UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended ~~June~~September 30, 2011 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

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	X		Accelerated filer

Non-accelerated filer		(Do not check if a smaller reporting company)	Smaller reporting company

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

Yes ____ No X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock: 73,~~067~~089,~~017~~156 shares as of ~~August~~October 228, 2011

TABLE OF CONTENTS

KINETIC CONCEPTS, INC.

			Page No.
PART I.	FINANCIAL INFORMATION		4
	Item 1.	Financial Statements	4
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Earnings	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2223
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
	Item 4.	Controls and Procedures	3738
PART II.	OTHER INFORMATION		3839
	Item 1.	Legal Proceedings	3839
	Item 1A.	Risk Factors	4142
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4546
	Item 6.	Exhibits	4647
	SIGNATURES		4748

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 those terms and other variations of them or by comparable terminology.

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” in this Quarterly Report on Form 10-Q, ~~and in~~ our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011 and June 30, 2011, 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.

TRADEMARKS

3M™ Tegaderm™ is a licensed trademark of 3M Company; Spirit Select™ is a licensed trademark of Carroll Hospital Group, Inc.; GRAFTJACKET® is a licensed trademark of Wright Medical Technology Inc.; and Novadaq® and SPY® are licensed trademarks of Novadaq Technologies, Inc. Unless otherwise indicated, all other trademarks appearing in this report are proprietary to KCI Licensing, Inc. or LifeCell Corporation, their affiliates and/or licensors. The absence of a trademark or service mark or logo from this report does not constitute a waiver of trademark or other intellectual property rights of KCI Licensing, Inc. or LifeCell Corporation, their affiliates and/or licensors.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
	June 30,		December 31,
	September 30,		December 31,
	2011		2010
	(unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	~~498~~656,~~424~~793	$	316,603
Accounts receivable, net		~~411~~404,~~095~~004		414,083
Inventories, net		~~168~~160,~~647~~833		172,552
Deferred income taxes		2928,~~065~~140		30,112
Prepaid expenses and other		4731,~~738~~651		34,199
Total current assets		1,~~154~~281,~~969~~421		967,549
Net property, plant and equipment		299,~~332~~037		271,063
Debt issuance costs, net		3029,~~691~~769		22,622
Deferred income taxes		20,~~597~~643		17,151
Goodwill		1,328,881		1,328,881
Identifiable intangible assets, net		~~443~~432,~~922~~388		453,802
Other non-current assets		15,~~537~~551		14,931
	$	3,~~293~~407,~~929~~690	$	3,075,999
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable	$	5138,~~227~~171	$	60,137
Accrued expenses and other		~~241~~259,~~628~~025		225,524
Current installments of long-term debt		27,500		169,500
Total current liabilities		320,355		455,161
Income taxes payable		24,295		-
Long-term debt, net of current installments and discount		1,097,486		935,290
Total current liabilities		348,991		455,161
Non-current tax liabilities		37,395		35,588
Long-term debt, net of current installments and discount		1,096,416		935,290
Deferred income taxes		140,996		163,386
Non-current tax liabilities		38,007		35,588
Other non-current liabilities		2,650		3,495
Deferred income taxes		137,909		163,386
Total liabilities		1,598,882		1,592,920
Other non-current liabilities		2,185		3,495
Total liabilities		1,623,508		1,592,920
Shareholders' equity:
Common stock; authorized 225,000 at 2011 and 2010; issued and outstanding 72,928 at 2011 and 71,996 at 2010		73		72
Common stock; authorized 225,000 at 2011 and 2010; issued and outstanding 73,081 at 2011 and 71,996 at 2010		73		72
Preferred stock; authorized 50,000 at 2011 and 2010; issued and outstanding 0 at 2011 and 2010		-		-
Additional paid-in capital		~~904~~919,~~845~~190		852,152
Retained earnings		~~763~~854,~~277~~003		613,434
Accumulated other comprehensive income, net		2610,~~852~~916		17,421
Shareholders' equity		1,~~695~~784,~~047~~182		1,483,079
	$	3,~~293~~407,~~929~~690	$	3,075,999
See accompanying notes to condensed consolidated financial statements.

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(in thousands, except per share data)

(unaudited)

Three months ended

~~Six~~Nine months ended

June 30,

September 30,

2011

2010

2011

2010

Revenue:

Rental

279,~~314~~135

~~283~~288,~~084~~970

~~558~~837,~~014~~149

~~563~~852,~~075~~045

Sales

~~240~~252,~~516~~236

~~214~~217,~~688~~738

~~463~~715,~~000~~236

~~420~~638,~~502~~240

Total revenue

~~519~~531,~~830~~371

~~497~~506,~~772~~708

1,~~021~~552,~~014~~385

~~983~~1,~~577~~490,285

Rental expenses

~~146~~136,~~353~~789

155,~~622~~765

~~296~~433,~~845~~634

~~308~~464,~~841~~606

Cost of sales

6062,~~418~~925

6261,~~307~~551

~~122~~185,~~137~~062

~~123~~184,~~231~~782

Gross profit

~~313~~331,~~059~~657

~~279~~289,~~843~~392

~~602~~933,~~032~~689

~~551~~840,~~505~~897

Selling, general and administrative expenses

~~152,~~155,855

~~147~~139,~~212~~512

~~296~~452,~~522~~377

~~282~~422,~~591~~103

Research and development expenses

23,~~411~~530

2120,~~718~~873

4468,~~594~~124

4667,~~502~~375

Acquired intangible asset amortization

8,~~856~~855

98,~~556~~855

1726,~~712~~567

1928,~~715~~570

Operating earnings

~~128~~143,~~637~~417

~~101~~120,~~357~~152

~~243~~386,~~204~~621

~~202~~322,~~697~~849

Interest income and other

~~267~~297

~~143~~265

~~469~~766

~~279~~544

Interest expense

(17,~~157~~314

)

(2221,~~264~~534

)

(3755,~~997~~311

)

(4567,~~826~~360

)

Foreign currency loss

(206

)

(2,657

)

(25

)

(5,267

)

Foreign currency gain (loss)

(2,117

)

2,148

(2,142

)

(3,119

)

Earnings before income taxes

~~111~~124,~~541~~283

76101,~~579~~031

~~205~~329,~~651~~934

~~151~~252,~~883~~914

Income taxes

3033,~~116~~557

2225,~~974~~258

5589,~~808~~365

4570,~~565~~823

Net earnings

8190,~~425~~726

5375,~~605~~773

~~149~~240,~~843~~569

~~106~~182,~~318~~091

Net earnings per share:

Basic

1.1325

01.7607

23.0934

12.5057

Diluted

1.0916

01.7506

23.0421

12.4854

Weighted average shares outstanding:

Basic

72,~~128~~546

70,~~836~~994

7172,~~748~~017

70,~~678~~784

Diluted

7478,~~882~~411

71,~~805~~695

7374,~~420~~889

71,~~657~~647

See accompanying notes to condensed consolidated financial statements.

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
	Six months ended
	Nine months ended
	June 30,
	September 30,
	2011			2010
Cash flows from operating activities:
Net earnings	$	~~149~~240,~~843~~569		$	~~106~~182,~~318~~091
Adjustments to reconcile net earnings to net cash provided by operating activities:
Amortization of convertible debt discount		1117,~~279~~084			1015,~~443~~818
Depreciation and other amortization		71106,~~685~~333			80119,~~511~~188
Provision for bad debt		58,~~364~~350			47,~~139~~024
Write-off of deferred debt issuance costs		3,218			12,~~928~~301
Share-based compensation expense		1523,~~879~~738			1524,~~434~~173
Deferred income tax benefit		(2124,~~061~~957	)		(2948,~~647~~946	)
Excess tax benefit from share-based payment arrangements		(2,~~082~~393	)		(1,~~392~~426	)
Change in assets and liabilities:
Decrease in accounts receivable, net		31,~~586~~101			3014,~~932~~829
Decrease (increase) in inventories, net		411,~~504~~659			(3653,~~102~~353	)
Increase in prepaid expenses and other		(13,540	)		(4,193	)
Decrease in prepaid expenses and other		2,547			3,927
Decrease in accounts payable		(8,585	)		(632	)
Increase (decrease) in accounts payable		(21,994	)		5,212
Increase (decrease) in accrued expenses and other		1732,~~824~~826			(2018,~~687~~117	)
Increase (decrease) in tax liabilities, net		227,~~088~~118			(189,~~692~~227	)
Decrease in deferred income taxes, net		(32,~~541~~039	)		(~~460~~10,379	)
Net cash provided by operating activities		~~236~~423,~~461~~160			~~137~~233,~~900~~115
Cash flows from investing activities:
Additions to property, plant and equipment		(6689,~~750~~029	)		(4663,~~192~~255	)
Decrease (increase) in inventory to be converted into equipment for short-term rental		(7,~~239~~047	)		79,~~265~~771
Dispositions of property, plant and equipment		~~913~~1,186			1,~~067~~557
Increase in identifiable intangible assets and other non-current assets		(1719,~~364~~093	)		(29,~~091~~632	)
Net cash used by investing activities		(90113,~~440~~983	)		(3961,~~951~~559	)
Cash flows from financing activities:
Repayments of long-term debt, revolving credit facility and capital lease obligations		(13,830	)		(125,054	)
Repayments of long-term debt and capital lease obligations		(20,734	)		(185,059	)
Proceeds from exercise of stock options		3642,~~004~~606			10,~~185~~383
Proceeds from the purchase of stock in ESPP and other		4,107			3,~~451~~452
Excess tax benefit from share-based payment arrangements		2,~~082~~393			1,~~392~~426
Purchase of immature shares for minimum tax withholdings		(3,~~681~~797	)		(1,~~108~~134	)
Payment of debt issuance costs related to KCI’s pending merger		(827	)		-
Refinancing of senior credit facility:
Proceeds from borrowings on refinancing of senior credit facility		146,012			-
Repayments on senior credit facility – due 2013		(123,346	)		-
Payment of debt issuance costs		(14,676	)		-
Net cash provided (used) by financing activities		3231,~~672~~738			(~~111~~170,~~134~~932	)
Effect of exchange rate changes on cash and cash equivalents		~~3,128~~(725	)		(~~2,904~~484	)
Net increase (decrease) in cash and cash equivalents		181,821			(16,089	)
Net increase in cash and cash equivalents		340,190			140
Cash and cash equivalents, beginning of period		316,603			263,157
Cash and cash equivalents, end of period	$	~~498~~656,~~424~~793		$	~~247~~263,~~068~~297
Cash paid for:
Interest, including cash paid under interest rate swap agreements	$	1923,~~613~~752		$	2835,~~215~~894
Income taxes, net of refunds	$	8486,~~913~~265		$	94139,~~306~~728
See accompanying notes to condensed consolidated financial statements.

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. Summary of Significant Accounting Policies

(a) Basis of Presentation

The condensed consolidated financial statements presented herein include the accounts of Kinetic Concepts, Inc., together with its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The consolidated entity is referred to herein as "KCI®." The condensed consolidated financial statements appearing in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and our Quarterly ~~Report~~Reports on Form 10-Q for the quarterly ~~period~~periods ended March 31, 2011 and June 30, 2011.

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP” or “the Codification”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, financial position and cash flows in conformity with GAAP. Operating results from interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of our results for the interim periods presented. Certain prior-period amounts have been reclassified to conform to the 2011 presentation.

We have three reportable operating segments which correspond to our global business units: Active Healing Solutions™ (“AHS”); LifeCell™; and Therapeutic Support Systems (“TSS”). We have three primary geographic regions for which we provide supplemental information: Americas, which is comprised principally of the United States and includes Canada, Puerto Rico and Latin America; EMEA, which is comprised principally of Europe and includes the Middle East and Africa; and APAC, which is comprised of the Asia Pacific region.

On July 12, 2011, we entered into a definitive merger agreement (“Merger Agreement”) under which a consortium of funds advised by Apax Partners (“Apax”), together with controlled affiliates of Canada Pension Plan Investment Board (“CPPIB”) and the Public Sector Pension Investment Board (“PSP Investments”), will acquire KCI (the “Merger”) for $68.50 per share in cash in a transaction currently valued at $6.1 billion, inclusive of KCI’s outstanding debt.

The transaction is subject to certain closing conditions but is not subject to any closing condition with regard to the financing of the transaction.

On October 28, 2011, we held a special meeting of shareholders to approve the Merger Agreement, which requires approval by the affirmative vote of holders of two-thirds of our outstanding shares entitled to vote. Approximately 85.7% of the outstanding shares of our common stock as of the record date were voted at the special meeting. Of the shares that were voted, approximately 99.9% voted in favor of the Merger and 0.05% voted against the Merger. We anticipate the Merger closing in early November 2011 with our subsequent delisting from the New York Stock Exchange.

