timing.  Although the outcome of open tax examinations is uncertain, in management's opinion, adequate provisions for income taxes have been made for potential liabilities emanating from these reviews.  If actual outcomes differ materially from these estimates, they could have a material impact on our financial condition and results of operations. Differences between actual results and assumptions, or changes in assumptions in future periods, are recorded in the period they become known.  To the extent additional information becomes available prior to resolution, such accruals are adjusted to reflect probable outcomes.

On January 1, 2007, KCI adopted the provisions of FIN 48.  We recognized no change in the amount of our reported liability for unrecognized income tax benefits as a result of the implementation of FIN 48.  As of January 1, 2007, we had $28.7 million of unrecognized tax benefits that were reclassified as long-term liabilities, of which $24.4 million would favorably impact our effective tax rate, if recognized.  At December 31, 2007, unrecognized tax benefits totaled $31.3 million of which $26.9 would favorably impact our effective tax rate, if recognized.

The reconciliation of the allowance for uncertain tax positions is as follows (dollars in thousands):

Balance at January 1, 2007	$	28,732
Net additions & reductions for tax positions of prior years		1,929
Net additions & reductions based on positions related to the current year		2,665
Settlements		-
Reductions resulting from a lapse of the applicable statute of limitation		(2,013	)
Balance at December 31, 2007	$	31,313

KCI’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense.  KCI recognized $1.9 million of interest and penalties expense in the consolidated statement of earnings for the year ended December 31, 2007, and $7.6 million in the consolidated balance sheet as of December 31, 2007.

KCI is subject to U.S. federal income tax, multiple state taxes, and foreign income tax. In general, the tax years 2002 through 2007 remain open in the major taxing jurisdictions, with some state and foreign jurisdictions remaining open longer, as the result of net operating losses and longer statutes.

KCI is periodically under examination in multiple tax jurisdictions.  It is reasonably possible that these examinations or statutes could close at various times within the next twelve months.  As a result, between $2.0 million and $5.0 million of our unrecognized tax benefit could be reduced within the next twelve months.

The cumulative undistributed earnings of our foreign subsidiaries were approximately $267.4 million, $187.2 million and $124.2 million at December 31, 2007, 2006 and 2005, respectively.  These earnings are considered to be permanently reinvested in foreign operations and, accordingly, no provision for U.S. federal or state income taxes has been provided thereon.  Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.  Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

The 2006 Tax Relief and Healthcare Act was signed into law on December 20, 2006.  This reinstated the federal Research and Development Credit for 2006 and 2007.  Accordingly, we recognized a benefit in the fourth quarter of 2006.

Income taxes paid were $113.9 million, $72.1 million and $17.8 million for the years ended 2007, 2006 and 2005, respectively.

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NOTE 8.     Shareholders' Equity

On February 9, 2004, in connection with the initial public offering, KCI’s shareholders amended our Articles of Incorporation to increase the number of shares of stock authorized to be issued by KCI to 225,000,000 shares of common stock, $0.001 par value (the "Common Stock") and authorized KCI to issue up to 50,000,000 shares of preferred stock, $0.001 par value.  The number of shares of Common Stock issued and outstanding as of December 31, 2007 and 2006 was 72,153,231 and 70,461,231, respectively.  During the years ended December 31, 2007, 2006 and 2005, there were no preferred stock shares issued or outstanding.

NOTE 9.     Share Repurchase Program

In August 2006, KCI's Board of Directors authorized a share repurchase program for the repurchase of up to $200.0 million in market value of common stock.  In August 2007, the Board authorized a one-year extension of this share repurchase program through September 30, 2008.  As of December 31, 2007, the authorized amount for share repurchases under this program was $87.4 million.  Pursuant to the share repurchase program, we have entered into a pre-arranged purchase plan under Rule 10b5-1 of the Exchange Act authorizing repurchases of up to $87.0 million of KCI common stock if our stock price is below certain levels.

During the second half of 2006, $100.0 million of the authorized shares were repurchased in open-market transactions through a pre-arranged purchase plan pursuant to Rule 10b5-1 of the Exchange Act.  During 2007, we repurchased and retired approximately 54,900 shares of KCI common stock at an average price of $50.90 per share for an aggregate purchase price of $2.8 million.  During 2006, we repurchased and retired approximately 3.5 million shares of KCI common stock at an average price of $31.05 per share for an aggregate purchase price of $109.8 million.  The stock not repurchased in open-market transactions during 2007 and 2006 resulted from the purchase and retirement of shares in connection with the net share settlement exercise of employee stock options for the minimum tax withholdings and exercise price and the withholding of shares to satisfy the minimum tax withholdings on the vesting of restricted stock.  No open-market repurchases were made under the share repurchase program during 2007.

The purchase price for shares of KCI's common stock repurchased under the program has been reflected as a reduction to shareholders’ equity.  In accordance with Accounting Principles Board Opinion No. 6, “Status of Accounting Research Bulletins,” we are required to allocate the purchase price of the repurchased shares as a reduction to common stock and additional paid-in capital and an increase to retained deficit.  The share repurchases since the inception of this program are summarized in the table below (amounts in thousands):

			Common Stock				Total
	Shares of		and Additional		Retained		Shareholders’
	Common Stock		Paid-in Capital		Deficit		Equity
Repurchase of common stock		3,590	$	38,684	$	73,877	$	112,561

NOTE 10.     Employee Benefit Plans

Investment Plan:

We have an Investment Plan intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code of 1986.  The Investment Plan is available to all domestic employees and we match employee contributions up to a specified limit.  In 2007, 2006 and 2005, matching contributions charged to expense were approximately $7.4 million, $6.5 million and $4.5 million, respectively.

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Deferred Compensation Plan:

Through December 31, 2006, KCI offered a deferred compensation plan (the "Plan") for key management personnel.  The Plan offered the employee a rate of return based on various investment opportunities.  The employee was able to receive distributions in a lump sum, or over five or ten years upon retirement as defined, or at a date previously specified. Our obligation under this Plan was that of an unsecured promise to pay in the future.  In December 2006, management made the decision to discontinue the Plan effective January 1, 2007.  There were no salary deferrals made subsequent to December 31, 2006.  All balances as of December 31, 2006 remained with the Plan throughout 2007 unless the participant had a previously-scheduled distribution.  Any undistributed balances as of December 31, 2007 will be distributed during the first quarter of 2008.  Amounts payable to a participant shall be paid from the general assets of KCI, exclusively.  KCI established a Rabbi Trust to increase security for the Plan benefits.  At December 31, 2007, the assets in the Rabbi Trust include approximately $7.8 million of cash surrender value under life insurance policies for the participants and cash held by the Trust.  The liability of the Plan is approximately $7.1 million.  Both the assets and the liabilities of the Plan have been reflected in our consolidated financial statements.

Stock Option Plans:

In December 1997, the Board of Directors approved the 1997 Management Equity Plan (the “Management Equity Plan”).  In January of 2004, the Board of Directors determined that no new equity grants would be made under the Management Equity Plan.  The maximum aggregate number of shares of common stock that could be issued in connection with grants under the Management Equity Plan, as amended, was approximately 13.9 million shares, subject to adjustment as provided for in the plan.  Outstanding grants under the Management Equity Plan are administered by the Compensation Committee of the Board of Directors.  The exercise price and term of options granted under the Management Equity Plan have been determined by the Compensation Committee or the entire Board of Directors.  However, in no event has the term of any option granted under the Management Equity Plan exceeded ten years.

The 2003 Non-Employee Directors Stock Plan (the “Directors Stock Plan”) became effective on May 28, 2003, and was amended and restated on November 9, 2004, November 15, 2005, November 28, 2006, and December 4, 2007.  The maximum aggregate number of shares of common stock that may be issued in connection with grants under the Directors Stock Plan is 400,000 shares, subject to adjustment as provided for in the plan.  The exercise price of options granted under this plan is determined as the fair market value of the shares of our common stock, which is equal to the closing price of our common stock on the date that such option is granted.  The options granted will vest and become exercisable incrementally over a period of three years.  The right to exercise an option terminates seven years after the grant date, unless sooner as provided for in the Directors Stock Plan.  The Compensation Committee of the Board of Directors administers the Directors Stock Plan.  During 2007, 2006 and 2005, we granted approximately 44,000, 41,000 and 41,000 options, respectively, to purchase shares of common stock.  Additionally, during 2007, 2006 and 2005, we issued approximately 18,000, 14,000 and 10,000 shares of restricted stock, respectively, under this plan.

On February 9, 2004, KCI’s shareholders approved the 2004 Equity Plan (the “Equity Plan”) and the 2004 Employee Stock Purchase Plan (the “ESPP”).  The Equity Plan was effective on February 27, 2004 and reserves for issuance a maximum of 7,000,000 shares of common stock to be awarded as stock options, stock appreciation rights, restricted stock and/or restricted stock units.  Of the 7,000,000 shares, 20% may be issued in the form of restricted stock, restricted stock units or a combination of the two.  The exercise price of options granted under the Equity Plan is equal to KCI’s closing stock price on the date that such option is granted.  The options granted will vest and become exercisable incrementally over a period of four years unless otherwise provided in the option award agreement.  The right to exercise an option terminates ten years after the grant date, unless sooner as provided for in the plan.  Restricted stock and restricted stock units granted under the Equity Plan generally vest over a period of three to six years unless otherwise provided in the award agreement.  The fair value of the restricted stock and restricted stock units is determined on the grant date based on KCI’s closing stock price.  The likelihood of meeting the performance criteria is considered when determining the vesting period on a periodic basis.  Restricted stock and restricted stock units granted are classified primarily as equity awards.

During 2007, 2006 and 2005, we granted approximately 972,000, 1,596,000 and 766,000 options, respectively, to purchase shares of common stock under the Equity Plan.  Additionally, during 2007, 2006 and 2005, we issued approximately 270,000, 385,000 and 123,000 shares, respectively, of restricted stock and restricted stock units under the Equity Plan at a weighted average estimated fair value of $53.03, $35.71 and $57.83, respectively.

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The 2006 restricted stock grants included 50,000 shares of restricted stock (“Awards”) granted on April 1, 2006 to KCI’s former President and Chief Executive Officer who retired effective December 31, 2006.  The lapsing of restrictions for these Awards were based on performance milestones set forth by the Compensation Committee of the Board of Directors.  The compensation cost associated with these Awards was recognized over the estimated performance period for all restrictions probable of lapsing.  Based on the retirement of said Chief Executive Officer, we recognized, in the fourth quarter of 2006, compensation cost for awards with restrictions probable of lapsing.  The additional expense associated with the acceleration of vesting for these awards was $450,000.  In 2007, 25,000 of these Awards were forfeited as the target associated with this award was not attained.  In addition, 12,500 of these Awards vested during 2007 and the remaining 12,500 Awards are scheduled to vest in 2008.

The 2006 stock grants include options granted on November 6, 2006, to KCI’s current President and Chief Executive Officer to purchase 332,000 shares of KCI’s common stock, which will vest over four years, and a restricted stock grant of 88,200 shares, whose restrictions will lapse at the end of three years.  Both grants are subject to continual employment with KCI and may become fully vested in the event of a change in control of KCI or termination of employment for any reason other than "Cause," or she terminates for "Good Reason," as defined.

The ESPP became effective in the second quarter of 2004.  The maximum number of shares of common stock reserved for issuance under the ESPP is 2,500,000 shares.  Under the ESPP, each eligible employee is permitted to purchase shares of our common stock through regular payroll deductions in an amount between 1% and 10% of the employee's compensation for each payroll period, not to exceed $25,000 per year.  The ESPP provides for six-month offering periods.  Each six-month offering period will be composed of an identical six-month purchase period.  Participating employees are able to purchase shares of common stock with payroll deductions at a purchase price equal to 85% of the fair market value of the common stock at either the beginning of each offering period or the end of each respective purchase period, whichever price is lower.  During 2007, 2006 and 2005, there were approximately 119,000, 124,000 and 106,000 shares of common stock purchased, respectively, under the ESPP.

The following table summarizes the number of common shares reserved for future issuance under our stock option plans as of December 31, 2007:

2003 Non-Employee Directors Stock Plan	126,826
2004 Equity Plan	3,003,661
2004 Employee Stock Purchase Plan	2,107,836
	5,238,323

A summary of our stock option activity, and related information, for the year ended December 31, 2007 is set forth in the table below:

						Weighted
						Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Options			Exercise		Term		Value
	(in thousands)			Price		(years)		(in thousands)
Options outstanding – January 1, 2007		4,207		$	32.51
Granted		1,016		$	52.53
Exercised		(1,493	)	$	19.26
Forfeited/Expired		(518	)	$	46.84
Options outstanding – December 31, 2007		3,212		$	42.69		7.58	$	38,046
Exercisable as of December 31, 2007		932		$	38.54		5.98	$	15,221

The intrinsic value for stock options is defined as the difference between the current market value and the grant price.  The total intrinsic value of stock options exercised during 2007, 2006 and 2005 was $50.5 million, $120.7 million and $77.7 million, respectively.  Cash received from stock options exercised during 2007 and 2006 was $28.4 million and $11.9 million, respectively, and the actual tax benefit from share-based payment arrangements totaled $18.4 million and $45.8 million, respectively.

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The fair value of stock options granted during 2007, 2006 and 2005 was $24.30, $17.63 and $21.04, respectively.  As of December 31, 2007, there was $44.0 million of total unrecognized compensation cost related to non-vested stock options granted under our various plans.  This unrecognized compensation cost is expected to be recognized over a weighted average period of 2.7 years.

The following table summarizes restricted stock activity for the year ended December 31, 2007:

	Number of			Weighted
	Shares			Average Grant
	(in thousands)			Date Fair Value
Unvested Shares – January 1, 2007		532		$	43.10
Granted		289		$	52.79
Vested and Distributed		(74	)	$	57.86
Forfeited		(145	)	$	45.13
Unvested Shares – December 31, 2007		602		$	45.88

The weighted average grant date fair value of restricted stock granted during 2007, 2006 and 2005 was $52.79, $35.84 and $57.95, respectively.  The total fair value of restricted stock which vested during 2007 and 2006 was approximately $4.3 million and $400,000, respectively.  No restricted stock vested in 2005.  As of December 31, 2007, there was $22.5 million of total unrecognized compensation cost related to non-vested restricted stock granted under our plans.  This unrecognized compensation cost is expected to be recognized over a weighted average period of 2.8 years.

KCI has a policy of issuing new shares to satisfy stock option exercises and restricted stock award issuances.  In addition, KCI may purchase shares in connection with the net share settlement exercise of employee stock options for minimum tax withholdings and exercise price and the withholding of shares to satisfy the minimum tax withholdings on the vesting of restricted stock.

NOTE 11.     Other Comprehensive Income

KCI follows SFAS No. 130, "Reporting Comprehensive Income," in accounting for comprehensive income and its components.  The components of other comprehensive income are as follows (dollars in thousands):

	Year ended December 31,
	2007		2006			2005
Net earnings	$	237,144	$	195,468		$	122,155
Foreign currency translation adjustment, net of taxes of $353 in 2007, $880 in 2006 and $(2,164) in 2005		14,819		19,431			(16,746	)
Net derivative gain, net of taxes of $1 in 2007, $41 in 2006 and $530 in 2005		1		75			983
Reclassification adjustment for losses (gains) included in income, net of taxes of $18 in 2007, $(701) in 2006 and $(468) in 2005		33		(1,301	)		(868	)
Other comprehensive income	$	251,997	$	213,673		$	105,524

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The components of accumulated other comprehensive income are as follows (dollars in thousands):

	Accumulated
	Foreign			Accumulated			Accumulated
	Currency			Derivative			Other
	Translation			Gains			Comprehensive
	Adjustment			(Losses)			Income
Balances at December 31, 2004	$	22,278		$	1,077		$	23,355
Foreign currency translation adjustment, net of taxes of $(2,164)		(16,746	)		-			(16,746	)
Net derivative gain, net of taxes of $530		-			983			983
Reclassification adjustment for gains included in income, net of taxes of $(468)		-			(868	)		(868	)
Balances at December 31, 2005	$	5,532		$	1,192		$	6,724
Foreign currency translation adjustment, net of taxes of $880		19,431			-			19,431
Net derivative gain, net of taxes of $41		-			75			75
Reclassification adjustment for gains included in income, net of taxes of $(701)		-			(1,301	)		(1,301	)
Balances at December 31, 2006	$	24,963		$	(34	)	$	24,929
Foreign currency translation adjustment, net of taxes of $353		14,819			-			14,819
Net derivative gain, net of taxes of $1		-			1			1
Reclassification adjustment for losses included in income, net of taxes of $18		-			33			33
Balances at December 31, 2007	$	39,782		$	-		$	39,782

NOTE 12.     Earnings Per Share

Net earnings per share were calculated using the weighted average number of common shares outstanding.  See Note 1(m) to our consolidated financial statements.  The following table sets forth the reconciliation from basic to diluted weighted average shares outstanding and the calculations of net earnings per share (in thousands, except per share data):

	2007		2006		2005
Net earnings	$	237,144	$	195,468	$	122,155
Weighted average shares outstanding:
Basic		70,975		70,732		69,404
Dilutive potential common shares from stock options and restricted stock (1)		699		1,920		3,620
Diluted		71,674		72,652		73,024
Basic net earnings per share	$	3.34	$	2.76	$	1.76
Diluted net earnings per share	$	3.31	$	2.69	$	1.67
(1)   Potentially dilutive stock options and restricted stock totaling 1,779 shares, 3,241 shares and 595 shares for 2007, 2006 and 2005, respectively, were excluded from the computation of diluted weighted average shares outstanding due to their antidilutive effect.

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NOTE 13.     Litigation Settlement

On September 30, 2005, KCI reached an agreement to settle its litigation with Novamedix Limited, a subsidiary of Orthofix International NV.  Under the terms of the settlement, KCI paid Novamedix $75.0 million.  The settlement payment resulted in a charge of $72.0 million, net of recorded reserves of $3.0 million, or $47.4 million and $0.65 per diluted share, net of taxes, during the third quarter of 2005.  The settlement resolved and settled all claims between the parties in the case and allows KCI to continue selling the PlexiPulse line of products going forward under a royalty-free license without further claim of infringement by Novamedix.  Total revenues for the PlexiPulse product line were $3.0 million, $3.8 million and $4.7 million for 2007, 2006 and 2005, respectively.  The Novamedix settlement will not have a continuing impact on future operations or cash flows.

NOTE 14.     Commitments and Contingencies

KCI and its affiliates, together with Wake Forest University Health Sciences, are involved in multiple patent infringement suits involving patents licensed exclusively to KCI by Wake Forest.  The 2003 case filed against BlueSky Medical Group, Inc., Medela, Inc. and Medela AG is currently on appeal before the Federal Circuit Court of Appeals in Washington, D.C.  In 2006, the District Court jury found that the Wake Forest patents involved in the litigation were valid and enforceable, but that the patent claims at issue were not infringed by the device marketed by BlueSky.  In 2007, BlueSky Medical was acquired by Smith & Nephew plc, which is now a party to the appeal.  Initial appellate briefs have been filed by all parties to the appeal.  As a result of the appeal, the District Court’s final judgment could be modified, set aside or reversed, or the case could be remanded to District Court for retrial.

In May 2007, KCI, its affiliates and Wake Forest filed two related patent infringement suits; one case against Smith & Nephew and BlueSky and a second case against Medela, for the manufacture, use and sale of negative pressure devices which we believe infringe a Wake Forest continuation patent issued in 2007 relating to our V.A.C. technology.  Also, in June 2007, Medela filed patent nullity suits in the German Federal Patent Court against two of Wake Forest’s German patents licensed to KCI.  These patents were originally issued by the German Patent Office in 1998 and 2000, upon granting of the corresponding European patents.  The European patents were upheld as amended and corrected during Opposition Proceedings before the European Patent Office in 2003.

In September 2007, KCI and two affiliates were named in a declaratory judgment action filed in the Federal District Court for the District of Delaware by Innovative Therapies, Inc. (ITI).  In that case, the plaintiff has alleged the invalidity or unenforceability of four patents licensed to KCI by Wake Forest University Health Sciences and one patent owned by KCI relating to V.A.C. Therapy, and has requested a finding that products made by the plaintiff do not infringe the patents at issue.

In January 2008, KCI, its affiliates and Wake Forest filed a patent infringement lawsuit against ITI in the U.S. District Court for the Middle District of North Carolina. The federal complaint alleges that a NPWT device recently introduced by ITI infringes three Wake Forest patents which are exclusively licensed to KCI.  We are seeking damages and injunctive relief in the case. Also in January 2008, in a separate action, KCI and its affiliates filed suit in state District Court in Bexar County, Texas, against ITI and three of its principals, all of whom were former employees of KCI. The claims in the suit include breach of confidentiality agreements, conversion of KCI technology, theft of trade secrets and conspiracy. We are seeking damages and injunctive relief in the case.

Although it is not possible to reliably predict the outcome of the lawsuits described above, we believe that each of the patents involved in litigation are valid and enforceable, and that our patent infringement claims are meritorious.  However, if any of our key patent claims were narrowed in scope or found to be invalid or unenforceable, or we otherwise do not prevail, our share of the advanced wound care market for our V.A.C. Therapy systems could be significantly reduced in the U.S. or Europe, due to increased competition, and pricing of V.A.C. Therapy systems could decline significantly, either of which would materially and adversely affect our financial condition and results of operations.  We derived $950.1 million in revenue, or 59.0% of total revenue for the year ended December 31, 2007 and $808.3 million in revenue, or 58.9% of total revenue for the year ended December 31, 2006 from our domestic V.A.C. Therapy products relating to the U.S. patents at issue.  In continental Europe, we derived $199.5 million in revenue, or 12.4% of total revenue for the year ended December 31, 2007 and $158.9 million, or 11.6% of total revenue for the year ended December 31, 2006 in V.A.C. revenue relating to the patents at issue in the ongoing German litigation.

We are party to several additional lawsuits arising in the ordinary course of our business.  Additionally, the manufacturing and marketing of medical products necessarily entails an inherent risk of product liability claims.

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As a health care supplier, we are subject to extensive government regulation, including laws and regulations directed at ascertaining the appropriateness of reimbursement, preventing fraud and abuse and otherwise regulating reimbursement under various government programs.  The marketing, billing, documenting and other practices are all subject to government scrutiny.  To ensure compliance with Medicare and other regulations, regional carriers often conduct audits and request patient records and other documents to support claims submitted by KCI for payment of services rendered to customers.

From time to time, we receive inquiries from various government agencies requesting customer records and other documents.  It has been our policy to cooperate with all such requests for information. The U.S. Department of Health and Human Services Office of Inspector General, or OIG, initiated a study on NPWT in 2005.  As part of the 2005 study, KCI provided OIG with requested copies of our billing records for Medicare V.A.C. placements.  In June 2007, the OIG issued a report on the NPWT study including a number of findings and recommendations to CMS.  The OIG determined that substantially all V.A.C. claims met supplier documentation requirements; however, they were unable to conclude that the underlying patient medical records fully supported the supplier documentation in 44% of the claims, which resulted in an OIG estimate that approximately $27 million in improper payments may have been made on NPWT claims in 2004.  The purpose of the OIG report is to make 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 Medicare, its regional contractors and other third-party payers for refunds or recoupments of amounts previously paid to us.

In June 2007, the Medicare Region D contractor notified KCI of a post-payment audit of claims paid during 2006.  The DMAC requested information on 250 NPWT claims for patients treated with KCI’s V.A.C. Therapy.  In addition to KCI’s records, the DMAC requested relevant medical records supporting the medical necessity of the V.A.C. and related supplies and quantities being billed.  We submitted all of the requested documentation in a timely manner.  The DMAC subsequently made a minor recoupment for the exceptions noted during its review.

We are currently responding to requests from a Medicare Region A Recovery Audit Contractor (“RAC”) covering claims submitted between 2004 and 2005.  The RAC audits are part of a pilot program under the CMS Medicare Integrity Program, currently being conducted in California, Florida and New York.  At this time, we are awaiting additional information and it is not possible for KCI to determine the outcome of these requests.

While Medicare requires us to obtain a comprehensive physician order prior to providing products and services, we are not required to and do not as a matter of practice require or subsequently obtain the underlying medical records supporting the information included in such certificate.  Following a Medicare request for supporting documentation, we are obligated to procure and submit the underlying medical records retained by various medical facilities and physicians.  Obtaining these medical records in connection with a claims audit may be difficult or impossible and, in any event, all of these records are subject to further examination and dispute by an auditing authority.  In the event that a post-payment audit results in discrepancies in the records provided, Medicare may be entitled to extrapolate the results of the audit to make recoupment demands based on a wider population of claims than those provided in the audit.

We also routinely receive pre-payment reviews of claims we submit for Medicare reimbursement.  In December 2007, the Medicare Region B DMAC initiated a pre-payment review of all second and third cycle NPWT claims submitted by all providers, including KCI.  While we are actively responding to these ongoing requests, if a determination is 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.  The results of this or any pre-payment audit could also result in subsequent post-payment audits for claims previously paid by Medicare.  Under standard Medicare procedures, KCI is entitled to demonstrate the sufficiency of documentation and the establishment of medical necessity, and KCI has the right to appeal any adverse determinations.  If Medicare 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 could 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.

Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.

As of December 31, 2007, our commitments for the purchase of new product inventory were $39.9 million, including approximately $13.7 million of disposable products from our main disposable supplier and $10.9 million from our major electronic board and touch panel suppliers.  Other than commitments for new product inventory, we have no material long-term purchase commitments.

See discussion of our self-insurance program at Note 1(o) and leases at Note 6.

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NOTE 15.     Related Party Transactions

A member of our Board of Directors, David J. Simpson, was an officer of Stryker Corporation through December 31, 2007, with which we conduct business on a limited basis.  During 2007, 2006 and 2005, we purchased approximately $3.1 million, $4.3 million and $2.3 million in hospital bed frames from Stryker, respectively.  During 2005, we sold approximately $77,000 of therapeutic support systems to Stryker.  We made no sales to Stryker in 2007 and 2006.

C. Thomas Smith became a member of our Board of Directors in April 2003, after he had retired as the Chief Executive Officer and President of VHA Inc. VHA Inc. is affiliated with Novation, LLC, a group purchasing organization with which we have had major supply contracts since the 1980s.  During fiscal years 2007, 2006 and 2005, we received approximately $193.6 million, $179.2 million and $159.6 million, respectively, in V.A.C. and Therapeutic Support Systems revenues under our Novation contracts.

A member of our Board of Directors, Harry R. Jacobson, M.D., is the Vice Chancellor for Health Affairs of Vanderbilt University, with which we conduct business on a limited basis.  During fiscal years 2007, 2006 and 2005, we recorded revenue of approximately $1.5 million, $1.1 million and $1.5 million, respectively, for V.A.C. products and therapeutic support systems billed to Vanderbilt University.

NOTE 16.     Segment and Geographic Information

We are principally engaged in the rental and sale of advanced wound care systems and therapeutic support systems throughout the United States and in 18 primary countries internationally. Revenues are attributed to individual countries based on the location of the customer.

We define our business segments based on geographic management responsibility.  We have two reportable segments: the United States, which includes Puerto Rico, and International, which includes operations for all countries outside of the United States. We have two primary product lines: V.A.C. Therapy and therapeutic support systems.  Revenues for each of our product lines are disclosed for our operating segments.  Other than revenue, no discrete financial information is available for our product lines.  Our product lines are marketed and serviced by the same infrastructure and, as such, we do not manage our business by product line, but rather by geographical segments.  We measure segment profit as operating earnings, which is defined as income before interest income and other, interest expense, foreign currency gains and losses, and income taxes.  All intercompany transactions are eliminated in computing revenue and operating earnings.  Information on segments and a reconciliation of consolidated totals are as follows (dollars in thousands):

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	Year Ended December 31,
	2007			2006			2005
Revenue:
USA
V.A.C	$	950,096		$	808,261		$	706,046
Therapeutic  Support Systems		200,114			185,511			180,147
Subtotal – USA		1,150,210			993,772			886,193
International
V.A.C		329,527			260,828			201,497
Therapeutic Support Systems		130,207			117,036			120,866
Subtotal – International		459,734			377,864			322,363
	$	1,609,944		$	1,371,636		$	1,208,556
	Year Ended December 31,
	2007			2006			2005
Operating earnings:
USA	$	462,449		$	391,920		$	339,415
International		67,278			51,123			47,514
Litigation settlement expense		-			-			(72,000	)
Other (1):
Executive		(48,195	)		(30,279	)		(19,303	)
Finance		(47,005	)		(41,531	)		(36,219	)
Manufacturing/Engineering		(15,888	)		(12,012	)		(10,711	)
Administration		(46,333	)		(49,979	)		(39,692	)
Total other		(157,421	)		(133,801	)		(105,925	)
	$	372,306		$	309,242		$	209,004
	Year Ended December 31,
	2007			2006			2005
Depreciation, amortization and other:
USA	$	39,708		$	35,144		$	31,059
International		33,733			26,476			21,234
Other (1):
Executive		1,360			408			625
Finance		11,400			11,156			10,954
Manufacturing/Engineering		2,563			2,401			2,063
Administration		5,059			7,822			2,917
Total other		20,382			21,787			16,559
	$	93,823		$	83,407		$	68,852

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	December 31,
	2007		2006		2005
Total Assets:
USA	$	614,862	$	472,902	$	445,461
International		351,647		274,116		226,841
Other:
Executive		8,562		9,047		8,331
Finance		25,150		23,799		24,521
Manufacturing/Engineering		19,853		19,582		15,727
Administration		37,511		42,996		41,230
Total other		91,076		95,424		89,809
	$	1,057,585	$	842,442	$	762,111
	Year Ended December 31,
	2007		2006		2005
Gross capital expenditures:
USA	$	49,336	$	37,460	$	35,813
International		25,109		28,710		26,701
Other:
Finance		18,923		17,922		27,624
Manufacturing/Engineering		2,479		8,086		4,087
Total other		21,402		26,008		31,711
	$	95,847	$	92,178	$	94,225
(1)   Other includes general headquarter expenses which are not allocated to the individual segments and are included in selling, general and administrative expenses within our consolidated statements of earnings.

The following is other selected geographic financial information of KCI (dollars in thousands):

	December 31,
	2007		2006		2005
Geographic location of long-lived assets:
Domestic	$	228,549	$	223,884	$	211,885
Foreign		83,057		86,770		73,169
Total long-lived assets	$	311,606	$	310,654	$	285,054

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NOTE 17.     Quarterly Financial Data (unaudited)

The unaudited consolidated results of operations by quarter are summarized below (in thousands, except per share data):

	Year Ended December 31, 2007
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Revenue	$	368,816	$	396,652	$	410,880	$	433,596
Gross profit	$	171,185	$	190,131	$	204,221	$	213,861
Operating earnings	$	83,165	$	90,113	$	98,876	$	100,152
Net earnings	$	53,556	$	58,072	$	59,025	$	66,491
Net earnings per share:
Basic	$	0.76	$	0.82	$	0.83	$	0.93
Diluted	$	0.75	$	0.81	$	0.82	$	0.92
Weighted average shares outstanding:
Basic		70,347		70,802		71,214		71,547
Diluted		71,079		71,427		71,929		72,190

	Year Ended December 31, 2006
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Revenue	$	319,245	$	330,043	$	350,857	$	371,491
Gross profit	$	150,196	$	152,606	$	164,137	$	177,073
Operating earnings	$	74,945	$	71,350	$	79,781	$	83,166
Net earnings	$	48,517	$	46,631	$	48,982	$	51,338
Net earnings per share:
Basic	$	0.69	$	0.65	$	0.69	$	0.74
Diluted	$	0.66	$	0.63	$	0.67	$	0.73
Weighted average shares outstanding:
Basic		70,667		71,385		71,235		69,645
Diluted		73,275		73,586		73,105		70,668

Net earnings per share for the full year differs from the total of the quarterly earnings per share due to the repurchase of shares in our 2006 share repurchase program.