(b) Income Taxes

We compute our quarterly effective income tax rate based on our annual estimated effective income tax rate plus the impact of any discrete items that occur in the quarter. The effective income tax rate for the ~~second~~third quarter and the first ~~six~~nine months ofended September 30, 2011 was 27.0% and 27.1%, respectively, compared to 3025.0% ~~for the second quarter~~ and ~~the first six months of 2010~~28. ~~The~~0%, ~~lower~~respectively, ~~effective~~for ~~income tax rate in~~ the ~~second~~third quarter and the first ~~six~~nine months of ~~2011 resulted primarily from a higher percentage of taxable income being generated in lower-tax foreign jurisdictions~~2010.

We use derivative financial instruments to manage the economic impact of fluctuations in interest rates. We do not use financial instruments for speculative or trading purposes. Periodically, we enter into interest rate protection agreements to modify the interest characteristics of our outstanding debt. We designated our interest rate swap agreements as cash flow hedge instruments. 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.

We also use derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on our intercompany balances and corresponding cash flows and to manage our transactional currency exposures when our foreign subsidiaries enter into transactions denominated in currencies other than their local currency. We enter into foreign currency exchange contracts to manage these economic risks. These contracts are not designated as hedges; as such, we recognize the fair value of these instruments as an asset or liability with income or expense recognized in the current period. Gains and losses resulting from the foreign currency fluctuations impact on transactional exposures are included in foreign currency loss in our condensed consolidated statements of earnings.

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We also use derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on our intercompany balances and corresponding cash flows and to manage our transactional currency exposures when our foreign subsidiaries enter into transactions denominated in currencies other than their local currency. We enter into foreign currency exchange contracts to manage these economic risks. These contracts are not designated as hedges; as such, we recognize the fair value of these instruments as an asset or liability with income or expense recognized in the current period. Gains and losses resulting from the foreign currency fluctuations impact on transactional exposures are included in foreign currency gain (loss) in our condensed consolidated statements of earnings.

As required, all derivative instruments are recorded on the balance sheet at fair value. The fair values of our interest rate swap agreements and foreign currency exchange contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly-quoted markets, which represent level 2 inputs as defined by the Codification. We estimate the effectiveness of our interest rate swap agreements utilizing the hypothetical derivative method. Under this method, the fair value of the actual interest rate swap agreement is compared to the fair value of a hypothetical swap agreement that has the same critical terms as the portion of the loan being hedged. Changes in the effective portion of the fair value of the remaining interest rate swap agreement are recognized in other comprehensive income, net of tax, until the hedged item is recognized into earnings.

(d) Concentration of Credit Risk

KCI has a concentration of credit risk with financial institutions related to its derivative instruments and the note hedge described in Note 3. As of ~~June~~September 30, 2011, Bank of America and JP Morgan Chase held equity hedges related to our convertible note hedge in notional amounts of approximately $176.5 million each. Bank of America was also the counterparty on some of our interest rate protection agreements and our foreign currency exchange contracts in notional amounts totaling $50.0 million and $24.39 million, respectively. Additionally, JP Morgan Chase was also the counterparty on some of our interest rate protection agreements and our foreign currency exchange contracts in notional amounts totaling $25.0 million and $67.50 million, respectively. We use master netting agreements with our derivative counterparties to reduce our risk and use multiple counterparties to reduce our concentration of credit risk.

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.

(e) Other Significant Accounting Policies

For further information on our significant accounting policies, see Note 1 of the notes to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

NOTE 2. Supplemental Balance Sheet Data

(a) Accounts Receivable, net

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

	June 30,			December 31,
	2011			2010
Gross trade accounts receivable:
Americas:
AHS and TSS	$	307,049		$	341,874
LifeCell		42,501			39,251
Subtotal Americas		349,550			381,125
EMEA		117,272			106,174
APAC		12,825			11,583
Total trade accounts receivable		479,647			498,882
Less: Allowance for revenue adjustments		(69,814	)		(87,035	)
Gross trade accounts receivable		409,833			411,847
Less: Allowance for bad debt		(9,367	)		(9,970	)
Net trade accounts receivable		400,466			401,877
Other receivables		10,629			12,206
	$	411,095		$	414,083

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NOTE 2. Supplemental Balance Sheet Data

(a) Accounts Receivable, net

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

	September 30,			December 31,
	2011			2010
Gross trade accounts receivable:
Americas:
AHS and TSS	$	307,940		$	341,874
LifeCell		42,898			39,251

Subtotal Americas		350,838			381,125

EMEA		111,387			106,174
APAC		13,877			11,583

Total trade accounts receivable		476,102			498,882

Less: Allowance for revenue adjustments		(69,834	)		(87,035	)

Gross trade accounts receivable		406,268			411,847

Less: Allowance for bad debt		(9,854	)		(9,970	)

Net trade accounts receivable		396,414			401,877

Other receivables		7,590			12,206

	$	404,004		$	414,083

Americas trade accounts receivable consist of amounts due directly from acute and extended care organizations; third-party payers (“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. EMEA and APAC 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, could increase 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 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 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.

(b) Inventories, net

Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Inventories consist of the following (dollars in thousands):

	June 30,			December 31,
	2011			2010
Finished goods and tissue available for distribution	$	92,612		$	92,769
Goods and tissue in-process		16,187			9,507
Raw materials, supplies, parts and unprocessed tissue		90,463			96,197
		199,262			198,473
Less: Amounts expected to be converted into equipment for short-term rental		(17,247	)		(10,008	)
Reserve for excess and obsolete inventory		(13,368	)		(15,913	)
	$	168,647		$	172,552

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(b) Inventories, net

Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Inventories consist of the following (dollars in thousands):

	September 30,			December 31,
	2011			2010

Finished goods and tissue available for distribution	$	83,396		$	92,769
Goods and tissue in-process		24,925			9,507
Raw materials, supplies, parts and unprocessed tissue		83,071			96,197

		191,392			198,473

Less: Amounts expected to be converted into equipment for short-term rental		(17,054	)		(10,008	)
Reserve for excess and obsolete inventory		(13,505	)		(15,913	)

	$	160,833		$	172,552

NOTE 3. Long-Term Debt

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

	June 30,			December 31,
	September 30,			December 31,
	2011			2010
Senior Credit Facility – due 2016	$	~~536~~529,~~250~~375		$	-
Senior Credit Facility – due 2013		-			527,333
Senior Revolving Credit Facility – due 2016		-			-
Senior Revolving Credit Facility – due 2013		-			-
3.25% Convertible Senior Notes due 2015		690,000			690,000
Less: Convertible Notes Discount, net of accretion		(~~101~~95,~~264~~459	)		(112,543	)
		1,124,986			1,104,790
		1,123,916			1,104,790
Less: Current installments		(27,500	)		(169,500	)
	$	1,~~097~~096,~~486~~416		$	935,290

~~The~~At September 30, 2011, the fair value of the senior credit facility and the convertible senior notes was $~~536~~526.31 million and $~~884~~970.20 million, respectively~~, at June 30, 2011~~. At December 31, 2010, the fair value of the senior credit facility and the convertible senior notes was $527.3 million and $727.9 million, respectively. The fair values of our senior credit facilities and the convertible senior notes were estimated based upon open-market trades and related market quotations at or near quarter or year-end.

Senior Credit Facility

In January 2011, we entered into a new credit agreement which was used to refinance existing debt under the prior senior credit facility and may be used for general corporate purposes. The new credit agreement provides for (i) a $550.0 million term A facility that matures in January 2016, and (ii) a $650.0 million revolving credit facility that matures in January 2016 (the “2016 Senior Credit Facility”). Up to $75.0 million of the revolving credit facility is available for letters of credit and up to $25.0 million of the revolving credit facility is available for swing-line loans. Amounts available under the revolving credit facility are available for borrowing and reborrowing until maturity. At ~~June~~September 30, 2011, no revolving credit loans were outstanding and we had outstanding letters of credit in the aggregate amount of $12.0 million. The resulting availability under the revolving credit facility was $638.0 million. ~~The~~ KCI ~~Company~~ also has the right at any time to increase the total amount of its commitments under the 2016 Senior Credit Facility by an aggregate additional amount up to $500.0 million. As of ~~June~~September 30, 2011, we were in compliance with all covenants under the senior credit agreement.

For further information on our senior credit facility, see Note 17 of the notes to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and Note 3 of the notes to the condensed consolidated financial statement included in KCI’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011.

3.25% Convertible Senior Notes and Related Note Hedge and Warrants

In 2008, we issued $690.0 million aggregate principal amount of 3.25% convertible senior notes due April 2015 (the “Convertible Notes”). The notes are governed by the terms of an indenture dated as of April 21, 2008 (the “Indenture”). Concurrently with the issuance of the Convertible Notes, we entered into a convertible note hedge (the “Note Hedge”) and warrant transactions (the “Warrants”) with affiliates of the initial purchasers of the notes. These consist of purchased and written call options on KCI common stock. The Note Hedge and Warrants are structured to reduce the potential future economic dilution associated with conversion of the notes and to effectively increase the initial conversion price to $60.41 per share, which was approximately 50% higher than the closing price of KCI’s common stock on April 15, 2008. As of June 30, 2011, we were in compliance with all covenants under the Indenture for the Convertible Notes.

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For further information on our senior credit facility, see Note 17 of the notes to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and Note 3 of the notes to the condensed consolidated financial statements included in KCI’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011 and June 30, 2011.

3.25% Convertible Senior Notes and Related Note Hedge and Warrants

In 2008, we issued $690.0 million aggregate principal amount of 3.25% convertible senior notes due April 2015 (the “Convertible Notes”). The notes are governed by the terms of an indenture dated as of April 21, 2008 (the “Indenture”). Concurrently with the issuance of the Convertible Notes, we entered into a convertible note hedge (the “Note Hedge”) and warrant transactions (the “Warrants”) with affiliates of the initial purchasers of the notes. These consist of purchased and written call options on KCI common stock. The Note Hedge and Warrants are structured to reduce the potential future economic dilution associated with conversion of the notes and to effectively increase the initial conversion price to $60.41 per share, which was approximately 50% higher than the closing price of KCI’s common stock on April 15, 2008. As of September 30, 2011, we were in compliance with all covenants under the Indenture for the Convertible Notes.

Conversion. Holders of the Convertible Notes may convert their notes at their option on any business day prior to October 15, 2014 only if one or more of the following conditions are satisfied:

(1)

during any fiscal quarter commencing after June 30, 2008, if the last reported sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the conversion price of the notes in effect on each applicable trading day;

(2)

during the five business day period following any five consecutive trading day period in which the trading price for the notes (per $1,000 principal amount of the notes) for each such trading day was less than 98% of the last reported sale price of our common stock on such date multiplied by the applicable conversion rate; or

(3)

if we make certain significant distributions to holders of our common stock or enter into specified corporate transactions. The notes are convertible, regardless of whether any of the foregoing conditions have been satisfied, on or after October 15, 2014 at any time prior to the close of business on the third scheduled trading day immediately preceding the stated maturity date.

Upon conversion, holders will receive cash up to the aggregate principal amount of the notes being converted and shares of our common stock in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the notes being converted. The initial conversion rate for the notes is 19.4764 shares of our common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $51.34 per share of common stock and represents a 27.5% conversion premium over the last reported sale price of our common stock on April 15, 2008, which was $40.27 per share. The conversion rate and the conversion price are subject to adjustment upon the occurrence of certain events, such as distributions of dividends or stock splits. As of ~~June~~September 30, 2011, our Convertible Notes were not convertible by the holders thereof.

For further information on our Convertible Notes and related Note Hedge and Warrants, see Note 5 of the notes to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

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NOTE 4. Derivative Financial Instruments and Fair Value Measurements

We are exposed to credit loss in the event of nonperformance by counterparties to the extent of the fair values of the outstanding interest rate swap agreements and foreign currency exchange contracts, but we do not anticipate nonperformance by any of the counterparties. For further information on our derivative financial instruments, see Note 6 of the notes to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Interest Rate Protection

As of ~~June~~September 30, 2011, we had also entered into additional interest rate swap agreements to convert $~~225~~125.0 million of our variable rate debt to a fixed rate basis at interest rates ranging from 0.810% to 0.~~940~~816%, exclusive of the Eurocurrency Rate Loan Spread as disclosed in the senior credit agreement. These agreements become effective on ~~September 30, 2011 for $100.0 million and~~ December 31, 2011 ~~for $125.0 million~~ and were designated as cash flow hedge instruments.

As a result of the interest rate swap agreements in effect as of ~~June~~September 30, 2011 and December 31, 2010, approximately 9599.06% and 93.2%, respectively, of our long-term debt outstanding, including the Convertible Notes, was subject to a fixed interest rate.

11The interest rate swap agreements have quarterly interest payments, based on three-month LIBOR, due on the last day of March, June, September and December. The fair value of the swap agreements was zero at inception. At both September 30, 2011 and December 31, 2010, the aggregate fair value of our interest rate swap agreements was negative and was recorded as a liability of approximately $1.7 million. This amount was also recorded in other comprehensive income, net of tax. No asset derivatives were held as of September 30, 2011 and December 31, 2010 related to our interest rate swap agreements. The ineffective portion of these interest rate swaps was not significant for the third quarter or first nine months of 2011 and 2010. Effective October 2011, we elected to use one-month LIBOR for amounts outstanding under the 2016 Senior Credit Facility. As a result of this election, the ineffective portion of the interest rate swaps will likely increase. As of September 30, 2011 and December 31, 2010, the amount of hedge loss to be reclassified from Accumulated Other Comprehensive Income over the next 12 months was approximately $1.7 million for both periods. If our interest rate protection agreements were not in place, interest expense would have been approximately $0.6 million and $2.3 million lower for the third quarter and first nine months of 2011, respectively, and $2.0 million and $7.6 million lower during the same periods of the prior year.