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Schedule II

Kinetic Concepts, Inc.
Valuation and Qualifying Accounts
Three Years ended December 31, 2007
(in thousands)
Description	Balances at December 31, 2004		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts			Deductions		Balances at December 31, 2005
Accounts receivable realization reserves	$	60,816	$	17,435	$	17,695	(1)	$	17,216	$	78,730
Inventory reserve	$	4,340	$	1,239	$	-		$	1,871	$	3,708
Deferred tax asset valuation allowance	$	6,888	$	4,660	$	-		$	-	$	11,548
Description	Balances at December 31, 2005		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts			Deductions		Balances at December 31, 2006
Accounts receivable realization reserves	$	78,730	$	13,744	$	45,509	(1)	$	49,495	$	88,488
Inventory reserve	$	3,708	$	714	$	-		$	1,333	$	3,089
Deferred tax asset valuation allowance	$	11,548	$	3,324	$	-		$	-	$	14,872
Description	Balances at December 31, 2006		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts			Deductions		Balances at December 31, 2007
Accounts receivable realization reserves	$	88,488	$	7,567	$	41,262	(1)	$	40,527	$	96,790
Inventory reserve	$	3,089	$	3,412	$	-		$	2,103	$	4,398
Deferred tax asset valuation allowance	$	14,872	$	-	$	-		$	199	$	14,673
(1)   Additions to the accounts receivable realization reserves charged to other accounts reflect the net increase in revenue reserves to allow for expected credit memos, cancelled transactions and uncollectible items where collectibility is not reasonably assured in accordance with the provisions of Staff Accounting Bulletin No. 104.

98

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.     CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.  KCI’s management, with the participation of KCI’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of KCI’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report.  Based on such evaluation, KCI’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, KCI’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by KCI in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by KCI in the reports that it files or submits under the Exchange Act is accumulated and communicated to KCI’s management, including KCI’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.  There have not been any changes in KCI’s internal control over financial reporting (as such term is defined by paragraph (d) of Rule 13a-15) under the Exchange Act, during the fourth fiscal quarter of 2007 that have materially affected, or are reasonably likely to materially affect, KCI’s internal control over financial reporting.

99

Report of Management on Internal Control Over Financial Reporting

The management of Kinetic Concepts, Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2007. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria.

Ernst & Young LLP, the Company’s independent registered public accounting firm, has audited the Company's internal control over financial reporting as of December 31, 2007 as stated in their report, included herein.

Date:  February 22, 2008

/s/ Catherine M. Burzik

Catherine M. Burzik

President and Chief Executive Officer

/s/ Martin J. Landon

Martin J. Landon

Senior Vice President and Chief Financial Officer

100

The Board of Directors and Shareholders

Kinetic Concepts, Inc.

We have audited Kinetic Concepts, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Kinetic Concepts, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Kinetic Concepts, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based onthe COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Kinetic Concepts, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 of Kinetic Concepts, Inc. and subsidiaries and our report dated February 22, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

ERNST & YOUNG LLP

San Antonio, Texas

February 22, 2008

101

ITEM 9B.     OTHER INFORMATION

None.

PART III

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Incorporated in this Item 10, by reference, are those portions of the Company’s definitive Proxy Statement for its 2008 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the close of the fiscal year ended December 31, 2007 appearing under the caption "Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."

Our Code of Ethics for Chief Executive and Senior Financial Officers, along with our Directors' Code of Business Conduct and Ethics, and our KCI Code of Conduct can be found on our website at www.kci1.com under the tab entitled "Corporate Governance – Codes of Conduct" on the Investor Relations page.  We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of the Code of Ethics for Chief Executive and Senior Financial Officers by posting such information on our website, at the address and location specified above.

Information about our board committees, including our Audit and Compliance Committee, Compensation Committee and Director Affairs Committee, as well as the respective charters for our board committees, can also be found on our website under the tab entitled "Corporate Governance – Committee Composition and Charters" on the Investor Relations page.  Shareholders may request a copy of the above referenced codes and charters, at no cost, from Investor Relations, Kinetic Concepts, Inc., 8023 Vantage Drive, San Antonio, Texas 78230.

Furthermore, because our common stock is listed on the NYSE, our Chief Executive Officer is required to make a CEO's Annual Certification to the NYSE in accordance with Section 303A.12 of the NYSE Listed Company Manual regarding the Company’s compliance with the NYSE corporate governance listing standards.  The Annual Certification was made on June 21, 2007.  In addition, the certifications of the Company’s Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002, regarding the quality of the Company’s disclosures in this Annual Report on Form 10-K, are filed as exhibits 31.1 and 31.2 hereto.

ITEM 11.     EXECUTIVE COMPENSATION

Incorporated in this Item 11, by reference, is that portion of the Company’s definitive Proxy Statement appearing under the caption "Executive Compensation."

102

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT AND RELATED SHAREHOLDER MATTERS

The following chart gives aggregate information regarding grants under all of our equity compensation plans through December 31, 2007:

Plan category	Number of securities to be issued upon exercise of outstanding options			Weighted-average exercise price of outstanding options			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)			(b)			(c)
Equity compensation plans approved by security holders		3,283,181	(1)	$	42.69	(2)		5,238,323	(3)
Equity compensation plans not approved by security holders		-			-			-
Total		3,283,181		$	42.69			5,238,323
(1)   This amount includes 71,604 shares of common stock that are subject to outstanding restricted stock unit awards. This amount does not include 530,392 shares of common stock issued and outstanding pursuant to unvested restricted stock awards.
(2)   Calculated exclusive of outstanding restricted stock unit awards.
(3)   This amount includes 126,826 shares available for future issuance under the Directors Stock Plan and 3,003,661 shares available for future issuance under the 2004 Equity Plan, both of which provide for grants of restricted stock, options and other awards. This amount also includes 2,107,836 shares available for future issuance under the ESPP, which makes stock available for purchase by employees at specified times.

Incorporated in this Item 12, by reference, is that portion of the Company’s definitive Proxy Statement appearing under the caption "Security Ownership of Certain Beneficial Owners and Management."

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Incorporated in this Item 13, by reference, is that portion of the Company’s definitive Proxy Statement appearing under the caption "Certain Relationships and Related Transactions."

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated in this Item 14, by reference, is that portion of the Company’s definitive Proxy Statement appearing under the caption "Principal Accounting Fees and Services."

103

PART IV

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)   The following documents are filed as part of this Annual Report:
	1.   Financial Statements
		The following consolidated financial statements are filed as a part of this report:
			Report of Independent Registered Public Accounting Firm
			Consolidated Balance Sheets as of December 31, 2007 and 2006
			Consolidated Statements of Earnings for each of the three years ended December 31, 2007, 2006 and 2005
			Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 2007, 2006 and 2005
			Consolidated Statements of Cash Flows for each of the three years ended December 31, 2007, 2006 and 2005
			Notes to Consolidated Financial Statements
	2.   Financial Statement Schedules
		The following consolidated financial statement schedule for each of the three years ended December 31, 2007 is filed as part of this Annual Report:
			Schedule II—Valuation and Qualifying Accounts—Years ended December 31, 2007, 2006 and 2005
				All other schedules have been omitted as the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
(b)   Exhibits
	The following exhibits are incorporated herein by reference or are filed as part of this Annual Report:

104

EXHIBITS

Exhibits	Description
3.1	Restated Articles of Incorporation (with Amendments) of Kinetic Concepts, Inc. (filed as Exhibit 3.4 to Amendment No. 1 to our Registration Statement on Form S-1, filed on February 2, 2004, as thereafter amended).
3.2	Third Amended and Restated By-laws of Kinetic Concepts, Inc. (filed as Exhibit 3.6 to our Registration Statement on Form S-1, filed on May 28, 2004).
3.3	Amendment to the Third Amended and Restated By-laws of Kinetic Concepts, Inc. (filed as Exhibit 3.1 on Form 8-K, filed on December 28, 2007).
4.1	Specimen Common Stock Certificate (filed as Exhibit 4.3 to Amendment No. 1 to our Registration Statement on Form S-1, filed on February 2, 2004, as thereafter amended).
10.1	Amended and Restated Agreement Among Shareholders, dated as of January 26, 2005 (filed as Exhibit 10.1 on Form 8-K, filed on January 27, 2005).
10.2	KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1994, filed on January 23, 1996).
**10.3	Kinetic Concepts, Inc. Management Equity Plan effective October 2, 1997 (filed as Exhibit 10.33 to our Annual Report on Form 10-K for the year ended December 31, 1997, filed on March 31, 1998).
**10.4	Form of Option Instrument with respect to the Kinetic Concepts, Inc. Management Equity Plan (filed as Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 31, 2000, filed on March 30, 2001).
10.5	Standard Office Building Lease Agreement, dated July 31, 2002 between CKW San Antonio, L.P. d/b/a San Antonio CKW, L.P. and Kinetic Concepts, Inc. for the lease of approximately 138,231 square feet of space in the building located at 8023 Vantage Drive, San Antonio, Bexar County, Texas 78230 (filed as Exhibit 10.27 on Form S-4, filed on September 29, 2003).
†10.6	Toll Manufacturing Agreement, by and between KCI Manufacturing and Avail Medical Products, Inc. dated December 14, 2007.
††10.7	License Agreement, dated as of October 6, 1993, between Wake Forest University and Kinetic Concepts, Inc., as amended by that certain Amendment to License Agreement, dated as of July 1, 2000 (filed as Exhibit 10.29 to Amendment No. 4 to our Registration Statement on Form S-1, filed on February 23, 2004).
**10.8	Form of Director Indemnity Agreement (filed as Exhibit 10.31 to Amendment No. 1 to Registration Statement on Form S-1, filed on February 2, 2004, as amended).
10.9	2004 Equity Plan (filed as Exhibit 10.32 to Amendment No. 1 to Registration Statement on Form S-1, filed on February 2, 2004, as amended).
10.10	2004 Employee Stock Purchase Plan (filed as Exhibit 10.33 to Amendment No. 1 to Form S-1, filed on February 2, 2004, as amended).
**10.11	Form of Stock Option Agreement under Amended and Restated 2003 Non-Employee Directors Stock Plan (filed as Exhibit 10.2 to our Current Report on Form 8-K filed on November 15, 2004).
**10.12	Form of Restricted Stock Award Agreement under Amended and Restated 2003 Non-Employee Directors Stock Plan (filed as Exhibit 10.3 to our Current Report on Form 8-K filed on November 15, 2004).
**10.13	Executive Deferred Compensation Plan (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, filed on May 9, 2006).
**10.14	Form of KCI 2004 Equity Plan Restricted Stock Award Agreement (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.15	Form of KCI 2004 Equity Plan Nonqualified Stock Option Agreement (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.16	Form of KCI 2004 Equity Plan Restricted Stock Unit Award Agreement (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.17	Form of KCI 2004 Equity Plan International Restricted Stock Unit Award Agreement (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.18	Form of KCI 2004 Equity Plan International Stock Option Agreement (filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.19	Letter, dated October 16, 2006, from Kinetic Concepts, Inc. to Catherine M. Burzik outlining the terms of her employment (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on November 3, 2006).
**10.20	2004 Equity Plan Nonqualified Stock Option Agreement between Kinetic Concepts, Inc. and Catherine M. Burzik, dated November 6, 2006 (filed as Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2006, filed on February 23, 2007).
**10.21	2004 Equity Plan Restricted Stock Award Agreement between Kinetic Concepts, Inc. and Catherine M. Burzik, dated November 6, 2006 (filed as Exhibit 10.29 to our Annual Report on Form 10-K for the year ended December 31, 2006, filed on February 23, 2007).
***10.22	Kinetic Concepts, Inc. Compensation Policy for Outside Directors, as adopted on December 4, 2007.
**10.23	Executive Retention Agreement between Kinetic Concepts, Inc. and Martin J. Landon, dated February 21, 2007 (filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31, 2006, filed on February 23, 2007).
**10.24	Executive Retention Agreement between Kinetic Concepts, Inc. and Stephen D. Seidel, dated February 21, 2007 (filed as Exhibit 10.32 to our Annual Report on Form 10-K for the year ended December 31, 2006, filed on February 23, 2007).
***10.25	Executive Retention Agreement between Kinetic Concepts, Inc. and Lynne D. Sly, dated February 21, 2007.
***10.26	Executive Retention Agreement between Kinetic Concepts, Inc. and Todd M. Fruchterman, dated February 21, 2007.
10.27	Credit Agreement, dated as of July 31, 2007 (filed as Exhibit 99.1 on Form 8-K, filed on August 6, 2007).
**10.28	Employment Separation and Release Agreement, dated June 12, 2007, between Kinetic Concepts, Inc. and Mark Carbeau (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on July 27, 2007).
**10.29	Settlement Agreement, dated June 25, 2007, between KCI Europe Holding B.V. and Jörg Menten (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on July 27, 2007).
**10.30	Offer letter, dated July 18, 2007, between Kinetic Concepts, Inc. and Linwood A. Staub (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on July 27, 2007).
**10.31	Executive Retention Agreement, dated July 18, 2007, between Kinetic Concepts, Inc. and Linwood A. Staub (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on July 27, 2007).
***10.32	Contract of Employment, effective December 3, 2007, between KCI UK Holdings Limited and TLV Kumar.
***10.33	Executive Retention Agreement between Kinetic Concepts, Inc. and T.L.V. Kumar, dated December 3, 2007.
***10.34	2003 Non-Employee Directors Stock Plan, as Amended and Restated on December 4, 2007.
***10.35	Form of Kinetic Concepts, Inc. 2004 Equity Plan International Stock Option Agreement, as amended on February 19, 2008.
***10.36	Form of Kinetic Concepts, Inc. 2004 Equity Plan Restricted Stock Unit Award Agreement, as amended on February 19, 2008.
***10.37	Form of Kinetic Concepts, Inc. 2004 Equity Plan International Restricted Stock Unit Award Agreement, as amended on February 19, 2008.
***10.38	Form of Kinetic Concepts, Inc. 2004 Equity Plan Nonqualified Stock Option Agreement, as amended on February 19, 2008.
***10.39	Form of Kinetic Concepts, Inc. 2004 Equity Plan Restricted Stock Award Agreement, as amended on February 19, 2008.
*21.1	Kinetic Concepts, Inc. Listing of Subsidiaries.
*23.1	Consent of Independent Registered Public Accounting Firm, from Ernst & Young LLP.
*31.1	Certification of the Chief Executive Officer Pursuant to section 302 of the Sarbanes-Oxley Act of 2002 dated February 26, 2008.
*31.2	Certification of the Chief Financial Officer Pursuant to section 302 of the Sarbanes-Oxley Act of 2002 dated February 26, 2008.
*32.1	Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to section 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 dated February 26, 2008.
	*        Exhibit filed herewith.
	**      Compensatory arrangements for director(s) and/or executive officer(s).
	***    Exhibits filed herewith.  Compensatory arrangements for director(s) and/or executive officers(s).
	†        Exhibit filed herewith.  Confidential treatment requested on certain portions of this exhibit. An unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission.
	††      Confidential treatment granted on certain portions of this exhibit.  An unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission.

105

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, State of Texas on February 23, 2008.

KINETIC CONCEPTS, INC.
By:	/s/ Ronald W. Dollens
	Ronald W. Dollens
	Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Title	Date
/s/ Ronald W. Dollens	Chairman of the Board of Directors	February 23, 2008
RONALD W. DOLLENS
/s/ Catherine M. Burzik	Director, President and Chief Executive Officer	February 26, 2008
CATHERINE M. BURZIK	(Principal Executive Officer)
/s/ Martin J. Landon	Senior Vice President and Chief Financial Officer	February 26, 2008
MARTIN J. LANDON	(Principal Financial and Principal Accounting Officer)
/s/ James R. Leininger, M.D.	Director, Chairman Emeritus	February 25, 2008
JAMES R. LEININGER, M.D.
/s/ John P. Byrnes	Director	February 22, 2008
JOHN P. BYRNES
/s/ Woodrin Grossman	Director	February 26, 2008
WOODRIN GROSSMAN
/s/ Harry R. Jacobson	Director	February 25, 2008
HARRY R. JACOBSON
/s/ N. Colin Lind	Director	February 25, 2008
N. COLIN LIND
/s/ David J. Simpson	Director	February 26, 2008
DAVID J. SIMPSON
/s/ C. Thomas Smith	Director	February 24, 2008
C. THOMAS SMITH
/s/ Donald E. Steen	Director	February 22, 2008
DONALD E. STEEN

106

EXHIBITS

Exhibits	Description
3.1	Restated Articles of Incorporation (with Amendments) of Kinetic Concepts, Inc. (filed as Exhibit 3.4 to Amendment No. 1 to our Registration Statement on Form S-1, filed on February 2, 2004, as thereafter amended).
3.2	Third Amended and Restated By-laws of Kinetic Concepts, Inc. (filed as Exhibit 3.6 to our Registration Statement on Form S-1, filed on May 28, 2004).
3.3	Amendment to the Third Amended and Restated By-laws of Kinetic Concepts, Inc. (filed as Exhibit 3.1 on Form 8-K, filed on December 28, 2007).
4.1	Specimen Common Stock Certificate (filed as Exhibit 4.3 to Amendment No. 1 to our Registration Statement on Form S-1, filed on February 2, 2004, as thereafter amended).
10.1	Amended and Restated Agreement Among Shareholders, dated as of January 26, 2005 (filed as Exhibit 10.1 on Form 8-K, filed on January 27, 2005).
10.2	KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1994, filed on January 23, 1996).
**10.3	Kinetic Concepts, Inc. Management Equity Plan effective October 2, 1997 (filed as Exhibit 10.33 to our Annual Report on Form 10-K for the year ended December 31, 1997, filed on March 31, 1998).
**10.4	Form of Option Instrument with respect to the Kinetic Concepts, Inc. Management Equity Plan (filed as Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 31, 2000, filed on March 30, 2001).
10.5	Standard Office Building Lease Agreement, dated July 31, 2002 between CKW San Antonio, L.P. d/b/a San Antonio CKW, L.P. and Kinetic Concepts, Inc. for the lease of approximately 138,231 square feet of space in the building located at 8023 Vantage Drive, San Antonio, Bexar County, Texas 78230 (filed as Exhibit 10.27 on Form S-4, filed on September 29, 2003).
†10.6	Toll Manufacturing Agreement, by and between KCI Manufacturing and Avail Medical Products, Inc. dated December 14, 2007.
††10.7	License Agreement, dated as of October 6, 1993, between Wake Forest University and Kinetic Concepts, Inc., as amended by that certain Amendment to License Agreement, dated as of July 1, 2000 (filed as Exhibit 10.29 to Amendment No. 4 to our Registration Statement on Form S-1, filed on February 23, 2004).
**10.8	Form of Director Indemnity Agreement (filed as Exhibit 10.31 to Amendment No. 1 to Registration Statement on Form S-1, filed on February 2, 2004, as amended).
10.9	2004 Equity Plan (filed as Exhibit 10.32 to Amendment No. 1 to Registration Statement on Form S-1, filed on February 2, 2004, as amended).
10.10	2004 Employee Stock Purchase Plan (filed as Exhibit 10.33 to Amendment No. 1 to Form S-1, filed on February 2, 2004, as amended).
**10.11	Form of Stock Option Agreement under Amended and Restated 2003 Non-Employee Directors Stock Plan (filed as Exhibit 10.2 to our Current Report on Form 8-K filed on November 15, 2004).
**10.12	Form of Restricted Stock Award Agreement under Amended and Restated 2003 Non-Employee Directors Stock Plan (filed as Exhibit 10.3 to our Current Report on Form 8-K filed on November 15, 2004).
**10.13	Executive Deferred Compensation Plan (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, filed on May 9, 2006).
**10.14	Form of KCI 2004 Equity Plan Restricted Stock Award Agreement (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.15	Form of KCI 2004 Equity Plan Nonqualified Stock Option Agreement (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.16	Form of KCI 2004 Equity Plan Restricted Stock Unit Award Agreement (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.17	Form of KCI 2004 Equity Plan International Restricted Stock Unit Award Agreement (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.18	Form of KCI 2004 Equity Plan International Stock Option Agreement (filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on August 9, 2006).
**10.19	Letter, dated October 16, 2006, from Kinetic Concepts, Inc. to Catherine M. Burzik outlining the terms of her employment (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on November 3, 2006).
**10.20	2004 Equity Plan Nonqualified Stock Option Agreement between Kinetic Concepts, Inc. and Catherine M. Burzik, dated November 6, 2006 (filed as Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2006, filed on February 23, 2007).
**10.21	2004 Equity Plan Restricted Stock Award Agreement between Kinetic Concepts, Inc. and Catherine M. Burzik, dated November 6, 2006 (filed as Exhibit 10.29 to our Annual Report on Form 10-K for the year ended December 31, 2006, filed on February 23, 2007).
***10.22	Kinetic Concepts, Inc. Compensation Policy for Outside Directors, as adopted on December 4, 2007.
**10.23	Executive Retention Agreement between Kinetic Concepts, Inc. and Martin J. Landon, dated February 21, 2007 (filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31, 2006, filed on February 23, 2007).
**10.24	Executive Retention Agreement between Kinetic Concepts, Inc. and Stephen D. Seidel, dated February 21, 2007 (filed as Exhibit 10.32 to our Annual Report on Form 10-K for the year ended December 31, 2006, filed on February 23, 2007).
***10.25	Executive Retention Agreement between Kinetic Concepts, Inc. and Lynne D. Sly, dated February 21, 2007.
***10.26	Executive Retention Agreement between Kinetic Concepts, Inc. and Todd M. Fruchterman, dated February 21, 2007.
10.27	Credit Agreement, dated as of July 31, 2007 (filed as Exhibit 99.1 on Form 8-K, filed on August 6, 2007).
**10.28	Employment Separation and Release Agreement, dated June 12, 2007, between Kinetic Concepts, Inc. and Mark Carbeau (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on July 27, 2007).
**10.29	Settlement Agreement, dated June 25, 2007, between KCI Europe Holding B.V. and Jörg Menten (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on July 27, 2007).
**10.30	Offer letter, dated July 18, 2007, between Kinetic Concepts, Inc. and Linwood A. Staub (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on July 27, 2007).
**10.31	Executive Retention Agreement, dated July 18, 2007, between Kinetic Concepts, Inc. and Linwood A. Staub (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on July 27, 2007).
***10.32	Contract of Employment, effective December 3, 2007, between KCI UK Holdings Limited and TLV Kumar.
***10.33	Executive Retention Agreement between Kinetic Concepts, Inc. and T.L.V. Kumar, dated December 3, 2007.
***10.34	2003 Non-Employee Directors Stock Plan, as Amended and Restated on December 4, 2007.
***10.35	Form of Kinetic Concepts, Inc. 2004 Equity Plan International Stock Option Agreement, as amended on February 19, 2008.
***10.36	Form of Kinetic Concepts, Inc. 2004 Equity Plan Restricted Stock Unit Award Agreement, as amended on February 19, 2008.
***10.37	Form of Kinetic Concepts, Inc. 2004 Equity Plan International Restricted Stock Unit Award Agreement, as amended on February 19, 2008.
***10.38	Form of Kinetic Concepts, Inc. 2004 Equity Plan Nonqualified Stock Option Agreement, as amended on February 19, 2008.
***10.39	Form of Kinetic Concepts, Inc. 2004 Equity Plan Restricted Stock Award Agreement, as amended on February 19, 2008.
*21.1	Kinetic Concepts, Inc. Listing of Subsidiaries.
*23.1	Consent of Independent Registered Public Accounting Firm, from Ernst & Young LLP.
*31.1	Certification of the Chief Executive Officer Pursuant to section 302 of the Sarbanes-Oxley Act of 2002 dated February 26, 2008.
*31.2	Certification of the Chief Financial Officer Pursuant to section 302 of the Sarbanes-Oxley Act of 2002 dated February 26, 2008.
*32.1	Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to section 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 dated February 26, 2008.
	*        Exhibit filed herewith.
	**      Compensatory arrangements for director(s) and/or executive officer(s).
	***    Exhibits filed herewith.  Compensatory arrangements for director(s) and/or executive officers(s).
	†        Exhibit filed herewith.  Confidential treatment requested on certain portions of this exhibit. An unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission.
	††      Confidential treatment granted on certain portions of this exhibit.  An unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission.

EX-10.6

*** Confidential treatment requested on certain portions of this exhibit. An unredacted version of this agreement has been filed separately with the Securities and Exchange Commission.

Exhibit 10.6

AVAIL MEDICAL PRODUCTS, INC. & KCI MANUFACTURING

TOLL MANUFACTURING AGREEMENT

This Toll Manufacturing Agreement (this "Agreement") is entered into as of December 14, 2007, by and between on the first part KCI Manufacturing, a company incorporated under the laws of Ireland, with an address of Athlone Business & Technology Park, Garrycastle, Athlone, Co. Westmeath, Ireland ("KCI Manufacturing") and on the second part Avail Medical Products, Inc., a Delaware corporation with principal offices at 1600 Wells Fargo Tower, 201 Main Street, Fort Worth, Texas 76102 (collectively "Avail").  This Agreement will be effective as of November 30, 2007 (the "Effective Date").  Either Avail or KCI Manufacturing may be referred to herein as a “Party” or collectively as the “Parties.”

WITNESSETH

WHEREAS, KCI Manufacturing is the beneficial owner or licensee of certain manufacturing process technology used in the design and manufacture of negative pressure wound therapy devices, related disposables and other elements of high quality wound care methods and systems;

WHEREAS, KCI Manufacturing wishes to have Avail procure raw materials for and on behalf of KCI Manufacturing (the “Procurement Services”) and perform processing services (the “Processing Services”) to transform such raw materials into finished products and Avail wishes to perform the Procurement Services and the Processing Services for KCI Manufacturing in accordance with the terms of this Agreement;

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the sufficiency of which is hereby acknowledged, it is agreed by and between KCI Manufacturing and Avail (collectively, the "Parties"), for the mutual benefit of Avail and KCI Manufacturing, as follows:

1.Definitions.  It is understood that words and phrases set out in quotation marks in this Agreement (often within parentheses) constitute defined terms.  Absent a very clear expression otherwise, the definitions of defined terms of this Agreement shall be consistent for all purposes of this Agreement, irrespective of whether inconsistent definitions are given for the same or similar terms in other documents.  The term "includes" (and conjugates thereof) shall always be understood to mean "includes, without limitation," (or the like) unless expressly stated otherwise herein.

(a)   Affiliate.  The term “Affiliate” means, with respect to a Party, any company, partnership, joint venture, or other entity that directly or indirectly Controls, is Controlled by, or is under common Control with such Party.  “Control” or “Controlled by” shall mean ownership of fifty percent (50%) or more of the voting stock or the power to direct or cause the direction of the management and policies of the controlled entity, whether through the ownership of voting securities, by contract or otherwise.  

(b)   Products.  The term "Products" in this Agreement shall mean all sterile disposable products for use with vacuum assisted wound closure therapy currently (as of the Effective Date) being marketed worldwide by KCI Manufacturing, which are listed as integrated SKUs on Exhibit A.  Raw Materials procured by Avail for and on behalf of KCI Manufacturing as set forth on Exhibit B shall not be considered “Products” as that term is used in this Agreement.  The Products shall not include any new products that differ from the Products listed on Exhibit A (i) in terms of materials or manufacturing processes used, (ii) in form, fit or function, or (iii) because they assist in the delivery of vacuum assisted therapy together with other different therapies (such new products being referred to herein as “Different Products”).  Upon mutual written agreement by the Parties, Different Products may be added to Exhibit A (together with any pricing or other information that may be necessary) and shall become Products for purposes of this Agreement.  The Parties will cooperate in good faith to make such amendments to Exhibit A as are required to comport with changes to the Product Specifications (defined hereinafter).  

(c)   Product Specifications. The term “Product Specifications” means any and all designs, drawings, blueprints, formulations, models, specifications, quality standards, techniques, processes, performance data, manufacturing data and procedures, know-how and other technical information relating to the design, production/manufacture, packaging and labeling, and/or operation of the Products, which are provided by KCI Manufacturing to Avail for the purpose of producing/manufacturing the Products pursuant to this Agreement.  

(d)   Raw Materials.  The term "Raw Materials" means all raw materials and other component parts procured, manufactured, or used by Avail in the Processing Services for the Products, as listed on Exhibit B.  Upon mutual written agreement by the Parties, other Raw Materials may be added to Exhibit B (together with any pricing or other information that may be necessary) and shall become “Raw Materials” upon the mutual written agreement of the Parties.  The Parties will cooperate in good faith to make such amendments to Exhibit B as are required to comport with changes to the Product Specifications.  

2.License.  KCI Manufacturing hereby grants to Avail, and Avail hereby accepts, a limited, non-exclusive, non-transferable, royalty-free license to use all patents, copyrights, designs, trademarks, service marks, trade names, trade dress, design rights, data, manufacturing processes, domain names, know-how, trade secrets, and other proprietary rights owned or licensed by KCI Manufacturing, and all applications and registrations therefore, which pertain to the Products or any discovery, invention, idea or other concept created, developed or conceived in connection with or relating to the Products (the "Intellectual Property Rights"), in each case for the sole and exclusive purpose of performing the Processing Services for KCI Manufacturing in accordance with the Product Specifications and subject to the terms and conditions of this Agreement.  KCI Manufacturing hereby warrants that it holds adequate and sufficient rights, title or interest to the Intellectual Property Rights as necessary to grant the foregoing license to Avail.  Any termination of this Agreement shall immediately terminate all rights granted to Avail by KCI Manufacturing.

3.Exclusivity Period.  The Parties agree that there shall exist, under this Agreement, certain exclusivity between the Parties as regards the Products, for the period of time commencing on the Effective Date and, unless this Agreement is sooner Terminated or Converted With Cause (as defined herein), ceasing [***].  The Exclusivity Period shall be extended each time the term of this Agreement is extended in accordance with Section 22.  In the event this Agreement is Terminated or Converted With Cause during the Exclusivity Period, then the Exclusivity Period shall immediately cease as of such termination or conversion.

4.Exclusivity Terms.

(a)   Absent a written contrary agreement between the Parties, which both Parties represent does not exist as of the Effective Date [***] shall be deemed "Exclusive Products."  In the event KCI Manufacturing develops Different Products (as defined in Section 1 above), such Different Products shall not be Products without express agreement by KCI Manufacturing designating such Different Products to be Products.  In the Parties’ mutual spirit of goodwill and cooperation contemplated by this Agreement, unless KCI Manufacturing is contractually prevented from doing so by a confidentiality agreement or other written agreement that expressly bars KCI Manufacturing from doing so, KCI Manufacturing agrees to disclose to Avail the details of the Different Products and manufacturing plans for them, and to grant Avail the opportunity to submit proposals for the Processing Services related to such Different Products in sufficient time prior to KCI Manufacturing’s commencement of the manufacture thereof, or marketing launch of the Different Products by KCI Manufacturing, for Avail to adequately prepare and for KCI Manufacturing to analyze such proposal.  Throughout the Exclusivity Period and thereafter for a period of thirty-six (36) months, Avail agrees to not manufacture or sell any products or components that are either adapted for, or reasonably likely to be used in, vacuum assisted wound closure therapy ("Similar Products") to or for any customer other than KCI Manufacturing.  Moreover, Avail represents and covenants that each of its managerial, supervisory, development or engineering employees involved in the manufacture of Products are bound or shall be bound by terms that obligate such employees to not to be involved in the production or distribution of Similar Products during the Exclusivity Period and for a period of thirty-six (36) months thereafter unless this agreement is terminated by Avail as a result of an Event of Default or this Agreement is terminated by KCI Manufacturing without cause in which case such period shall be twelve months.  Subject to Section 4(b) below, throughout the Exclusivity Period, KCI Manufacturing agrees obtain Products exclusively with Avail for Processing Services.  

(b)   Notwithstanding the foregoing, KCI Manufacturing shall have the right to manufacture and commercialize the Products in unlimited quantities and for any purpose, conditioned upon [***].  In such event, Avail agrees to continue providing the Processing Services with respect to all Products ordered by KCI Manufacturing.  The exercise by KCI Manufacturing of its rights under this Section 4(b) shall not be deemed a conversion of this Agreement under Section 22.  

5.Procurement and Processing Services; Specifications; Passage of Title; Quality.