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The interest rate swap agreements have quarterly interest payments, based on three-month LIBOR, due on the last day of March, June, September and December. The fair value of the swap agreements was zero at inception. At June 30, 2011 and December 31, 2010, the aggregate fair value of our interest rate swap agreements was negative and was recorded as a liability of approximately $2.2 million and $1.7 million, respectively. This amount was also recorded in other comprehensive income, net of tax. No asset derivatives were held as of June 30, 2011 and December 31, 2010 related to our interest rate swap agreements. The ineffective portion of these interest rate swaps was not significant for the second quarter or first six months of 2011 and 2010. As of June 30, 2011 and December 31, 2010, the amount of hedge loss to be reclassified from Accumulated Other Comprehensive Income over the next 12 months was approximately $2.2 million and $1.7 million, respectively. If our interest rate protection agreements were not in place, interest expense would have been approximately $0.7 million and $1.7 million lower for the second quarter and first six months of 2011, respectively, and $2.7 million and $5.7 million lower in the same periods of the prior year.

Foreign Currency Exchange Risk Mitigation

At ~~June~~September 30, 2011 and December 31, 2010, we had foreign currency exchange contracts to sell or purchase $5650.51 million and $92.1 million, respectively, of various currencies. The periods of the foreign currency exchange contracts generally do not exceed one year and correspond to the periods of the exposed transactions or related cash flows.

Fair Value Measurements

The following tables set forth the location and aggregate fair value amounts of all derivative instruments with credit-related contingent features (dollars in thousands):

Asset Derivatives

Liability Derivatives

Balance

Fair Value

Balance

Fair Value

Sheet

June 30,

December 31,

Sheet

June 30,

December 31,

Location

2011

2010

Location

2011

2010

Derivatives

designated as

hedging

instruments

Prepaid

Accrued

Interest rate

expenses

swap agreements

and other

2,210

1,677

Derivatives not

designated as

hedging

instruments

Foreign currency

Prepaid

Accrued

exchange

expenses

contracts

and other

172

364

and other

1,018

3,425

Total derivatives

172

364

3,228

5,102

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~~The~~Fair ~~location~~Value and net amounts reported in the Statements of Earnings or in Accumulated Other Comprehensive Income (“OCI”) for derivatives designated as cash flow hedging instruments under the Derivatives and Hedges topic of the Codification are as follows (dollars in thousands):Measurements

	Three months ended June 30,
	Effective portion
Derivatives	Amount of						Location of gain (loss)	Amount of gain (loss)
designated as	gain (loss)						reclassified from	reclassified from
cash flow hedging	recognized in						accumulated	accumulated
instruments	OCI on derivative						OCI into income	OCI into income
	2011			2010				2011			2010
Interest rate swap agreements	$	(1,100	)	$	85		Interest expense	$	(451	)	$	(1,736	)
	Six months ended June 30,
	Effective portion
Derivatives	Amount of						Location of gain (loss)	Amount of gain (loss)
designated as	gain (loss)						reclassified from	reclassified from
cash flow hedging	recognized in						accumulated	accumulated
instruments	OCI on derivative						OCI into income	OCI into income
	2011			2010				2011			2010
Interest rate swap agreements	$	(1,460	)	$	(793	)	Interest expense	$	(1,113	)	$	(3,687	)

The following tables set forth the location and aggregate fair value amounts of all derivative instruments with credit-related contingent features (dollars in thousands):

KCI’s foreign currency exchange contracts are not designated as hedging instruments under the Derivatives and Hedges topic of the Codification. The gain or loss recognized on the foreign currency exchange contracts is included in the condensed consolidated statements of earnings under the caption “Foreign currency loss.” The following table summarizes the composition of foreign currency gain (loss) (dollars in thousands):

Asset Derivatives

Liability Derivatives

Balance

Fair Value

Balance

Fair Value

Sheet

September 30,

December 31,

Sheet

September 30,

December 31,

Location

2011

2010

Location

2011

2010

Derivatives

designated as

hedging

instruments

Prepaid

Accrued

Interest rate

expenses

swap agreements

and other

1,681

1,677

Derivatives not

designated as

hedging

instruments

Foreign currency

Prepaid

Accrued

exchange

expenses

contracts

and other

1,172

364

and other

306

3,425

Total derivatives

1, 172

364

1,987

5,102

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Foreign currency exchange contracts gain (loss)	$	(1,683	)	$	6,564		$	(3,016	)	$	8,812
Other foreign currency transaction gain (loss)		1,477			(9,221	)		2,991			(14,079	)
	$	(206	)	$	(2,657	)	$	(25	)	$	(5,267	)

The location and net amounts reported in the condensed consolidated statements of earnings under the caption “interest expense” or included in our condensed consolidated balance sheets under the caption “accumulated other comprehensive income” (“OCI”) for derivatives designated as cash flow hedging instruments under the Derivatives and Hedges topic of the Codification are as follows (dollars in thousands):

Certain of KCI’s derivative instruments contain provisions that require compliance with the restrictive covenants of our credit facilities. For further information regarding the restrictive covenants of our credit facilities, see Note 17 of the notes to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and Note 3 of the notes to the condensed consolidated financial statement included in KCI’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011.

	Three months ended September 30,
	Effective portion
Derivatives	Amount of						Location of gain (loss)	Amount of gain (loss)
designated as	gain (loss)						reclassified from	reclassified from
cash flow hedging	recognized in						accumulated	accumulated
instruments	OCI on derivative						OCI into income	OCI into income

	2011			2010				2011			2010

Interest rate swap agreements	$	(52	)	$	(926	)	Interest expense	$	(396	)	$	(1,281	)



	Nine months ended September 30,
	Effective portion
Derivatives	Amount of						Location of gain (loss)	Amount of gain (loss)
designated as	gain (loss)						reclassified from	reclassified from
cash flow hedging	recognized in						accumulated	accumulated
instruments	OCI on derivative						OCI into income	OCI into income

		2011			2010				2011			2010

Interest rate swap agreements	$	(1,512	)	$	(1,719	)	Interest expense	$	(1,509	)	$	(4,968	)

If we default under our credit facilities, the lenders could require immediate repayment of the entire principal. If those lenders require immediate repayment, we may not be able to repay them which could result in the foreclosure of substantially all of our assets. In these circumstances, the counterparties to the derivative instruments could request immediate payment or full collateralization on derivative instruments in net liability positions. All of our derivative counterparties are also parties to our credit facilities.

No collateral has been posted by KCI in the normal course of business. If the credit-related contingent features underlying these agreements were triggered on June 30, 2011, KCI could be required to settle or post the full amount as collateral to its counterparties.

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KCI’s foreign currency exchange contracts are not designated as hedging instruments under the Derivatives and Hedges topic of the Codification. The gain or loss recognized on the foreign currency exchange contracts is included in the condensed consolidated statements of earnings under the caption “Foreign currency gain (loss).” The following table summarizes the composition of foreign currency gain (loss) (dollars in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010

Foreign currency exchange contracts gain (loss)	$	1,082		$	(7,741	)	$	(1,933	)	$	1,071
Other foreign currency transaction gain (loss)		(3,199	)		9,889			(209	)		(4,190	)

	$	(2,117	)	$	2,148		$	(2,142	)	$	(3,119	)

Certain of KCI’s derivative instruments contain provisions that require compliance with the restrictive covenants of our credit facilities. For further information regarding the restrictive covenants of our credit facilities, see Note 17 of the notes to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and Note 3 of the notes to the condensed consolidated financial statements included in KCI’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011.

No collateral has been posted by KCI in the normal course of business. If the credit-related contingent features underlying these agreements were triggered on September 30, 2011, KCI could be required to settle or post the full amount as collateral to its counterparties.

NOTE 5. Earnings Per Share

Net earnings per share was calculated using the weighted average number of shares outstanding during the respective periods. 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):

	Three months ended				~~Six~~Nine months ended
	June 30,				June 30,
	September 30,				September 30,
	2011		2010		2011		2010
Net earnings	$	8190,~~425~~726	$	5375,~~605~~773	$	~~149~~240,~~843~~569	$	~~106~~182,~~318~~091
Weighted average shares outstanding:
Basic		72,~~128~~546		70,~~836~~994		7172,~~748~~017		70,~~678~~784
Dilutive potential common shares from stock options and restricted stock (1)		1,~~441~~679		~~969~~701		1,~~371~~508		~~979~~863
Dilutive potential common shares from conversion of Convertible Notes (2)		1,313		-		301		-
Dilutive potential common shares from conversion of Convertible Notes and Warrants (2)		4,186		-		1,364		-
Diluted		7478,~~882~~411		71,~~805~~695		7374,~~420~~889		71,~~657~~647
Basic net earnings per share	$	1.1325	$	01.7607	$	23.0934	$	12.5057
Diluted net earnings per share	$	1.0916	$	01.7506	$	23.0421	$	12.4854
(1) Potentially dilutive stock options and restricted stock totaling 1,112 shares and 3,619 shares for the three months ended June 30, 2011 and 2010, respectively, and 1,330 shares and 3,723 shares for the six months ended June 30, 2011 and 2010, respectively, were excluded from the computation of diluted weighted average shares outstanding due to their antidilutive effect. (2) The average price of our common stock was $56.90 and $52.52 for the three and six months ended June 30, 2011, respectively.
(1) Potentially dilutive stock options and restricted stock totaling 43 shares and 3,931 shares for the three months ended September 30, 2011 and 2010, respectively, and 1,109 shares and 4,156 shares for the nine months ended September 30, 2011 and 2010, respectively, were excluded from the computation of diluted weighted average shares outstanding due to their antidilutive effect. (2) The average price of our common stock was $66.18 and $35.10 for the three months ended September 30, 2011 and 2010, respectively, and $57.15 and $40.33 for the nine months ended September 30, 2011 and 2010, respectively.

Holders of our Convertible Notes may convert the Convertible Notes into cash, and if applicable, shares of our common stock at the applicable conversion rate, at their option any business day prior to October 15, 2014 if specific conditions are satisfied. For further information on the Convertible Notes, see Note 3 of the notes to the condensed consolidated financial statements. The Convertible Notes have no impact on diluted earnings per share (“EPS”) unless the average price of our common stock for the period exceeds the conversion price (initially $51.34 per share) because the principal amount of the Convertible Notes will be settled in cash upon conversion. Prior to conversion, we use the treasury stock method to include the effect of the additional shares that may be issued if our common stock price exceeds the conversion price. The convertible note hedge purchased in connection with the issuance of our Convertible Notes is excluded from the calculation of diluted EPS as its impact is always anti-dilutive. The warrant transactions associated with the issuance of our Convertible Notes have no impact on EPS unless our average share price for the period exceeds the $60.41 exercise price.14

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NOTE 6. Incentive Compensation Plans

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

Three months ended

~~Six~~Nine months ended

June 30,

September 30,

2011

2010

2011

2010

Rental expenses

1,~~074~~562

~~800~~1,486

23,~~304~~866

23,~~317~~803

Cost of sales

~~280~~224

~~133~~292

~~516~~740

~~444~~736

Selling, general and administrative expenses

6,~~880~~073

56,~~023~~961

1319,~~059~~132

1219,~~673~~634

Pre-tax share-based compensation expense

87,~~234~~859

58,~~956~~739

1523,~~879~~738

1524,~~434~~173

Less: Income tax benefit

(2,~~766~~750

)

(2,~~167~~919

)

(58,~~287~~037

)

(58,~~369~~288

)

Total share-based compensation expense, net of tax

5,~~468~~109

35,~~789~~820

1015,~~592~~701

1015,~~065~~885

14A summary of our stock option activity, and related information, for the nine months ended September 30, 2011 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, 2011	5,470		$	39.20
Granted	757		$	46.98
Exercised	(1,059	)	$	40.93
Forfeited/Expired	(288	)	$	40.36

Options outstanding – September 30, 2011	4,880		$	39.96	6.84	$	126,526

Exercisable as of September 30, 2011	2,371		$	41.47	5.80	$	57,916

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AThe ~~summary~~following oftable ~~our~~summarizes restricted stock ~~option~~ activity, ~~and related information,~~ for the ~~six~~nine months ended ~~June~~September 30, 2011 ~~is set forth in the table below~~:

					Weighted
	Number of		Weighted
					Average
	Shares		Average Grant
			Weighted		Remaining	Aggregate
	(in thousands)		Date Fair Value
			Average		Contractual	Intrinsic
Unvested shares – January 1, 2011	1,101		$	37.41
	Options		Exercise		Term	Value
Granted	713		$	48.73
	(in thousands)		Price		(years)	(in thousands)
Vested and distributed	(271	)	$	45.47
Options outstanding – January 1, 2011	5,470		$	39.20
Forfeited	(137	)	$	42.70
Granted	757		$	46.98
Unvested shares – September 30, 2011	1,406		$	41.06
Exercised	(919	)	$	39.98
Forfeited/Expired	(270	)	$	40.35
Options outstanding – June 30, 2011	5,038		$	40.17	7.06	$	88,626
Exercisable as of June 30, 2011	2,430		$	42.16	5.97	$	38,211

The following table summarizes restricted stock activity for the six months ended June 30, 2011:

	Number of		Weighted
	Shares		Average Grant
	(in thousands)		Date Fair Value
Unvested shares – January 1, 2011	1,101		$	37.41
Granted	651		$	46.88
Vested and distributed	(264	)	$	45.49
Forfeited	(128	)	$	43.10
Unvested shares – June 30, 2011	1,360		$	39.81

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 7. Other Comprehensive Income

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

	Three months ended						~~Six~~Nine months ended
	June 30,						June 30,
	September 30,						September 30,
	2011			2010			2011			2010
Net earnings	$	8190,~~425~~726		$	5375,~~605~~773		$	~~149~~240,~~843~~569		$	~~106~~182,~~318~~091
Foreign currency translation adjustment, net of taxes		1(16,~~914~~280	)		(4,~~779~~480	)		9(6,~~778~~502	)		(62,~~534~~054	)
Net derivative gain (loss), net of taxes		(1,100	)		85			(1,460	)		(793	)
Net derivative loss, net of taxes		(52	)		(926	)		(1,512	)		(1,719	)
Amount of loss reclassified from accumulated OCI into income, net of taxes		~~451~~396			1,~~736~~281			1,~~113~~509			34,~~687~~968
Total comprehensive income	$	8274,~~690~~790		$	5080,~~647~~608		$	~~159~~234,~~274~~064		$	~~102~~183,~~678~~286

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NOTE 8. Commitments and Contingencies

Litigation Relating to the Proposed Merger

Following the announcement on July 13, 2011 that KCI had entered into a definitive merger agreement under which a consortium of funds advised by Apax ~~Partners~~ will acquire KCI ~~(the “Merger”)~~, ~~two~~four purported shareholders of KCI initiated legal actions challenging the Merger. Between On July 20 and August 23, 2011, these purported ~~shareholder~~shareholders ~~John~~filed ~~Chevedden~~four ~~sent~~separate aputative ~~letter~~derivative toand/or class action petitions in the District Court of Bexar County, Texas. The petitions in these actions asserted claims against KCI’s ~~Board~~directors and against KCI as a nominal defendant, and certain of ~~Directors~~these ~~demanding~~actions ~~that~~additionally named as defendants Apax, CPPIB, PSP Investments, Chiron Holdings, Inc., Chiron Merger Sub, Inc., and John Does 1-25 (unidentified associates and affiliates forming the ~~Board~~consortium ~~take~~to purchase KCI) (collectively, “Apax Partners”). The petitions generally alleged that KCI’s directors breached their fiduciary duties by their actions toin ~~remedy~~approving the Merger and that Apax Partners aided and abetted in these alleged breaches of fiduciary duties. The petitions additionally alleged that the Schedule 14A Preliminary Proxy Statement filed with the Securities and Exchange Commission in connection with the ~~Board’s~~proposed ~~approval~~transaction ofcontained ~~the~~material ~~Merger~~omissions and misstatements. The ~~purported~~petitions ~~shareholder~~all ~~stated~~requested that if the ~~Board~~Merger be enjoined. The District Court of ~~Directors~~Bexar ~~does~~County, ~~not~~Texas, ~~take~~consolidated these actions asinto ~~demanded~~a insingle ~~his~~action ~~letter,~~styled he“In ~~will~~re ~~prosecute~~Kinetic aConcepts, ~~shareholder~~Inc. ~~derivative~~Shareholder ~~action~~Litigation” ~~against~~ (the ~~Company~~“Consolidated Action”). KCI and its directors filed motions to dismiss the petitions pending in the Consolidated Action. ~~The~~On ~~Board~~October 6, 2011, the District Court of ~~Directors~~Bexar ~~will~~County, ~~review~~Texas, ~~this~~held ~~purported~~a ~~shareholder’s~~hearing ~~demand~~on ~~and~~the ~~determine~~KCI ~~how~~defendants’ motions to ~~proceed~~dismiss. At inthe ~~response~~conclusion toof the ~~allegations~~hearing, the court dismissed all of the claims asserted in the Consolidated Action, without prejudice.

On July 22, 2011, purported shareholder Sharon M. Dunn filed a putative class action petition in the District Court of Bexar County, Texas, 288th Judicial District, in an action styled Dunn v. Apax Partners et al., Case No. 2011-CI-11943. The action asserts claims against KCI’s directors and against KCI as a nominal defendant, and additionally names as defendants Apax Partners, Chiron Holdings, Inc., Chiron Merger Sub, Inc., and John Does 1-25 (unidentified associates and affiliates of Apax Partners forming the consortium to purchase the Company) (collectively, “Apax Partners”). The petition in this putative class action alleges that KCI’s directors breached their fiduciary duties to shareholders and committed gross mismanagement and waste of corporate assets by their actions in approving the merger agreement. The petition further alleges that Apax Partners aided and abetted these alleged breaches of fiduciary duties. The petition requests that the Merger be enjoined.16

OnTable ~~August 2, 2011, purported shareholder Michael Ross filed a putative class action petition in the District Court~~ of Bexar County, Texas, 224th Judicial District, in an action styled Ross v. Kinetic Concepts, Inc. et al., Case No. 2011-CI-12497. This action asserts claims against KCI and its directors and additionally names as defendants Apax Partners, the Canada Pension Plan Investment Board, the Public Sector Pension Investment Board, Chiron Merger Sub, Inc., and Chiron Holdings, Inc. The petition in this putative class action alleges that KCI and its directors breached their fiduciary duties to shareholders by their actions in approving the merger agreement. The petition further alleges that the remaining defendants aided and abetted these alleged breaches of fiduciary duties. The petition requests that the Merger be enjoined.Contents

~~Although~~On itOctober is18, ~~not~~2011, ~~possible~~certain of the plaintiffs who commenced the initial litigation relating to ~~predict~~the Merger filed a new complaint relating to the ~~outcome~~Merger in the District Court of ~~these~~Bexar ~~litigation~~County, ~~matters~~Texas, ~~with~~styled ~~certainty~~“Ross et al. v. Apax Partners, ~~KCI~~et ~~and~~al., ~~its~~No. ~~directors~~2011-CI-16858” ~~believe~~(the ~~that~~“Second Shareholder Action”). The complaint in the ~~claims~~Second ~~raised~~Shareholder byAction ~~these~~raised ~~purported~~issues ~~shareholders~~substantially ~~are~~similar ~~without~~to ~~merit,~~those ~~and~~raised in the ~~defendants~~Consolidated ~~intend~~Action toand ~~defend~~also ~~their~~requested ~~positions~~that inthe ~~these~~Merger ~~matters~~be ~~vigorously~~enjoined. ~~Currently~~On weOctober ~~cannot~~26, ~~determine~~2011, ~~whether~~ the ~~ultimate~~District ~~outcome~~Court of ~~these~~Bexar ~~legal~~County, ~~actions~~Texas, ~~will~~held ~~have~~ a ~~material~~hearing ~~impact~~ on the ~~Company~~KCI defendants’s ~~financial~~motions ~~position,~~to ~~results~~dismiss the Second Shareholder Action. At the conclusion of ~~operations~~the hearing, orthe ~~cash~~court ~~flows~~dismissed all of the claims asserted in the Second Shareholder Action, without prejudice.

Intellectual Property Litigation

As the owner and exclusive licensee of patents, from time to time, KCI is a party to proceedings challenging these patents, including challenges in U.S. federal courts, foreign courts and the U.S. Patent and Trademark Office (“USPTO”). Additionally, from time to time, KCI is a party to litigation we initiate against others we contend infringe these patents, which often results in counterclaims regarding the validity of such patents. It is not possible to reliably predict the outcome of the proceedings described below. However, if we are unable to effectively enforce our intellectual property rights, third parties may become more aggressive in the marketing of competitive products around the world.

U.S. Intellectual Property Litigation

For the last several years, KCI and its affiliates have been involved in multiple patent infringement suits where claims under certain Wake Forest Patents were asserted against providers of competing negative pressure wound therapy (“NPWT”) products. In October 2010, the Federal District Court for the Western District of Texas entered an order in the Smith & Nephew case described below, invalidating the Wake Forest patent claims asserted in the case. In light of the ruling, KCI has determined that continued payment of the royalties scheduled under the Wake Forest license agreement was inappropriate. On February 28, 2011, KCI filed suit in the Federal District Court for the Western District of Texas seeking a declaratory judgment that KCI no longer owes royalties to Wake Forest based on the patents in suit because the relevant patent claims are invalid or not infringed. Historical royalties under the license agreement were accrued through February 27, 2011 and are reflected in our condensed consolidated financial statements. For the year ended December 31, 2010, royalty payments to Wake Forest under the licensing agreement were approximately $86 million. No royalty payments were made to Wake Forest during the first ~~six~~nine months of 2011.

16On March 18, 2011, Wake Forest provided written notice of termination under the license agreement with KCI and filed suit in Forsyth County Superior Court, North Carolina, alleging breach of contract by KCI. In its termination notice, Wake Forest is demanding that KCI cease manufacturing and selling licensed products. KCI subsequently removed the action from state court to the Federal District Court for the Middle District of North Carolina, after which Wake Forest amended its complaint to add allegations of patent infringement. That action was stayed pending a ruling by the Federal District Court in Texas on a motion to dismiss or transfer filed by Wake Forest there. On July 26, 2011, the Federal District Court in Texas denied Wake Forest’s motions and stayed the action pending a decision by the Court of Appeals for the Federal Circuit in the Smith & Nephew litigation described below. KCI believes that it does not infringe any valid claims of the Wake Forest Patents and that our defenses to any claims are meritorious and we intend to vigorously defend against any such claims and KCI will continue to manufacture and sell V.A.C. ® Therapy products. It is not possible to estimate damages that may result if we are unsuccessful in the litigation. In addition, as a result of the Wake Forest royalty litigation, KCI will not join Wake Forest in the continued enforcement of the Wake Forest Patents against alleged infringers. KCI intends to withdraw from each of the cases described below that involve the Wake Forest Patents and has withdrawn from the appeal of the Smith & Nephew litigation.

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On March 18, 2011, Wake Forest provided written notice of termination under the license agreement with KCI and filed suit in Forsyth County Superior Court, North Carolina, alleging breach of contract by KCI. In its termination notice, Wake Forest is demanding that KCI cease manufacturing and selling licensed products. KCI subsequently removed the action from state court to the Federal District Court for the Middle District of North Carolina, after which Wake Forest amended its complaint to add allegations of patent infringement. That action was stayed pending a ruling by the Federal District Court in Texas on a motion to dismiss or transfer filed by Wake Forest there. On July 26, 2011, the Federal District Court in Texas denied Wake Forest’s motions and stayed the action pending a decision by the Court of Appeals for the Federal Circuit in the Smith & Nephew litigation described below. KCI believes that it does not infringe any valid claims of the Wake Forest Patents and that our defenses to any claims are meritorious and we intend to vigorously defend against any such claims and KCI will continue to manufacture and sell V.A.C. ® Therapy products. It is not possible to estimate damages that may result if we are unsuccessful in the litigation. In addition, as a result of the Wake Forest royalty litigation, KCI will not join Wake Forest in the continued enforcement of the Wake Forest Patents against alleged infringers. KCI intends to withdraw from each of the cases described below that involve the Wake Forest Patents, including any appeal of the Smith & Nephew litigation.

In May 2007, KCI, its affiliates and Wake Forest filed two related patent infringement suits: one case against Smith & Nephew and a second case against Medela, for the manufacture, use and sale of NPWT products which we alleged infringe claims of patents licensed exclusively to KCI by Wake Forest. In October 2010, the Federal District Court for the Western District of Texas entered an order in the Smith & Nephew case invalidating the patent claims involved in the lawsuit. As a result, KCI has initiated the Wake Forest royalty litigation described above, and KCI is not planning to participate in any appeal of the Smith & Nephew litigation. Wake Forest is appealing the decision in the Smith & Nephew litigation. The case against Medela’s gauze-based devices remains pending, but was recently stayed by the Federal District Court.

In January 2008, KCI, its affiliates and Wake Forest filed a patent infringement lawsuit against Innovative Therapies, Inc. (“ITI”) in the U.S. District Court for the Middle District of North Carolina. The federal complaint alleges that a NPWT device introduced by ITI in 2007 infringes three Wake Forest patents which are exclusively licensed to KCI. This case is currently stayed.