(a)   Purchase of Procurement Services.  Pursuant to the terms and conditions of this Agreement, KCI Manufacturing hereby engages Avail to provide the Procurement Services, for a fee, to procure on behalf of KCI Manufacturing the Raw Materials in quantities to be specified by KCI Manufacturing.  In consideration for the fee paid by KCI Manufacturing for the purchases set forth in this Section (the “Procurement Services Fee” and as more fully defined herein) Avail agrees to: (i) provide such Procurement Services to or for KCI Manufacturing; (ii) drop-ship the procured Raw Materials to Avail’s Mexican processing facility in such manner as may be directed by KCI Manufacturing in writing; and (iii) thereafter promptly notify KCI Manufacturing with confirmation that such Raw Materials have been properly delivered by Avail to Avail’s Mexican facilities.  The Parties further agree that title, risk of loss, and insurable interest to the Raw Materials shall be transferred to KCI Manufacturing in Mexico when the Raw Materials are “Delivered at Frontier” ("DAF", INCOTERMS 2000) to the Mexican frontier (i.e., both after exiting the territory of the United States and after clearing the customs border of the United States) by Avail.  Avail shall arrange for Mexican customs clearance and pay for transportation from the frontier to Avail’s Mexican processing facility; all costs incurred by Avail in arranging for Mexican customs clearance, including the recordation, creation and reconciliation of pedimentos, shall be part of the Procurement Services Fees (as defined herein).  Once title to the Raw Materials has passed to KCI Manufacturing, Avail shall have no legal rights to the Raw Materials, and, without limitation, shall not pledge the Raw Materials as security for debts, liens, tax liens or other encumbrances, and shall not dispose of the Raw Materials without the express authorization of KCI Manufacturing.  KCI Manufacturing shall pay Avail for the costs of any export/import pedimentos assessed against or incurred by Avail arising from Avail’s providing the Procurement Services.  

(b)   Purchase of Processing Services.  Pursuant to the terms and conditions of this Agreement, KCI Manufacturing agrees to pay for and purchase, from Avail, Processing Services necessary to transform the Raw Materials delivered to Avail’s Mexican processing facility into Products in quantities to be specified by KCI Manufacturing in accordance with the terms and conditions of this Agreement.  In consideration for payments made by KCI Manufacturing for the services as set forth in this Section (the “Processing Services Fee” and as more fully defined herein), Avail agrees to (i) provide such Processing Services to KCI Manufacturing in accordance with KCI Manufacturing’s Product Specifications; (ii) drop-ship such Products to the destination specified in writing by the KCI Manufacturing; and (iii) thereafter, promptly notify KCI Manufacturing with confirmation that such Products have been properly shipped by Avail.  Subject to the Product Specifications, Avail is hereby authorized to perform all acts Avail deems appropriate to render the Processing Services and perform its duties under this Agreement without KCI Manufacturing’s prior approval, unless such approval is otherwise expressly required under this Agreement Title to the Raw Materials, work in process and Products shall remain with KCI Manufacturing until the Products are shipped by Avail in accordance with Section 24 of this Agreement.  

(c)   Purchase, Use and Maintenance of Equipment.  

(i)  KCI Equipment.  As part of this agreement, and the Parties’ performance hereunder, the Parties agree that certain equipment leased, owned, possessed or procured by KCI Manufacturing may be transferred or delivered to Avail by KCI Manufacturing solely for purposes of Avail performing the Processing Services (“KCI Equipment”).  KCI Equipment shall also include any Equipment acquired by Avail for KCI Manufacturing, at KCI Manufacturing’s cost, during the term hereof, and of which Avail shall retain possession for purposes of performing the Processing Services.  Equipment acquired by Avail solely for the purpose of manufacturing Products of KCI Manufacturing shall be deemed to be KCI Equipment, subject to the application of this Section.

(ii) Avail Equipment.  Avail may utilize certain of its equipment owned and possessed by Avail prior to the Effective Date, or acquired by Avail during the term hereof (“Avail Equipment”).  Avail may utilize any Avail Equipment for manufacture of products for other of Avail’s customers coincident with the use for manufacturing the Products, unless otherwise agreed in writing.

(iii) Procurement of Equipment by Avail.  Avail may procure Equipment for or on behalf of KCI Manufacturing according to specifications provided by KCI Manufacturing, at the direction of KCI Manufacturing, and subject to reimbursement from KCI Manufacturing for such procurement; such reimbursement shall be by direct payment by KCI Manufacturing to Avail, upon invoicing by Avail.  Upon possession by Avail, the procured Equipment shall be deemed KCI Equipment, and shall be subject to the terms herein related to KCI Equipment.

(iv) Transfer of KCI Equipment.  In the circumstance that KCI Manufacturing shall transfer KCI Equipment to Avail as part of the Parties’ performance hereunder, the Parties shall agree to a written Transfer Plan. A “Transfer Plan” is a written document, ancillary to but made a part hereof by reference, describing the specific manner in which Avail may take possession, transfer and place such KCI Equipment in operation at Avail’s facilities  Notwithstanding,  KCI Manufacturing shall retain all of its rights in and to the KCI Equipment.

(v) Use and Maintenance of KCI Equipment.  Avail shall not use the KCI Equipment for any purpose other than the Processing Services.  Avail shall maintain the KCI Equipment in good working order by utilizing generally accepted preventive maintenance processes and procedures.  Avail shall be responsible for damage to or loss of the KCI Equipment while in Avail’s possession, other than normal wear and tear, arising from Avail’s negligence.  KCI Manufacturing is responsible for (a) any KCI Equipment failures that result from KCI Equipment design or malfunction (other than malfunctions caused by Avail’s failure to maintain the KCI Equipment properly); (b) replacement of any of the KCI Equipment during the term hereof for any reason other than the abuse, mishandling or negligence of Avail; and, (c) for all reasonable costs incurred by Avail for maintaining the KCI Equipment, and shall remit such costs upon invoicing by Avail.  Avail shall be responsible for the safekeeping, maintenance and protection of the Equipment while in its possession, including protection from theft, fire, environmental or other potential means of destruction.

(vi)  Representations regarding KCI Equipment.  Any of the KCI Equipment utilized by Avail in rendering the Processing Services, which are transferred to Avail from KCI Manufacturing, shall perform in accord with representations made in writing to Avail by KCI Manufacturing prior to the transfer regarding the condition and efficiency of the KCI Equipment transferred. Avail may rely upon such representations in the pricing of the Processing Services, to the extent that such pricing depends upon the conformance of the KCI Equipment to such representations.  If the KCI Equipment does not function in accordance with such representations, as Avail’s sole remedy for any breach of such representations, the parties agree to cooperate in good faith to adjust the pricing an any specified Processing Services impacted by the non-conforming KCI Equipment to the extent and in proportion to any lost efficiencies or increased costs caused by non-conforming KCI Equipment; or otherwise to procure conforming equipment as described elsewhere in this Agreement.  Avail does not warrant the functionality, suitability and operability of any KCI Equipment, whether transferred from KCI Manufacturing or procured by Avail on behalf of KCI Manufacturing.

(d)   Product Specifications.  From time to time during the term of this Agreement, KCI Manufacturing shall provide Avail with data and documents embodying all of the Product Specifications required for Avail’s performance of the Processing Services.  The term "Product Specifications" in this Agreement shall mean and include any and all designs, drawings, blueprints, formulations, models, specifications, quality standards, techniques, processes, performance data, manufacturing data and procedures, know-how and other technical information relating to the design, production/manufacture and/or operation of the Products, which are provided by KCI Manufacturing to Avail for the purpose of producing/manufacturing the Products pursuant to this Agreement, including any changes to the Products.  

(e)   Improvements and Modifications.  KCI Manufacturing may, in its sole discretion, advise Avail in writing of changes in the design or specifications of any of the Products, including the addition of new features or capacities (“Improvements and Modifications”) to the Products that are owned, developed by or licensed to, KCI Manufacturing during the term of this Agreement.  KCI Manufacturing and Avail shall jointly determine the feasibility of utilizing such Improvements and Modifications in the performance of Processing Services with respect to the Products.  Avail shall also provide to KCI Manufacturing all costs which may be incurred by Avail in its implementation of the proposed Improvements and Modifications, including both capital costs and changes to costs in delivering Processing Services.  If the Parties agree that it is feasible and desirable to use such Improvements and Modifications, and KCI Manufacturing accepts the cost changes submitted by Avail, then KCI Manufacturing shall provide to Avail: (i) KCI Manufacturing’s approval of the costs and authorization for Avail to incur such costs, and (ii) a data package which shall include all of the Product Specifications required by Avail to incorporate all such Improvements and Modifications into the Products, and thereafter Avail shall utilize all such Improvements and Modifications in the performance of the Processing Services related to the Products.  Any Improvements and Modifications shall be become effective prospectively at such time as the Parties agree.  

(f)   Deviation from Specifications.  Avail must give written notice to KCI Manufacturing and receive approval from KCI Manufacturing prior to deviating from the Product Specifications.  Such notice shall provide, in reasonable detail, the reasons for any such deviation.  KCI Manufacturing may direct Avail to deviate from the Product Specification provided that KCI Manufacturing (i) protects Avail from any costs incurred as a result of such deviation; and (ii) protects Avail from and against the violation of any regulations or laws arising from such deviation.  To the extent that such deviation from the Product Specifications constitutes an Improvement and Modification that results in a reduction in the cost of Processing Services, then the terms of Section 5(e) shall apply.  

(g)   Production.  Avail may employ: (i) its existing processing processes, (ii) adopt KCI Manufacturing’s manufacturing processes licensed to Avail as part of the Intellectual Property Rights, or (iii) establish or utilize its own production methods ((i) and (iii) collectively being the “Avail Production Methods”) as the Parties may agree. Avail shall retain all rights and interests in and to the Avail Production Methods, and grants to KCI Manufacturing a perpetual, paid-up, non-exclusive, license to make, have made, use, and sell products manufactured using the Avail Production Methods at no cost to KCI Manufacturing.  Such license shall be sublicensable to affiliates and manufacturers of KCI Manufacturing for the purpose of manufacturing products of KCI Manufacturing or such affiliates.  Avail shall not be obligated to produce for or deliver to KCI Manufacturing any quantity of Products in excess of the capacity of the manufacturing equipment used by Avail in providing the Processing Services (either KCI Equipment or Avail Equipment) or in excess of that which can be accommodated by Avail’s facilities.  Other than as provided in Section 5(c) herein, Avail shall not change or modify the Products at any time without KCI Manufacturing’s prior approval.  Avail shall utilize Avail Equipment or KCI Equipment in a manner suitable to the production of Products that meet the Product Specifications.  Should Avail identify additional Equipment that it deems necessary for the proper rendering of Processing Services, it shall notify KCI Manufacturing of such need, in writing.  Upon agreement of the Parties that such additional Equipment should be procured, Avail shall procure such Equipment which shall be deemed KCI Equipment; the procurement of such KCI Equipment shall be handled in accord with Section 5(c)(iii).  

(h)   Inspection.  Upon at least two (2) days’ prior written notice and during Avail’s regular hours of business, KCI Manufacturing (or its representatives) shall have the right to (a) inspect work in progress to determine the adequacy of production methods and equipment employed by Avail; and (b) conduct spot inspections of finished Products to verify that the Products have been manufactured in accordance with the Product Specifications (collectively, “Inspections”).  Inspections may be conducted only at the production facilities or the storage facilities of Avail, or at the point of loading. All representatives of KCI Manufacturing conducting above inspections shall comply with all applicable safety and security rules of Avail.  Subject to the above conditions and on the written request of KCI Manufacturing, Avail shall also grant access to Avail’s facilities to customers of KCI Manufacturing’s Affiliates (or their representatives) who wish to carry out an audit of the Avail’s facilities and the Products (i.e. for the purpose of the certification of same). If KCI Manufacturing identifies any shortcomings in Avail’s manufacturing processes that result in Product being produced by Avail that does not meet the Product Specifications, then KCI Manufacturing may issue a notice to Avail regarding changes to Avail’s manufacturing processes. Avail shall implement any changes identified by KCI Manufacturing as changes necessary, and which can be objectively determined to bring the Products into conformance with the Product Specifications.  All representatives of KCI Manufacturing conducting such inspections shall comply with all of Avail’s applicable safety and security rules.  Subject to the above conditions and on the request of KCI Manufacturing, Avail shall also grant access to Avail’s facilities to customers of KCI Manufacturing’s Affiliates (or their representatives) to carry out an audit of the Avail’s facilities and the Products (i.e. for the purpose of the certification of same), provided that KCI Manufacturing protects Avail from any associated costs incurred.  

(i)   Testing.  At its expense, KCI Manufacturing may require Avail to provide samples of Products for random testing.  The samples may be of finished Products or of Products at intermediate stages of production.  The finished Products shall be tested by Avail in accordance with procedures established by the Parties from time to time, in a written protocol.  To the extent that Avail’s costs incurred for such testing is not a cost not included in the pricing structure made a part hereof, then KCI Manufacturing shall reimburse Avail for all such costs.  KCI Manufacturing shall design all Product tests and testing equipment, and shall, at its own expense, provide Avail with all testing equipment, technical instruction and information necessary for the performance of Product testing.  Such testing equipment shall be treated as KCI Equipment, unless the Parties agree otherwise.  

(j)   Processing Services Approval.  Avail shall obtain written approval and revised Product Specifications from KCI Manufacturing before commencing any Processing Services for the production of Products added to the listing of Products on Exhibit A as of the Effective  Date, or Products which have been subject to an approved  change in the manufacturing process.  

(k)   Product Orders.  From time to time, and as set forth herein, KCI Manufacturing shall deliver to Avail purchase orders for the Products in accord with Section 6 hereof.  Avail shall arrange for the shipment and insurance of such Products, on behalf of and as directed by KCI Manufacturing.  Orders for Product, including Shipment Orders, shall placed by KCI Manufacturing and fulfilled by Avail in accord with Section 6 herein.  

(l)   Title and Risk of Loss.  Subject to the terms and conditions of this Agreement, once KCI obtains title and risk of loss to the Raw Materials pursuant to Section 5(a), KCI Manufacturing shall have and retain title to all Raw Materials and Products throughout each stage of production and at no time shall any right, title, or interest in the Raw Materials or Products vest in or transfer to Avail.  KCI Manufacturing shall bear all risk of loss arising from the manufacture, sale, transportation, storage, handling, or other use of Products and Raw Materials, including all parts, components, and materials comprising the Products, Raw Materials and components, from any cause whatsoever other than any loss resulting from the negligence or willful misconduct of Avail.  Without limiting the generality of the foregoing, KCI Manufacturing shall bear all risk of loss relating to or arising from delinquencies, defaults, insolvencies of suppliers and third-party claims relating to the Products and sales thereof.  

(m)   Subcontracting.  Avail shall be entitle to subcontract all of its obligations under this Agreement, and to assign its rights to collect fees from KCI Manufacturing for such services rendered under a subcontracting arrangement, to an Avail subsidiary that is wholly owned and controlled by Avail, provided that KCI Manufacturing consents to such subcontracting arrangement and assignment of rights to receive or collect remuneration.  Such consent shall be in writing and shall not unreasonably be withheld.  

6.Order Processing.  KCI Manufacturing forecast and shall place orders for Product in accord with the following:

(a)   Forecasts.  On a quarterly basis, commencing with the Effective Date, and no later than the first day of every succeeding quarter of the term of this Agreement, KCI Manufacturing shall deliver to Avail a written forecast of KCI Manufacturing’s expected requirements (i.e., expected quantities) for: (y) Raw Materials and components which Avail shall procure in accord with its rendering of the Procurement Services (the “Procurement Forecast”). The Procurement Forecast may be generated by KCI Manufacturing from a materials replenishment plan (“MRP”) provided by Avail and (z) finished Products which Avail shall deliver to KCI Manufacturing as part of Avail’s rendering of the Processing Services (the “Processing Forecast”); KCI Manufacturing may submit revised Procurement Forecasts or Processing Forecasts at any time during any quarter, before such forecasts are due (an “Interim Forecast”); to the extent such Interim Forecasts modify an extant forecast, Avail shall endeavor in good faith to meet the request for such change, but shall not be bound to such Interim Forecast.  

(b)   Orders; Shipment Orders.  Coincident with the quarterly Procurement Forecast and Processing Forecast, KCI Manufacturing shall submit purchase orders to Avail for the rendering of the Processing Services, detailing the Product which Avail shall deliver to or on behalf of KCI Manufacturing for the succeeding quarter (three months) (each, an “Order”).  Each Order shall comport with the corresponding Processing Forecast in the following manner: (i) the first month of the Order will reflect the exact quantity contained in the latest Processing Forecast; (ii) the second month of the Order may vary from the latest Processing Forecast by no more than ten (10%) percent; (iii) the third month of the Order may vary from the latest Processing Forecast by no more than fifteen (15%) percent. From time to time, KCI Manufacturing shall issue to Avail an order for the shipping and delivery of Products to or on direction of KCI Manufacturing covered by an Order (each, a “Shipment Order”).  Each Shipment Order shall be initiated by or under the direction of KCI Manufacturing by means of a computerized system that will be networked between Avail and KCI Manufacturing;  

(c)   Avail’s Shipment of Products.  Upon initiation of a Shipment Order within the networked system, Avail shall thereupon ship the ordered Products as instructed, provided that the Shipment Order properly comports with the corresponding Order as set forth in Section 6(b);  

(d)   Avail’s Confirmation.  Promptly upon shipment of the ordered Products, Avail shall confirm such shipment by means of entering a shipment confirmation in the networked system;  

(e)   Avail’s Invoicing.  Avail shall invoice KCI Manufacturing as Avail incurs costs hereunder, as frequently as daily invoicing, for payment of Procurement Services Fees and Processing Services Fees attributable to Products shipped.  

7.Stock Levels.  Avail agrees to maintain a supply of the following:

(a)   Raw Materials and components.  Avail shall manage inventory of Raw Materials and components for use in the production of finished Products based upon the Procurement Forecast as may be updated in accord with Section 6(a);  

(b)   Finished Products.  As part of its performance hereunder, Avail shall manage inventory of finished Product on behalf of KCI Manufacturing based upon the Processing Forecast as may be updated in accord with Section 6(a); Avail shall also manage adequate inventory levels on all finished Products for immediate shipment of reasonably forecasted quantities, with a reasonable amount of added safety stock, as directed by KCI Manufacturing and at KCI Manufacturing’s cost (“Product Stock”).  

(c)   Product Stock Replenishment.  For Products destined for delivery within the continental U.S., the Parties agree that the 3-5-7 Week Stock Replenishment Rules constitute adequate Products Stock.  The Parties also agree that following an initial stocking level of eight (8) weeks of usage, similar replenishment rules will be developed and implemented for stock destined for delivery outside the continental U.S., adjusted from the U.S. rules to allow for transportation time.  The Parties agree to negotiate in good faith toward developing such replenishment rules within 90 days of the Effective Date; barring agreement on such Rules, Avail shall maintain Product Stock in accord with this Section.  

8.Shipment.  Upon receipt of a Shipment Order, Avail shall timely drop-ship all the Products listed on the Shipment Order to the site(s) designated in the Shipment Order, in the manner indicated in the Shipment Order.  For shipments within the continental U.S., the term "Same-Day Deadline" shall mean three o'clock p.m., Pacific Standard Time (3:00 p.m. PST), or such other reasonable deadline time as may be agreed in writing between the Parties. For purposes of this Section, the term “shipped” or “Shipment” shall mean that Avail has placed the Product detailed in the Shipment Order with the carrier as designated by KCI Manufacturing; timing associated with shipping and for determining Avail’s performance hereunder shall not include time expired following Avail’s placement of the Product with the carrier. All Products for which a Shipment Order is entered into the networked system and received by Avail prior to the Same-Day Deadline on any given business day shall be shipped that same day by Avail, in the manner required.  If, on the other hand, a Shipment Order is not entered into the networked system until after the Same-Day Deadline on any given business day, Avail shall not be required to ship the corresponding Products until the next business day.  Avail shall not confirm shipment of any Products until shipment has actually occurred.  Terms of shipment for international shipments will be agreed to by both Parties prior to initiating shipments from Avail’s Mexican facility.  Each shipment confirmation shall contain or refer to such information as may be required and as may be appropriate for such confirmation to meet the needs of KCI Manufacturing.  KCI Manufacturing shall be responsible for all freight expenses for Products sent outbound from Avail (or from an Avail agent or sub-contractor) to KCI Manufacturing customers pursuant to a Shipment Order.  In the event the terms of a purchase order or Shipment Order are not in accordance with any provisions of this Agreement and Avail has not so notified KCI Manufacturing of the nonconformance by the Same-Day Deadline on the next business day following Avail's receipt of such an order, then the terms of such order shall be deemed accepted by Avail.  Avail shall do all things reasonably required to facilitate processing of purchase orders, shipments, invoices and confirmations in such manner as may be requested by KCI Manufacturing.  KCI Manufacturing has the responsibility to pay any local taxes, including VAT in Europe, on the Products it receives from Avail when such taxes relate to the transfer of title for the Products.

9.Delivery.  Consistent and predictable on-time delivery of the Products by Avail to KCI Manufacturing is of fundamental importance to this Agreement.  In Section 7, the Parties have established procedures and protocols to provide for minimum levels of finished goods inventory for the Products to be held by Avail.  As part of its performance hereunder, Avail agrees to the following:

(a)   Manage levels of both Raw Materials and Products as agreed by the Parties herein;  

(b)   Issue to KCI Manufacturing written notice of any conditions that will likely result in a shortfall in Product inventories (as agreed herein), and which arise from: (i) quality of Avail-procured Raw Materials or components; (ii) changes to Product Specifications.  Avail shall issue notice to KCI Manufacturing within seventy-two (72) hours of identifying such conditions that are likely to result in shortfalls or delays in Product manufacturing or inventories, regardless of when that Product shortage is likely to occur (such conditions referred to as “Process Impediments”). Upon receiving notice of a Process Impediment, KCI Manufacturing shall work with Avail in good faith to implement corrective actions to mitigate or eliminate the Process Impediment.  

10.Preventive and Corrective Actions.  Irrespective of the foregoing, the Parties shall negotiate in good faith to create methods of objectively measuring Avail’s timely performance of its obligations hereunder, to include the following

(a)   Avail shall develop a "Shipping Performance Report" and an "Inventory Level Report" reasonably acceptable to KCI Manufacturing that will be published monthly by Avail and provided to KCI Manufacturing.  The Shipping Performance Report and the Inventory Level Report shall include a rolling six-month average of Avail’s performance, also identifying the existence and impact of Process Impediments on Avail’s performance.  

(b)   If the Shipping Performance Report and an Inventory Level Report objectively identify a consistent negative change in Avail's performance in Product production or delivery, KCI shall request and KCI and Avail shall attend a meeting to work toward an agreed corrective action, which shall be a written agreement.  Failing such agreement, KCI Manufacturing may provide notice of a ninety (90) day cure period as described in Section 21.  

The provisions of this Agreement regarding the time within which Avail must deliver the Products are of the essence.  If a Shipment Order is within forecasted quantities and Avail fails to timely ship the ordered Products within [***] of the time required herein for shipping, then KCI Manufacturing shall receive a [***] discount on the price for such Product.  KCI Manufacturing shall also receive [***] the Product is shipped late, although such discounts shall not exceed an aggregate maximum discount of ten percent (10%).  The terms and conditions set forth in this section are in addition to and not in lieu of all rights and remedies otherwise provided by law.

11.Procurement Services Fees..  KCI shall pay the Procurement Services Fee set forth in Exhibit B for the Procurement Services according to the terms of Section 16.  Notwithstanding the foregoing, Exhibit B shall be modified at any time upon the Parties mutual written agreement to reflect any increases in the price of Raw Materials paid by Avail in rendering the Procurement Services.

12.Processing Services Fees.  The Processing Services Fee paid to Avail is set forth on Exhibit A, on a Product-by-Product basis for each SKU (the “Processing Services Fee”).  The Parties agree to cooperate with respect to price changes to the Processing Services Fee, as described in Section 23.  Increases in the Processing Services Fee shall not exceed [***] over any applicable period, except where any increase in such price is caused by a change in the Product Specifications made by KCI Manufacturing.

13.Price Reductions.  At least annually, an no later than the successive anniversary dates of the Effective Date, the Parties shall jointly review Procurement Services Fee (and related costs of Raw Materials) and Processing Services Fee to determine if it the Parties can achieve a reduction in either or both such fees in response to changes to design, materials, manufacturing processes, production volumes or market conditions.  This pricing review will be mutually undertaken in accordance with Section 23 of this Agreement.

14.Logistics.  Avail's facility in Tijuana, Mexico will be the primary manufacturing site for the Products.

15.Annual Payment [***] For purposes of this Section, a “Contract Year” shall constitute the period commencing on December 1 of any year during the term hereof and include the subsequent calendar year.  The Initial Contract year shall commence on December 1, 2007 and end on November 30, 2008. [***]

16.Payment.  KCI Manufacturing shall pay the Procurement Services Fee and Processing Services Fee within fifteen (15) days of the receipt of invoice.  Invoices shall be delivered promptly to KCI Manufacturing, Athlone Business & Technology Park, Garrycastle, Athlone, Co. Westmeath, Ireland or to such other address as may be designated by KCI Manufacturing.  KCI Manufacturing shall issue payment to Avail by means of wire transfer, according the instructions provided to KCI Manufacturing in writing.  Payment shall be deemed as received upon deposit of funds into Avail’s account.

(a)   Credit Limit; Remedies.  Avail reserves the right to establish a credit limit for outstanding amounts owed and unpaid by KCI Manufacturing hereunder, and amounts incurred by Avail in performance hereunder whether or not yet payable by KCI Manufacturing, whether or not such amounts are in arrears (“Credit Limit”).  Avail shall establish the Credit Limit in accord with its ordinary practices, and may consider factors external to the terms of this Agreement in establishing or revising the Credit Limit, including information which KCI Manufacturing may provide regarding its financial condition The initial Credit Limit shall be established on or before the Effective Date; Avail shall promptly notify KCI Manufacturing thereof.  Avail may revise the Credit Limit from time to time in accord with its ordinary practices, and shall notify KCI Manufacturing of any revisions.  Avail shall be under no obligation at any time to advise or notify KCI Manufacturing of any balance due or amount of credit remaining to KCI Manufacturing under the Credit Limit.  Avail may suspend or cease its performance hereunder, in any or every aspect, when KCI Manufacturing’s outstanding balance exceeds the Credit Limit, and KCI Manufacturing may not assert any default by Avail therefor.  For purposes of this Section, Avail may calculate the KCI Manufacturing outstanding balance at any time as any and all costs incurred by Avail on behalf of KCI Manufacturing hereunder for which Avail shall receive remuneration, but which are not paid by or on behalf of KCI Manufacturing.  

(b)   No Waiver.  Avail’s failure or election to not seek any remedy provided in this Section shall not constitute a waiver of any rights or remedies contained in this Section, or contained elsewhere in this Agreement.  

17.Product Quality.

(a)   Each lot of Products shipped by Avail will meet the Product Specifications as of the date on which the Products are manufactured.  No non-conforming Products will be released to KCI Manufacturing, or its customers, without the prior written approval of KCI Manufacturing.  

(b)   Avail acknowledges that KCI Manufacturing, in reliance upon Avail’s obligation to inspect and test the Products in accordance with Section 5(h) herein and Avail’s warranties hereunder, shall use or sell the Products without doing any further quality control or inspection.  

(c)   Any container holding the Product when the Product is delivered to KCI Manufacturing shall be labeled with the net weight of the Product contained therein, and the actual weight of the Product contained in any container shall comply with applicable laws and regulations.  Avail shall include in each Product’s labeling all warnings and instructions specified by KCI Manufacturing.  

(d)   Avail shall provide customary product warranties as may be reasonably agreed between the Parties.  

(e)   KCI Manufacturing must approve, in writing, any changes that may affect the performance of any Products before such changes are made.  In the event that changes are required to correct defects in the Products, to enhance the safety or the Products, or to otherwise improve the quality of the Products, KCI Manufacturing shall be notified immediately upon Avail's recognition of the need for the same, and KCI Manufacturing shall approve any such changes and the appropriate validation for such changes.  All Product Specifications changes, including changes in quality control and manufacturing processes, shall be validated and documented by Avail and approved by KCI Manufacturing.  

(f)   Avail shall develop, and KCI Manufacturing shall approve, a Quality Plan or Plans applicable to the Products outlining the responsibilities and expectations of KCI Manufacturing regarding Quality and Service Performance Levels for the products.  Such quality plans, which may be amended from time to time at the request of KCI Manufacturing, [***] shall be of a form and complexity consistent with customary industry standards.  The Quality Plan or Plans shall be considered integral to this Agreement and shall govern the responsibilities of each Party under this Agreement with respect to quality concerns. The basis for Quality Levels for all of the products shall be [***] completed in the design and process verification and validation activities for each of the products.  The [***]  framework shall be developed by Avail and approved by KCI Manufacturing.  It is expected that the products, given their complexity and regulatory classification status, will have applicable to each of them a [***] confidence level that they are free of defects in workmanship and material.  Each shipment of Products shall be accompanied, where appropriate, by an accurate certificate of analysis or other mutually agreeable quality control data where requested by the customer or preformed as standard business practice.  

(g)   It is the expectation of the Parties entering this Agreement that the Quality and Service levels to be provided by Avail going forward shall be consistent with those provided by Avail in the past to Affiliates of KCI Manufacturing.  The Parties will agree upon a "Quality Performance Report", similar to quality reports provided by Avail in the past to Affiliates of KCI Manufacturing, to be published monthly by Avail and in a format acceptable to KCI Manufacturing.  A rolling six-month average of performance levels published in the Quality Performance Report will be used as the basis for measuring changes in Avail's historic quality performance levels.  Avail will cooperate fully with KCI Manufacturing in amending and updating performance levels and expectations to assure the Products continue to meet and exceed the customary Quality and Service expectations of the market.  Should complaints or other forms of negative quality events occur at a level or frequency that causes concern to KCI Manufacturing and are inconsistent with or different from the historical performance levels of Avail, KCI Manufacturing may request an inspection and meeting as contemplated in Section 19 of this Agreement.  It will then be the right of KCI Manufacturing to examine all manufacturing and quality related documentation to assure that Avail is consistently following the procedures established during the verification and validation processes to meet product quality expectations.  To the degree that Avail is failing to materially conduct such activities as set out above, KCI Manufacturing may provide notice to Avail of such facts and provide for the ninety (90) day cure period as described in Section 21.  

18.Packaging and Labeling.  Avail shall label and package the Products in accordance with the Product Specifications.  Avail will ship all Products under KCI Manufacturing's name.  KCI Manufacturing shall notify Avail of any known damage to the Products within five (5) business days of KCI Manufacturing's actual knowledge of such damage, and Avail shall provide replacements for damaged Products if damage is caused by failure to meet the Product Specifications.  Absent contrary written instruction by KCI Manufacturing, the labeling for Products (i) shall bear such trademarks, logos and source identifiers as set forth in the Product Specifications ("KCI Manufacturing Trademarks"), or may be otherwise directed by KCI Manufacturing in writing, provided that any additional costs to Avail for such labeling shall be borne by KCI Manufacturing; (ii) shall bear such notices as may be required under applicable laws and regulations, or by KCI Manufacturing or provided that any deviations from the Product Specifications regarding packaging or labeling be handled in accord with Section 5(f)(i); (iii) shall bear the designation "MADE FOR KCI MANUFACTURING"; and (iv) shall not include any reference to Avail.  Nothing herein, nor any performance hereunder, shall be construed as a license for Avail to use the KCI Manufacturing Trademarks in any manner not expressly stated herein or in written instructions provided by KCI Manufacturing.

19.Inspection.  Upon at least two (2) days’ written notice, KCI Manufacturing shall have the right to inspect all facilities used to manufacture the Products by or for Avail and to inspect all documents and records relating to the manufacture and shipment of the Products.  If KCI Manufacturing identifies concerns or possible insufficiencies in Avail’s quality control procedures or Avail’s documents or records, KCI Manufacturing may issue its comments or suggestions regarding such allegations to Avail.  If such allegations constitute objective deficiencies by Avail of its covenants, obligations or performance, then Avail shall implement corrective actions to any reasonable allegation of material deficiencies, at Avail’s cost.  If KCI Manufacturing’s comments or suggestions do not relate to deficiency in Avail’s performance of its obligations, then Avail may implement such suggestions at KCI Manufacturing’s Avail’s cost, and it shall be treated as a matter subject to Section 25.

20.Returns.  KCI Manufacturing and Avail agree to cooperate in good faith to establish adequate procedures for processing and evaluating Product returns in a mutually beneficial manner.  Avail agrees to incur all freight and return expenses for Products returned due to Avail’s failure to conform to the terms of this Agreement, the Product Specifications or any Order or Shipment Order.