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Also in January and June of 2008, KCI and its affiliates filed separate suits in state District Court in Bexar County, Texas, against ITI and several of its principals, all of whom are former employees of KCI. These cases have now been consolidated into a single case. The claims in this case include breach of confidentiality agreements, conversion of KCI technology, theft of trade secrets and conspiracy. We are seeking damages and injunctive relief in the state court case. At this time, the state court case against ITI and its principals is not set for trial.

In December 2008, KCI, its affiliates and Wake Forest filed a patent infringement lawsuit against Boehringer Wound Systems, LLC, Boehringer Technologies, LP, and Convatec, Inc. in the U.S. District Court for the Middle District of North Carolina. The federal complaint alleges that a NPWT device manufactured by Boehringer and commercialized by Convatec infringes Wake Forest patents which are exclusively licensed to KCI. In February 2009, the defendants filed their answer which includes affirmative defenses and counterclaims alleging non-infringement and invalidity of the Wake Forest patents. This case was recently stayed by the Federal District Court.

International Intellectual Property Litigation

In June 2007, Medela filed a patent nullity suit in the German Federal Patent Court against Wake Forest’s German patent corresponding to European Patent No. EP0620720 (“the ‘720 Patent”). In March 2008 and February 2009, Mölnlycke Health Care AB and Smith & Nephew, respectively, joined the nullity suit against the ‘720 Patent. In March 2009, the German Federal Patent Court ruled the German patent corresponding to the ‘720 Patent invalid. KCI is not appealing this decision.

In March 2009, KCI and its affiliates filed a patent infringement lawsuit asserting Australian counterparts to the Wake Forest Patents against Smith & Nephew in the Federal Court of Australia, requesting preliminary injunctive relief to prohibit the commercialization of a Smith & Nephew negative pressure wound therapy dressing kit. The Federal Court issued a temporary injunction in the case which was subsequently overturned by the Full Court of the Federal Court of Australia. A full trial on validity and infringement of the Wake Forest patent involved in the case was held in 2010. AIn ~~ruling~~September in2011, ~~this~~the ~~case~~Federal ~~could~~Court ruled the asserted claims to be ~~made~~invalid atand ~~any~~not ~~time~~infringed by Smith & Nephew’s product. KCI will not appeal the decision.

17In March 2009, KCI's German subsidiary filed a request for a preliminary injunction with the German District Court of Düsseldorf to prevent commercialization of a Smith & Nephew negative pressure wound therapy system that KCI believes infringes the German counterpart of KCI’s European Patent No. EP0777504 (“KCI’s ‘504 Patent”). Following a hearing in July 2009 on this matter, the Court denied KCI’s request for preliminary injunction. Also, in April 2009, KCI's German subsidiary filed a patent infringement lawsuit against Smith & Nephew, GmbH Germany in the German District Court of Mannheim. The lawsuit alleges that the negative pressure wound therapy systems commercialized by Smith & Nephew infringe KCI’s ‘504 Patent and another German patent owned by KCI corresponding to European Patent No. EP0853950 (“KCI’s ‘950 Patent”). A trial was held in October 2009 on KCI’s ‘504 Patent claims, after which the Court dismissed KCI’s infringement allegations. This decision was affirmed on appeal in July 2011. A trial on KCI’s ‘950 Patent claims was held in June 2010, and in September 2010, the Court issued its ruling finding that components used with Smith & Nephew’s negative pressure wound therapy systems infringe KCI’s ‘950 Patent. Smith & Nephew is appealing this decision. In separate actions filed with the German Federal Patent Court, Smith & Nephew has asserted that the ‘950 and ‘504 Patents are invalid. Following a hearing in September 2011, the Federal Patent Court ruled the ‘950 Patent to be invalid. A hearing on the validity of the ‘504 Patent is yet to be set.

~~Table~~In July 2009, KCI and its affiliates filed a patent infringement lawsuit against Smith & Nephew in France alleging infringement of ~~Contents~~KCI’s ‘504 Patent and KCI’s ‘950 Patent. KCI also filed a request for a preliminary injunction with the Paris District Court in France to prevent commercialization of Smith & Nephew’s NPWT system that KCI believes infringes the French counterpart of KCI’s ‘504 Patent. A hearing on KCI’s request for preliminary injunction was held in October 2009 in France. In November 2009, the Paris District Court denied KCI’s request for a preliminary injunction. On April 29, 2011, the Paris District Court upheld the validity of key claims of KCI’s ‘504 patent but ruled KCI’s ‘504 patent was not infringed by Smith & Nephew’s NPWT systems. The Paris District Court also ruled the asserted claims of KCI’s ‘950 patent invalid. KCI has filed an appeal of this decision.

In March 2009, KCI's German subsidiary filed a request for a preliminary injunction with the German District Court of Düsseldorf to prevent commercialization of a Smith & Nephew negative pressure wound therapy system that KCI believes infringes the German counterpart of KCI’s European Patent No. EP0777504 (“KCI’s ‘504 Patent”). Following a hearing in July 2009 on this matter, the Court denied KCI’s request for preliminary injunction. Also, in April 2009, KCI's German subsidiary filed a patent infringement lawsuit against Smith & Nephew, GmbH Germany in the German District Court of Mannheim. The lawsuit alleges that the negative pressure wound therapy systems commercialized by Smith & Nephew infringe KCI’s ‘504 Patent and another German patent owned by KCI corresponding to European Patent No. EP0853950 (“KCI’s ‘950 Patent”). A trial was held in October 2009 on KCI’s ‘504 Patent claims, after which the Court dismissed KCI’s infringement allegations. This decision was affirmed on appeal in July 2011. A trial on KCI’s ‘950 Patent claims was held in June 2010, and in September 2010, the Court issued its ruling finding that components used with Smith & Nephew’s negative pressure wound therapy systems infringe KCI’s ‘950 Patent. Smith & Nephew is appealing this decision.

In July 2009, KCI and its affiliates filed a patent infringement lawsuit against Smith & Nephew in France alleging infringement of KCI’s ‘504 Patent and KCI’s ‘950 Patent. KCI also filed a request for a preliminary injunction with the Paris District Court in France to prevent commercialization of Smith & Nephew’s NPWT system that KCI believes infringes the French counterpart of KCI’s ‘504 Patent. A hearing on KCI’s request for preliminary injunction was held in October 2009 in France. In November 2009, the Paris District Court denied KCI’s request for a preliminary injunction. On April 29, 2011, the Paris District Court upheld the validity of key claims of KCI’s ‘504 patent but ruled KCI’s ‘504 patent was not infringed by Smith & Nephew’s NPWT systems. The Paris District Court also ruled the asserted claims of KCI’s ‘950 patent invalid. KCI is considering its options, including whether to appeal this decision.

Also in July 2009, KCI and its affiliates filed patent infringement lawsuits against Smith & Nephew in the United Kingdom alleging infringement of KCI’s ‘504 Patent and KCI’s ‘950 Patent. KCI withdrew its request for a preliminary injunction in the United Kingdom based on KCI’s ‘504 Patent and KCI’s ‘950 Patent and proceeded to trial in May 2010. In June 2010, the Court in the United Kingdom ruled the claims at issue from KCI’s ‘504 Patent and ‘950 Patent to be valid and infringed by Smith & Nephew’s Renasys NPWT systems. In July 2010, the Court ordered that Smith & Nephew be enjoined from further infringement of KCI’s ‘504 Patent and ‘950 Patent. The Court stayed the injunction pending appeal, which was heard on October 18-19, 2010. On November 28, 2010, the Court of Appeal upheld the validity of key claims of both patents and the finding of infringement on KCI’s ‘950 Patent. Smith & Nephew has since notified the Court that it will modify its products to avoid infringement and that its modified NPWT products will stay on the market in the United Kingdom.

LifeCell Litigation

In September 2005, LifeCell Corporation recalled certain human-tissue based products because the organization that recovered the tissue, Biomedical Tissue Services, Ltd. (“BTS”), may not have followed Food and Drug Administration (“FDA”) requirements for donor consent and/or screening to determine if risk factors for communicable diseases existed. LifeCell Corporation promptly notified the FDA and all relevant hospitals and medical professionals. LifeCell Corporation did not receive any donor tissue from BTS after September 2005. LifeCell Corporation was named, along with BTS and many other defendants, in lawsuits relating to the BTS donor irregularities. These lawsuits generally fell within three categories, (1) recipients of BTS tissue who claim actual injury; (2) suits filed by recipients of BTS tissue seeking medical monitoring and/or damages for emotional distress; and (3) suits filed by family members of tissue donors who did not authorize BTS to donate tissue.

LifeCell Corporation resolved all of those lawsuits which have now been dismissed. The resolution of those lawsuits did not have a material impact on our financial position or results of operations. Subsequently, LifeCell Corporation was served with approximately ten new suits filed by other family members of tissue donors who also allege no authorization was provided. These cases are in the early stages of discovery and have not been set for trial. Although it is not possible to reliably predict the outcome of the litigation, LifeCell Corporation believes that its defenses to these claims are meritorious and will defend them vigorously. We do not expect these new cases to have a material impact on our results of operations or our financial position.

LifeCell Corporation is also a party to approximately 50 lawsuits filed by individuals alleging personal injury and seeking monetary damages for failed hernia repair procedures using LifeCell Corporation’s AlloDerm products. These cases have been consolidated for centralized management in Middlesex County, New Jersey. All of these cases are in the early stages of litigation and have not yet been set for trial. Although it is not possible to reliably predict the outcome of the litigation, we believe that the defenses to these claims are meritorious and will defend them vigorously. We have insurance that we believe covers these claims and lawsuits and believe that after the application of our self-insured retention relating to products liability claims, such policies will cover litigation expenses, settlement costs and damage awards, if any, arising from these suits. However, the insurance coverage may not be adequate if we are unsuccessful in our defenses. We do not expect these cases to have a material impact on our results of operations or our financial position.

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LifeCell Litigation

LifeCell Corporation is also a party to approximately 60 lawsuits filed by individuals alleging personal injury and seeking monetary damages for failed hernia repair procedures using LifeCell Corporation’s AlloDerm products. All of these cases are in the early stages of litigation and have not yet been set for trial. Although it is not possible to reliably predict the outcome of the litigation, we believe that the defenses to these claims are meritorious and will defend them vigorously. We have insurance that we believe covers these claims and lawsuits and believe that after the application of our self-insured retention relating to products liability claims, such policies will cover litigation expenses, settlement costs and damage awards, if any, arising from these suits. However, the insurance coverage may not be adequate if we are unsuccessful in our defenses. We do not expect these cases to have a material impact on our results of operations or our financial position.

Other Litigation

In February 2009, we received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General ("“OIG"”) seeking records regarding our billing practices under the local coverage policies of the four regional Durable Medical Equipment Medicare Administrative Contractors (“~~DMACs~~DME MACs”). ~~The~~ ~~Company~~KCI cooperated with the OIG’s inquiry and provided substantial documentation to the OIG and the U.S. Attorneys’ office in response to its request. On May 9, 2011, ~~the~~KCI ~~Company~~ received notice that the U.S. Attorneys’ office had declined to intervene in qui tam actions filed against ~~the~~KCI ~~Company~~on March 20, 2008 and September 29, 2008 by two former employees in ~~Federal~~the U.S. District Court, inCentral District of California, Western Division. These cases are captioned United States of America, ex rel. Geraldine Godecke v. Kinetic Concepts, Inc., et al. and United States of America, ex rel. Steven J. Hartpence v. Kinetic Concepts, Inc. et al. The complaints ~~were~~contend ~~recently~~that ~~unsealed~~KCI violated the Federal False Claims Act by billing in a manner that was not consistent with the Local Coverage Determinations issued by the DME MACs and seek recovery of monetary damages. Under the Federal False Claims Act, a defendant determined to be liable by a court of law must pay three times the actual damages sustained by the government, plus civil penalties of between $5,500 and $11,000 for each separate false claim. Potential damages arising from these non-intervened cases are not currently probable and not reasonably estimable. These cases were originally filed under seal pending the government’s review of the allegations contained therein. Following the completion of the government’s review and their decision to decline to intervene in such suits, the live pleadings were ordered unsealed on May 3, 2011. KCI intends to vigorously defend itself in these matters ~~vigorously~~, including seeking the dismissal of these ~~allegations~~suits.

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. We maintain multiple layers of product liability insurance coverage and we believe these policies and the amounts of coverage are appropriate and adequate.

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Other Commitments and Contingencies

As a healthcare 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 oversight and review. 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.