21.Excessive Returns.  Returns of a Product that arise from the failure of the Product to meet Product Specifications are considered a quality issue for the purposes of this Agreement and will therefore be managed consistent with Sections 17 and 25 of this Agreement

22.Term and Termination or Conversion.  The term of this Agreement shall commence on the Effective Date and shall continue for a period of thirty-six (36) months thereafter (the "Initial Term").  At the end of the Initial Term, the term of this Agreement shall automatically extend for an additional twelve (12) months (the “Extended Term”) unless either Party has previously delivered to the other Party a Notice of Termination. On each successive anniversary of the Effective Date, the term will automatically extend for an additional twelve (12) months unless either Party has previously delivered to the other Party a Voluntary Notice of Termination (as defined herein).  A Voluntary Notice of Termination shall be written notice to the other Party that the noticing Party intends to terminate this Agreement as provided herein.  Such Voluntary Notice of Termination must be delivered as set forth herein. Either Party may terminate this Agreement, without cause, upon providing twenty-four (24) months written notice effective as of the next anniversary of the Effective Date following transmittal of such notice to the other Party (a "Voluntary Notice of Termination").  In addition, KCI Manufacturing may terminate or convert this Agreement to a non-exclusive agreement at its sole option, in the event that Avail:  (i) materially breaches this Agreement; (ii) seeks protection from its creditors under the bankruptcy or insolvency laws of its jurisdiction of incorporation or domicile, or becomes involuntarily subject to the jurisdiction of a Court under the bankruptcy or insolvency laws of its jurisdiction of incorporation or domicile; (iii) fails in a material way to manufacture Products in accordance with the QSR of the FDA and in accordance with any and all applicable international regulations or standards and fails to cure or remedy such situation within ninety (90) days unless the US FDA, or similar foreign counterpart, requires action that takes longer than ninety (90) days to execute, in which case Avail shall have the time necessary to comply with such regulations or standards; (iv) manufactures and/ or distributes of any Product involved in a Class I "recall" subject to the conditions specified in sections 17and 25and as defined in the regulations promulgated by the FDA (an "Event of Default"); and (v) failure to meet Product shipping or inventory level standards in accordance with Sections 7 and 8, or Product quality standards in accordance with Section 17.  Each of the foregoing occurrences (i) through (v) shall constitute an “Event of Default.”  Avail may terminate this Agreement in the event that KCI Manufacturing (i) materially breaches this Agreement or (ii) seeks protection from its creditors under the bankruptcy or insolvency laws of its jurisdiction of incorporation; each of the foregoing occurrences, (i) and (ii) shall constitute an “Event of Default.”  Either Party may elect to terminate or convert this Agreement if the other Party is not able to cure an Event of Default of such other party within thirty (30) days of written notice of such an Event of Default; such termination shall be deemed a “Termination or Conversion With Cause” and the Agreement shall be “Terminated or Converted With Cause.” Only in the event of Termination or Conversion with Cause by KCI Manufacturing, Avail shall supply Products to KCI Manufacturing at the pricing in effect as of conversion or termination for a period of one (1) year after any conversion or termination of this Agreement (subject to price changes permitted in this Agreement), and Avail shall make available to KCI Manufacturing a list of vendors who supply Product components, and do such things, as may be reasonably requested by KCI Manufacturing to enable KCI Manufacturing to manufacture the Products in the same manner as previously manufactured by Avail.  For purposes of this Agreement, the term “conversion” and “convert” shall mean the conversion of this Agreement to a non-exclusive agreement.  Upon termination of this Agreement, Avail agrees to deliver to KCI Manufacturing all finished Product produced, acquired or committed in accordance with outstanding purchase orders and forecasts, in addition to all Raw Materials in Avail’s possession.  The restrictions on Avail set forth in Section 4 shall survive the termination of this Agreement as set forth in Section 4.

23.Cooperation.  The Parties agree to cooperate in identifying methods of reducing costs of the production and delivery of Products.  The Parties will split cost reductions arising from this cooperation on a 50/50 basis, excluding costs reductions arising from the following:  (i) any cost reduction obtained on P/N M3248406 (Drape), which shall be fully passed to KCI Manufacturing; and (ii) any cost reduction arising from a capital expenditure exceeding [***] (a “Capital Cost Reduction”), which shall be enjoyed fully the Party making the capital expenditure. In regard to a Capital Cost Reduction opportunity, KCI Manufacturing reserves the election of making such expenditure and thus securing the resulting cost reduction benefit, if any.  KCI Manufacturing shall make this election, in writing to Avail, within thirty (30) days of the Capital Cost Reduction opportunity being defined by a project cost and benefit analysis prepared by either or both Parties.  Should  KCI Manufacturing fail to timely and properly so elect, then the Capital Cost Reduction shall be solely Avail’s right to exercise, which it shall do by written notice to KCI Manufacturing.  The Parties will work together in good faith to agree upon such other terms and conditions as may be appropriate to achieve each of these purposes and objectives.  As part of the ongoing cooperation of the Parties, KCI Manufacturing shall retain the right to approve all suppliers of material to Avail for use in Products and no change of any current supplier, shall occur without KCI Manufacturing's approval, which shall not be unreasonably withheld.

KCI Manufacturing represents and warrants that it has no knowledge of any fact, set of facts or circumstances, which have or could result in a default by Avail pursuant to this Agreement.  The Parties hereto agree that if any fact, set of facts or circumstances which existed as of the date of this Agreement related to the regulation of the Products and which would otherwise have resulted in a default under this Agreement become known subsequent to the date of this Agreement that such fact, set of facts of circumstances shall not be deemed to be a default pursuant to the terms of this Agreement and the Parties shall in good faith work to resolve these items.

24.Title and Risk of Loss for Products.  Title, risk of loss to, and insurable interest in Products shipped to the United States shall pass when the Products are Delivered at Frontier by Avail ("DAF", INCOTERMS 2000) to the frontier of the United States (i.e., both before entering the territory of the United States and before entering the customs border of the United States).  Products shipped to Europe, Australia or Singapore shall be delivered Free Carrier ("FCA") (INCOTERMS 2000) to Avail’s [Mexican warehouse], where the Products shall be transferred to the common carrier specified by KCI Manufacturing.  Title, risk of loss to, and insurable interest in Products shipped to Europe, Australia or Singapore shall pass from KCI Manufacturing to its Affiliate upon delivery to the common carrier.  Products shipped to Canada and Puerto Rico shall be Delivered Duty Unpaid (“DDU”) (INCOTERMS 2000) to a location specified by KCI Manufacturing.  Title, risk of loss, and insurable interest in Products shipped to Canada or Puerto Rico shall be transferred from KCI Manufacturing to its Affiliate upon delivery to the designated port of entry or warehouse of such Affiliate.  Avail shall not be responsible for customs clearance, nor shall Avail be responsible for any risk or delay associated with clearance of Products with and through customs or related agencies.

25.Warranty.  Avail warrants to KCI Manufacturing that the Products shall be manufactured and packaged in accordance with the Product Specifications and may otherwise be agreed by the Parties in writing, that the Products and related packaging shall be of consistent good quality, free from defects in workmanship.  Avail further warrants that all customer-supplied documentation shall be promptly filed in Avail's master device record for each Product.  This warranty does not apply to damage caused by unreasonable neglect, destruction, improper use and improper care.  Avail warrants that all Products distributed in the U.S. shall be manufactured in accordance with the QSR of the FDA, or any new or revised standards imposed by that agency, in a facility that is registered with the FDA.  Avail warrants that all Products distributed in Australia, Canada, Japan or The Netherlands shall be manufactured and distributed in accordance with all laws, rules and regulations which are applicable to the manufacture or distribution of the Products in that locale and that such Products shall be manufactured in a facility which is operated in accordance with all laws, rules and regulations applicable to a facility utilized to manufacture such Products in that locale.  Avail warrants that the articles comprising each shipment or other delivery hereafter made by Avail to, or to the order of, KCI Manufacturing or its customers, as of the date of such shipment or delivery, shall not be adulterated or misbranded within the meaning of the Federal Food, Drug, and Cosmetic Act (the "Act"), or any other applicable law, rule or regulation (including applicable foreign laws, rules and regulations).  Avail shall cooperate with KCI Manufacturing to aid KCI Manufacturing in communicating with or otherwise contacting each customer with respect to the safety or efficacy of the Products as requested by KCI Manufacturing or required by the FDA or any other governmental entity with appropriate jurisdiction.  Each of the Parties shall report to the other any problems relating to the safety or efficacy of the Products as soon as possible after learning of the existence of such problems.  Avail shall abide by all regulations of the FDA applicable to manufacturers of medical devices.  KCI Manufacturing shall be responsible for compliance with QSR paragraph 820.198 regarding complaint handling.

The Product Specifications, as well as all performance and suitability claims for each of the products are the responsibility of KCI Manufacturing.  Avail's responsibility is to accurately convert the aforesaid data into the documents and processes needed to produce the Products.  Any failure of the products to meet regulatory requirements or to be consistently manufacturable based upon the Product Specifications is the sole responsibility of KCI Manufacturing.  Any recall of any product that is a consequence of an error in any of the Product Specifications is the responsibility of KCI Manufacturing.  Obtaining and maintaining all applicable regulatory approvals and continued compliance for all products in all jurisdictions served by KCI Manufacturing or any of its Affiliates shall be the responsibly of KCI Manufacturing.  KCI Manufacturing shall indemnify and hold Avail harmless from any cost or expense directly related to (i) an error in any of the Product Specifications or (ii) a breach of this agreement.  Avail shall indemnify and hold KCI Manufacturing harmless from any cost or expense directly related to(i) a breach of a warranty set forth in, or provided for, in this Agreement, and (ii) any breach of this Agreement.

26.Force Majeure.  In the event any delay in performance by either Party is due to any cause arising from or attributable to acts, events, omissions, accidents or acts of God, beyond the reasonable control of the Party (including but not limited to strikes, lock-outs, civil commotion, riots, war, fire, explosion, storm, flood or earthquakes), the Party so delayed or prevented shall be under no liability for loss or injury suffered by the other Party thereby.  In the event that Avail is prevented from meeting the delivery schedule provided by KCI Manufacturing because of a delay caused by any of such acts, Avail shall give KCI Manufacturing written notification of any material or indefinite delay due to such causes.  In such an event, KCI Manufacturing may not exercise the remedy set forth in Section 9 hereof, but shall (a) instruct Avail that the sales orders affected by such delay are either (i) affirmed, and the time for performance is extended for as many days as such causes affect deliveries, or (ii) terminated and (b) have the right to access Product from sources other than Avail with respect to those sales orders.

27.Insurance.  Each Party shall carry and continue in force a policy of broad form Products liability insurance for the Products sold hereunder with limits of not less than [***] per occurrence and [***] in the aggregate.  All such policies shall provide that each Party shall receive written notice from the insurer thirty (30) days prior to any cancellation or change in coverage of the policy of the other Party.  Each Party shall provide the other with appropriate certificates of insurance evidencing such coverage.

28.Compliance with Law and ISO Standards.  Avail agrees to comply at all times with all U.S. and foreign federal, state and local laws, rules, and regulations relating to the Products during the period of this Agreement.  Avail further agrees to comply with standards imposed by the International Standards Organization (“ISO”) and related product development process requirements adopted by KCI Manufacturing.  Avail shall tender any documents required by KCI Manufacturing with respect to ISO certification and/or compliance with laws, regulations and the like.

29.Power and Authority.  Each of the Parties represents and warrants to the other that:  (a) it is a legal entity duly formed and validly existing under applicable law; (b) it has full right, power and authority to enter into and perform its respective obligations under this Agreement; (c) this Agreement, and its performance hereunder, does not conflict with any outstanding contract, commitment, or arrangement to which it is a Party or is bound; and (d) this Agreement constitutes a legal, valid and binding obligation of such Party.

30.No Liens.  Avail represents, warrants, and covenants that the Products shall be free and clear of all liens and encumbrances of any kind (collectively, "Liens") at the time of delivery of the Products to the KCI Manufacturing Affiliate or its customer, whichever occurs first.

31.Indemnity.  Avail and its Affiliates shall defend, indemnify and hold harmless each of KCI Manufacturing, its Affiliates and their respective directors, officers, shareholders, customers, employees, and agents, and their respective successors and assigns, from and against any and all losses, damages, costs and expenses (including attorneys’ fees) arising out of any and all claims related to any of the following:  (i) the failure of Products to meet the Product Specifications, (ii) claims that relate to actual Liens encumbering any KCI Equipment, Raw Materials, Products, and components or works-in-process of the Products, (iii) a breach of this Agreement and (iv) Avail's actual or alleged willful acts or omissions, or gross negligence ("Avail Fault").  Except in the event and to the extent caused by Avail Fault, and except in the event and to the extent the Products fail to meet the Product Specifications as a result of a breach of this Agreement by Avail, KCI Manufacturing and its Affiliates shall defend, indemnify and hold harmless each of Avail, its Affiliates and their respective directors, officers, shareholders, customers, employees and agents, and their respective successors and assigns, from and against any and all losses, damages, costs and expenses (including attorneys' fees) arising out of claims based upon the following, (i) any use, distribution or sale of the Products by any third party resulting in an infringement, or alleged infringement of any copyright, trade secret, trademark, patent, invention, proprietary information, non-disclosure right or other statutory or common law right of any person or entity (ii) the failure of the Products design to comply with applicable laws or regulations, including without limitation, those promulgated by the FDA, (iii) any error in any of the Product Specifications, (iv) any Products liability or other related claims not related to the manufacture of the Products, and (v) a material breach of this Agreement.  Except with respect to the matters set forth in this Section 30, in no event shall either Party be liable for any indirect, special, incidental or consequential damages (including, without limitation, loss of profits, loss of goodwill, interruption of business or other economic loss) whether such damages are alleged as a result of tortuous conduct or breach of contract or otherwise even if the other Party has been advised of the possibility of such damages.  Each of the Parties shall also indemnify, defend and hold harmless the other Party, the other Party’s Affiliates and their respective directors, officers, shareholders, customers, employees, and agents, and their respective successors and assigns, from and against any and all losses, damages, costs and expenses (including attorneys’ fees) arising out of any and all claims related to breach of any warranty, representation or covenant of this Agreement.

32.No Infringement.  KCI Manufacturing represents, warrants and covenants to Avail that the Products do not infringe upon or otherwise violate any valid copyright, trade secret, trademark, patent, invention, proprietary information, non-disclosure right, or other statutory or common law right of any person or entity.

33.Assumption of Obligations and Liabilities.  KCI Manufacturing does not assume any obligations or liabilities of Avail.

34.Assignment.  This Agreement shall be binding upon, and shall inure to the benefit of, the Parties and such Affiliates and subsidiaries of KCI Manufacturing as may order Products hereunder, and their respective permitted successors and assigns.  No assignment or transfer by either Party hereto of its rights and obligations hereunder shall be valid except on prior written consent (which shall not be unreasonably withheld or delayed) of the other Party.  At KCI Manufacturing's option, in the event of an attempted assignment by Avail to, or any transaction causing a change of control of Avail with (which shall be deemed an assignment hereunder), any third party which KCI Manufacturing considers to be a competitor of any Affiliate of KCI Manufacturing, KCI Manufacturing may withhold such consent at its sole discretion.  KCI Manufacturing hereby grants its consent to the change of control of Avail as shall occur in the forthcoming merger of Avail with and acquisition by Flextronics International, U.S.A., Inc.  Avail hereby consents to any assignment by KCI Manufacturing to any current or future affiliate of KCI Manufacturing provided such affiliate agrees in writing to assume all of KCI Manufacturing’s obligations under this Agreement.

35.Waiver.  The failure of any Party to this Agreement at any time or times to require the performance of any provisions of this Agreement shall in no manner affect the right to enforce such provision.  No waiver by any Party to this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed or construed either as a further or continuing waiver of any such provision or breach or as a waiver of any other provision (or of a breach of any other provision) of this Agreement.

36.Notices.  All notices permitted or required hereunder shall be deemed sent when deposited in the U.S. mail, registered or certified mail, addressed to the Parties at each of the following addresses or such other address as a Party may designate in writing:

If to KCI Manufacturing:	If to Avail:
KCI Manufacturing	Avail Medical Products, Inc.
Athlone Business & Technology Park Garrycastle, Athlone	1600 Wells Fargo Tower 201 Main Street
County Westmeath, Ireland	Ft. Worth, TX 76102
Attention:  John Elwood Re:  V.A.C. Disposables	Attention:  President and C.E.O With a copy to General Counsel Avail Medical Products, Inc. 1600 Wells Fargo Tower 201 Main Street Fort Worth, TX  76102

37.Severability.  The invalidity or unenforceability of any term or provision of this Agreement shall not affect the validity or enforceability of this Agreement as a whole or of any other term or provision hereof.  In lieu of any such invalid or unenforceable term or provision, the Parties hereto shall negotiate in good faith to replace the invalid clause or clauses with provisions having similar business purposes.

38.Entire Agreement.  The terms and conditions contained herein and in the attachments hereto constitute the entire agreement between the Parties and shall supersede all communications, representations, or agreements, either oral or written, between the Parties with respect to the subject matter hereof.  No agreement or understanding varying the terms and conditions hereof shall be binding on either Party hereto unless in writing and signed by duly authorized representatives of each Party.  Exhibit A is incorporated in this Agreement as though set forth herein in its entirety.  The terms expressed in Exhibit A may be expanded or otherwise modified in writing upon mutual agreement signed by each of the Parties to be bound.  Any preprinted terms on preprinted purchase orders shall supplement the terms of this Agreement only to the extent such preprinted terms are consistent with the terms of this Agreement.  In the event any such preprinted terms are contradictory, the terms of this Agreement shall control (absent written agreement signed by each of the Parties).

39.Applicable Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the United States without regard to any conflict of laws provisions.  The Parties hereto hereby agree that the sole and exclusive place of personal jurisdiction and venue for resolution of any disputes arising hereunder or related hereto shall be the applicable federal courts located in San Antonio, Texas.

If a dispute arises between the Parties relating to this Agreement, the Parties shall resolve the dispute using binding arbitration, which shall include, without limitation, the following steps:

(a)   The aggrieved Party shall provide the other Party with a written request to arbitrate along with written notice of the dispute, which shall identify the nature of the dispute and its relevant facts;  

(b)   The other Party shall respond to the notice of the dispute within thirty (30) days after receipt and assert counterclaims, if any, against the aggrieved Party;  

(c)   The Parties shall attempt to agree on the selection of an arbitrator;  

(d)   If the Parties cannot agree upon an arbitrator, one will be selected pursuant to the Commercial Arbitration Rules of the American Arbitration Association;  

(e)   The costs associated with the selection of an arbitrator will be borne equally by both Parties;  

(f)   The decision of the arbitrator shall be final and binding;  

(g)   The arbitrator may award reasonable attorney fees and costs; and  

(h)   These procedures and this Agreement shall be governed by the law of the State of  Texas without regard to its conflict of laws provisions.  

40.Confidentiality.  Each Party shall maintain in confidence any trade secrets or proprietary information disclosed to it by the other Party or the other Party's agents or representatives, including information disclosed prior to the execution of this Agreement.  This information shall include, but not be limited to, Product information, trade secrets, customer lists and any other confidential business information pertaining to or in connection with the business of the Parties. This provision shall survive the termination of this Agreement.

All confidential information of any of Avail and its Affiliates or KCI Manufacturing and its Affiliates provided to the other Party hereto in conjunction with the performance under this Agreement, whether prior to or subsequent to the execution of this Agreement, will be considered to be information which is confidential and proprietary when (i) it pertains to identification of the customers of the providing Party or its Affiliates, or (ii) when it was provided prior to the execution of this Agreement and is subject to confidentiality obligations of the Confidentiality Agreement, or (iii) when the information is provided after the execution of this Agreement and is marked in writing as "CONFIDENTIAL".  Such information will hereinafter be referred to as "Confidential and Proprietary Information," and will be held in confidence, and will not be disclosed to third parties or used for any purpose other than to fulfill the obligations of this Agreement without prior written consent of the providing Party.  Confidential and Proprietary Information will not include information that:

(a)   is or becomes publicly available through no act or fault of the receiving Party;  

(b)   is disclosed to the receiving Party by a third party having the right to disclose it;  

(c)   is already known by the receiving Party as shown by its prior written records provided the receiving Party provides written notice to the providing Party thereof promptly after receiving the Confidential and Proprietary Information; or  

(d)   is required by law to be disclosed.  

All obligations of confidentiality and non-disclosure set forth in this Agreement will survive for a period of three years following the expiration or termination of this Agreement.

41.Parties Benefited.  This Agreement will be binding and inure to the benefit of the Parties and KCI Manufacturing’s Affiliates, permitted successors and assigns.  The representations, warranties, covenants, and undertakings contained in this Agreement are for the sole benefit of the Parties hereto and their permitted successors and assigns and such representations, warranties, covenants, and undertakings will not be construed as conferring any rights on any other Party.  This Agreement may not be assigned by a Party to a non-Party without the prior written consent of the other Parties.

42.No Agency; Independent Contractors.  KCI Manufacturing and Avail hereby agree that, in the performance of their respective obligations hereunder, they are and shall be independent contractors.  Except as expressly provided herein, nothing in this Agreement shall be construed to (a) constitute either Party as the agent of the other Party for any purpose whatsoever; (b) give either Party control over the day-to-day activities, managerial practices, financial administration or personnel practices, policies or procedures of the other Party; (c) constitute Avail to be a legal and contractual representative within the meaning of the laws of the jurisdiction of KCI Manufacturing or Avail; (d) allow Avail to create or assume obligations on behalf of KCI Manufacturing except as provided herein; (e) constitute Avail to be a commercial agent within the meaning of the laws of the jurisdiction of KCI Manufacturing or Avail or the equivalent mandatory provisions of public order with respect to commercial agents in the laws of the various countries within which Avail provides the Processing Services; or (f) constitute the Parties as franchisor and franchisee, partners, joint venturers, co-owners or otherwise as participants in a joint undertaking.  Neither Party shall have the power to bind the other Party to any contract or the performance of any other obligation, or represent to any third party that it has any right to enter into any binding obligation on the other Party’s behalf except as provided in this Agreement or with the prior written consent of the other Party.

43.Multiple Counterparts.  This Agreement may be executed by facsimile signature in two or more counterparts, each of which will be deemed an original, but all of which taken together will constitute one and the same instrument.

44.Headings.  Section headings have been used in this Agreement but shall not affect the meaning of any provision of this Agreement.

[Signature Page Follows.]

IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement effective as of the Effective Date first above written.

KCI MANUFACTURING By:       /s/ John Elwood                                               John Elwood	AVAIL MEDICAL PRODUCTS, INC. By:       /s/ J. Randall Keene                                                         J. Randall Keene
Title:   Director	Title:   President and Chief Executive Officer

(Signed Copy on File)

EXHIBIT A

PROCESSING FEE SCHEDULE

Avail P/N KCI P/N Product Description  Processing Fee

[***]

EXHIBIT B

PROCUREMENT FEE SCHEDULE

Avail P/N KCI P/N Product Description  Procurement Fee

[***]

EX-10.22

Exhibit 10.22

Kinetic Concepts, Inc. Compensation Policy for Outside Directors

Adopted December 4, 2007

Purpose:  The purpose of the Kinetic Concepts, Inc. Compensation Policy for Outside Directors (the "Policy") is to establish the compensation for Outside Directors, as defined herein, in a manner that aligns their interests with those of the shareholders of Kinetic Concepts, Inc. (the "Company") and is competitive with comparable companies.  Directors who are not Outside Directors will not  be compensated pursuant to the Policy.

Effective Date:  The Policy was approved by the Board of Directors of the Company (the "Board") on December 4, 2007 and will become effective commencing for the 2008 calendar year, and, at that time, will replace any other policies previously in effect for this purpose.  The Policy will remain in effect until amended or terminated by the Board.

Components:  Outside Directors' compensation will consist of the components described below.

Annual Retainer:

Anannual retainer in the amount of $45,000 will be paid in cash increments of $11,250 within 10 days following each regularly-scheduled quarterly Board meeting.

Additional Retainer for Chairperson and Committee Chairpersons:

An additional amount will be paid annually within 10 days following each annual meeting of shareholders in cash to the following Outside Directors as follows:

Chairperson of the Board	$35,000
Chairperson of the Audit Committee	$20,000
Chairperson of the Compensation Committee	$20,000
Chairperson of all other committees	$10,000

Payment for Meetings:

Meeting Fee:  Each Outside Director will be paid a cash fee of $1,500 for each Board meeting he or she attends in person or by telephone, other than a regularly-scheduled quarterly Board meeting, and for each committee meeting he or she attends in person or by telephone, regardless of whether such committee meeting is scheduled in conjunction with a regularly-scheduled quarterly Board meeting; provided, that an Outside Director may only be paid for a maximum of four meetings on any given day.

Annual Stock Option Grant:

On the date of each annual meeting of shareholders, commencing with the 2008 annual meeting of shareholders, each Outside Director (other than the Chairperson of the Board) will automatically receive a grant of nonqualified stock options to purchase that number of shares of Company common stock with a Black-Scholes calculation value approximately equal to $100,000 ($200,000 for the Chairperson of the Board) and a per share exercise price equal to the fair market value of the Company common stock as of the date of such annual meeting. The actual number of shares subject to the option shall conclusively be determined by the CFO and set forth in the stock option award agreement. The term of the options will be seven years and the options will vest at a rate of 1/12th of the grant at every three-month anniversary of the date of grant, over a period of three years.  If an Outside Director's service with the Board terminates by reason of the Outside Director’s death or disability the unvested portion of the options will vest in full and the options must be exercised within one year following the date of termination.  If an Outside Director's service with the Board terminates by reason of the Outside Director’s failure to be renominated or reelected to the Board, then the unvested portion of the options will be forfeited at the time of termination, and the vested portion of the options must be exercised within one year following the date termination.  In the event of termination for any other reason, the unvested portion of the options will be forfeited at the time of termination, and the vested portion of the options must be exercised within three months of termination.  These and the remaining terms of the option grant will be governed by, but shall not supersede, the terms of the applicable plan and award agreement pursuant to which it is granted.

Initial Stock Option Grant:

If an Outside Director first becomes an Outside Director at any time other than at an annual meeting of shareholders, such director shall receive the annual stock option grant described above that an Outside Director is entitled to receive at the annual meeting of shareholders.  However, with the unanimous approval of the Board, an initial grant (or grants) to an Outside Director may differ from the initial grant described herein.

Annual Restricted Stock Award:

At each annual meeting of shareholders, commencing with the 2008 annual meeting of shareholders, each Outside Director (other than the Chairperson of the Board) will automatically receive a grant of restricted shares of common stock of Company ("Restricted Shares") approximately equal in value to $100,000 ($200,000 for the Chairperson of the Board) as of the date of grant. The actual number of Restricted Shares shall be determined by the CFO and set forth in the Restricted Shares award agreement. The Restricted Shares granted will vest in full on the third anniversary of the date of the grant (the “Vesting Date”), provided that the Outside Director has served continuously from the date of grant until the Vesting Date.  If an Outside Director's service with the Board terminates by reason of the Outside Director’s death, disability or failure to be renominated or reelected to the Board, then any unvested Restricted Shares will become vested at the rate of one-third of the Restricted Shares vesting for each full year the Outside Director served on the Board after the date of grant.  These and the remaining terms of the Restricted Shares will be governed by the terms of the applicable plan and award agreement.

Stock Ownership Requirement: In accepting these awards stock options and Restricted Shares, each Outside Director agrees not to sell any shares of Company stock (including shares acquired as a result of the exercise of a stock option) granted hereunder (except to pay the exercise price of stock options granted hereunder or taxes generated as a result of equity grants under the Policy) until such time as his or her ownership of shares of Company stock equals or exceeds five times the then Annual Retainer, as conclusively determined by the CFO.  This stock ownership requirement may be waived by the Board, in its sole and absolute discretion, at any time, and from time to time.  In addition, this requirement shall terminate with respect to an Outside Director when such director ceases to serve on the Board.

Director’s and Officer’s Insurance:  The Company will provide D&O insurance in the amount of $35,000,000 for the Outside Directors, unless such insurance is not available on commercially reasonable terms.

Status as Outside Director:

For purposes of the Policy, an Outside Director is any director:  (i)  who is not employed by the Company, and (ii) who satisfies such other criteria for Outside Directors as established from time to time by the Board.

For purposes of the Policy, annual compensation and equity grants will be based on the date the Outside Director is elected to the Board or, in the case of existing Board members, the date on which the Policy is approved by the Board and becomes effective.  In the case of an existing Board member who becomes an Outside Director as a result of a change in status, the grants will be as of the date the director's status changes to Outside Director.

Amendment or Termination of the Policy:  The Board reserves the right to amend or terminate the Policy at any time or waive any of the provisions generally or specifically.

EX-10.25

Exhibit 10.25

EXECUTIVE RETENTION AGREEMENT

          This Executive Retention Agreement (the "Agreement") is effective as of February 21, 2007 (the "Effective Date"), by and between Lynne D. Sly (the "Executive"), and Kinetic Concepts, Inc. ("KCI" or the "Company") (together the "Parties").

RECITALS

                  WHEREAS, the Executive is presently employed by the Company as President Therapeutic Surfaces and has significant strategic and management responsibilities necessary to the continued successful operation of the Company’s business;

                  WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Executive;

                  WHEREAS, the Board believes that it is imperative to provide the Executive with certain severance benefits upon the Executive’s termination of employment under the circumstances described herein that provide the Executive with the financial incentive and encouragement necessary to remain with the Company on a long-term basis.

                  NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Parties agree as follows:

          1.     Term of Agreement.  The Company and the Executive agree that this Agreement will be in effect from the Effective Date until the termination of the Executive's employment with the Company as set forth in Section 2 herein.

          2.     At-Will Employment.  While this Agreement is in effect, the Executive's employment with the Company shall continue to be at-will and, as such, may be terminated by the Executive or the Company at any time, for any reason and with or without advance notice, subject to the Company's severance obligations set forth herein.

          3.     Definition of Terms.  The following terms referred to in this Agreement shall have the following meanings:

                  (a)     Change in Control.  A Change in Control means the first to occur of any one of the following events: (i) consummation of any sale, lease, exchange, or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company (together with the assets of the Company's direct and indirect subsidiaries) to any Person or group of related Persons, as that term is used in Section 13(d) of the Exchange Act (a "Group"), together with any affiliates thereof; or (ii) any Person or Group becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Shares representing more than 50% of the aggregate voting power of the issued and outstanding stock entitled to vote in the election of directors of the Company; or (iii) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company.

                  (b)     Qualifying Termination.  A "Qualifying Termination" shall mean the Executive's (i) termination of employment by the Company without "Cause;" or (ii) the Executive's resignation from employment for "Good Reason."

                  (c)     Cause.  "Cause" shall mean conduct involving one or more of the following:  (i) the substantial and continuing failure of the Executive to render services to the Company or any subsidiary or affiliate in accordance with the Executive’s obligations and position with the Company, subsidiary or affiliate; provided that the Company or any subsidiary or affiliate provides the Executive with adequate notice of such failure and, if such failure is capable of cure, the Executive fails to cure such failure within 30 days of the notice; (ii) dishonesty, gross negligence, or breach of fiduciary duty; (iii) the Executive's indictment of, conviction of, or no contest plea to, an act of theft, fraud or embezzlement; (iv) the commission of a felony; or (v) a material breach of the terms of an agreement between the Executive and the Company or any subsidiary or affiliate on the other hand or a material breach of any Company policy.

                  (d)     Good Reason.  "Good Reason" shall mean one or more of the following:  (i) the material reduction of Executive’s duties and/or responsibilities, which is not cured within 30 days after the Executive provides written notice to the Company; provided, however, it shall not be considered Good Reason if, upon or following a Change in Control, the Executive's duties and responsibilities remain the same as those prior to the Change in Control but the Executive's title and/or reporting relationship is changed; (ii) the material reduction of Executive's base salary, other than across-the-board decreases in base salary applicable to all executive officers of the Company; or (iii) the relocation of the Executive to a business location in excess of fifty (50) miles from the Company’s headquarters in San Antonio.

                  (e)     Disability.  For purposes of this Agreement, "Disability" shall mean that the Executive is unable, with or without reasonable accommodation, to perform one or more essential functions of his or her position as an employee of the Company as the result of his or her incapacity due to physical or mental impairment for more than 90 days (not necessarily consecutive) in any 180-day period.

          4.     Severance Benefits Upon a Qualifying Termination.

                  (a)     Qualifying Termination in Connection with a Change in Control.  If the Executive experiences a Qualifying Termination upon or within 24 months following a Change of Control, then the Executive shall be entitled to receive the following severance benefits, which shall be in addition to any salary earned and vacation accrued up to and including the date of termination, as determined by the Company: (i) a severance payment in the amount of two times  the sum of the Executive's annual base salary plus annual target bonus, payable as a lump sum payment within five business days of the date the Executive executes and returns a full waiver and release of all claims in a form provided by the Company; and (ii) if the Executive timely elects COBRA health insurance continuation coverage, reimbursement of COBRA premiums for up to 18 months following the date of termination.

                  (b)     Qualifying Termination not in Connection with a Change in Control.  If the Executive experiences a Qualifying Termination that is not in connection with a Change of Control as described in Section 4(a) herein, then the Executive shall be entitled to receive the following severance benefits, which shall be in addition to any salary earned and vacation accrued up to and including the date of termination, as determined by the Company: (i) a severance payment in the amount of the Executive's annual base salary plus annual target bonus, payable as a lump sum payment within five business days of the date the Executive executes and returns a full waiver and release of all claims in a form provided by the Company; and (ii) if the Executive timely elects COBRA health insurance continuation coverage, reimbursement of COBRA premiums for up to 12 months following the date of termination.

          5.     Termination of Executive's Employment Other than a Qualifying Termination

                  (a)     Termination on Account of Executive's Disability or Death.  If the Company terminates the Executive’s employment as a result of the Executive’s Disability or due to the death of the Executive, then the Executive shall not be entitled to receive any severance benefits and shall only be entitled to receive any salary earned and vacation accrued up to and including the date of termination; provided, however, that this provision shall not have any effect upon any rights the Executive or his estate may have under the terms of any Company short or long-term disability policy or life insurance policy.

                  (b)     Termination for Cause or Resignation without Good Reason.  If the Executive is terminated for Cause or resigns from employment without Good Reason, then the Executive shall not be entitled to receive any severance benefits and shall only be entitled to receive any salary earned and vacation accrued up to and including the date of termination

          6.     Conditions to Severance Benefits.

                  (a)     No severance benefits shall be made under Sections 4(a) and (b) unless and until the Executive shall, in consideration of such benefits, execute a full waiver and release of all claims in a form provided by the Company.

                  (b)      The Executive acknowledges and agrees that he or she is not entitled to any severance or change in control benefits provided under the terms of the 1997 KCI Severance Pay Plan or any similar agreement, plan or arrangement, other than the Company's stock option plans.

                  (c)     All payment of severance benefits under this Agreement shall comply with section 409A of the Internal Revenue Code.

          7.     Successors.

                  (a)     Company’s Successors.  Any successor (or parent thereof) to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company’s business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession.  For all purposes under this Agreement, the term "Company" shall include any successor (or parent thereof) to the Company’s business and/or assets.

                  (b)     Executive’s Successors.  All rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.  Executive shall have no right to assign any of his obligations or duties under this Amended Agreement to any other person or entity.

          8.     Notice.

                  (a)     General.  Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid.  In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing.  In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its General Counsel.

                  (b)     Notice of Termination.  Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by a written notice of termination to the other party hereto.  Such notice shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated.

          9.     Arbitration.  All disputes relating to or arising out of this Agreement or otherwise in connection with the Executive's employment with, or termination from, the Company, shall be settled by binding arbitration in accordance with the Company's standard arbitration policy and procedures.

         10.    Miscellaneous Provisions.

                  (a)     Waiver.  No provision of this Agreement shall be amended, modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive).  No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

                  (b)     Choice of Law.  The validity, interpretation, construction and performance of this Amended Agreement shall be governed by the laws of the State of Texas.

                  (c)     Severability.  The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

                  (d)     Employment Taxes.  All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes and other authorized deductions.

                  (e)     No Representations.  Each party acknowledges that it is not relying and has not relied on any promise, representation or statement made by or on behalf of the other party that is not set forth in this Amended Agreement.

                  (f)     Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

                  (g)     Prior Agreements.  Except as specifically set forth on Exhibit A hereto, this Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement.

[Signatures to Follow on Next Page]

                  IN WITNESS WHEREOF, each of the Parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

COMPANY	KINETIC CONCEPTS, INC. By:              /s/ Catherine M. Burzik                                            Catherine M. Burzik,                     President and Chief Executive Officer
EXECUTIVE	/s/ Lynne D. Sly                                                                    Lynne D. Sly     Address:     To the address as last set forth in the                     Company's employment records      SSN:           On File

EX-10.26

Exhibit 10.26

EXECUTIVE RETENTION AGREEMENT

          This Executive Retention Agreement (the "Agreement") is effective as of February 21, 2007 (the "Effective Date"), by and between Todd M. Fruchterman (the "Executive"), and Kinetic Concepts, Inc. ("KCI" or the "Company") (together the "Parties").

RECITALS

                  WHEREAS, the Executive is presently employed by the Company as Sr. V.P. Research & Development and has significant strategic and management responsibilities necessary to the continued successful operation of the Company’s business;

                  WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Executive;

                  WHEREAS, the Board believes that it is imperative to provide the Executive with certain severance benefits upon the Executive’s termination of employment under the circumstances described herein that provide the Executive with the financial incentive and encouragement necessary to remain with the Company on a long-term basis.

                  NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Parties agree as follows:

          1.     Term of Agreement.  The Company and the Executive agree that this Agreement will be in effect from the Effective Date until the termination of the Executive's employment with the Company as set forth in Section 2 herein.

          2.     At-Will Employment.  While this Agreement is in effect, the Executive's employment with the Company shall continue to be at-will and, as such, may be terminated by the Executive or the Company at any time, for any reason and with or without advance notice, subject to the Company's severance obligations set forth herein.

          3.     Definition of Terms.  The following terms referred to in this Agreement shall have the following meanings:

                  (a)     Change in Control.  A Change in Control means the first to occur of any one of the following events: (i) consummation of any sale, lease, exchange, or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company (together with the assets of the Company's direct and indirect subsidiaries) to any Person or group of related Persons, as that term is used in Section 13(d) of the Exchange Act (a "Group"), together with any affiliates thereof; or (ii) any Person or Group becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Shares representing more than 50% of the aggregate voting power of the issued and outstanding stock entitled to vote in the election of directors of the Company; or (iii) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company.

                  (b)     Qualifying Termination.  A "Qualifying Termination" shall mean the Executive's (i) termination of employment by the Company without "Cause;" or (ii) the Executive's resignation from employment for "Good Reason."

                  (c)     Cause.  "Cause" shall mean conduct involving one or more of the following:  (i) the substantial and continuing failure of the Executive to render services to the Company or any subsidiary or affiliate in accordance with the Executive’s obligations and position with the Company, subsidiary or affiliate; provided that the Company or any subsidiary or affiliate provides the Executive with adequate notice of such failure and, if such failure is capable of cure, the Executive fails to cure such failure within 30 days of the notice; (ii) dishonesty, gross negligence, or breach of fiduciary duty; (iii) the Executive's indictment of, conviction of, or no contest plea to, an act of theft, fraud or embezzlement; (iv) the commission of a felony; or (v) a material breach of the terms of an agreement between the Executive and the Company or any subsidiary or affiliate on the other hand or a material breach of any Company policy.

                  (d)     Good Reason.  "Good Reason" shall mean one or more of the following:  (i) the material reduction of Executive’s duties and/or responsibilities, which is not cured within 30 days after the Executive provides written notice to the Company; provided, however, it shall not be considered Good Reason if, upon or following a Change in Control, the Executive's duties and responsibilities remain the same as those prior to the Change in Control but the Executive's title and/or reporting relationship is changed; (ii) the material reduction of Executive's base salary, other than across-the-board decreases in base salary applicable to all executive officers of the Company; or (iii) the relocation of the Executive to a business location in excess of fifty (50) miles from the Company’s headquarters in San Antonio.

                  (e)     Disability.  For purposes of this Agreement, "Disability" shall mean that the Executive is unable, with or without reasonable accommodation, to perform one or more essential functions of his or her position as an employee of the Company as the result of his or her incapacity due to physical or mental impairment for more than 90 days (not necessarily consecutive) in any 180-day period.

          4.     Severance Benefits Upon a Qualifying Termination.

                  (a)     Qualifying Termination in Connection with a Change in Control.  If the Executive experiences a Qualifying Termination upon or within 24 months following a Change of Control, then the Executive shall be entitled to receive the following severance benefits, which shall be in addition to any salary earned and vacation accrued up to and including the date of termination, as determined by the Company: (i) a severance payment in the amount of two times  the sum of the Executive's annual base salary plus annual target bonus, payable as a lump sum payment within five business days of the date the Executive executes and returns a full waiver and release of all claims in a form provided by the Company; and (ii) if the Executive timely elects COBRA health insurance continuation coverage, reimbursement of COBRA premiums for up to 18 months following the date of termination.

                  (b)     Qualifying Termination not in Connection with a Change in Control.  If the Executive experiences a Qualifying Termination that is not in connection with a Change of Control as described in Section 4(a) herein, then the Executive shall be entitled to receive the following severance benefits, which shall be in addition to any salary earned and vacation accrued up to and including the date of termination, as determined by the Company: (i) a severance payment in the amount of the Executive's annual base salary plus annual target bonus, payable as a lump sum payment within five business days of the date the Executive executes and returns a full waiver and release of all claims in a form provided by the Company; and (ii) if the Executive timely elects COBRA health insurance continuation coverage, reimbursement of COBRA premiums for up to 12 months following the date of termination.

          5.     Termination of Executive's Employment Other than a Qualifying Termination

                  (a)     Termination on Account of Executive's Disability or Death.  If the Company terminates the Executive’s employment as a result of the Executive’s Disability or due to the death of the Executive, then the Executive shall not be entitled to receive any severance benefits and shall only be entitled to receive any salary earned and vacation accrued up to and including the date of termination; provided, however, that this provision shall not have any effect upon any rights the Executive or his estate may have under the terms of any Company short or long-term disability policy or life insurance policy.

                  (b)     Termination for Cause or Resignation without Good Reason.  If the Executive is terminated for Cause or resigns from employment without Good Reason, then the Executive shall not be entitled to receive any severance benefits and shall only be entitled to receive any salary earned and vacation accrued up to and including the date of termination

          6.     Conditions to Severance Benefits.

                  (a)     No severance benefits shall be made under Sections 4(a) and (b) unless and until the Executive shall, in consideration of such benefits, execute a full waiver and release of all claims in a form provided by the Company.

                  (b)      The Executive acknowledges and agrees that he or she is not entitled to any severance or change in control benefits provided under the terms of the 1997 KCI Severance Pay Plan or any similar agreement, plan or arrangement, other than the Company's stock option plans.

                  (c)     All payment of severance benefits under this Agreement shall comply with section 409A of the Internal Revenue Code.

          7.     Successors.

                  (a)     Company’s Successors.  Any successor (or parent thereof) to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company’s business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession.  For all purposes under this Agreement, the term "Company" shall include any successor (or parent thereof) to the Company’s business and/or assets.

                  (b)     Executive’s Successors.  All rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.  Executive shall have no right to assign any of his obligations or duties under this Amended Agreement to any other person or entity.

          8.     Notice.

                  (a)     General.  Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid.  In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing.  In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its General Counsel.

                  (b)     Notice of Termination.  Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by a written notice of termination to the other party hereto.  Such notice shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated.

          9.     Arbitration.  All disputes relating to or arising out of this Agreement or otherwise in connection with the Executive's employment with, or termination from, the Company, shall be settled by binding arbitration in accordance with the Company's standard arbitration policy and procedures.

         10.    Miscellaneous Provisions.

                  (a)     Waiver.  No provision of this Agreement shall be amended, modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive).  No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

                  (b)     Choice of Law.  The validity, interpretation, construction and performance of this Amended Agreement shall be governed by the laws of the State of Texas.

                  (c)     Severability.  The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

                  (d)     Employment Taxes.  All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes and other authorized deductions.

                  (e)     No Representations.  Each party acknowledges that it is not relying and has not relied on any promise, representation or statement made by or on behalf of the other party that is not set forth in this Amended Agreement.

                  (f)     Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

                  (g)     Prior Agreements.  Except as specifically set forth on Exhibit A hereto, this Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement.

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                  IN WITNESS WHEREOF, each of the Parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

COMPANY	KINETIC CONCEPTS, INC. By:               /s/ Catherine M. Burzik                                                           Catherine M. Burzik,                     President and Chief Executive Officer
EXECUTIVE	/s/ Todd M. Fruchterman                                                                     Todd. M. Fruchterman    Address:     To the address as last set forth in the                     Company's employment records     SSN:           On File

EX-10.32

Exhibit 10.32

PRIVATE & CONFIDENTIAL

16  November 2007

Mr TLV Kumar

104 Cedar Drive

Redhill Peninsula

18 Pak Pat Sham Road

Hong Kong

RE:            CONTRACT OF EMPLOYMENT

Dear TLV:

Further to our recent discussions, we are very pleased to be able to confirm our offer of employment as President, EMEA with KCI UK Holdings Limited (‘’KCI’’).

1.   Your start date will be December 3, 2007, and your continuous employment will also begin on this date.

2.   Your basic salary at the commencement of your employment will be $350,000 per annum. As of your start date, this sum will be converted into pounds sterling based on the then-prevailing currency rates as published in the Wall Street Journal. You will be eligible for a salary review in April 2008. On a regular basis, and at least annually, the Company will review any changes to the dollar/sterling currency rates and will determine, at its sole discretion, whether any changes to your underlying base salary are appropriate in light of such currency changes.

Salaries are paid monthly direct into employees’ bank accounts by the 25th of the month, and are computed from the 16th to the 15th of the month as regards any unusual payments etc.   Your salary will be paid net of deductions that KCI are legally required to make.

The company reserves the right to pay salaries by cheque on the last day of the month in unusual circumstances.

3.   In this position you are entitled to receive a car allowance of 1,000 pounds per month (or as mutually agreed) in accordance with our vehicle user policy.

4.   In addition to your base salary, you will be eligible for an incentive bonus opportunity with a target bonus value equal to 55% of your annual base salary as part of the Annual Incentive Bonus (AIB) program.  AIB awards will be determined on both individual and corporate performance and will require that you remain in a bonus eligible position through December 31 of the year in question, except as otherwise set forth herein. For 2007, your target bonus opportunity will be pro-rated based on your start date.  This is a discretionary incentive award, subject to change or termination at the Company's sole discretion.

5.   As part of your employment, you will be expected to travel regularly to the Netherlands, the United States and other countries in which KCI operates.  As a result, your employment in the UK will be based out of your personal residence in the UK.

6.   Working Time Directive

In order for KCI to provide excellent customer service, there may be occasions when you will be required to exceed the 48 hour weekly limit imposed by the Working Time Regulations 1998.

We are therefore asking you to agree that for the purposes of the Working Time Regulations 1998 (and any amendment or re-enactment thereof) any legislative provisions imposing a maximum number of average weekly working hours shall not apply to your employment.  A copy of such an agreement is annexed at the end of this written statement.

However, you may revoke your agreement to this at any time by giving the Company not less than 3 months’ written notice of your intention to do so.  If you do revoke your agreement as above, then the standard reference period for calculating weekly working hours will be successive individual blocks of 17 weeks, calculated as from 1 January being the beginning of the first block

7.   Upon starting, you will become eligible to join KCI's pension scheme and life assurance program (details of which are available on request from the Human Resource Manager).

8.   Your position is eligible for participation in the Kinetic Concepts, Inc. equity plan. A recommendation will be made to the Compensation Committee of the Board of Directors that you receive a new hire equity grant with a Black-Scholes value of approximately $1,350,000. This grant will consist of shares of non-qualified stock options (which vest ratably over 4 years) and shares of restricted stock units (60% of the value will be in options and 40% in restricted stock units);  the specific number of shares and units  granted will be calculated at the Company’s sole discretion and will be communicated to you separately. The option exercise price will be set as the closing price on your start date (or the next subsequent closing price if your start date is a date on which the market is closed).  The restricted stock units will vest 33% on each of the 4th, 5th and 6th anniversaries of the grant date (but based on financial performance this vesting could be accelerated to as early as 33% on each of the 1st, 2nd and 3rd anniversaries of the grant date as further specified in the award agreement).  Your position is also eligible for consideration for future annual grants. All equity grant recommendations are subject to CEO and Board of Directors approval, and all grants are governed by the 2004 KCI Equity Plan Document (the “Equity Plan”), which is subject to change.

9.   To assist with your relocation from Hong Kong to London, the Company will provide you with an executive relocation package (details of which will be provided to you separately).  In the event you voluntarily resign your position within 12 months of your start date, you agree to reimburse the Company for any relocation expenses provided to you.  Your relocation package will include use of a Company-leased townhome.

10.     You will be provided with a cost-of-living allowance of $4,000 per month (this amount will be grossed up for tax purposes).  This dollar amount will be converted into pounds sterling at your start date and subject to review as outlined in Item 2 above.

11.   You will be asked to sign an Executive Retention Agreement which generally provides that in the event your employment is terminated by the Company other than for Cause (as that term is defined in the Equity Plan), you will receive a severance payment equal to one years’ base salary and one year’s target bonus (or two years base salary and two years’ target bonus if your termination other than for cause is within 24 months of a change–in-control).

12.   You will be provided with private health care coverage for you and your wife.  Details of this coverage will be provided to you separately.

13.   Your paid holiday entitlement, in addition to all bank and public holidays, will be 25 days per calendar year worked and will be in accordance with and governed by Company holiday policies.

14.   The notice period required by either you or by KCI to terminate the employment will be one month on either side.

15.   Please note that it is not permitted for unauthorised software to be used on company computers, and that all computer diskettes etc. must be checked as virus-free before use on company computers.  Violation of these guidelines would be regarded as gross misconduct.

16.   During your induction we will give you guidelines as to the procedure to follow if you are unexpectedly absent from work.  These are contained in KCI’s Sickness Absence Policy.

If you find the above terms and conditions of employment acceptable, please sign below and return the original to me, with a fax copy of this signature page to me at 210-255-6756.  Our offer is also contingent upon your signing and returning to me a copy of the Non-Disclosure Agreement (attached separately) – please fax a signed signature page for that as well.

TLV, it is my sincere hope you will find your experience with KCI to be personally and professionally rewarding.  I look forward to a mutually prosperous working relationship.

We hope you decide to accept this offer of employment, in which case would you kindly sign the enclosed copy of this letter and return it to me within 7 days of receipt.

Yours sincerely

/s/ R. James Cravens

R. James Cravens

Senior Vice President, Human Resources

On behalf of KCI UK Holdings Limited

ACKNOWLEDGMENT BY EMPLOYEE

I accept your offer of employment in your letter dated 19 November 2007.  I have read the terms and conditions contained in this letter (“Written Statement”), the Terms of Employment and the associated Policies referred to in it.  I understand that this Written Statement, the Terms of Employment and the associated Policies together contain the terms that form the basis of my contract of employment with KCI.  I acknowledge receipt of an identical copy of this Written Statement (of which this document is the original) and the Terms of Employment.

SIGNED by:  /s/  TLV Kumar    TLV Kumar Date:   20 Nov. 2007   

KCI POLICIES

The following policies are accessible from your Office Manager.

Adoption Leave

Alcohol, Drugs & Smoking

Data Protection

Disciplinary & Capability

Email & Internet

Equal Opportunities

Eye Test

Flexible Working

Grievance

Maternity

Parental Leave

Paternity

Recruitment, Selection & Promotion

Sickness Absence

Stress Management

Theft Prevention

Time off Work

Training

Vehicle User

Whistle Blowing

CIRP

THE WORKING TIME REGULATIONS 1998

(Statutory Instrument 1998 No 1833)

(“The Regulations”)

Agreement under Regulation 5 (1) to exclude the maximum weekly working time provisions as set out in Regulation 4(1) of the Regulations.

Name of worker TLV Kumar (the “Employee”)

Date this Agreement is effective from December 3, 2007

1 The Employee agrees that the limit on maximum weekly working time specified in Regulation 4(1) of the Regulations shall not apply to the Employee.

2 The Employee may withdraw his/her agreement given in paragraph 1 above by giving the Company not less than 3 months’ written notice.  This Agreement shall terminate on the expiry of the notice period and the Employee’s maximum weekly working time shall then become subject to the limit specified in Regulation 4(1).

Employee’s signature    /s/  TLV Kumar 

Explanatory notes for Employee

1 The Working Time Regulations limit the number of hours you are permitted to work each week to 48 hours averaged over a period of 17 weeks (or, if applicable, 26 weeks).

2 It is unlawful for the Company to allow you to work more than 48 hours a week averaged over a period of 17 weeks (or, if applicable, 26 weeks).

3 The Regulations allow you to ‘opt-out’ of the 48 hour limit so that you can work more than the averaged 48 hours a week.  To ‘opt out’ you must sign a written agreement with the Company stating that the limit will not apply to you.

4 You can exercise your right to ‘opt out’ (so that you can work more than the averaged 48 hour week) by signing this form.

5 If you exercise your right to ‘opt out’ by signing this form and later change your mind, you can give the Company 3 months written notice that you wish the limit on maximum weekly working hours to apply to you.

EX-10.33

Exhibit 10.33

Executive Retention Agreement

This Executive Retention Agreement (the "Agreement") is effective as of  December 2007 (the "Effective Date"), by and between T.L.V. Kumar (the "Executive"), and Kinetic Concepts, Inc. ("KCI" or the "Company") (together the "Parties").

RECITALS

WHEREAS, the Executive has accepted employment with KCI UK Holdings (one of the Company’s subsidiaries) as President, EMEA and has significant strategic and management responsibilities necessary to the continued successful operation of the Company’s business;

WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Executive;

WHEREAS, the Board believes that it is imperative to provide the Executive with certain severance benefits upon the Executive’s termination of employment under the circumstances described herein that provide the Executive with the financial incentive and encouragement necessary to remain with the Company on a long-term basis.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Parties agree as follows:

1.Term of Agreement.  The Company and the Executive agree that this Agreement will be in effect from the Effective Date until the termination of the Executive's employment with the Company as set forth in Section 2 herein.

2.At-Will Employment.  While this Agreement is in effect, the Executive's employment with the Company shall continue to be at-will and, as such, may be terminated by the Executive or the Company at any time, for any reason and with or without advance notice, subject to the Company's severance obligations set forth herein.

3.Definition of Terms.  The following terms referred to in this Agreement shall have the following meanings:

(a)Change in Control.  A Change in Control means the first to occur of any one of the following events: (i) consummation of any sale, lease, exchange, or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company (together with the assets of the Company's direct and indirect subsidiaries) to any Person or group of related Persons, as that term is used in Section 13(d) of the Exchange Act (a "Group"), together with any affiliates thereof; or (ii) any Person or Group becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Shares representing more than 50% of the aggregate voting power of the issued and outstanding stock entitled to vote in the election of directors of the Company; or (iii) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company.

(b)Qualifying Termination.  A "Qualifying Termination" shall mean the Executive's (i) termination of employment by the Company without "Cause;" or (ii) the Executive's resignation from employment for "Good Reason."

(c)Cause.  "Cause" shall mean conduct involving one or more of the following:  (i) the substantial and continuing failure of the Executive to render services to the Company or any subsidiary or affiliate in accordance with the Executive’s obligations and position with the Company, subsidiary or affiliate; provided that the Company or any subsidiary or affiliate provides the Executive with adequate notice of such failure and, if such failure is capable of cure, the Executive fails to cure such failure within 30 days of the notice; (ii) dishonesty, gross negligence, or breach of fiduciary duty; (iii) the Executive's indictment of, conviction of, or no contest plea to, an act of theft, fraud or embezzlement; (iv) the commission of a felony; or (v) a material breach of the terms of an agreement between the Executive and the Company or any subsidiary or affiliate on the other hand or a material breach of any Company policy.

(d)Good Reason.  "Good Reason" shall mean one or more of the following:  (i) the material reduction of Executive’s duties and/or responsibilities, which is not cured within 30 days after the Executive provides written notice to the Company; provided, however, it shall not be considered Good Reason if, upon or following a Change in Control, the Executive's duties and responsibilities remain the same as those prior to the Change in Control but the Executive's title and/or reporting relationship is changed; (ii) the material reduction of Executive's base salary, other than across-the-board decreases in base salary applicable to all executive officers of the Company; or (iii) the relocation of the Executive to a business location in excess of fifty (50) miles from the Company’s headquarters in San Antonio.

(e)Disability.  For purposes of this Agreement, "Disability" shall mean that the Executive is unable, with or without reasonable accommodation, to perform one or more essential functions of his or her position as an employee of the Company as the result of his or her incapacity due to physical or mental impairment for more than 90 days (not necessarily consecutive) in any 180-day period.

4.Severance Benefits Upon a Qualifying Termination.

(a)Qualifying Termination in Connection with a Change in Control.  If the Executive experiences a Qualifying Termination upon or within 24 months following a Change of Control, then the Executive shall be entitled to receive the following severance benefits, which shall be in addition to any salary earned and vacation accrued up to and including the date of termination, as determined by the Company: (i) a severance payment in the amount of two times  the sum of the Executive's annual base salary plus annual target bonus, payable as a lump sum payment within five business days of the date the Executive executes and returns a full waiver and release of all claims in a form provided by the Company; and (ii) if the Executive timely elects COBRA health insurance continuation coverage, reimbursement of COBRA premiums for up to 18 months following the date of termination.

(b)Qualifying Termination not in Connection with a Change in Control.  If the Executive experiences a Qualifying Termination that is not in connection with a Change of Control as described in Section 4(a) herein, then the Executive shall be entitled to receive the following severance benefits, which shall be in addition to any salary earned and vacation accrued up to and including the date of termination, as determined by the Company: (i) a severance payment in the amount of the Executive's annual base salary plus annual target bonus, payable as a lump sum payment within five business days of the date the Executive executes and returns a full waiver and release of all claims in a form provided by the Company; and (ii) if the Executive timely elects COBRA health insurance continuation coverage, reimbursement of COBRA premiums for up to 12 months following the date of termination.

5.Termination of Executive's Employment Other than a Qualifying Termination

(a)Termination on Account of Executive's Disability or Death.  If the Company terminates the Executive’s employment as a result of the Executive’s Disability or due to the death of the Executive, then the Executive shall not be entitled to receive any severance benefits and shall only be entitled to receive any salary earned and vacation accrued up to and including the date of termination; provided, however, that this provision shall not have any effect upon any rights the Executive or his estate may have under the terms of any Company short or long-term disability policy or life insurance policy.

(b)Termination for Cause or Resignation without Good Reason.  If the Executive is terminated for Cause or resigns from employment without Good Reason, then the Executive shall not be entitled to receive any severance benefits and shall only be entitled to receive any salary earned and vacation accrued up to and including the date of termination

6.Conditions to Severance Benefits.

(a)No severance benefits shall be made under Sections 4(a) and (b) unless and until the Executive shall, in consideration of such benefits, execute a full waiver and release of all claims in a form provided by the Company.

(b)The Executive acknowledges and agrees that he or she is not entitled to any severance or change in control benefits provided under the terms of the 1997 KCI Severance Pay Plan or any similar agreement, plan or arrangement, other than the Company's stock option plans.

(c)All payment of severance benefits under this Agreement shall comply with section 409A of the Internal Revenue Code.

7.Successors.

(a)Company’s Successors.  Any successor (or parent thereof) to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company’s business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession.  For all purposes under this Agreement, the term "Company" shall include any successor (or parent thereof) to the Company’s business and/or assets.

(b)Executive’s Successors.  All rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.  Executive shall have no right to assign any of his obligations or duties under this Amended Agreement to any other person or entity.

8.Notice.

(a)General.  Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid.  In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing.  In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its General Counsel.

(b)Notice of Termination.  Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by a written notice of termination to the other party hereto.  Such notice shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated.

9.Arbitration.  All disputes relating to or arising out of this Agreement or otherwise in connection with the Executive's employment with, or termination from, the Company, shall be settled by binding arbitration in accordance with the Company's standard arbitration policy and procedures.

10.Miscellaneous Provisions.

(a)Waiver.  No provision of this Agreement shall be amended, modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive).  No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(b)Choice of Law.  The validity, interpretation, construction and performance of this Amended Agreement shall be governed by the laws of the State of Texas.

(c)Severability.  The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

(d)Employment Taxes.  All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes and other authorized deductions.

(e)No Representations.  Each party acknowledges that it is not relying and has not relied on any promise, representation or statement made by or on behalf of the other party that is not set forth in this Amended Agreement.

(f)Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

(g)Prior Agreements.  Except as specifically set forth on Exhibit A hereto, this Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement.

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In Witness Whereof, each of the Parties has executed this Agreement, in the case of the Company by its duly authorized officer.

COMPANY	Kinetic Concepts, Inc. By:    /s/  Catherin M. Burzik                                  Title:  President and Chief Executive Officer Date:
EXECUTIVE	/s/   TLV Kumar       T.L.V. Kumar    Date:  03 Dec. 2007

EX-10.34

Exhibit 10.34

KINETIC CONCEPTS, INC.

2003 NON-EMPLOYEE DIRECTORS STOCK PLAN

As Amended and Restated on December 4, 2007

____________________________________

ARTICLE I.  DEFINITIONS

1.1            Affiliate.  A corporate parent, corporate subsidiary, limited liability company, partnership or other business entity that is wholly-owned, controlled by, or controls the Company through the beneficial ownership of greater than 50% of the outstanding capital stock of the Company, as determined in accordance with Rule 13d-3 under the Exchange Act.

1.2            Affiliated Participant.  A Participant who is (i) receiving a management fee from the Company, or (ii) a principal of, or a non-employee Board member appointed by, a shareholder of the Company which is receiving a management fee from the Company.

1.3            Agreement.  A written agreement (including any amendment or supplement thereto) between the Company or an Affiliate of the Company and a Participant specifying the terms and conditions of an Option or a Restricted Stock Award, as the case may be, granted to such Participant.

1.4            Board.  The board of directors of the Company.

1.5            Code.  The Internal Revenue Code of 1986, as amended.

1.6            Committee.  A committee that is designated by the Board to serve as the administrator of the Plan.  The Committee shall be composed of at least two individuals who are members of the Board and are not employees of the Company or an Affiliate, and who are designated by the Board as the "compensation committee" or are otherwise designated to administer the Plan.  In the absence of a designation of a Committee by the Board, the Board shall be the Committee.

1.7            Company.  Kinetic Concepts, Inc. and its successors.

1.8            Date of Exercise.  The date that the Participant tenders the exercise price of an Option.

1.9            Effective Date.  The effective date of the Plan, which is May 28, 2003.

1.10          Exchange Act.  The Securities Exchange Act of 1934, as amended.

1.11          Fair Market Value.  On any given date, Fair Market Value shall be determined by the applicable method described below:

(a)            If the Stock is traded on a trading exchange (e.g., the New York Stock Exchange) or is reported on the NASDAQ National Market System or another NASDAQ automated quotation system or the OTC Bulletin Board System, Fair Market Value shall be the closing selling price of the Stock on such exchange or system with respect to the date for which Fair Market Value is being determined. If there is no closing selling price for the Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such a quotation exists.

(b)            If the Stock is not traded on a recognized exchange or automated trading system, Fair Market Value shall be the value determined in good faith by the Committee.

1.12          Grant Date.  The date set forth herein in Article IV as the date of grant for an Option or Stock Award, notwithstanding that an Agreement with respect thereto may be executed or delivered thereafter.

1.13.         Non-Affiliated Participant.  A Participant who is not an Affiliated Participant.

1.14          Option.  The right that is granted hereunder to a Participant to purchase from the Company a stated number of shares of Stock at the price set forth in an Agreement.

1.15          Participant.  A member of the Board who is not employed by the Company or an Affiliate of the Company and who otherwise satisfies the criteria for being a Participant, as established from time to time by the Board.

1.16          Plan.  The Kinetic Concepts, Inc. 2003 Non-Employee Directors Stock Plan, as amended and restated.

1.17          Restricted Stock Award.  An award of shares of Stock granted under the Plan and subject to the restrictions set forth herein and in the Agreement executed in connection therewith.

1.18          Restriction Period.  The period of time during which restrictions apply to a Restricted Stock Award.

1.19          Stock.  The common stock, par value $0.001 per share, of the Company or any successor security.

1.20          Stock Award.  A Restricted Stock Award or an Unrestricted Stock Award granted under the Plan, as applicable.

1.21          Underwriting Agreement.  The agreement between the Company and the underwriter or underwriters managing the initial public offering of the Stock.

1.22          Underwriting Date.  The date on which the Underwriting Agreement is executed and priced in connection with the initial public offering of the Common Stock.

1.23          Unrestricted Stock Award.  An award of shares of Stock granted under the Plan which is not subject to vesting requirements or transferability restrictions (other than those required under Article IX, applicable law and any Company policy restricting the trading of shares of Stock by directors and officers).