We also are subject to routine pre-payment and post-payment audits of medical claims submitted to Medicare. These audits typically involve a review, by Medicare or its designated contractors and representatives, of documentation supporting the medical necessity of the therapy provided by KCI. 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 claim. 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. 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 a determination is made that KCI’s records or the patients’ medical records are insufficient to meet medical necessity or Medicare reimbursement requirements for the claims subject to a pre-payment or post-payment audit, KCI could be subject to denial, recoupment or refund demands for claims submitted for Medicare reimbursement. In the event that an 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 examined in the audit. In November 2010, KCI USA, Inc.’s Raleigh, North Carolina office was the subject of a Medicare audit of 31 claims conducted by the Zone Program Integrity Contractor (“ZPIC”). In May 2011, based on an extrapolation of the ZPIC’s audit results, the ZPIC determined that KCI USA, Inc. had been overpaid by Medicare in the amount of $5.8 million. KCI appealed these claims to Redetermination and reduced the overpayment to $5.1 million. KCI has appealed these claims to the next level of review. Recoupment of the overpayment was stayed pending appeal and interest will accrue on the overpayment unless it is overturned on appeal. In addition to challenging the underlying clinical basis for the claims denials, KCI intends to challenge the validity of the sampling used to extrapolate the overpayment. If the extrapolation is found to have been invalid, the extrapolation may be rejected even if the actual claims denials on which the extrapolation was based are not overturned. We cannot predict the outcome of theses appeals. However, we do not expect that the final determination of the audit will have a material impact on our results of operations or our financial position. Other KCI offices could be subjected to similar audits in which overpayments are extrapolated. In addition, Medicare or its contractors could place KCI on an extended pre-payment review, which could slow our collections process for submitted claims. 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. In addition, violations of federal and state regulations regarding Medicare reimbursement could result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs. Going forward, it is likely that we will be subject to periodic inspections, assessments and audits of our billing and collections practices.

On May 9, 2011, LifeCell Corporation received a warning letter dated May 5, 2011 from the FDA following an inspection by the FDA at LifeCell in November 2010. The Warning Letter primarily related to ~~the Company~~LifeCell’s failure to submit required documentation to the FDA prior to conduct of certain clinical studies. The FDA also identified certain observed non-compliance with FDA regulations covering the promotion of LifeCell’s Strattice/LTM product for use with breast implants. ~~The~~LifeCell ~~Company~~ submitted a written response to the FDA on May 31, 2011. LifeCell is cooperating with the FDA and believes that the corrective actions it is taking will resolve the FDA’s concerns without a material impact on ~~the Company~~LifeCell’s business. However, ~~the~~we ~~Company~~ cannot give any assurances that the FDA will be satisfied with its response to the warning letter or as to the expected date of the resolution of the matters included in the warning letter.

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NOTE 9. Segment and Geographic Information

We are engaged in the rental and sale of advanced wound care systems, regenerative medicine products and therapeutic support systems. KCI has operations in more than 20 countries.

We have three reportable operating segments which correspond to our three global business units: AHS; LifeCell; and TSS. Our three global operating segments also represent our reporting units as defined by the Codification. We have three primary geographic regions for which we provide supplemental information: Americas, which is comprised principally of the United States and includes Canada, Puerto Rico and Latin America; EMEA, which is comprised principally of Europe and includes the Middle East and Africa; and APAC, which is comprised of the Asia Pacific region. Revenue for each of our geographic regions in which we operate is disclosed for each of our business units. In most countries where we operate, our product lines are marketed and serviced by the same infrastructure and, as such, we have allocated these costs to the various business units based on allocation methods including rental and sales events, headcount, revenue and other methods as deemed appropriate. We measure segment profit as operating earnings, which is defined as income before interest and other income, 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):

Three months ended

~~Six~~Nine months ended

June 30,

September 30,

2011

2010

2011

2010

Revenue:

AHS

Americas

~~266~~281,~~859~~227

~~266~~275,~~681~~494

~~524~~805,~~719~~946

~~516~~792,~~513~~007

EMEA

7573,~~155~~852

71,~~919~~505

~~144~~217,~~095~~947

~~147~~219,~~524~~029

APAC

1517,~~957~~029

911,~~126~~393

2946,~~696~~725

1628,~~642~~035

Subtotal – AHS

~~357~~372,~~971~~108

~~347~~358,~~726~~392

~~698~~1,~~510~~070,618

~~680~~1,~~679~~039,071

LifeCell

Americas

9394,~~268~~507

8283,~~188~~213

~~183~~278,~~505~~012

~~160~~243,~~162~~375

EMEA

32,~~062~~934

1,~~555~~722

58,~~839~~773

24,~~596~~318

Subtotal – LifeCell

9697,~~330~~441

8384,~~743~~935

~~189~~286,~~344~~785

~~162~~247,~~758~~693

TSS

Americas

4037,~~966~~687

4441,~~563~~788

85123,~~519~~206

92134,~~963~~751

EMEA

2423,~~191~~888

21,~~564~~056

4770,~~061~~949

4667,~~453~~509

APAC

~~372~~247

~~176~~537

~~580~~827

~~724~~1,261

Subtotal – TSS

6561,~~529~~822

6663,~~303~~381

~~133~~194,~~160~~982

~~140~~203,~~140~~521

Total revenue

~~519~~531,~~830~~371

~~497~~506,~~772~~708

1,~~021~~552,~~014~~385

~~983~~1,~~577~~490,285

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	Three months ended							Six months ended
	June 30,							June 30,
	2011			2010				2011			2010
Operating earnings:
AHS	$	128,815		$	116,689			$	243,189		$	217,281
LifeCell		24,775			19,819				52,913			41,871
TSS		4,387			(5,204	)	(1)		8,619			2,968		(1)
Non-allocated costs:
General headquarter expense		(12,251	)		(14,061	)	(2)		(27,927	)		(23,361	)	(2)
Share-based compensation		(8,234	)		(5,956	)			(15,879	)		(15,434	)
Acquisition-related expenses (3)		(8,855	)		(9,930	)			(17,711	)		(20,628	)
Total non-allocated costs		(29,340	)		(29,947	)			(61,517	)		(59,423	)
Total operating earnings	$	128,637		$	101,357			$	243,204		$	202,697
(1) Includes $7.4 million of expenses associated with the TSS product portfolio rationalization recorded in the second quarter of 2010. (2) Includes expenses associated with our global business transformation efforts, including severance and other expenses of $5.3 million recorded during the second quarter of 2010. (3) Includes amortization of acquired intangible assets and costs to retain key employees related to our purchase of LifeCell in May 2008.

NOTE 10. Subsequent Events

On July 12, 2011, we entered into a definitive merger agreement under which a consortium of funds advised by Apax Partners, together with controlled affiliates of Canada Pension Plan Investment Board and Canada’s Public Sector Pension Investment Board, will acquire KCI for $68.50 per share in cash in a transaction valued at $6.3 billion, inclusive of KCI’s outstanding debt.

The Board of Directors of KCI has unanimously approved the merger agreement and recommended that KCI’s shareholders adopt the agreement with the consortium. A special meeting of KCI’s shareholders will be held as soon as practicable after the filing of a definitive proxy statement with the U.S. Securities and Exchange Commission and subsequent mailing to shareholders. The mailing of the proxy statement is expected to take place following the expiration of a 40-day ‘go-shop’ period, during which KCI is permitted to encourage and solicit alternative proposals from third parties.

The transaction is subject to certain closing conditions, including the approval of KCI’s shareholders, regulatory approvals and the satisfaction of other customary closing conditions, but is not subject to any condition with regard to the financing of the transaction. The transaction is currently expected to close in the second half of 2011.

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	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Operating earnings:
AHS	$	154,442		$	122,827		$	397,631		$	340,108
LifeCell		27,511			24,561			80,424			66,432
TSS		(77	)		2,506			8,542			5,474		(1)

Non-allocated costs:
General headquarter expense (2)		(15,748	)		(12,194	)		(42,469	)		(35,555	)
Share-based compensation		(7,859	)		(8,739	)		(23,738	)		(24,173	)
Merger-related expenses (3)		(5,996	)		-			(7,202	)		-
LifeCell acquisition-related expenses (4)		(8,856	)		(8,809	)		(26,567	)		(29,437	)

Total non-allocated costs		(38,459	)		(29,742	)		(99,976	)		(89,165	)

Total operating earnings	$	143,417		$	120,152		$	386,621		$	322,849


(1) Includes $7.4 million of expenses associated with the TSS product portfolio rationalization recorded in the second quarter of 2010. (2) Includes restructuring charges of $2.1 million during the three and nine months ended September 30, 2011 and $5.3 million during the nine months ended September 30, 2010. (3) Represents expenses related to KCI’s pending merger. (4) Includes amortization of acquired intangible assets and costs to retain key employees related to our purchase of LifeCell in May 2008.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in our “Risk Factors,” (Part II, Item 1A.), including those previously disseminated in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011 and June 30, 2011.

GENERAL

Kinetic Concepts, Inc. (“KCI”) is a leading global medical technology company devoted to the discovery, development, ~~manufacture~~manufacturing and marketing of innovative, high-technology therapies and products that have been designed to leverage the body’s ability to heal, thus improving clinical outcomes while helping to reduce the overall cost of patient care. We have an infrastructure designed to meet the specific needs of medical professionals and patients across all healthcare settings, including acute care hospitals, extended care organizations and patients’ homes, both in the United States and abroad. Our primary business units serve the advanced wound care, regenerative medicine and therapeutic support systems markets.

· Our Active Healing Solutions ™ business unit (“AHS”), ~~which represents a significant majority of our revenue,~~ is focused on the development and commercialization of advanced wound care therapies based on our Negative Pressure Technology Platform (“NPTP”) which employs negative pressure in a variety of applications to promote wound healing through unique mechanisms of action and to speed recovery times while reducing the overall cost of treating patients with complex wounds. NPTP comprises three primary product categories: Negative Pressure Wound Therapy (“NPWT”), Negative Pressure Surgical Management (“NPSM”) and Negative Pressure Regenerative Medicine (“NPRM”). NPWT, through our proprietary V.A.C.® Therapy portfolio, currently represents the primary source of revenue for the AHS business. InWe ~~addition, we~~ continue to develop and commercialize new products and therapies in NPSM and plan to launch NPRM products, which are currently being developed by our research and development group, to broaden and diversify our NPTP ~~revenue streams in the future~~. During 2011, our newest NPWT product, the V.A.C.ViaTM Therapy System, was launched in the U.S. and in select European markets. In addition, during 2010, ~~the~~we ~~Company~~ launched our PrevenaTM Incision Management System (“Prevena”) globally. Prevena is our newest NPSM product designed specifically for the management of surgically-closed incisions. In the acute care setting, we bill our customers directly for the rental and sale of our products. In the homecare setting, we ~~provide products and services to patients in the home and~~ generally bill third-party payers directly.

· Our LifeCell™ business unit is focused on the development and commercialization of regenerative and reconstructive acellular tissue matrices for use in reconstructive, orthopedic, and urogynecologic surgical procedures to repair soft tissue defects, as well as for reconstructive and cosmetic procedures. Existing products include our human-based AlloDerm® Regenerative Tissue Matrix (“AlloDerm”) and porcine-based StratticeTM Reconstructive Tissue Matrix (“Strattice”) in various configurations designed to meet the needs of patients and caregivers. The majority of our LifeCell revenue is generated from the clinical applications of challenging hernia repair and post-mastectomy breast reconstruction, which is generated primarily in the United States in the acute care setting on a direct billing basis. We continue efforts to penetrate markets with our other LifeCell products while developing and commercializing additional tissue matrix products and applications to expand into new markets and geographies. During January 2011, ~~the~~we ~~Company~~ launched our newest acellular dermal matrix, AlloDerm® Regenerative Tissue Matrix Ready to Use. AlloDerm® RTM Ready to Use provides all the regenerative features of AlloDerm in a sterile ~~format~~configuration with improved ease of use that does not require rehydration like the freeze-dried ~~version~~versions of AlloDerm products.

Our Therapeutic Support Systems business unit (“TSS”) is focused on commercializing specialized therapeutic support systems, including hospital beds, mattress replacement systems, overlays and patient mobility devices. Our TSS business unit rents and sells products in three primary surface categories: critical care, wound care and bariatric care. Our critical care products, typically used in the ICU, are designed to address pulmonary complications associated with immobility; our wound care surfaces are used to reduce or treat skin breakdown; and our bariatric care surfaces assist caregivers in the safe and dignified handling of obese and morbidly obese patients, while addressing complications related to immobility. We also have products designed to reduce the incidence and severity of patient falls in the hospital setting.

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We are principally engaged in the rental and sale of our products in more than 20 countries. We currently have approximately 7,~~000~~100 employees worldwide and are headquartered in San Antonio, Texas. We have research and development facilities in the United States and the United Kingdom, and we maintain manufacturing and engineering operations in Ireland, the United States, the United Kingdom and Belgium.

Historically, we have experienced a seasonal slowing of AHS unit demand 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. LifeCell has also historically experienced a similar seasonal slowing of sales in the third quarter of each year. Although we do not know if our historical experience will prove to be indicative of future periods, similar slow-downs may occur in subsequent periods.

RECENT DEVELOPMENTS

On July 12, 2011, we entered into a definitive merger agreement (~~the~~ “Merger Agreement”) under which a consortium of funds advised by Apax Partners (“Apax”), together with controlled affiliates of Canada Pension Plan Investment Board (“~~CPP~~CPPIB”) and ~~Canada’s~~the Public Sector Pension Investment Board (“PSP Investments”), will acquire KCI (the “Merger”) for $68.50 per share in cash in a transaction currently valued at $6.31 billion, inclusive of KCI’s outstanding debt.

The ~~Board~~transaction ofis ~~Directors~~subject ofto ~~KCI~~certain ~~has~~closing ~~unanimously~~conditions ~~approved~~but ~~the~~is ~~merger~~not ~~agreement~~subject ~~and~~to ~~recommended~~any ~~that~~closing ~~KCI’s~~condition ~~shareholders adopt the agreement~~ with ~~the~~regard ~~consortium. A~~to ~~special meeting of KCI’s shareholders will be held as soon as practicable after~~ the ~~filing~~financing of ~~a definitive proxy statement with~~ the Utransaction.S. Securities and Exchange Commission (“SEC”) and subsequent mailing to shareholders. The mailing of the proxy statement is expected to take place following the expiration of a 40-day ‘go-shop’ period, during which KCI is permitted to encourage and solicit alternative proposals from third parties.

~~The~~On ~~transaction~~October is28, ~~subject~~2011, we held a special meeting of shareholders to ~~certain~~approve ~~closing~~the ~~conditions~~Merger Agreement, ~~including~~which ~~the~~requires approval by the affirmative vote of ~~KCI’s~~holders ~~shareholders,~~of ~~regulatory~~two-thirds ~~approvals~~of ~~and~~our outstanding shares entitled to vote. Approximately 85.7% of the ~~satisfaction~~outstanding shares of ~~other~~our ~~customary~~common ~~closing~~stock ~~conditions,~~as ~~but~~of isthe ~~not~~record ~~subject~~date towere ~~any~~voted ~~condition~~at ~~with~~the ~~regard~~special tomeeting. Of the ~~financing~~shares that were voted, approximately 99.9% voted in favor of the ~~transaction~~Merger and 0. ~~The~~05% ~~transaction~~voted isagainst ~~currently~~the ~~expected~~Merger. We toanticipate ~~close~~the Merger closing in early November 2011 with our subsequent delisting from the ~~second~~New ~~half~~York ofStock ~~2011~~Exchange.

Additional Information about the Merger and Where to Find It

This Form 10-Q may be deemed to be solicitation material in respect of the proposed acquisition of KCI by a consortium comprised of funds advised by Apax, together with controlled affiliates of CPP and Canada’s PSP. In connection with the proposed acquisition, KCI plans to file a preliminary proxy statement with the SEC. INVESTORS AND SECURITY HOLDERS OF KCI ARE ADVISED TO READ THE PRELIMINARY PROXY STATEMENT, THE DEFINITIVE PROXY STATEMENT AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THOSE DOCUMENTS WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED ACQUISITION. The definitive proxy statement will be mailed to shareholders of KCI. Investors and security holders may obtain a free copy of the proxy statement when it becomes available, and other documents filed by KCI with the SEC, at the SEC’s web site at http://www.sec.gov. Free copies of the proxy statement, when it becomes available, and KCI’s other filings with the SEC may also be obtained from KCI by directing a request to Kinetic Concepts, Inc., Attention: Investor Relations, 8023 Vantage Drive, San Antonio, TX 78230-4726, or by calling 210-255-6157.

KCI and its directors, executive officers and other members of its management and employees may be deemed to be soliciting proxies from KCI’s shareholders in favor of the proposed acquisition. Information regarding KCI’s directors and executive officers is available in its 2010 Annual Report on Form 10-K filed with the SEC on March 1, 2011, and definitive proxy statement relating to its 2011 Annual Meeting of Shareholders filed with the SEC on April 15, 2011. Shareholders may obtain additional information regarding the interests of KCI and its directors and executive officers in the proposed acquisition, which may be different than those of KCI’s shareholders generally, by reading the preliminary proxy statement, definitive proxy statement and other relevant documents filed with the SEC when they become available.

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RESULTS OF OPERATIONS

We have three reportable operating segments which correspond to our three global business units: AHS, LifeCell and TSS. We have three primary geographic regions for which we provide supplemental information: Americas, which is comprised principally of the United States and includes Canada, Puerto Rico and Latin America; EMEA, which is comprised principally of Europe and includes the Middle East and Africa; and APAC, which is comprised of the Asia Pacific region. Revenue for each of our geographic regions in which we operate is disclosed for each of our business units. Certain prior period amounts have been reclassified to conform to the 2011 presentation. In 2011, we began separately reporting the EMEA and APAC geographic revenue results.

Revenue by Operating Segment

The following table sets forth, for the periods indicated, business unit revenue by geographic region, as well as the percentage change in each line item, comparing the second quarter of 2011 to the second quarter of 2010 and the first six months of 2011 to the first six months of 2010 (dollars in thousands):

	Three months ended June 30,						Six months ended June 30,
					%						%
	2011		2010		Change		2011		2010		Change
AHS revenue:
Americas	$	266,859	$	266,681	0.1	%	$	524,719	$	516,513	1.6	%
EMEA		75,155		71,919	4.5			144,095		147,524	(2.3	)
APAC		15,957		9,126	74.9			29,696		16,642	78.4
Total – AHS		357,971		347,726	2.9			698,510		680,679	2.6
LifeCell revenue:
Americas		93,268		82,188	13.5			183,505		160,162	14.6
EMEA		3,062		1,555	96.9			5,839		2,596	124.9
Total – LifeCell		96,330		83,743	15.0			189,344		162,758	16.3
TSS revenue:
Americas		40,966		44,563	(8.1	)		85,519		92,963	(8.0	)
EMEA		24,191		21,564	12.2			47,061		46,453	1.3
APAC		372		176	111.4			580		724	(19.9	)
Total – TSS		65,529		66,303	(1.2	)		133,160		140,140	(5.0	)
Total revenue	$	519,830	$	497,772	4.4	%	$	1,021,014	$	983,577	3.8	%

For additional discussion on segment and operation information, see Note 9 of the notes to the condensed consolidated financial statements.

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Revenue by ~~Geography~~Operating Segment

The following table sets forth, for the periods indicated, ~~rental~~business ~~and~~unit ~~sales~~ revenue by ~~geography~~geographic region, as well as the percentage change in each line item, comparing the ~~second~~third quarter of 2011 to the ~~second~~third quarter of 2010 and the first ~~six~~nine months of 2011 to the first ~~six~~nine months of 2010 (dollars in thousands):

	Three months ended June 30,						Six months ended June 30,
	Three months ended September 30,						Nine months ended September 30,
					%						%
	2011		2010		Change		2011		2010		Change
Americas revenue:
AHS revenue:
Rental	$	218,338	$	227,660	(4.1	)%	$	438,958	$	448,063	(2.0	)%
Americas	$	281,227	$	275,494	2.1	%	$	805,946	$	792,007	1.8	%
Sales		182,755		165,772	10.2			354,785		321,575	10.3
EMEA		73,852		71,505	3.3			217,947		219,029	(0.5	)
Total –Americas		401,093		393,432	1.9			793,743		769,638	3.1
APAC		17,029		11,393	49.5			46,725		28,035	66.7
EMEA revenue:
Total – AHS		372,108		358,392	3.8			1,070,618		1,039,071	3.0
Rental		52,098		50,919	2.3			102,214		106,684	(4.2	)
LifeCell revenue:
Sales		50,310		44,119	14.0			94,781		89,889	5.4
Americas		94,507		83,213	13.6			278,012		243,375	14.2
Total – EMEA		102,408		95,038	7.8			196,995		196,573	0.2
EMEA		2,934		1,722	70.4			8,773		4,318	103.2
APAC revenue:
Total – LifeCell		97,441		84,935	14.7			286,785		247,693	15.8
Rental		8,878		4,505	97.1			16,842		8,328	102.2
TSS revenue:
Sales		7,451		4,797	55.3			13,434		9,038	48.6
Americas		37,687		41,788	(9.8	)		123,206		134,751	(8.6	)
Total – APAC		16,329		9,302	75.5			30,276		17.366	74.3
EMEA		23,888		21,056	13.4			70,949		67,509	5.1
Total rental revenue		279,314		283,084	(1.3	)		558,014		563,075	(0.9	)
APAC		247		537	(54.0	)		827		1,261	(34.4	)
Total sales revenue		240,516		214,688	12.0			463,000		420,502	10.1
Total – TSS		61,822		63,381	(2.5	)		194,982		203,521	(4.2	)
Total revenue	$	~~519~~531,~~830~~371	$	~~497~~506,~~772~~708	4.49	%	$	1,~~021~~552,~~014~~385	$	~~983~~1,~~577~~490,285	34.82	%

~~The~~For ~~change~~additional indiscussion ~~total~~on ~~revenue~~segment ~~compared to the prior-year periods was due to increased LifeCell~~ and ~~AHS~~operation ~~sales~~information, ~~partially~~see ~~offset~~Note by9 ~~decreased~~of ~~TSS revenue. Foreign currency exchange rate movements favorably impacted total revenue by 3.0% and 1.7%, respectively, for~~ the ~~second~~notes ~~quarter and first six months of 2011 compared~~ to the ~~corresponding~~condensed ~~periods~~consolidated offinancial ~~the prior year~~statements.

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Revenue by Geography

The following table sets forth, for the periods indicated, rental and sales revenue by geography, as well as the percentage change in each line item, comparing the third quarter of 2011 to the third quarter of 2010 and the first nine months of 2011 to the first nine months of 2010 (dollars in thousands):

	Three months ended September 30,						Nine months ended September 30,
					%						%
	2011		2010		Change		2011		2010		Change
Americas revenue:
Rental	$	221,157	$	232,314	(4.8	)%	$	660,115	$	680,377	(3.0	)%
Sales		192,264		168,181	14.3			547,049		489,756	11.7

Total –Americas		413,421		400,495	3.2			1,207,164		1,170,133	3.2

EMEA revenue:
Rental		48,445		50,664	(4.4	)		150,659		157,348	(4.3	)
Sales		52,229		43,619	19.7			147,010		133,508	10.1

Total – EMEA		100,674		94,283	6.8			297,669		290,856	2.3

APAC revenue:
Rental		9,533		5,992	59.1			26,375		14,320	84.2
Sales		7,743		5,938	30.4			21,177		14,976	41.4

Total – APAC		17,276		11,930	44.8			47,552		29,296	62.3

Total rental revenue		279,135		288,970	(3.4	)		837,149		852,045	(1.7	)
Total sales revenue		252,236		217,738	15.8			715,236		638,240	12.1

Total revenue	$	531,371	$	506,708	4.9	%	$	1,552,385	$	1,490,285	4.2	%

The change in total revenue compared to the prior-year periods was due to increased LifeCell and AHS revenue, partially offset by decreased TSS revenue. Foreign currency exchange movements favorably impacted total revenue by 2% for both the third quarter and the first nine months of 2011 compared to the corresponding periods of the prior year.

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 the ~~second~~third quarter of 2011 to the ~~second~~third quarter of 2010 and the first ~~six~~nine months of 2011 to the first ~~six~~nine months of 2010:

	Three months ended June 30,					Six months ended June 30,
	Three months ended September 30,					Nine months ended September 30,
	2011		2010		Change	2011		2010		Change
AHS revenue	6870.90	%	6970.97	%	(~~100~~70 bps)	6869.40	%	69.27	%	(8070 bps)
LifeCell revenue	18.53		16.8		~~170~~150 bps	18.65		16.6		~~200~~190 bps
TSS revenue	1211.67		1312.35		(7080 bps)	1312.05		1413.27		(120 bps)
Total revenue	100.0	%	100.0	%		100.0	%	100.0	%
Americas revenue	77.28	%	79.0	%	(~~180~~120 bps)	77.78	%	78.25	%	(5070 bps)
EMEA revenue	1918.79		1918.16		6030 bps	19.32		2019.05		(7030 bps)
APAC revenue	3.13		12.94		~~120~~90 bps	3.0		12.80		~~120~~100 bps
Total revenue	100.0	%	100.0	%		100.0	%	100.0	%
Rental revenue	5352.75	%	5657.90	%	(~~320~~450 bps)	5453.79	%	57.2	%	(~~250~~330 bps)
Sales revenue	4647.35		43.10		~~320~~450 bps	4546.31		42.8		~~250~~330 bps
Total revenue	100.0	%	100.0	%		100.0	%	100.0	%

AHS Revenue

The following table sets forth, for the periods indicated, AHS rental and sales revenue by geography, as well as the percentage change in each line item, comparing the second quarter of 2011 to the second quarter of 2010 and the first six months of 2011 to the first six months of 2010 (dollars in thousands):

	Three months ended June 30,						Six months ended June 30,
					%						%
	2011		2010		Change		2011		2010		Change
Americas revenue:
Rental	$	184,478	$	189,076	(2.4	)%	$	366,340	$	368,069	(0.5	)%
Sales		82,381		77,605	6.2			158,379		148,444	6.7
Total Americas revenue		266,859		266,681	0.1			524,719		516,513	1.6
EMEA revenue:
Rental		31,775		33,271	(4.5	)		62,224		68,856	(9.6	)
Sales		43,380		38,648	12.2			81,871		78,668	4.1
Total EMEA revenue		75,155		71,919	4.5			144,095		147,524	(2.3	)
APAC revenue:
Rental		8,861		4,502	96.8			16,821		8,281	103.1
Sales		7,096		4,624	53.5			12,875		8,361	54.0
Total APAC revenue		15,957		9,126	74.9			29,696		16,642	78.4
Total rental revenue		225,114		226,849	(0.8	)		445,385		445,206	-
Total sales revenue		132,857		120,877	9.9			253,125		235,473	7.5
Total AHS revenue	$	357,971	$	347,726	2.9	%	$	698,510	$	680,679	2.6	%