ARTICLE II.  PURPOSE OF PLAN

The purpose of the Plan is to provide an incentive to enable the Company to attract and retain experienced and highly-qualified individuals to serve as directors of the Company, and to encourage stock ownership by such directors so that their interests are aligned with the interests of the Company and its shareholders.  It is intended that Participants may acquire and maintain equity interests in the Company to align their interests with the Company's shareholders.

ARTICLE III.  ADMINISTRATION

3.1            Administration of Plan.  The Plan shall be administered by the Committee.  The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee.  Any decision made or action taken by the Committee to administer the Plan shall be final and conclusive.  No member of the Committee shall be liable for any act done in good faith with respect to this Plan or any Agreement, Option or Stock Award.  The Company shall bear all expenses of Plan administration.  In addition to all other authority vested in the Committee under the Plan, the Committee shall have complete authority to:

(a)            Interpret all provisions of the Plan;

(b)            Prescribe the form of any Agreement and notice and manner for executing or giving the same;

(c)            Make amendments to all Agreements;

(d)            Adopt, amend and rescind rules for Plan administration;

(e)            Make all determinations it deems advisable for the administration of the Plan;

(f)            Amend the terms of outstanding Options and impose terms and conditions on the shares of Stock issued pursuant to Stock Awards or upon the exercise of Options;

(g)            Either at the time an Option or Stock Award is granted, or by subsequent action, to impose such restrictions, conditions, or limitations as it determines appropriate as to the timing and manner of any resales including, but not limited to restrictions under an insider trading policy, restrictions designed to delay and/or coordinate the timing and manner of sales by Participants, and restrictions as to the use of specific brokerage firms for any resales or transfers. Notwithstanding the foregoing, an amendment, restriction, condition or limitation that would have a material adverse effect on the rights of a Participant under an outstanding Option or Stock Award shall not be valid with respect to such Option or Stock Award without the Participant’s consent;

(h)            Waive conditions to and/or accelerate the exercisability or vesting of an Option or Stock Award, either automatically or upon the occurrence of specified events or otherwise in its discretion; and

(i)            Determine the extent to which a leave of absence for military or government service, illness, temporary or permanent disability, or other reasons shall be treated as a termination, disability or interruption of service as a member of the Board.

3.2            Section 16(b).  Notwithstanding anything in the Plan to the contrary, the Committee, in its absolute discretion, may restrict, limit or condition the use of any provision of the Plan in order to ensure compliance with Section 16(b) of the Exchange Act and the rules promulgated thereunder.

ARTICLE IV.  ELIGIBILITY AND LIMITATIONS ON GRANTS

4.1            Option Grants.  Options shall be granted automatically as follows:

(a)            Number.

(i)            Effective for all periods prior to January 1, 2005, each Participant shall automatically be granted an Option on a yearly basis to purchase a number of shares of Stock equal to $50,000 divided by the Fair Market Value of the Stock as of the Grant Date. The initial Grant Date for each Non-Affiliated Participant shall be on the earlier to occur of (i) the Effective Date, if the Participant is serving as a Board member on such date, or (ii) the first date after the Effective Date that such Participant is elected by the shareholders of the Company to serve as a Board member. The initial Grant Date for each Affiliated Participant shall be on the earlier of occur of (x): the Underwriting Date, or (y) the date on which the agreement pursuant to which a management fee is required to be paid, paid by the Company to the Affiliated Participant or the Affiliated Participant’s employer shall be terminated.  Each year thereafter, each Participant shall be granted an additional Option to purchase a number of shares of Stock equal to $50,000 divided by the Fair Market Value of the Stock on the date the Board ratifies such grant, provided that he or she is serving as a Board member on each such date.

(ii)            Effective for the period beginning on January 1, 2006 and ending on December 31, 2006, as of the date of the annual meeting of shareholders, each Participant that is serving as a Board member immediately following the annual meeting of shareholders shall automatically be granted an Option to purchase 4,500 shares of Stock. In addition to the foregoing, unless the Board unanimously determines otherwise, if an individual first becomes a Participant at any time during this period other than at an annual meeting of shareholders, then that Participant shall receive an initial Option grant to purchase 4,500 shares of Stock at such time as he or she first becomes a Participant.

(iii)            Effective for the period beginning on January 1, 2007 and ending on December 31, 2007, as of the date of each annual meeting of shareholders, each Participant (other than the Chairperson of the Board) that is serving as a Board member immediately following the annual meeting of shareholders shall automatically be granted an Option to purchase a number of shares of Stock approximately equal to the Company's then current Black-Scholes calculation value of $90,000 ($180,000 for the Chairperson of the Board). In addition to the foregoing, unless the Board unanimously determines otherwise, if an individual first becomes a Participant at any time other than at an annual meeting of shareholders, then that Participant shall receive an initial Option grant to purchase a number of shares of Stock approximately equal to the Company's then current Black-Scholes calculation value of $90,000 at such time as he or she first becomes a Participant. The actual number of shares subject to the Option shall conclusively be determined by the Company's Chief Financial Officer and set forth in the stock option award agreement.

(iv)            Effective for all periods from and following January 1, 2008, as of the date of each annual meeting of shareholders, commencing with the 2008 annual meeting of shareholders, each Participant (other than the Chairperson of the Board) that is serving as a Board member immediately following the annual meeting of shareholders shall automatically be granted an Option to purchase a number of shares of Stock approximately equal to the Company's then current Black-Scholes calculation value of $100,000 ($200,000 for the Chairperson of the Board). In addition to the foregoing, unless the Board unanimously determines otherwise, if an individual first becomes a Participant at any time other than at an annual meeting of shareholders, then that Participant shall receive an initial Option grant to purchase a number of shares of Stock approximately equal to the Company's then current Black-Scholes calculation value of $100,000 at such time as he or she first becomes a Participant. The actual number of shares subject to the Option shall conclusively be determined by the Company's Chief Financial Officer and set forth in the stock option award agreement.

(b)            Price.  The exercise price of each share of Stock subject to an Option shall be the Fair Market Value of Stock on the Grant Date of such Option.

(c)            Option Period.  Each Option granted to a Participant will vest and become exercisable incrementally over a period of three years with one-twelfth (1/12) of the number of the shares of Stock subject to the Option vesting and becoming exercisable on the date which is three calendar months following the Grant Date, provided that the Participant remains a Board member on each such date.  The right to exercise an Option shall terminate seven (7) years after the Grant Date, unless terminated sooner pursuant to any of the following:

(i)            If a Participant is terminated as a Board member on account of fraud, dishonesty or other acts detrimental to the interests of the Company, the Option, including any portion of the Option which has vested or is otherwise exercisable by the Participant, shall terminate as of the date of such termination.

(ii)            Upon the death or disability (as defined in Section 22(e)(3) of the Code) of a Participant, the Option shall fully vest on the date thereof and may be exercised within twelve (12) months after such death or disability. In the event a participant fails to be re-elected to serve as a Board member, the Option may be exercised, to the extent the Option had vested as of the Participant’s last day of service as a member of the Board, within twelve (12) months of such an event.  Thereafter, the Option shall terminate and no longer be exercisable.

(iii)            If a Participant is terminated as a Board member for any reason other than the circumstances described in subparagraphs (i) or (ii) above, the Option may be exercised, to the extent the Option had vested as of the date of termination of his directorship, within three (3) months after the effective date of such termination. Thereafter, the Option shall terminate and no longer be exercisable. Notwithstanding the foregoing, if the Participant becomes an employee of the Company or an Affiliate upon the termination of his directorship, the Option shall expire after the termination of his employment in a manner that is consistent with this subparagraph (iii).

(d)            Rights of Participant.  No Participant shall have any rights as a shareholder of the Company with respect to shares of Stock subject to Options prior to the date of exercise of such Option.

4.2            Restricted Stock Awards.  Restricted Stock Awards shall be granted automatically as follows:

(a)            Number.

(i)            Effective for all periods prior to January 1, 2005, each Participant shall automatically be granted at no cost to the Participant a Restricted Stock Award with respect to a number of shares of Stock equal to $50,000 divided by the Fair Market Value of the Stock as of the Grant Date on a yearly basis. The initial Grant Date for each Non-Affiliated Participant shall be on the earlier to occur of (i) the Effective Date, if the Participant is serving as a Board member on such date, or (ii) the first date after the Effective Date that such Participant is elected by the shareholders of the Company to serve as a Board member.  The initial Grant Date for each Affiliated Participant shall be in the earlier to occur of: (x) the Underwriting Date or (y) such earlier date on which the management fee paid to the Participant or the Participant’s employer is terminated.  Each year thereafter, each Participant shall be granted an additional Restricted Stock Award with respect to a number of shares of Stock equal to $50,000 divided by the Fair Market Value of the Stock on the date the Board ratifies such grant, provided that he or she is serving as a Board member on each such date.

(ii)            Effective for the period beginning on January 1, 2006 and ending on December 31, 2006, as of the date of the annual meeting of shareholders, each Participant that is serving as a Board member immediately following the annual meeting of shareholders shall automatically be granted at no cost to the Participant a Restricted Stock Award with respect to 1,600 shares of Stock. In addition to the foregoing, unless the Board unanimously determines otherwise, if an individual first becomes a Participant at any time during this period other than at an annual meeting of shareholders, then that Participant shall receive an initial Restricted Stock Award with respect to 1,600 shares of Stock at such time as he or she first becomes a Participant.

(iii)            Effective for the period beginning on January 1, 2007 and ending on December 31, 2007, as of the date of each annual meeting of shareholders, each Participant (other than the Chairperson of the Board) that is serving as a Board member immediately following the annual meeting of shareholders shall automatically be granted at no cost to the Participant a Restricted Stock Award covering a number of shares of Stock approximately equal to $90,000 ($180,000 for the Chairperson of the Board) divided by the Fair Market Value of the Stock as of the Grant Date. In addition to the foregoing, unless the Board unanimously determines otherwise, if an individual first becomes a Participant at any time other than at an annual meeting of shareholders, then that Participant shall receive at no cost to the Participant a Restricted Stock Award covering a number of shares of Stock approximately equal to $90,000 divided by the Fair Market Value of the Stock as of the Grant Date at such time as he or she first becomes a Participant. The actual number of shares subject to the Restricted Stock Award shall conclusively be determined by the Company's Chief Financial Officer and set forth in the Restricted Stock award agreement.

(iv)            Effective for all periods from and following January 1, 2008, as of the date of each annual meeting of shareholders, commencing with the 2008 annual meeting of shareholders, each Participant (other than the Chairperson of the Board) that is serving as a Board member immediately following the annual meeting of shareholders shall automatically be granted at no cost to the Participant a Restricted Stock Award covering a number of shares of Stock approximately equal to $100,000 ($200,000 for the Chairperson of the Board) divided by the Fair Market Value of the Stock as of the Grant Date. In addition to the foregoing, unless the Board unanimously determines otherwise, if an individual first becomes a Participant at any time other than at an annual meeting of shareholders, then that Participant shall receive at no cost to the Participant a Restricted Stock Award covering a number of shares of Stock approximately equal to $100,000 divided by the Fair Market Value of the Stock as of the Grant Date at such time as he or she first becomes a Participant. The actual number of shares subject to the Restricted Stock Award shall conclusively be determined by the Company's Chief Financial Officer and set forth in the Restricted Stock award agreement.

(b)            Restrictions.  The Restricted Stock Award shall be granted to a Participant only pursuant to an Agreement, which shall set forth such terms and conditions of the Restricted Stock Award as may be determined by the Committee to be consistent with the Plan, and which may include additional provisions and restrictions that are not inconsistent with the Plan.  During the Restriction Period, a Participant may not sell, assign, transfer, pledge, or otherwise dispose of the shares of Stock subject to the Restricted Stock Award except in accordance with Article VI hereof.  Except for any restrictions under applicable law or pursuant to any Company policy restricting the trading of shares of Stock by directors and officers, all restrictions imposed under the Restricted Stock Award shall lapse (i) upon the expiration of the Restriction Period, subject to the provisions of subparagraph (c) below or (ii) as provided under Section 8.3.

(c)            Restriction Period.  The rights of a Participant in respect of a Restricted Stock Award shall be subject to a Restriction Period commencing on the Grant Date and ending on the third anniversary of the Grant Date provided that:

(i)            If during the Restriction Period, the Participant is terminated as a Board member by death or disability (as defined in Section 22(e)(3) of the Code), or in the event the Participant fails to be re-elected to serve as a Board member, then for each full year such Participant served as a Board member during the Restriction Period, one-third (1/3) of the shares of Stock subject to the applicable Restricted Stock Award shall be deemed fully vested, and the restrictions with respect such vested shares shall lapse on the date of termination.  Upon any such termination, if any portion of the Restricted Stock Award remains unvested pursuant to this subparagraph (i), Participant shall immediately return the share certificates for the Stock granted under the Restricted Stock Award to the Company and the Company will re-issue share certificates to Participant representing the vested portion of the Restricted Stock Award.

(ii)            If during the Restriction Period, a Participant is terminated as a Board member for any reason other than the circumstances described in subparagraph (i) above, the Restricted Stock Award shall terminate and Participant shall immediately return the share certificates for the Stock granted under the Restricted Stock Award to the Company.

(d)            Rights of Participant.  The Participant shall be entitled to delivery of certificates representing the shares of Stock granted under the Restricted Stock Award.  Upon the grant of a Restricted Stock Award, the Participant receiving the grant shall be entitled to vote the shares of Stock and to receive any dividends paid thereon.

(e)            Stock Certificates.  A stock certificate registered in the name of each Participant receiving a Restricted Stock Award (or in the name of a trustee for the benefit of each Participant) shall be issued in respect of the shares of Stock issuable pursuant to such Restricted Stock Award.  Such certificate shall bear whatever appropriate legend referring to the terms, conditions, and restrictions applicable to such award as the Board or the Committee shall determine.

4.3            Unrestricted Stock Awards.  Effective for all periods prior to January 1, 2005, unrestricted Stock Awards shall be granted automatically as follows:

(a)            Number.  Each Participant shall automatically be granted an Unrestricted Stock Award on a yearly basis with respect to a number of shares of Stock equal to $10,000 divided by the Fair Market Value of the Stock as of the Grant Date.  The initial Grant Date for each Non-Affiliated Participant shall be the earlier to occur of (i) the Effective Date, if the Participant is serving as a Board member on such date, or (ii) the first date after the Effective Date that such Participant is elected by the shareholders of the Company to serve as a Board member.  The initial Grant Date for each Affiliated Participant shall be on the earlier to occur of: (x) the Underwriting Date, or (y) the date on which the agreement pursuant to which a management fee is required to be paid by the Company to the Affiliated Participant or the Affiliated Participant’s employer shall be terminated.  Each year thereafter, each Participant shall automatically be granted an additional Unrestricted Stock Award with respect to a number of shares of Stock equal to $10,000 divided by the Fair Market Value of the Stock on the anniversary date of the initial Unrestricted Stock Award grant to such Participant, provided he or she is serving as a Board member on such date.

(b)            Rights of Participant.  Ownership of shares under an Unrestricted Stock Award shall vest in the Participant immediately upon the Grant Date.  The Participant shall be entitled to delivery of stock certificates representing the shares of Stock granted under the Unrestricted Stock Award.  Upon the grant of an Unrestricted Stock Award, the Participant receiving the grant shall be entitled to all the rights of a shareholder of the Company.

ARTICLE V.  STOCK SUBJECT TO PLAN

5.1            Source of Shares.  Upon the grant of a Stock Award or the exercise of an Option, the Company shall transfer to the Participant authorized but previously unissued shares of Stock or, if determined by the Board, shares of Stock that are held in treasury.

5.2            Maximum Number of Shares.  The maximum aggregate number of shares of Stock (including shares issuable upon exercise of all Options) that may be issued pursuant to this Plan is 400,000 shares, subject to increases and adjustments as provided in Article VIII.  Should the exercise price of an Option under the Plan be paid with shares of Stock or should shares of Stock otherwise issuable under the Plan be withheld by the Company in satisfaction of the withholding taxes incurred in connection with the exercise of an Option or the grant of a Stock Award, then the number of shares of Stock issuable under the Plan shall be reduced by the gross number of shares of Stock for which the Option is exercised, and not by the net number of shares of Stock issued to the Participant.  If, on any Grant Date, there are not sufficient shares of Stock that remain available pursuant to this Section 5.2 to provide the grant on such date, then the number of shares of Stock subject to the grant on that date shall be determined on a pro-rata basis, with fractional shares rounded down to the nearest number of whole shares.  All references to numbers of shares of Stock subject to grants under Article IV are subject to adjustment in accordance with Article VIII.

5.3            Forfeitures.  If any Option or Restricted Stock Award granted hereunder is forfeited, expires or terminates for any reason, in part or whole, the shares of Stock subject thereto which are thus forfeited shall again be available for issuance under the Plan.

ARTICLE VI.  TRANSFERABILITY OF OPTIONS AND

RESTRICTED STOCK AWARDS

Any Option or Restricted Stock Award granted under this Plan shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the Participant only by the Participant; provided, however, that an Option or Restricted Stock Award may be transferable to the extent provided in an Agreement.  No right or interest of a Participant in any Option or Restricted Stock Award shall subject to any lien, obligation or liability of such Participant.

ARTICLE VII.  METHOD OF EXERCISE OF OPTIONS

7.1            Exercise.  An Option granted hereunder shall be deemed to have been exercised on the Date of Exercise.  Subject to the provisions of Articles VI and IX, an Option may be exercised in whole or in compliance with such requirements as the Committee shall determine, but in no event sooner than six months from the date of grant.

7.2            Payment.  Except as otherwise provided by the Option Agreement, payment of the exercise price of an Option shall be made (i) in cash, (ii) where the Stock is publicly traded on a recognized exchange or automated trading system, in actual or constructive delivery of Stock that was acquired at least six months prior to the exercise of the Option, or such shorter or longer period, if any, as is required by the Company’s accountants to avoid a charge to the Company’s earnings for financial reporting purposes, (iii) where the Stock is publicly traded on a recognized exchange or automated trading system, through a special sale and remittance procedure pursuant to which a Participant shall concurrently provide irrevocable instructions to (a) a Company-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable income and employment taxes required to be withheld by the Company by reason of such exercise and (b) the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale, (iv) in other consideration acceptable to the Committee, or (v) in a combination thereof; provided, however, that a form of payment other than cash is only acceptable to the extent that the same is approved by the Committee. Payment of the exercise price must include payment of tax withholding, as described in Section 7.3, in cash unless the Company consents to alternative arrangements for withholding.

7.3            Withholding Tax Requirements.  Upon exercise of an Option, the Participant shall, upon notification of the amount due and prior to or concurrently with the delivery of the certificates representing the shares, pay to the Company amounts necessary to satisfy applicable federal, state and local withholding tax requirements or shall otherwise make arrangements satisfactory to the Company for such requirements, but only to the extent that the Company is required by law to withhold such amounts or that the Participant voluntarily elects for such withholding.

7.4            Issuance and Delivery of Shares.  Shares of Stock issued pursuant to the exercise of Options hereunder shall be delivered to Participants by the Company (or its transfer agent) as soon as administratively feasible after a Participant exercises an Option hereunder and executes any applicable shareholder agreement or agreement described in Section 9.2 that the Company requires at the time of exercise.

7.5            Fractional Shares.  Only whole shares of Stock may be issued pursuant to a Stock Award or upon exercise of an Option.  Any fractional shares resulting from the calculations under Sections 4.1, 4.2 and 4.3 shall be rounded down to the nearest whole share.  Any amounts tendered in the exercise of an Option remaining after the maximum number of whole shares of Stock have been purchased will be returned to the Participant in the form of cash.

ARTICLE VIII.  ADJUSTMENT UPON CORPORATE CHANGES

8.1            Adjustments to Shares.  The maximum number of shares of Stock with respect to which Options or Stock Awards hereunder may be granted, the number of shares of Stock which are the subject of outstanding Options or Stock Awards, and the exercise price of Options, shall be equitably and appropriately adjusted by the Committee, in the event that:

(a)            the Company effects one or more Stock dividends, Stock splits, reverse Stock splits, subdivisions, consolidations or other similar events;

(b)            the Company engages in a transaction which is described in section 424(a) of the Code; or

(c)            there occurs any other recapitalization or reorganization event which necessitates such action; provided, however, adjustments to the limit on Options or Stock Awards specified in Section 5.2 shall be proportionate to the modifications of the Stock that are on account of such corporate changes. Notwithstanding the foregoing, the Committee may not modify the Plan or the terms of any Options or Stock Awards then outstanding or to be granted hereunder to provide for the issuance under the Plan of a different class of stock or kind of securities. If an event described in paragraph (a), (b) or (c) occurs, the number of shares of Stock subject to each Option grant to be granted following such event pursuant to Section 4.1(a) shall not be adjusted to reflect such event unless the Board (in its sole discretion) determines otherwise.

8.2            Substitution of Options on Merger or Acquisition.  The Committee may grant Options or Stock Awards in substitution for stock awards, stock options, stock appreciation rights or similar awards held by an individual who becomes a director of the Company in connection with a transaction to which section 424(a) of the Code applies.  The terms of such substituted Options or Stock Awards shall be determined by the Committee in its sole discretion, subject only to the limitations of Article V.

8.3            Effect of Certain Transactions.  The provisions of this Section 8.3 shall apply to the extent that an Agreement does not otherwise expressly address the matters contained herein.  If the Company experiences an event which results in a "Change in Control," as defined in Section 8.3(a), then, whether or not the vesting requirements set forth in any Agreement have been satisfied, (i) all Options that are outstanding at the time of the Change in Control shall become fully vested and exercisable immediately prior to the Change in Control event, and (ii) the Restriction Period on an outstanding Restricted Stock Award shall automatically expire and all restrictions imposed under such Restricted Stock Award shall immediately lapse.

(a)            A Change in Control will be deemed to have occurred for purposes hereof if (1) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than an individual who is a shareholder on the date of the adoption of the Plan by the Board, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company’s then outstanding Voting Securities (as defined below), or (2) the shareholders of the Company approve a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) more than 50% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (3) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of its assets. For purposes of this Section 8.3(a), "Voting Securities" of an entity shall mean any securities of the entity which vote generally in the election of its directors.

(b)            In the event of a Change in Control, the Committee may provide, in its discretion and on such terms and conditions as it deems appropriate, either by the terms of the Agreement or by a resolution adopted prior to the occurrence of the Change in Control, that:

(i)             any outstanding Option shall be assumed by the surviving corporation or any successor corporation to the Company, or a parent or subsidiary thereof, or other corporation that is a party to the transaction resulting in the Change in Control, in which event, (1) the shares of the Stock subject to such Option shall be substituted with the number and class of securities of the successor, surviving or other corporation that would have been issued to the Participant in exchange for shares of the Stock pursuant to the Change in Control transaction had the Option been exercised prior to such transaction, (2) notwithstanding Section 8.3(b)(i)(1) hereof, the number of such securities of the successor, surviving or other corporation that is made subject to such Option shall be adjusted as necessary so that the aggregate value of such securities shall be equal to the aggregate value of the consideration that would have been paid or issued to the Participant in exchange for the shares of Stock pursuant to the Change in Control transaction had the Option been exercised immediately prior to such transaction, and (3) the exercise price payable per share of Stock subject to such Option shall be appropriately adjusted provided, however, that the aggregate exercise price for such Option shall remain the same;

(ii)            any outstanding Option shall be converted into a right to receive cash on or following the closing date or expiration date of the Change in Control transaction in an amount equal to the aggregate value of the consideration that would have been paid or issued to the Participant in exchange for shares of the Stock pursuant to the Change in Control transaction had the Option been exercised immediately prior to such transaction less the aggregate exercise price of such Option;

(iii)           any outstanding Option cannot be exercised after such a Change in Control; or

(iv)           any outstanding Option may be dealt with in any other manner determined in the discretion of the Committee.

(c)            Notwithstanding the foregoing, a portion of the acceleration of vesting described in this Section shall not occur with respect to an Option to the extent such acceleration of vesting would cause the Participant or holder of such Option to realize less income, net of taxes, after deducting the amount of excise taxes that would be imposed pursuant to section 4999 of the Code, than if accelerated vesting of that portion of the Option did not occur. This limitation shall not apply (i) to the extent that the Company, an Affiliate or the acquirer are obligated to indemnify the Participant or holder for such excise tax liability under an enforceable "golden parachute" indemnification agreement, or (ii) to the extent applicable, the shareholder approval described in Q&A 7 of Prop. Treas. Reg. ss. 1.280G-1 issued under section 280G of the Code is obtained to permit the acceleration of vesting described in this Section (applied as if the shareholder approval date was the date of the Change in Control).

(d)            Notwithstanding anything to the contrary contained herein, a change in ownership that occurs as a result of a public offering of the Company’s equity securities that is approved by the Board shall not constitute a Change in Control.

8.4            No Adjustment upon Certain Transactions.  The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services rendered, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, outstanding Options or Stock Awards.

ARTICLE IX.  COMPLIANCE WITH LAW AND REGULATORY APPROVAL

9.1            General.  No Option shall be exercisable, no shares of Stock shall be issued, no certificates for shares of Stock shall be delivered, and no payment shall be made under this Plan except in compliance with all federal, state and local laws and regulations including, without limitation, withholding tax requirements, federal and state securities laws and regulations and the rules and regulations of any government or regulatory agency or body and in compliance with the rules of all securities exchanges or self-regulatory organizations on which the Company’s shares may be listed, which the Committee shall, in its discretion, determine to be necessary or applicable, in all respects. The Company shall have the right to rely on an opinion of its counsel as to such compliance.  Any certificate issued to evidence shares of Stock for which an Option is exercised or a Stock Award is granted may bear such legends and statements as the Committee upon advice of counsel may deem advisable to assure compliance with federal or state laws and regulations.

9.2            Representations by Participants.  As a condition to the exercise of an Option or issuance of a Stock Award, the Company may require a Participant to represent and warrant at the time of any such exercise or grant that the shares are being acquired only for investment and without any present intention to sell or distribute such shares, if, in the opinion of counsel for the Company, such representation is required by any relevant provision of the laws referred to in Section 9.1.  At the option of the Company, a stop transfer order against any shares of Stock may be placed on the official stock books and records of the Company, and a legend indicating that the Stock may not be pledged, sold or otherwise transferred unless an opinion of counsel was provided (concurred in by counsel for the Company) and stating that such transfer is not in violation of any applicable law or regulation may be stamped on the stock certificate in order to assure exemption from registration.  The Committee may also require such other action or agreement by the Participants as may from time to time be necessary to comply with federal or state securities laws.  This provision shall not obligate the Company or any Affiliate to undertake registration of Options or Stock hereunder.

ARTICLE X.  GENERAL PROVISIONS

10.1          Unfunded Plan.  The Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under this Plan.  Any liability of the Company to any person with respect to any grant under this Plan shall be based solely upon contractual obligations that may be created hereunder.  No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company.

10.2          Rules of Construction.  Headings are given to the articles and sections of this Plan solely as a convenience to facilitate reference.  The masculine gender when used herein refers to both masculine and feminine.  The reference to any statute, regulation or other provision of law shall be construed to refer to any amendment to or successor of such provision of law.

10.3          Governing Law.  The internal laws of the State of Texas (without regard to choice of law) shall apply to all matters arising under this Plan, to the extent that federal law does not apply.

10.4          Compliance with Section 16 of the Exchange Act.  Transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 (or successor provisions) promulgated under the Exchange Act.  To the extent any provision of this Plan or action by Committee fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee.

10.5          Amendment.  The Board may amend or terminate this Plan at any time; provided, however, an amendment that would have a material adverse effect on the rights of a Participant under an outstanding Option or Stock Award is not valid with respect thereto without the Participant’s consent; and provided, further, that the shareholders of the Company must approve, in general meeting, any amendment that changes the number of shares in the aggregate which may be issued pursuant to Options or Stock Awards granted under the Plan. Such amendment must be approved coincident with or prior to the date Options or Stock Awards are granted with respect to such shares.

10.6          Disputes and Dispute Resolution.

(a)            Any and all claims arising out of or relating to the Plan, or the Committee’s administration or interpretation of the Plan with respect to any Participant, shall be resolved by binding arbitration which shall be the sole and exclusive method of resolving such disputes or claims and shall be in lieu of any trial before a court of jury.  The Committee, in offering an option grant under this Plan, and a Participant, in accepting any option grant under the Plan, expressly waive any and all rights to a trial before a court or jury regarding any disputes and claims which arise from or relate to the Plan, and any option grant made under the Plan.

(b)            Arbitration shall be conducted within Bexar County, Texas before a single neutral arbitrator selected jointly by the Committee and the Participant in accordance with the rules of the American Arbitration Association ("AAA") rules and applicable law then in effect. However, the standard of review to be applied by the Arbitrator shall be whether the Committee’s disputed act, omission or decision with respect to the Participant was contrary to any Plan provision or otherwise arbitrary and capricious.

(c)            To the extent that any of the provisions of this Section 10.6 or the AAA Rules conflicts with applicable law for the arbitration of contract disputes, the provisions or procedures required by applicable law shall govern.

EX-10.35

Exhibit 10.35

Option Number:                                                

                Optionee Name:                                                

KINETIC CONCEPTS, INC.

2004 EQUITY PLAN

INTERNATIONAL STOCK OPTION AGREEMENT

THIS AGREEMENT (the “Option Agreement”) is made and entered into as of _______________, 200__ (the “Date of Grant”), by and between Kinetic Concepts, Inc., a Texas corporation (the “Company”), and [_________________________] (the “Optionee”).  Capitalized terms not defined herein shall have the meaning ascribed to them in the Company’s 2004 Equity Plan (the “Plan”).  Where the context permits, references to the Company or any of its Subsidiaries or affiliates shall include the successors to the foregoing.

Pursuant to the Plan, the Administrator has determined that the Optionee is to be granted an option (the “Option”) to purchase Shares, subject to the terms and conditions set forth in the Plan and herein, and hereby grants such Option.

1.Number of Shares and Exercise Price.  The Option entitles the Optionee to purchase [_______] Shares (the “Option Shares”) at a price of US$[______] per share (the “Option Exercise Price”).

2.Option Term.  The term of the Option and of the Option Agreement (the “Option Term”) shall commence on the Date of Grant and, unless the Option is previously terminated pursuant to Paragraph 5 below, shall terminate upon the expiration of ten (10) years from the Date of Grant (the “Expiration Date”).  As of the Expiration Date, all rights of the Optionee hereunder shall terminate.

3.Conditions of Exercise.

(a)   Subject to Paragraph 5 below, the Option shall become vested and exercisable as to 25% of the Option Shares on the first anniversary of the Date of Grant, and as to an additional 25% of the Option Shares on each of the three succeeding anniversaries of Date of Grant, provided that the Optionee has been continuously employed by or actively providing services to the Company or any Subsidiary or affiliate through each such date  

(b)   Except as otherwise provided herein, the right of the Optionee to purchase Option Shares with respect to which the Option has become exercisable and vested may be exercised in whole or in part at any time or from time to time prior to the Expiration Date; provided, however, that the Option may not be exercised for a fraction of a Share.  

4.Method of Exercise.  This Option may be exercised, in whole or in part, by means of a written notice of exercise to the Company in such form as may be approved by the Administrator from time to time and which may be obtained from the Company’s Equity Accounting and Administration department, accompanied by payment in full of the aggregate Option Exercise Price in U.S. dollars which may be made (i) in cash or by check, (ii) to the extent permitted by applicable law, by means of any cashless exercise procedure through the use of a brokerage arrangement approved by the Administrator, or (iii) any combination of the foregoing.

5.Effect of Conduct Constituting Cause; Termination of Employment or Service; or Change in Control.

(a)   If at any time (whether before or after termination of employment or service) the Administrator determines that the Optionee has engaged in conduct that would constitute Cause, consistent with local law and regulations, the Administrator may provide for the immediate forfeiture of the Option (including any securities, cash or other property issued upon exercise or other settlement of the Option), whether or not vested, consistent with local law and regulations.  Any such determination by the Administrator shall be final, conclusive and binding on all persons.  

(b)   If the Optionee’s active employment with or service to the Company, any Subsidiary or affiliate thereof terminates for any reason other than for Cause, death or Disability, the Option, to the extent vested and exercisable as of the date of such termination, shall expire 30 days following the date of such termination and the Option, to the extent not vested and exercisable as of the date of such termination, shall expire as of such date.  Notwithstanding the foregoing, if the Optionee’s active employment with or service to the Company, any Subsidiary or affiliate thereof terminates for Cause, the Option, whether or not vested or exercisable, shall expire as of the date of such termination.  The Option shall not be exercisable after the Expiration Date.  

(c)   If the Optionee’s employment with or service to the Company, any Subsidiary or any affiliate thereof terminates by reason of the Optionee’s death or Disability, any portion of the Option that is outstanding at such time shall become fully and immediately vested and exercisable, and shall expire 180 days following the date of such termination.  The Option shall not be exercisable after the Expiration Date.  

(d)   Upon the occurrence of a Change in Control, any portion of the Option that is outstanding at such time shall become fully and immediately vested and exercisable, unless the Option is either assumed or an equitable substitution is made therefore.  In addition, if the Optionee’s employment with or service to the Company, any Subsidiary or affiliate thereof is terminated other than for Cause within 24 months following a Change in Control, any portion of the Option that is outstanding at such time shall become fully and immediately vested and exercisable.  

(e)   If Optionee transfers from the Company to its Subsidiary or affiliate or from one of the Company’s Subsidiaries or affiliates to another, such transfer shall not constitute a termination of employment for purposes of the vesting and exercisability of the Option and the expiration of the Option, unless otherwise determined by the Administrator.  

6.Adjustments.  The Option and all rights and obligations under this Option Agreement are subject to Section 5 of the Plan.

7.Nontransferability of Option.  Except by will or under the laws of descent and distribution and as set forth in the following two sentences, the Optionee may not sell, transfer, pledge or assign the Option, and, during the lifetime of the Optionee, only the Optionee may exercise the Option.  Notwithstanding the foregoing, during the Optionee’s lifetime, the Administrator may, in its sole discretion, permit the transfer, assignment or other encumbrance of the Option.  Additionally, subject to the approval of the Administrator and to any conditions that the Administrator may prescribe, the Optionee may, upon providing written notice to the Company, elect to transfer the Option (i) to members of his or her Immediate Family, provided that no such transfer may be made in exchange for consideration, (ii) by instrument to an inter vivos or testamentary trust in which the Option is to be passed to beneficiaries upon the death of the Optionee, or (iii) pursuant to a qualified domestic relations order or any similar instrument, to the extent permitted by applicable law.  Any attempted sale, transfer, pledge, assignment, encumbrance or other disposition of the Option contrary to the provisions hereof shall be null and void and without effect.

8.Notice.  Whenever any notice is required or permitted hereunder, such notice shall be in writing and shall be given by personal delivery, facsimile, first class mail, certified or registered with return receipt requested.  Any notice required or permitted to be delivered hereunder shall be deemed to have been duly given on the date which it is personally delivered or, whether actually received or not, on the fifth day after depositing in the post or 24 hours after transmission by facsimile to the respective parties named below.

                      If to the Company: Kinetic Concepts, Inc.

Attn.: Chief Financial Officer

8023 Vantage Drive

San Antonio, TX 78230

U.S.A.

Phone: 1-(210) 255-6494

Fax: 1-(210) 255-6997

      If to the Optionee:         [Name of Optionee]

[Address]

______________________

Facsimile: _____________

Either party may change such party’s address for notices by duly giving notice pursuant hereto.

9.Withholding Requirements in Connection With Option Exercises.

(a)   Pursuant to Section 14 of the Plan, the Company (or Subsidiary or affiliate, as the case may be) has the right to require the Optionee to remit to the Company (or Subsidiary or affiliate, as the case may be) in cash an amount sufficient to satisfy Optionee’s income tax, social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”) related to the Option.  Regardless of any action the Company (or Subsidiary or affiliate) takes with respect to any or all Tax-Related Items, the Optionee has the ultimate liability for all Tax-Related Items legally due by the Optionee and remains responsible for payment of same.  The Company or Subsidiary (or affiliate): (1) makes no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant, vesting or exercise of the Option, the subsequent sale of Shares acquired pursuant to such exercise and the receipt of any dividends; and (2) does not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate the Optionee’s liability for Tax-Related Items.  

(b)   The Optionee shall pay or make adequate arrangements satisfactory to the Company and/or the Subsidiary (or affiliate) to satisfy all withholding and payment on account obligations of the Company and/or the Subsidiary (or affiliate).  With the approval of the Administrator and if permissible under local law, the Optionee may elect to have the Company withhold from delivery Shares or deliver Shares, in each case, having a value equal to the aggregate required minimum Tax-Related Items withholding to be collected by the Company or any Subsidiary or affiliate thereof.  Such Shares shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined.  The Optionee agrees to allow the Company and/or the Subsidiary (or affiliate) to withhold all applicable Tax-Related Items legally payable by the Optionee from the Optionee’s wages or other cash compensation paid to the Optionee by the Company and/or the Subsidiary (or affiliate) or from the proceeds of the sale of the Shares.  Alternatively, or in addition, with the approval of the Administrator and if permissible under local law, to the extent that Optionee is not able to otherwise pay the Tax-Related Items withholding, the Optionee agrees that the Company may sell or arrange for the sale of Shares that the Optionee acquires to meet the withholding obligation for Tax-Related Items; and/or withhold from delivery Shares having a value equal to the aggregate required minimum Tax-Related Items withholding.  Finally, the Optionee shall pay to the Company or the Subsidiary (or affiliate) any amount of Tax-Related Items that the Company or the Subsidiary (or affiliate) may be required to withhold as a result of the Optionee’s participation in the Plan or the Optionee’s purchase of Shares that cannot be satisfied by the means previously described.  The Company may refuse to honor the exercise and refuse to deliver the Shares if the Optionee fails to comply with the Optionee’s obligations in connection with the Tax-Related Items as described in this paragraph.  

10.Compliance with Laws.

(a)   Shares shall not be issued pursuant to the exercise of the Option granted hereunder unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the U.S. Securities Act of 1933, as amended, the U.S. Exchange Act, the requirements of any stock exchange upon which the Shares may then be listed, and the applicable local laws, and shall be further subject to the approval of counsel for the Company with respect to such compliance.  The Company shall be under no obligation to effect the registration pursuant to the U.S. Securities Act of 1933, as amended, of any interests in the Plan or any Shares to be issued hereunder or to effect similar compliance under any state or local laws.  

(b)   All certificates for Shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the U.S. Securities and Exchange Commission, any stock exchange upon which the Shares may then be listed, and any applicable federal, state, or local securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions.  The Administrator may require, as a condition of the issuance and delivery of certificates evidencing Shares pursuant to the terms hereof, that the recipient of such Shares make such agreements and representations as the Administrator, in its sole discretion, deems necessary or desirable.  

11.Protections Against Violations of Agreement.  No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer in trust (voting or other) or other disposition of, or creation of a security interest in or lien on, any of the Option Shares by any holder thereof in violation of the provisions of this Option Agreement or the Articles of Incorporation or the Bylaws of the Company, will be valid, and the Company will not transfer any of such Option Shares on its books nor will any of such Option Shares be entitled to vote, nor will any dividends be paid thereon, unless and until there has been full compliance with such provisions to the satisfaction of the Company.  The foregoing restrictions are in addition to and not in lieu of any other remedies, legal or equitable, available to enforce said provisions.

12.Nature of Grant.

(a)   The Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Option Agreement;  

(b)   The grant of the Options is voluntary and occasional and does not create any contractual or other right to receive future grants of Options, or benefits in lieu of Options, even if Options have been granted repeatedly in the past;  

(c)   All decisions with respect to future Option grants, if any, will be at the sole discretion of the Company;  

(d)   Participation in the Plan is voluntary;  

(e)   The Option is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to the Company or the Subsidiary (or affiliate), and which is outside the scope of the Optionee’s employment contract, if any;  

(f)   The Option is not a part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;  

(g)   The future value of the underlying Shares is unknown and cannot be predicted with certainty;  

(h)   If the underlying Shares do not increase in value, the Options will have no value;  

(i)   If the Optionee exercises the Option and obtains Shares, the value of those Shares acquired upon exercise may increase or decrease in value, even below the Option Exercise Price;  

(j)   In consideration of the grant of the Option, no claim or entitlement to compensation or damages shall arise from termination of the Option or diminution in value of the Option or Shares purchased through the exercise of the Option resulting from termination of the Optionee’s active employment by the Company or the Subsidiary (or affiliate) (for any reason whatsoever and whether or not in breach of local labor laws) and the Optionee hereby releases the Company and the Subsidiary (or affiliate) from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Option Agreement, the Optionee shall be deemed irrevocably to have waived the Optionee’s entitlement to pursue such claim; and  

(k)   Notwithstanding any terms or conditions of the Plan to the contrary, in the event of involuntary termination of the Optionee’s employment (whether or not in breach of local labor laws), the Optionee’s right to receive the Option and vest in Options under the Plan, if any, will terminate effective as of the date that the Optionee is no longer actively employed and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of “garden leave” or similar period pursuant to local law); furthermore, in the event of involuntary termination of employment (whether or not in breach of local labor laws), the Optionee’s right to exercise the Option after termination of employment, if any, will be measured by the date of termination of the Optionee’s active employment and will not be extended by any notice period mandated under local law.  

13.Data Privacy.  The Optionee explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Optionee’s personal data as described in this document by and among, as applicable, the Company and the Subsidiary and affiliates for the exclusive purpose of implementing, administering and managing the Optionee’s participation in the Plan.

The Optionee hereby understands that the Company and the Subsidiary (or affiliates) hold certain personal information about the Optionee, including, but not limited to, the Optionee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Optionee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”).  The Optionee hereby understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Optionee’s country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Optionee’s country.  The Optionee hereby understands that the Optionee may request a list with the names and addresses of any potential recipients of the Data by contacting the Optionee’s local human resources representative.  The Optionee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Optionee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Optionee may elect to deposit any Shares acquired upon exercise of the option.  The Optionee hereby understands that Data will be held only as long as is necessary to implement, administer and manage the Optionee’s participation in the Plan.  The Optionee hereby understands that the Optionee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Optionee’s local human resources representative.  The Optionee hereby understands, however, that refusing or withdrawing the Optionee’s consent may affect the Optionee’s ability to participate in the Plan.  For more information on the consequences of the Optionee’s refusal to consent or withdrawal of consent, the Optionee hereby understands that the Optionee may contact the human resources representative responsible for the Optionee’s country at the local or regional level.

14.Failure to Enforce Not a Waiver.  The failure of the Company to enforce at any time any provision of the Option Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

15.Governing Law.  The Option Agreement shall be governed by and construed according to the laws of the State of Texas without regard to its principles of conflicts of laws as provided in the Plan.  For purposes of litigating any dispute that arises under this Option or the Option Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Texas, agree that such litigation shall be conducted in the courts of San Antonio, Texas, or the federal courts for the United States for the Western District of Texas, and no other courts, where this Option grant is made and/or performed.

16.Incorporation of the Plan.  The Plan, as it exists on the date of the Option Agreement and as amended from time to time, is hereby incorporated by reference and made a part hereof, and the Option and this Option Agreement shall be subject to all terms and conditions of the Plan.  In the event of any conflict between the provisions of the Option Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise.  The term “Section” generally refers to provisions within the Plan; provided, however, the term “Paragraph” shall refer to a provision of this Option Agreement.

17.Amendments.  This Option Agreement may be amended or modified at any time, but only by an instrument in writing signed by each of the parties hereto.

18.Rights as a Shareholder.  Neither the Optionee nor any of the Optionee’s successors in interest shall have any rights as a shareholder of the Company with respect to any Option Shares until the Optionee has given written notice of exercise, has paid in full for such Shares, and has satisfied the requirements in Section 14 and 15(b) of the Plan.

19.Agreement Not a Contract of Employment.  Neither the Plan, the granting of the Option, the Option Agreement nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Optionee has a right to continue to be employed by, or to provide services as a director, consultant or advisor to, the Company, any Subsidiary or affiliate thereof for any period of time or at any specific rate of compensation.

20.Authority of the Administrator.  The Administrator shall have full authority to interpret and construe the terms of the Plan and the Option Agreement.  The Administrator shall have the exclusive discretion to determine when the Optionee is no longer actively employed for purposes of the Option.  The determination of the Administrator as to any such matter of interpretation or construction shall be final, binding and conclusive.

21.Binding Effect.  The Option Agreement shall apply to and bind the Optionee and the Company and their respective permitted assignees or transferees, heirs, legatees, executors, administrators and legal successors.

22.Tax Representation.  The Optionee has reviewed with his or her own tax advisors the federal, state, local and worldwide tax consequences of the transactions contemplated by this Option Agreement.  The Optionee is relying solely on such advisors and not on any statement or representations of the Company or any of its agents.  The Optionee understands that he or she (and not the Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by the Option Agreement.

23.Language.  If the Optionee has received this or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.

24.Electronic Delivery.  The Company may, in its sole discretion, decide to deliver any documents related to the Option granted under and participation in the Plan or future options that may be granted under the Plan by electronic means or to request the Optionee’s consent to participate in the Plan by electronic means.  The Optionee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

25.Acceptance.  The Optionee hereby acknowledges receipt of a copy of the Plan and this Option Agreement.  Optionee has read and understands the terms and provisions thereof, and accepts the Option subject to all the terms and conditions of the Plan and the Option Agreement.

26.Severability.  The provisions of this Option Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have executed and delivered the Option Agreement on the day and year first above written.

KINETIC CONCEPTS, INC.

By:

Name:

Title:

OPTIONEE

Signature:

Name:

Address:

Telephone No.:

Identification No.:

DATE OF GRANT NUMBER OF SHARES SUBJECT TO OPTION OPTION EXERCISE PRICE EXPIRATION DATE

EX-10.36

Exhibit 10.36

Award Number:                                      

Grantee Name:                                      

KINETIC CONCEPTS, INC.

2004 EQUITY PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the “Award Agreement”) is made and entered into as of _______________, 200__ (the “Date of Grant”), by and between Kinetic Concepts, Inc., a Texas corporation (the “Company”), and [_________________________] (the “Grantee”).  Capitalized terms not defined herein shall have the meaning ascribed to them in the Company’s 2004 Equity Plan (the “Plan”).  Where the context permits, references to the Company or any of its Subsidiaries or affiliates shall include the successors to the foregoing.

Pursuant to the Plan, the Administrator has determined that the Grantee is to be granted Restricted Stock Units, subject to the terms and conditions set forth in the Plan and herein, and hereby grants such Restricted Stock Units.  Each Restricted Stock Unit represents a hypothetical Common Share and will, at all times the Award Agreement is in effect, be equal in value to one Common Share.

1.Grant of Restricted Stock Units.  The Company hereby grants to the Grantee [_______] Restricted Stock Units (the "Award") on the terms and conditions set forth in the Award Agreement and as otherwise provided in the Plan.

2.Terms and Conditions of Award.  The Award shall be subject to the following terms, conditions and restrictions:

(a)   Vesting.  The Restricted Stock Units shall vest at such time or times, and/or upon the occurrence of such events as are set forth in Exhibit A hereto.  

(b)   Nontransferability.  Restricted Stock Units and any interest therein, may not be sold, transferred, pledged, hypothecated, assigned or otherwise encumbered or disposed of, except by will or the laws of descent and distribution, to the extent applicable.  Any attempt to dispose of any Restricted Stock Units in contravention of any such restrictions shall be null and void and without effect.  

(c)   Rights as a Shareholder.  Restricted Stock Units represent only hypothetical shares; therefore, the Grantee is not entitled to any of the rights or benefits generally accorded to stockholders with respect thereto, except upon vesting, to the extent provided in Paragraph 2(d).  

(d)   Benefit Upon Vesting.  Upon the vesting of a Restricted Stock Unit, the Grantee shall be entitled to receive, within 30 days of the date on which such Restricted Stock Unit vests, an amount in cash, Shares or a combination of the foregoing, as determined by the Administrator in its sole discretion equal, per Restricted Stock Unit, to the sum of (1) the Fair Market Value of a Share on the date on which such Restricted Stock Unit vests and (2) the aggregate amount of cash dividends paid with respect to a Share during the period commencing on the Date of Grant and terminating on the date on which such unit vests.  

(e)   Effect of Conduct Constituting Cause; Termination of Employment or Service; or Change in Control.  

(i)    If at any time (whether before or after termination of employment or service) the Administrator determines that the Grantee has engaged in conduct that would constitute Cause for termination, the Administrator may provide for the immediate forfeiture of the Award (including any securities, cash or other property issued upon settlement of the Award), whether or not the Restricted Stock Units have vested. Any such determination by the Administrator shall be final, conclusive and binding on all persons.  

(ii)    If the Grantee’s employment with or service to the Company and any Subsidiary terminates for any reason, other than by reason of the Grantee’s death or Disability, then the Grantee shall immediately forfeit any rights to the Restricted Stock Units that have not vested as of the date of termination, if any, the Grantee shall have no further rights thereto and such Restricted Stock Units shall immediately terminate; provided that if a Subsidiary ceases to be a Subsidiary of the Company, then, as of such date of cessation, the Grantee's employment with or service to the Subsidiary shall be deemed to have terminated.  

(iii)    If the Grantee’s employment with or service to the Company, any Subsidiary or affiliate thereof terminates by reason of Grantee’s death or Disability during the Restricted Period, with respect to Restrictions that lapse based on the passage on time, the Restrictions on all outstanding Restricted Stock with respect to which the Restrictions have not lapsed shall immediately lapse and, with respect to Restrictions that lapse based on attainment of specified performance conditions, the Restrictions on all outstanding Restricted Stock with respect to which the Restrictions have not lapsed shall immediately lapse as if the target performance goals were met.

(iv)    Upon the occurrence of a Change in Control, all unvested Restricted Stock Units shall immediately vest, unless the Award is either assumed or an equitable substitution is made therefor. In addition, if the Grantee’s employment with or service to the Company and any Subsidiary thereof is terminated other than for Cause within 24 months following a Change in Control, all outstanding unvested Restricted Stock Units shall immediately vest.  

(f)   Taxes.  Pursuant to Section 14 of the Plan, the Company (or Subsidiary or affiliate, as the case may be) has the right to require the Grantee to remit to the Company (or Subsidiary or affiliate, as the case may be) in cash an amount sufficient to satisfy any federal, state and local tax withholding requirements related to the Award.  With the approval of the Administrator, the Grantee may satisfy the foregoing requirement by electing to have the Company withhold from delivery Shares (to the extent applicable) or by delivering Shares, in each case, having a value equal to the aggregate required minimum tax withholding to be collected by the Company or any Subsidiary or affiliate thereof.  Such Shares shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined. Fractional share amounts shall be settled in cash.  

3.Adjustments.  The Award and all rights and obligations under the Award Agreement are subject to Section 5 of the Plan.

4.Notice.  Whenever any notice is required or permitted hereunder, such notice shall be in writing and shall be given by personal delivery, facsimile, first class mail, certified or registered with return receipt requested.  Any notice required or permitted to be delivered hereunder shall be deemed to have been duly given on the date that it is personally delivered or, whether actually received or not, on the third business day after mailing or 24 hours after transmission by facsimile to the respective parties named below.

                If to the Company: Kinetic Concepts, Inc.

Attn.: Chief Financial Officer

8023 Vantage Drive

San Antonio, TX 78230

Phone: (210) 255-6494

Fax: (210) 255-6997

If to the Grantee:                  [Name of Grantee]

[Address]

______________________

Facsimile:  _____________

Either party may change such party’s address for notices by duly giving notice pursuant hereto.

5.Compliance with Laws.

(a) Shares (to the extent payable hereunder) shall not be issued pursuant to the Award granted hereunder unless the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Company shall be under no obligation to effect the registration pursuant to the Securities Act of 1933, as amended, of any interests in the Plan or any Shares to be issued hereunder or to effect similar compliance under any state laws.

(b) All certificates for Shares delivered under the Plan (to the extent applicable) shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares may then be listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. The Administrator may require, as a condition of the issuance and delivery of certificates evidencing Shares pursuant to the terms hereof, that the recipient of such Shares make such agreements and representations as the Administrator, in its sole discretion, deems necessary or desirable.

6.Protections Against Violations of Agreement.  No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer in trust (voting or other) or other disposition of, or creation of a security interest in or lien on, any of the Shares underlying the Award by any holder thereof in violation of the provisions of the Award Agreement, the Plan or the Articles of Incorporation or the Bylaws of the Company, will be valid, and the Company will not transfer any such Shares on its books nor will any such Shares be entitled to vote, nor will any dividends be paid thereon, unless and until there has been full compliance with such provisions to the satisfaction of the Company.  The foregoing restrictions are in addition to and not in lieu of any other remedies, legal or equitable, available to enforce said provisions.

7.Failure to Enforce Not a Waiver.  The failure of the Company to enforce at any time any provision of the Award Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

8.Governing Law.  The Award Agreement shall be governed by and construed according to the laws of the State of Texas without regard to its principles of conflict of laws.

9.Incorporation of the Plan.  The Plan, as it exists on the date of the Award Agreement and as amended from time to time, is hereby incorporated by reference and made a part hereof, and the Award and the Award Agreement shall be subject to all terms and conditions of the Plan.  In the event of any conflict between the provisions of the Award Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise.  The term “Section” generally refers to provisions within the Plan (except where denoted otherwise); provided, however, the term “Paragraph” shall refer to a provision of the Award Agreement.

10.Amendments.  The Award Agreement may be amended or modified at any time, but only by an instrument in writing signed by each of the parties hereto.

11.Agreement Not a Contract of Employment.  Neither the Plan, the granting of the Award, the Award Agreement nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Grantee has a right to continue to be employed by, or to provide services as a director, consultant or advisor to, the Company, any Subsidiary or affiliate thereof for any period of time or at any specific rate of compensation.

12.Authority of the Administrator.  The Administrator shall have full authority to interpret and construe the terms of the Plan and the Award Agreement.  The determination of the Administrator as to any such matter of interpretation or construction shall be final, binding and conclusive.

13.Binding Effect.  The Award Agreement shall apply to and bind the Grantee and the Company and their respective permitted assignees or transferees, heirs, legatees, executors, administrators and legal successors.

14.Tax Representation.  The Grantee has reviewed with his or her own tax advisors the federal, state, local and foreign tax consequences of the transactions contemplated by the Award Agreement.  The Grantee is relying solely on such advisors and not on any statement or representations of the Company or any of its agents.  The Grantee understands that he or she (and not the Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by the Award Agreement.

15.Acceptance.  The Grantee hereby acknowledges receipt of a copy of the Plan and the Award Agreement.  Grantee has read and understands the terms and provisions thereof, and accepts the Award subject to all the terms and conditions of the Plan and the Award Agreement.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have executed and delivered the Option Agreement on the day and year first above written.

KINETIC CONCEPTS, INC.

By:

Name:

Title:

GRANTEE

Signature:

Name:

Address:

Telephone No.:

Social Security No.:

DATE OF GRANT NUMBER OF RESTRICTED STOCK UNITS

EX-10.37

Exhibit 10.37

Award Number:                                  

Grantee Name:                                  

KINETIC CONCEPTS, INC.

2004 EQUITY PLAN

INTERNATIONAL RESTRICTED STOCK UNIT AWARD AGREEMENT

THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the “Award Agreement”) is made and entered into as of _______________, 200__ (the “Date of Grant”), by and between Kinetic Concepts, Inc., a Texas corporation (the “Company”), and [_________________________] (the “Grantee”).  Capitalized terms not defined herein shall have the meaning ascribed to them in the Company’s 2004 Equity Plan (the “Plan”).  Where the context permits, references to the Company or any of its Subsidiaries or affiliates shall include the successors to the foregoing.

Pursuant to the Plan, the Administrator has determined that the Grantee is to be granted Restricted Stock Units, subject to the terms and conditions set forth in the Plan and herein, and hereby grants such Restricted Stock Units.  Each Restricted Stock Unit represents a hypothetical Common Share and will, at all times as the Award Agreement is in effect, be equal in value to one Common Share.

1.Grant of Restricted Stock Units.  The Company hereby grants to the Grantee [_______] Restricted Stock Units (the "Award") on the terms and conditions set forth in the Award Agreement and as otherwise provided in the Plan.

2. Terms and Conditions of Award.  The Award shall be subject to the following terms, conditions and restrictions:

(a)   Vesting.  The Restricted Stock Units shall vest at such time or times, and/or upon the occurrence of such events as are set forth in Appendix A hereto.  

(b)   Nontransferability.  Restricted Stock Units and any interest therein, may not be sold, transferred, pledged, hypothecated, assigned or otherwise encumbered or disposed of, except by will or the laws of descent and distribution, to the extent applicable.  Any attempt to dispose of any Restricted Stock Units in contravention of any such restrictions shall be null and void and without effect.

(c)   Rights as a Shareholder.  Restricted Stock Units represent only hypothetical shares; therefore, the Grantee is not entitled to any of the rights or benefits generally accorded to stockholders with respect thereto, except upon vesting, to the extent provided in Paragraph 2(d).  

(d)   Benefit Upon Vesting.  Upon the vesting of a Restricted Stock Unit, the Grantee shall be entitled to receive, within 30 days of the date on which such Restricted Stock Unit vests, an amount in cash, Shares or a combination of the foregoing, as determined by the Administrator in its sole discretion equal, per Restricted Stock Unit, to the sum of (1) the Fair Market Value of a Share on the date on which such Restricted Stock Unit vests and (2) the aggregate amount of cash dividends paid with respect to a Share during the period commencing on the Date of Grant and terminating on the date on which such unit vests.  

(e)   Effect of Conduct Constituting Cause; Termination of Employment or Service; or Change in Control.  

(i)    If at any time (whether before or after termination of employment or service) the Administrator determines that the Grantee has engaged in conduct that would constitute Cause for termination, consistent with local law and regulations, the Administrator may provide for the immediate forfeiture of the Award (including any securities, cash or other property issued upon settlement of the Award), whether or not the Restricted Stock Units have vested, consistent with local law and regulations. Any such determination by the Administrator shall be final, conclusive and binding on all persons.  

(ii)    If the Grantee’s active employment with or service to the Company and any Subsidiary or affiliate terminates for any reason, other than by reason of the Grantee’s death or Disability, then the Grantee shall immediately forfeit any rights to the Restricted Stock Units that have not vested as of the date of termination, if any, the Grantee shall have no further rights thereto and such Restricted Stock Units shall immediately terminate; provided that if a Subsidiary or affiliate ceases to be a Subsidiary or affiliate of the Company, then, as of such date of cessation, the Grantee's employment with or service to the Subsidiary or affiliate shall be deemed to have terminated; and further provided that if Grantee transfers from the Company to its Subsidiary or affiliate or from one of the Company’s Subsidiaries or affiliates to another, such transfer shall not constitute a termination of employment for purposes of the vesting of the Award, unless otherwise determined by the Administrator.  

(iii)    If the Grantee’s employment with or service to the Company, any Subsidiary or affiliate thereof terminates by reason of Grantee’s death or Disability during the Restricted Period, with respect to Restricted Stock Units that vest based on the passage of time, all outstanding unvested Restricted Stock Units shall immediately vest and, with respect to Restricted Stock Units that vest based on the attainment of specified performance conditions, all outstanding unvested Restricted Stock Units shall immediately vest as if the target performance goals were met.  

(iv)    Upon the occurrence of a Change in Control, all unvested Restricted Stock Units shall immediately vest, unless the Award is either assumed or an equitable substitution is made therefor. In addition, if the Grantee’s employment with or service to the Company and any Subsidiary thereof is terminated other than for Cause within 24 months following a Change in Control, all outstanding unvested Restricted Stock Units shall immediately vest.  

(f)   Taxes In Connection With the Grant or Vesting of the Award.  

(i)    Pursuant to Section 14 of the Plan, the Company (or Subsidiary or affiliate, as the case may be) has the right to require the Grantee to remit to the Company (or Subsidiary or affiliate, as the case may be) in cash an amount sufficient to satisfy Grantee’s income tax, social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”) related to the Award.  Regardless of any action the Company (or Subsidiary or affiliate) takes with respect to any or all Tax-Related Items, the Grantee has the ultimate liability for all Tax-Related Items legally due by the Grantee and remains responsible for payment of same.  The Company or Subsidiary (or affiliate): (1) makes no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant and vesting of the Restricted Stock Unit, and the subsequent sale of Shares acquired pursuant to the Award and the receipt of any dividends or dividend equivalents; and (2) does not commit to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax-Related Items.  

(ii)    In the event that the Company or Subsidiary (or affiliate) is required to withhold any Tax-Related Item as a result of the grant or vesting of the Restricted Stock Units, or subsequent sale of Shares or receipt of dividends or dividend equivalents, the Grantee shall pay or make adequate arrangements satisfactory to the Company and/or the Subsidiary (or affiliate) to satisfy all withholding and payment on account obligations of the Company and/or the Subsidiary (or affiliate). With the approval of the Administrator and if permissible under local law, the Grantee may elect to have the Company withhold from delivery Shares or deliver Shares, in each case, having a value equal to the aggregate required minimum Tax-Related Items withholding to be collected by the Company or any Subsidiary or affiliate thereof. Such Shares shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined. The Grantee agrees to allow the Company and/or the Subsidiary (or affiliate) to withhold all applicable Tax-Related Items legally payable by the Grantee from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Subsidiary (or affiliate) or from the proceeds of the sale of the Shares.  Alternatively, or in addition, with the approval of the Administrator and if permissible under local law, to the extent that Grantee is not able to otherwise pay the Tax-Related Items withholding, the Grantee agrees that, the Company may sell or arrange for the sale of Shares that the Grantee acquires to meet the withholding obligation for Tax-Related Items; and/or withhold Shares, provided that the Company withholds only the amount of Shares necessary to satisfy the minimum withholding amount.  Finally, the Grantee shall pay to the Company or the Subsidiary (or affiliate) any amount of Tax-Related Items that the Company or the Subsidiary (or affiliate) may be required to withhold as a result of the Grantee’s participation in the Plan or the Grantee’s Award that cannot be satisfied by the means previously described.  The Company may refuse to deliver the Shares if the Grantee fails to comply with the Grantee’s obligations in connection with the Tax-Related Items as described in this paragraph.  

3.Adjustments.  The Award and all rights and obligations under the Award Agreement are subject to Section 5 of the Plan.

4.Notice.  Whenever any notice is required or permitted hereunder, such notice shall be in writing and shall be given by personal delivery, facsimile, first class mail, certified or registered with return receipt requested.  Any notice required or permitted to be delivered hereunder shall be deemed to have been duly given on the date that it is personally delivered or, whether actually received or not, on the fifth business day after depositing in the post or 24 hours after transmission by facsimile to the respective parties named below.

                If to the Company: Kinetic Concepts, Inc.

Attn.: Chief Financial Officer

8023 Vantage Drive

San Antonio, TX 78230

U.S.A.

Phone: 1-(210) 255-6494

Fax: 1-(210) 255-6997

If to the Grantee:                [Name of Grantee]

[Address]

______________________

Facsimile:  _____________

Either party may change such party’s address for notices by duly giving notice pursuant hereto.

5.Compliance with Laws.

         (a) Shares (to the extent payable hereunder) shall not be issued pursuant to the Award granted hereunder unless the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the U.S. Securities Act of 1933, as amended, the U.S. Exchange Act and the requirements of any stock exchange upon which the Shares may then be listed, and any applicable local laws, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Company shall be under no obligation to effect the registration pursuant to the U.S. Securities Act of 1933, as amended, of any interests in the Plan or any Shares to be issued hereunder or to effect similar compliance under any state laws.

        (b) All certificates for Shares delivered under the Plan (to the extent applicable) shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the U.S. Securities and Exchange Commission, any stock exchange upon which the Shares may then be listed, and any applicable federal, state or local securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. The Administrator may require, as a condition of the issuance and delivery of certificates evidencing Shares pursuant to the terms hereof, that the recipient of such Shares make such agreements and representations as the Administrator, in its sole discretion, deems necessary or desirable.

6.Protections Against Violations of Agreement.  No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer in trust (voting or other) or other disposition of, or creation of a security interest in or lien on, any of the Shares underlying the Award by any holder thereof in violation of the provisions of the Award Agreement, the Plan or the Articles of Incorporation or the Bylaws of the Company, will be valid, and the Company will not transfer any such Shares on its books nor will any such Shares be entitled to vote, nor will any dividends be paid thereon, unless and until there has been full compliance with such provisions to the satisfaction of the Company.  The foregoing restrictions are in addition to and not in lieu of any other remedies, legal or equitable, available to enforce said provisions.

7.Nature of Award.

(a)   The Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Award Agreement;  

(b)   The grant of the Award is voluntary and occasional and does not create any contractual or other right to receive future grants of Restricted Stock Units, or benefits in lieu of Restricted Stock Units, even if Restricted Stock Units have been granted repeatedly in the past;  

(c)   All decisions with respect to future grants of Restricted Stock Units, if any, will be at the sole discretion of the Company;  

(d)   Participation in the Plan is voluntary;  

(e)   The Award is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to the Company or the Subsidiary (or affiliate), and which is outside the scope of the Grantee’s employment contract, if any;  

(f)   The Award is not a part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;  

(g)   In consideration of the grant of the Award, no claim or entitlement to compensation or damages shall arise from termination of the Award or diminution in value of the Award resulting from termination of the Grantee’s active employment by the Company or the Subsidiary (or affiliate) (for any reason whatsoever and whether or not in breach of local labor laws) and the Grantee shall release the Company and the Subsidiary (or affiliate) from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Award Agreement, the Grantee shall be deemed irrevocably to have waived the Grantee’s entitlement to pursue such claim; and  

(h)   Notwithstanding any terms or conditions of the Plan to the contrary, in the event of involuntary termination of the Grantee’s employment (whether or not in breach of local labor laws), the Grantee’s right to receive the Award and vest in Restricted Stock Units under the Plan, if any, will terminate effective as of the date that the Grantee is no longer actively employed and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of “garden leave” or similar period pursuant to local law); furthermore, in the event of involuntary termination of employment (whether or not in breach of local labor laws), the Grantee’s right to vest in Restricted Stock Unit after termination of employment, if any, will be measured by the date of termination of the Grantee’s active employment and will not be extended by any notice period mandated under local law.  

8.Data Privacy:  The Grantee explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Grantee’s personal data as described in this document by and among, as applicable, the Company and the Subsidiary and affiliates for the exclusive purpose of implementing, administering and managing the Grantee’s participation in the Plan.

The Grantee hereby understands that the Company and the Subsidiary (or affiliates) hold certain personal information about the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”).  The Grantee hereby understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Grantee’s country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Grantee’s country.  The Grantee hereby understands that the Grantee may request a list with the names and addresses of any potential recipients of the Data by contacting the Grantee’s local human resources representative.  The Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Grantee may elect to deposit any Shares acquired upon vesting of the Award.  The Grantee hereby understands that Data will be held only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan.  The Grantee hereby understands that the Grantee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Grantee’s local human resources representative.  The Grantee hereby understands, however, that refusing or withdrawing the Grantee’s consent may affect the Grantee’s ability to participate in the Plan.  For more information on the consequences of the Grantee’s refusal to consent or withdrawal of consent, the Grantee hereby understands that the Grantee may contact the appropriate human resources representative responsible for Grantee’s country at the local or regional level.

9.Failure to Enforce Not a Waiver.  The failure of the Company to enforce at any time any provision of the Award Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

10.Governing Law.  The Award Agreement shall be governed by and construed according to the laws of the State of Texas without regard to its principles of conflict of laws.  For purposes of litigating any dispute that arises under this Award or Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Texas, agree that such litigation shall be conducted in the courts of San Antonio, Texas, or the federal courts for the United States for the Western District of Texas, and no other courts, where this Award grant is made and/or performed.

11.Incorporation of the Plan.  The Plan, as it exists on the date of the Award Agreement and as amended from time to time, is hereby incorporated by reference and made a part hereof, and the Award and the Award Agreement shall be subject to all terms and conditions of the Plan.  In the event of any conflict between the provisions of the Award Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise.  The term “Section” generally refers to provisions within the Plan (except where denoted otherwise); provided, however, the term “Paragraph” shall refer to a provision of the Award Agreement.

12.Amendments.  The Award Agreement may be amended or modified at any time, but only by an instrument in writing signed by each of the parties hereto.

13.Agreement Not a Contract of Employment.  Neither the Plan, the granting of the Award, the Award Agreement nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Grantee has a right to continue to be employed by, or to provide services as a director, consultant or advisor to, the Company, any Subsidiary or affiliate thereof for any period of time or at any specific rate of compensation.

14.Authority of the Administrator.  The Administrator shall have full authority to interpret and construe the terms of the Plan and the Award Agreement.  The Administrator shall have the exclusive discretion to determine where the Grantee is no longer actively employed for purposes of the Award.  The determination of the Administrator as to any such matter of interpretation or construction shall be final, binding and conclusive.

15.Binding Effect.  The Award Agreement shall apply to and bind the Grantee and the Company and their respective permitted assignees or transferees, heirs, legatees, executors, administrators and legal successors.

16.Tax Representation.  The Grantee has reviewed with his or her own tax advisors the federal, state, local and worldwide tax consequences of the transactions contemplated by the Award Agreement.  The Grantee is relying solely on such advisors and not on any statement or representations of the Company or any of its agents.  The Grantee understands that he or she (and not the Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by the Award Agreement.

17.Language.  If the Grantee has received this or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.

18.Electronic Delivery.  The Company may, in its sole discretion, decide to deliver any documents related to the Award granted under and participation in the Plan or future awards that may be granted under the Plan by electronic means or to request the Grantee’s consent to participate in the Plan by electronic means.  The Grantee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

19.Acceptance.  The Grantee hereby acknowledges receipt of a copy of the Plan and the Award Agreement.  Grantee has read and understands the terms and provisions thereof, and accepts the Award subject to all the terms and conditions of the Plan and the Award Agreement.

20.Severability.  The provisions of this Award Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

Special Notice for Canadian Grantees:  You understand and agree that by accepting this Award, the benefit you will receive upon the vesting of the Restricted Stock Unit will be settled in Shares only, and not in cash, not withstanding the terms of paragraph 2(d) above.

Special Notice for Italian Grantees:  You understand and agree that by accepting this Award, the benefit you will receive upon the vesting of the Restricted Stock Unit will be settled in cash only, and not in Shares, notwithstanding the terms of paragraph 2(d) above.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have executed and delivered the Award Agreement on the day and year first above written.

KINETIC CONCEPTS, INC.

By:

Name:

Title:

GRANTEE

Signature:

Name:

Address:

Telephone:

Social Security No.:

DATE OF GRANT NUMBER OF RESTRICTED STOCK UNITS

EX-10.38

Exhibit 10.38

Option Number:                                             

Optionee Name:                                             

KINETIC CONCEPTS, INC.

2004 EQUITY PLAN

NONQUALIFIED STOCK OPTION AGREEMENT

THIS AGREEMENT (the “Option Agreement”) is made and entered into as of _______________, 200__ (the “Date of Grant”), by and between Kinetic Concepts, Inc., a Texas corporation (the “Company”), and [_________________________] (the “Optionee”).  Capitalized terms not defined herein shall have the meaning ascribed to them in the Company’s 2004 Equity Plan (the “Plan”).  Where the context permits, references to the Company or any of its Subsidiaries or affiliates shall include the successors to the foregoing.

Pursuant to the Plan, the Administrator has determined that the Optionee is to be granted an option (the “Option”) to purchase Shares, subject to the terms and conditions set forth in the Plan and herein, and hereby grants such Option.

1.Number of Shares and Exercise Price.  The Option entitles the Optionee to purchase [_______] Shares (the “Option Shares”) at a price of $[______] per share (the “Option Exercise Price”).

2.Option Term.  The term of the Option and of the Option Agreement (the “Option Term”) shall commence on the Date of Grant and, unless the Option is previously terminated pursuant to Paragraph 5 below, shall terminate upon the expiration of ten (10) years from the Date of Grant (the “Expiration Date”).  As of the Expiration Date, all rights of the Optionee hereunder shall terminate.

3.Conditions of Exercise.

(a)   Subject to Paragraph 5 below, the Option shall become vested and exercisable as to 25% of the Option Shares on the first anniversary of the Date of Grant, and as to an additional 25% of the Option Shares on each of the three succeeding anniversaries of Date of Grant, provided that the Optionee has been continuously employed by or providing services to the Company or any Subsidiary or affiliate through each such date.  

(b)   Except as otherwise provided herein, the right of the Optionee to purchase Option Shares with respect to which the Option has become exercisable and vested may be exercised in whole or in part at any time or from time to time prior to the Expiration Date; provided, however, that the Option may not be exercised for a fraction of a Share.  

4.Method of Exercise.  This Option may be exercised, in whole or in part, by means of any online broker-assisted exercise procedure approved by the Administrator, or by delivery of a written notice of exercise to the Company in such form as may be approved by the Administrator from time to time and which may be obtained from the Company’s Equity Accounting and Administration department, accompanied by payment in full of the aggregate Option Exercise Price which may be made (i) in cash or by check, (ii) to the extent permitted by applicable law, by means of any cash or cashless exercise procedure through the use of a brokerage arrangement approved by the Administrator, (iii) in the form of unrestricted Shares already owned by the Optionee for at least six months on the date of surrenderto the extent the unrestricted Shares have a Fair Market Value on the date of surrender equal to the aggregate Option Exercise Price of the Shares as to which such Option shall be exercised, or (iv) any combination of the foregoing.

5.Effect of Conduct Constituting Cause; Termination of Employment or Service; or Change in Control.

(a)   If at any time (whether before or after termination of employment or service) the Administrator determines that the Optionee has engaged in conduct that would constitute Cause, the Administrator may provide for the immediate forfeiture of the Option (including any securities, cash or other property issued upon exercise or other settlement of the Option), whether or not vested.  Any such determination by the Administrator shall be final, conclusive and binding on all persons.  

(b)   If the Optionee’s employment with or service to the Company, any Subsidiary or affiliate thereof terminates for any reason other than for Cause, death or Disability, the Option, to the extent vested and exercisable as of the date of such termination, shall expire 30 days following the date of such termination and the Option, to the extent not vested and exercisable as of the date of such termination, shall expire as of such date.  

(c)   If the Optionee’s employment with or service to the Company, any Subsidiary or any affiliate thereof terminates by reason of the Optionee’s death or Disability, any portion of the Option that is outstanding at such time shall become fully and immediately vested and exercisable, and shall expire 180 days following the date of such termination.  The Option shall not be exercisable after the Expiration Date.  

(d)   Notwithstanding the foregoing, if the Optionee’s employment with or service to the Company, any Subsidiary or affiliate thereof terminates for Cause, the Option, whether or not vested or exercisable, shall expire as of the date of such termination.  The Option shall not be exercisable after the Expiration Date.  

(e)   Upon the occurrence of a Change in Control, any portion of the Option that is outstanding at such time shall become fully and immediately vested and exercisable, unless the Option is either assumed or an equitable substitution is made therefore.  In addition, if the Optionee’s employment with or service to the Company, any Subsidiary or affiliate thereof is terminated other than for Cause within 24 months following a Change in Control, any portion of the Option that is outstanding at such time shall become fully and immediately vested and exercisable.  

6.Adjustments.  The Option and all rights and obligations under this Option Agreement are subject to Section 5 of the Plan.

7.Nontransferability of Option.  Except by will or under the laws of descent and distribution and as set forth in the following two sentences, the Optionee may not sell, transfer, pledge or assign the Option, and, during the lifetime of the Optionee, only the Optionee may exercise the Option.  Notwithstanding the foregoing, during the Optionee’s lifetime, the Administrator may, in its sole discretion, permit the transfer, assignment or other encumbrance of the Option.  Additionally, subject to the approval of the Administrator and to any conditions that the Administrator may prescribe, the Optionee may, upon providing written notice to the Company, elect to transfer the Option (i) to members of his or her Immediate Family, provided that no such transfer may be made in exchange for consideration, (ii) by instrument to an inter vivos or testamentary trust in which the Option is to be passed to beneficiaries upon the death of the Optionee, or (iii) pursuant to a qualified domestic relations order within the meaning of Section 414(p) of the Code or any similar instrument, to the extent permitted by applicable law.  Any attempted sale, transfer, pledge, assignment, encumbrance or other disposition of the Option contrary to the provisions hereof shall be null and void and without effect.

8.Notice.  Whenever any notice is required or permitted hereunder, such notice shall be in writing and shall be given by personal delivery, facsimile, first class mail, certified or registered with return receipt requested.  Any notice required or permitted to be delivered hereunder shall be deemed to have been duly given on the date which it is personally delivered or, whether actually received or not, on the third business day after mailing or 24 hours after transmission by facsimile to the respective parties named below.

                If to the Company: Kinetic Concepts, Inc.

Attn.: Chief Financial Officer

8023 Vantage Drive

San Antonio, TX 78230

Phone: (210) 255-6494

Fax: (210) 255-6997

If to the Optionee:              [Name of Optionee]

[Address]

______________________

Facsimile: _____________

Either party may change such party’s address for notices by duly giving notice pursuant hereto.

9.Withholding Requirements.  Pursuant to Section 14 of the Plan, the Company (or Subsidiary or affiliate, as the case may be) has the right to require the Optionee to remit to the Company (or Subsidiary or affiliate, as the case may be) in cash an amount sufficient to satisfy any federal, state and local tax withholding requirements related to the exercise of the Option.  With the approval of the Administrator, the Optionee may satisfy the foregoing requirement by electing to have the Company withhold from delivery Shares or by delivering Shares, in each case, having a value equal to the aggregate required minimum tax withholding to be collected by the Company or any Subsidiary or affiliate thereof.  Such Shares shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined. Fractional share amounts shall be settled in cash.

10.Compliance with Laws.

        (a) Shares shall not be issued pursuant to the exercise of the Option granted hereunder unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Company shall be under no obligation to effect the registration pursuant to the Securities Act of 1933, as amended, of any interests in the Plan or any Shares to be issued hereunder or to effect similar compliance under any state laws.

        (b) All certificates for Shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares may then be listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. The Administrator may require, as a condition of the issuance and delivery of certificates evidencing Shares pursuant to the terms hereof, that the recipient of such Shares make such agreements and representations as the Administrator, in its sole discretion, deems necessary or desirable.

11.Protections Against Violations of Agreement.  No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer in trust (voting or other) or other disposition of, or creation of a security interest in or lien on, any of the Option Shares by any holder thereof in violation of the provisions of this Option Agreement or the Articles of Incorporation or the Bylaws of the Company, will be valid, and the Company will not transfer any of such Option Shares on its books nor will any of such Option Shares be entitled to vote, nor will any dividends be paid thereon, unless and until there has been full compliance with such provisions to the satisfaction of the Company.  The foregoing restrictions are in addition to and not in lieu of any other remedies, legal or equitable, available to enforce said provisions.

12.Failure to Enforce Not a Waiver.  The failure of the Company to enforce at any time any provision of the Option Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

13.Governing Law.  The Option Agreement shall be governed by and construed according to the laws of the State of Texas without regard to its principles of conflict of laws.

14.Incorporation of the Plan.  The Plan, as it exists on the date of the Option Agreement and as amended from time to time, is hereby incorporated by reference and made a part hereof, and the Option and this Option Agreement shall be subject to all terms and conditions of the Plan.  In the event of any conflict between the provisions of the Option Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise.  The term “Section” generally refers to provisions within the Plan; provided, however, the term “Paragraph” shall refer to a provision of this Option Agreement.

15.Amendments.  This Option Agreement may be amended or modified at any time, but only by an instrument in writing signed by each of the parties hereto.

16.Rights as a Shareholder.  Neither the Optionee nor any of the Optionee’s successors in interest shall have any rights as a shareholder of the Company with respect to any Option Shares until the Optionee has given written notice of exercise, has paid in full for such Shares, and has satisfied the requirements in Section 14 and 15(b) of the Plan.

17.Agreement Not a Contract of Employment.  Neither the Plan, the granting of the Option, the Option Agreement nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Optionee has a right to continue to be employed by, or to provide services as a director, consultant or advisor to, the Company, any Subsidiary or affiliate thereof for any period of time or at any specific rate of compensation.

18.Authority of the Administrator.  The Administrator shall have full authority to interpret and construe the terms of the Plan and the Option Agreement.  The determination of the Administrator as to any such matter of interpretation or construction shall be final, binding and conclusive.

19.Binding Effect.  The Option Agreement shall apply to and bind the Optionee and the Company and their respective permitted assignees or transferees, heirs, legatees, executors, administrators and legal successors.

20.Tax Representation.  The Optionee has reviewed with his or her own tax advisors the Federal, state, local and foreign tax consequences of the transactions contemplated by this Option Agreement.  The Optionee is relying solely on such advisors and not on any statement or representations of the Company or any of its agents.  The Optionee understands that he or she (and not the Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by the Option Agreement.

21.Acceptance.  The Optionee hereby acknowledges receipt of a copy of the Plan and this Option Agreement.  Optionee has read and understands the terms and provisions thereof, and accepts the Option subject to all the terms and conditions of the Plan and the Option Agreement.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have executed and delivered the Option Agreement on the day and year first above written.

KINETIC CONCEPTS, INC.

By:

Name:

Title:

OPTIONEE

Signature:

Name:

Address:

Telephone:

Social Security No.:

DATE OF GRANT NUMBER OF SHARES SUBJECT TO OPTION OPTION EXERCISE PRICE EXPIRATION DATE

EX-10.39

Exhibit 10.39

Award Number:                                                 

Grantee Name:                                                 

KINETIC CONCEPTS, INC.

2004 EQUITY PLAN

RESTRICTED STOCK AWARD AGREEMENT

THIS RESTRICTED STOCK AWARD AGREEMENT (the “Award Agreement”) is made and entered into as of _______________, 200__ (the “Date of Grant”), by and between Kinetic Concepts, Inc., a Texas corporation (the “Company”), and [_________________________] (the “Grantee”).  Capitalized terms not defined herein shall have the meaning ascribed to them in the Company’s 2004 Equity Plan (the “Plan”).  Where the context permits, references to the Company or any of its Subsidiaries or affiliates shall include the successors to the foregoing.

Pursuant to the Plan, the Administrator has determined that the Grantee is to be granted Restricted Stock, subject to the terms and conditions set forth in the Plan and herein, and hereby grants such Restricted Stock.

1.Grant of Restricted Stock.  The Company hereby grants to the Grantee [_______] shares of Restricted Stock (the "Award") on the terms and conditions set forth in this Award Agreement and as otherwise provided in the Plan.

2.Terms and Conditions of Award.  The Award shall be subject to the following terms, conditions and restrictions:

(a)   Restrictions.  Restricted Stock and any interest therein, may not be sold, transferred, pledged, hypothecated, assigned or otherwise disposed of, except by will or the laws of descent and distribution, during the Restricted Period.  Any attempt to dispose of any Restricted Stock in contravention of any such restrictions (the "Restrictions") shall be null and void and without effect.  

(b)   Certificate; Restrictive Legend.  The Grantee agrees that any certificate issued for Restricted Stock prior to the lapse of any outstanding restrictions relating thereto shall be inscribed with the following legend:  

THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS, INCLUDING FORFEITURE PROVISIONS AND RESTRICTIONS AGAINST TRANSFER (THE "RESTRICTIONS"), CONTAINED IN THE KINETIC CONCEPTS, INC. 2004 EQUITY PLAN AND THE RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND THE COMPANY.  ANY ATTEMPT TO DISPOSE OF THESE SHARES IN CONTRAVENTION OF THE RESTRICTIONS, INCLUDING BY WAY OF SALE, ASSIGNMENT, TRANSFER, PLEDGE, HYPOTHECATION OR OTHERWISE, SHALL BE NULL AND VOID AND WITHOUT EFFECT.

(c)   Rights as a Shareholder.  Subject to the restrictions set forth in the Plan and this Award Agreement, including the Restrictions set forth in Paragraphs 2(a) and 2(d), during the Restricted Period, the Grantee shall possess all incidents of ownership with respect to the Restricted Stock granted hereunder, including the right to receive dividends with respect to such Restricted Stock (provided however, that any dividends paid in property other than cash shall be subject to the same restrictions that apply to the underlying Restricted Stock) and the right to vote such Restricted Stock.  

(d)   Lapse of Restrictions.  Except as may otherwise be provided herein, the Restrictions on transfer set forth in Paragraph 2(a) shall lapse subject to the terms and conditions and in the manner set forth in Appendix A attached hereto.  

Promptly after each lapse of Restrictions relating to the Restricted Stock without forfeiture, and provided that the Grantee shall have complied with his or her obligations under Paragraph 2(f) hereof, the Company shall issue to the Grantee or the Grantee's personal representative a stock certificate representing a number of Shares, free of the restrictive legend described in Paragraph 2(b), equal to the number of Shares of Restricted Stock with respect to which such restrictions have lapsed.  If certificates representing such Restricted Stock shall have theretofore been delivered to the Grantee, such certificates shall be returned to the Company, complete with any necessary signatures or instruments of transfer prior to the issuance by the Company of such unlegended Shares.

(e)   Effect of Conduct Constituting Cause; Termination of Employment or Service; or Change in Control.  

(i)   If at any time (whether before or after termination of employment or service) the Administrator determines that the Grantee has engaged in conduct that would constitute Cause for termination, the Administrator may provide for the immediate forfeiture of the Award (including any securities, cash or other property issued upon settlement of the Award), whether or not the Restrictions on the Shares of Restricted Stock have lapsed.  Any such determination by the Administrator shall be final, conclusive and binding on all persons.  

(ii)   If the Grantee’s employment with or service to the Company, any Subsidiary or affiliate thereof terminates for any reason, other than by reason of the Grantee’s death or Disability, during the Restricted Period, the Grantee shall immediately forfeit any rights to the Shares of Restricted Stock with respect to which the Restrictions have not lapsed and shall have no further rights thereto.  

(iii)   If the Grantee’s employment with or service to the Company, any Subsidiary or affiliate thereof terminates by reason of Grantee’s death or Disability during the Restricted Period, with respect to Restrictions that lapse based on the passage on time, the Restrictions on all outstanding Restricted Stock with respect to which the Restrictions have not lapsed shall immediately lapse and, with respect to Restrictions that lapse based on attainment of specified performance conditions, the Restrictions on all outstanding Restricted Stock with respect to which the Restrictions have not lapsed shall immediately lapse as if the target performance goals were met.  

(iv) Upon the occurrence of a Change in Control, Restrictions on all outstanding Restricted Stock shall immediately lapse, unless the Award is either assumed or an equitable substitution is made therefore. In addition, if the Grantee’s employment with or service to the Company, any Subsidiary or affiliate thereof is terminated other than for Cause within 24 months following a Change in Control, Restrictions on all outstanding Restricted Stock with respect to which the Restrictions have not lapsed shall immediately lapse.  

(f)   Taxes.  Pursuant to Section 14 of the Plan, the Company (or Subsidiary or affiliate, as the case may be) has the right to require the Grantee to remit to the Company (or Subsidiary or affiliate, as the case may be) in cash an amount sufficient to satisfy any federal, state and local tax withholding requirements related to the Award.  With the approval of the Administrator, the Grantee may satisfy the foregoing requirement by electing to have the Company withhold from delivery Shares or by delivering Shares, in each case, having a value equal to the aggregate required minimum tax withholding to be collected by the Company or any Subsidiary or affiliate thereof.  Such Shares shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined. Fractional share amounts shall be settled in cash.  

The Grantee shall promptly notify the Company of any election made pursuant to Section 83(b) of the Code.

3.Adjustments.  The Award and all rights and obligations under this Award Agreement are subject to Section 5 of the Plan.

4.Notice.  Whenever any notice is required or permitted hereunder, such notice shall be in writing and shall be given by personal delivery, facsimile, first class mail, certified or registered with return receipt requested.  Any notice required or permitted to be delivered hereunder shall be deemed to have been duly given on the date which it is personally delivered or, whether actually received or not, on the third business day after mailing or 24 hours after transmission by facsimile to the respective parties named below.

                If to the Company: Kinetic Concepts, Inc.

Attn.: Chief Financial Officer

8023 Vantage Drive

San Antonio, TX 78230

Phone: (210) 255-6494

Fax: (210) 255-6997

If to the Grantee:                [Name of Grantee]

[Address]

______________________

Facsimile: _____________

Either party may change such party’s address for notices by duly giving notice pursuant hereto.

5.Compliance with Laws.

       (a)Shares shall not be issued pursuant to the Award granted hereunder unless the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.  The Company shall be under no obligation to effect the registration pursuant to the Securities Act of 1933, as amended, of any interests in the Plan or any Shares to be issued hereunder or to effect similar compliance under any state laws.

       (b)All certificates for Shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares may then be listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions.  The Administrator may require, as a condition of the issuance and delivery of certificates evidencing Shares pursuant to the terms hereof, that the recipient of such Shares make such agreements and representations as the Administrator, in its sole discretion, deems necessary or desirable.

6.Protections Against Violations of Agreement.  No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer in trust (voting or other) or other disposition of, or creation of a security interest in or lien on, any of the Shares underlying the Award by any holder thereof in violation of the provisions of this Award Agreement, the Plan or the Articles of Incorporation or the Bylaws of the Company, will be valid, and the Company will not transfer any such Shares on its books nor will any such Shares be entitled to vote, nor will any dividends be paid thereon, unless and until there has been full compliance with such provisions to the satisfaction of the Company.  The foregoing restrictions are in addition to and not in lieu of any other remedies, legal or equitable, available to enforce said provisions.

7.Failure to Enforce Not a Waiver.  The failure of the Company to enforce at any time any provision of the Award Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

8.Governing Law.  The Award Agreement shall be governed by and construed according to the laws of the State of Texas without regard to its principles of conflict of laws.

9.Incorporation of the Plan.  The Plan, as it exists on the date of the Award Agreement and as amended from time to time, is hereby incorporated by reference and made a part hereof, and the Award and this Award Agreement shall be subject to all terms and conditions of the Plan.  In the event of any conflict between the provisions of the Award Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise.  The term “Section” generally refers to provisions within the Plan (except where denoted otherwise) and the term “Paragraph” shall refer to a provision of this Award Agreement.

10.Amendments.  This Award Agreement may be amended or modified at any time, but only by an instrument in writing signed by each of the parties hereto.

11.Agreement Not a Contract of Employment.  Neither the Plan, the granting of the Award, the Award Agreement nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Grantee has a right to continue to be employed by, or to provide services as a director, consultant or advisor to, the Company, any Subsidiary or affiliate thereof for any period of time or at any specific rate of compensation.

12.Authority of the Administrator.  The Administrator shall have full authority to interpret and construe the terms of the Plan and the Award Agreement.  The determination of the Administrator as to any such matter of interpretation or construction shall be final, binding and conclusive.

13.Binding Effect.  The Award Agreement shall apply to and bind the Grantee and the Company and their respective permitted assignees or transferees, heirs, legatees, executors, administrators and legal successors.

14.Tax Representation.  The Grantee has reviewed with his or her own tax advisors the federal, state, local and foreign tax consequences of the transactions contemplated by this Award Agreement.  The Grantee is relying solely on such advisors and not on any statement or representations of the Company or any of its agents.  The Grantee understands that he or she (and not the Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by the Award Agreement.

15.Acceptance.  The Grantee hereby acknowledges receipt of a copy of the Plan and this Award Agreement.  Grantee has read and understands the terms and provisions thereof, and accepts the Award subject to all the terms and conditions of the Plan and the Award Agreement.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have executed and delivered the Award Agreement on the day and year first above written.

KINETIC CONCEPTS, INC.

By:

Name:

Title:

GRANTEE

Signature:

Name:

Address:

Telephone:

Social Security No.:

DATE OF GRANT NUMBER OF SHARES OF RESTRICTED STOCK

SEE APPENDIX A FOR SCHEDULE OF LAPSE OF RESTRICTIONS.

EX-21.1

Exhibit 21.1 
KINETIC CONCEPTS, INC. 
LISTING OF SUBSIDIARIES 
Subsidiaries of Registrant 
      
State or Other Jurisdiction of Incorporation or Organization 
      
      
KCI Medical Australia PTY, Ltd. 
      
Australia 
      
      
KCI Austria GmbH 
      
Austria 
      
      
Biomonde Holdings BVBA 
      
Belgium 
      
      
KCI Medical Belgium BVBA 
      
Belgium 
      
      
Polymedics BVBA 
      
Belgium 
      
      
KCI (Bermuda) Holding Ltd. 
      
Bermuda 
      
      
Equi-Tron Manufacturing, Inc. 
      
Canada 
      
      
KCI Equitron, Inc. 
      
Canada 
      
      
KCI Medical Canada, Inc. 
      
Canada 
      
      
European Medical Distributors LP 
      
Cayman Islands 
      
      
International Medical Distributors LP 
      
Cayman Islands 
      
      
KCI APAC Holdings Ltd 
      
Cayman Islands 
      
      
KCI International V.O.F. GP 
      
Cayman Islands 
      
      
KCI Medical Holdings Unlimited 
      
Cayman Islands 
      
      
KCI MS Unlimited 
      
Cayman Islands 
      
      
KCI Holding Co., Inc. 
      
Delaware 
      
      
KCI International Holdings Company, Inc. 
      
Delaware 
      
      
KCI International, Inc. 
      
Delaware 
      
      
KCI Licensing, Inc. 
      
Delaware 
      
      
KCI Real Holdings, L.L.C. 
      
Delaware 
      
      
KCI USA, Inc. 
      
Delaware 
      
      
KCI USA Real Holdings, L.L.C. 
      
Delaware 
      
      
KCII Holdings, L.L.C. 
      
Delaware 
      
      
KCI Medical ApS 
      
Denmark 
      
      
Laboratoire KCI Médical 
      
France 
      
      
KCI Medical Holdings GmbH 
      
Germany 
      
      
KCI Medizinprodukte GmbH 
      
Germany 
      
      
KCI Manufacturing 
      
Ireland 
      
      
KCI Medical Limited 
      
Ireland 
      
      
KCI Medical Resources 
      
Ireland 
      
      
KCI Medical S.r.l. 
      
Italy 
      
      
KCI KK 
      
Japan 
      
      
Medical Holdings Limited 
      
Malta 
      
      
KCI Europe Holding B.V. 
      
Netherlands 
      
      
KCI Medical B.V. 
      
Netherlands 
      
      
KCI New Zealand Unlimited 
      
New Zealand 
      
      
KCI Norway AS 
      
Norway 
      
      
KCI Medical Puerto Rico, Inc. 
      
Puerto Rico 
      
      
KCI Medical Asia Pte. Ltd. 
      
Singapore 
      
      
KCI Medical South Africa Pty, Ltd. 
      
South Africa 
      
      
KCI Clinic Spain S.L. 
      
Spain 
      
      
KCI Medical A.B. 
      
Sweden 
      
      
KCI Medical GmbH 
      
Switzerland 
      
      
KCI Properties Ltd 
      
Texas 
      
      
KCI Real Properties Ltd 
      
Texas 
      
      
KCI Medical Limited 
      
United Kingdom 
      
      
KCI Medical Products (UK) Ltd 
      
United Kingdom 
      
      
KCI Medical UK Ltd 
      
United Kingdom 
      
      
KCI United Kingdom Holdings, Ltd. 
      
United Kingdom 
      
      

      
      


    

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

     We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-114010 and 333-115254) pertaining to the 2004 Equity Plan, the 2004 Employee Stock Purchase Plan, the 1997 Management Equity Plan and the 2003 Non-Employee Directors Stock Plan of Kinetic Concepts, Inc. of our reports dated February 22, 2008, with respect to the consolidated financial statements and schedule of Kinetic Concepts, Inc. and subsidiaries, Kinetic Concepts, Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Kinetic Concepts, Inc., included in the Annual Report (Form 10-K) for the year ended December 31, 2007.

/s/ ERNST & YOUNG LLP

   ERNST & YOUNG LLP

San Antonio, Texas

February 22, 2008

EX-31.1

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

(PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

I, Catherine M. Burzik, certify that:

1.   I have reviewed this Annual Report on Form 10-K of Kinetic Concepts, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

   (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

   (c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   (d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

   (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

   (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:       February 26, 2008

                                                                                             /s/ Catherine M. Burzik                       

                                                                                            Catherine M. Burzik

                                                                                            President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

(PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

I, Martin J. Landon, certify that:

1.   I have reviewed this Annual Report on Form 10-K of Kinetic Concepts, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

   (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

   (c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   (d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

   (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

   (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   February 26, 2008

                                                                                             /s/ Martin J. Landon                                              

                                                                                            Martin J. Landon

                                                                                            Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND

CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Kinetic Concepts, Inc. (the "Company") on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Catherine M. Burzik, as Chief Executive Officer of the Company, and Martin J. Landon, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of their knowledge, respectively, that (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 26, 2008

 /s/ Catherine M. Burzik                                        

Catherine M. Burzik

President and Chief Executive Officer

 /s/ Martin J. Landon                                             

Martin J. Landon

Senior Vice President and Chief Financial Officer