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AHS revenue from the Americas region for the second quarter of 2011 was comparable to the prior-year period. The 1.6% increase in revenue for the first half of 2011 resulted from a combination of increased V.A.C.® disposable sales and the adoption of new negative pressure-based therapies we have introduced in the U.S., partially offset by a decrease in realized rental pricing. Foreign currency exchange rate movements did not have a significant impact on AHS Americas revenue as compared to the prior-year periods.Revenue

The ~~increase~~following intable ~~AHS~~sets ~~revenue~~forth, ~~from the EMEA region~~ for the ~~second~~periods ~~quarter~~indicated, ofAHS ~~2011~~rental ~~compared~~and tosales ~~the~~revenue ~~prior-year~~by ~~period~~geography, ~~was~~as ~~attributable~~well ~~primarily~~as tothe ~~favorable~~percentage ~~foreign~~change ~~currency~~in ~~exchange~~each ~~rate~~line ~~movements and volume growth for V.A.C.Via™~~item, ~~partially~~comparing ~~offset~~the bythird aquarter ~~decrease~~of in2011 ~~revenue due~~ to ~~increased~~the ~~European~~third ~~Union~~quarter ~~healthcare~~of ~~spending~~2010 ~~austerity~~and ~~measures~~the ~~combined~~first ~~with~~nine ~~continued~~months ~~pricing~~of ~~pressures.~~2011 ~~Foreign~~to ~~currency~~the ~~exchange rate movements favorably impacted second quarter and~~ first ~~half~~nine ~~2011~~months ~~AHS~~of ~~EMEA~~2010 ~~revenue~~(dollars byin ~~12.2% and 5.9%, respectively, compared to the prior-year periods.~~thousands):

The AHS APAC revenue growth for the second quarter and first six months of 2011 was due to higher unit volumes, particularly in Japan, favorable foreign currency rate movements, and improved average pricing resulting from favorable product mix by country. Foreign currency exchange rate movements favorably impacted second quarter and first half 2011 AHS APAC revenue by 21.0% and 17.5%, respectively, compared to the prior-year periods.

	Three months ended September 30,						Nine months ended September 30,
					%						%
	2011		2010		Change		2011		2010		Change
Americas revenue:
Rental	$	189,056	$	196,775	(3.9	)%	$	555,396	$	564,844	(1.7	)%
Sales		92,171		78,719	17.1			250,550		227,163	10.3

Total Americas revenue		281,227		275,494	2.1			805,946		792,007	1.8

EMEA revenue:
Rental		29,351		33,111	(11.4	)		91,575		101,967	(10.2	)
Sales		44,501		38,394	15.9			126,372		117,062	8.0

Total EMEA revenue		73,852		71,505	3.3			217,947		219,029	(0.5	)

APAC revenue:
Rental		9,528		5,961	59.8			26,349		14,242	85.0
Sales		7,501		5,432	38.1			20,376		13,793	47.7

Total APAC revenue		17,029		11,393	49.5			46,725		28,035	66.7

Total rental revenue		227,935		235,847	(3.4	)		673,320		681,053	(1.1	)
Total sales revenue		144,173		122,545	17.6			397,298		358,018	11.0

Total AHS revenue	$	372,108	$	358,392	3.8	%	$	1,070,618	$	1,039,071	3.0	%

~~LifeCell~~The ~~Revenue~~increase in AHS Americas revenue during both the third quarter and first nine months of 2011 compared to the prior-year periods was attributable to a combination of increased sales volumes of V.A.C.® Therapy units and increased sales revenue from the adoption of recently-launched, new negative pressure-based therapies in the U.S., partially offset by a decrease in rental volumes and realized pricing on V.A.C. Therapy rental units.

The ~~following~~increase ~~table~~in ~~sets~~AHS ~~forth,~~EMEA ~~for~~revenue during the ~~periods~~third ~~indicated,~~quarter ~~LifeCell~~of ~~revenue~~2011 bycompared ~~geography,~~to asthe ~~well~~prior-year asperiod ~~the~~was ~~percentage~~due ~~change~~primarily into ~~each~~favorable ~~line~~foreign ~~item~~currency exchange rate movements, ~~comparing~~volume ~~the~~growth ~~second~~on ~~quarter~~sales of ~~2011~~V.A.C.Via™, ABThera™ and V.A.C. Therapy units, partially offset by decreases in revenue due to ~~the~~continued ~~second~~pricing ~~quarter~~pressures ofon ~~2010~~V.A.C. Therapy rental units and a decline in rental and sales volumes. Foreign currency exchange rate movements favorably impacted AHS EMEA revenue during the third quarter and first ~~six~~nine months of 2011 toby ~~the~~8.3% ~~first~~and ~~six~~6.7%, ~~months~~respectively, ofcompared ~~2010~~to ~~(dollars~~the inprior-year ~~thousands):~~periods.

	Three months ended June 30,						Six months ended June 30,
	2011		2010		Change		2011		2010		Change
Americas	$	93,268	$	82,188	13.5	%	$	183,505	$	160,162	14.6	%
EMEA		3,062		1,555	96.9			5,839		2,596	124.9
Total LifeCell revenue	$	96,330	$	83,743	15.0	%	$	189,344	$	162,758	16.3	%

The increase in AHS APAC revenue during the third quarter and first nine months of 2011 compared to the prior-year periods was due primarily to favorable foreign currency rate movements and higher rental and sales volumes in Japan. Foreign currency exchange rate movements favorably impacted AHS APAC revenue during both the third quarter and first nine months of 2011 by 17.4% compared to the prior-year periods.

The growth in LifeCell revenue over the prior-year periods was due primarily to increased demand for our acellular tissue matrix products as the result of continued market penetration and geographic expansion. EMEA LifeCell sales reported growth in all geographic locations where we have launched our LifeCell products. LifeCell revenue generated from the use of AlloDerm, Strattice, and other acellular tissue matrix products in reconstructive surgical procedures, including challenging hernia repair and breast reconstruction, accounted for 93.9% and 93.2%, respectively, of total LifeCell revenue for the second quarter and first six months of 2011 compared to 93.2% during both prior-year periods. Direct sales of Strattice, our porcine-based reconstructive tissue matrix product, accounted for 45.5% and 45.0% of total LifeCell revenue for the second quarter and first six months of 2011, respectively, compared to 39.6% and 38.3%, respectively, in the prior-year periods. Foreign currency exchange rate movements did not have a significant impact on worldwide LifeCell revenue as compared to the prior-year periods.

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LifeCell Revenue

The following table sets forth, for the periods indicated, LifeCell revenue by geography, as well as the percentage change in each line item, comparing the third quarter of 2011 to the third quarter of 2010 and the first nine months of 2011 to the first nine months of 2010 (dollars in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2011		2010		Change		2011		2010		Change

Americas	$	94,507	$	83,213	13.6	%	$	278,012	$	243,375	14.2	%
EMEA		2,934		1,722	70.4			8,773		4,318	103.2

Total LifeCell revenue	$	97,441	$	84,935	14.7	%	$	286,785	$	247,693	15.8	%

The growth in LifeCell revenue over the prior-year periods was due primarily to increased demand for our acellular tissue matrix products as the result of continued market penetration and geographic expansion. EMEA LifeCell sales reported growth in all geographic locations where we have launched our LifeCell products. LifeCell revenue generated from the use of AlloDerm, Strattice, and other acellular tissue matrix products in reconstructive surgical procedures, including challenging hernia repair and breast reconstruction, accounted for 94.1% and 93.8%, respectively, of total LifeCell revenue for the third quarter and first nine months of 2011 compared to 94.3% and 93.5% during the corresponding prior-year periods. Direct sales of Strattice, our porcine-based reconstructive tissue matrix product, accounted for 46.1% and 45.4% of total LifeCell revenue for the third quarter and first nine months of 2011, respectively, compared to 42.2% and 39.6%, respectively, in the prior-year periods. Foreign currency exchange rate movements did not have a significant impact on worldwide LifeCell revenue as compared to the prior-year periods.

TSS Revenue

The following table sets forth, for the periods indicated, TSS rental and sales revenue by geography, as well as the percentage change in each line item, comparing the ~~second~~third quarter of 2011 to the ~~second~~third quarter of 2010 and the first ~~six~~nine months of 2011 to the first ~~six~~nine months of 2010 (dollars in thousands):

	Three months ended June 30,						Six months ended June 30,
	Three months ended September 30,						Nine months ended September 30,
					%						%
	2011		2010		Change		2011		2010		Change
Americas revenue:
Rental	$	3331,~~505~~558	$	3835,~~584~~539	(1311.2	)%	$	72103,~~028~~586	$	79115,~~994~~533	(10.03	)%
Sales		76,~~461~~129		56,~~979~~249	24(1.89	)		1319,~~491~~620		1219,~~969~~218	42.01
Total Americas revenue		4037,~~966~~687		4441,~~563~~788	(89.18	)		85123,~~519~~206		92134,~~963~~751	(8.06	)
EMEA revenue:
Rental		2019,~~323~~094		17,~~648~~553	158.28			3959,~~990~~084		3755,~~828~~381	56.7
Sales		34,~~868~~794		3,~~916~~503	(136.29	)		711,~~071~~865		812,~~625~~128	(182.02	)
Total EMEA revenue		2423,~~191~~888		21,~~564~~056	1213.24			4770,~~061~~949		4667,~~453~~509	15.31
APAC revenue:
Rental		175		331	~~466~~(83.79	)		2126		4778	(5566.37	)
Sales		~~355~~242		~~173~~506	~~105~~(52.2	)		~~559~~801		~~677~~1,183	(1732.43	)
Total APAC revenue		~~372~~247		~~176~~537	~~111~~(54.40	)		~~580~~827		~~724~~1,261	(1934.94	)
Total rental revenue		5350,~~845~~657		5653,~~235~~123	(4.36	)		~~112~~162,~~039~~696		~~117~~170,~~869~~992	(4.9	)
Total sales revenue		11,~~684~~165		10,~~068~~258	168.18			2132,~~121~~286		2232,~~271~~529	(50.27	)
Total TSS revenue	$	6561,~~529~~822	$	6663,~~303~~381	(1.2.5	)%	$	~~133~~194,~~160~~982	$	~~140~~203,~~140~~521	(54.02	)%

The decrease in ~~worldwide~~ TSS Americas revenue ~~from~~was ~~the~~driven ~~prior-year~~by ~~periods~~our ~~was~~rental ~~due~~business, ~~primarily~~which tohas ~~lower~~experienced ~~rental~~increased ~~volumes~~competitive pressure and modest share loss. The increase in ~~both~~TSS ~~wound~~EMEA ~~care~~revenue ~~and~~during ~~bariatric~~the ~~care~~third asquarter ~~hospitals~~of ~~shifted~~2011 ~~towards~~compared ~~capital~~to ~~purchases~~the prior-year period was due primarily to favorable foreign currency rate movements and ~~away~~strong ~~from~~capital ~~rentals~~sales. Foreign currency exchange rate movements favorably impacted Americas and EMEA TSS revenue by 1.0% and 139.38%, respectively, in the ~~second~~third quarter of 2011 and 0.9% and 5.6.9%, respectively, in the first ~~half~~nine months of 2011 compared to the prior-year periods.

Rental Expenses

The following table presents rental expenses and the percentage relationship to AHS and TSS revenue comparing the second quarter of 2011 to the second quarter of 2010 and the first six months of 2011 to the first six months of 2010 (dollars in thousands):

	Three months ended June 30,								Six months ended June 30,
	2011			2010			Change		2011			2010			Change
Rental expenses	$	146,353		$	155,622		(6.0	)%	$	296,845		$	308,841		(3.9	)%
As a percent of total AHS and TSS revenue		34.6	%		37.6	%	(300 bps)			35.7	%		37.6	%	(190 bps)

Rental, or field, expenses are comprised of both fixed and variable costs including facilities, field service, sales force compensation and royalties associated with our rental products. Rental expenses as a percent of total AHS and TSS revenue during the second quarter and first six months of 2011 decreased from the prior-year periods due primarily to lower product royalty costs on AHS revenue associated with our previous license agreement with Wake Forest University and lower rental fleet depreciation, partially offset by additional investment in our AHS sales force during the second half of 2010 and the first half of 2011.

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Rental Expenses

The following table presents rental expenses and the percentage relationship to AHS and TSS revenue comparing the third quarter of 2011 to the third quarter of 2010 and the first nine months of 2011 to the first nine months of 2010 (dollars in thousands):

	Three months ended September 30,								Nine months ended September 30,
	2011			2010			Change		2011			2010			Change
Rental expenses	$	136,789		$	155,765		(12.2	)%	$	433,634		$	464,606		(6.7	)%
As a percent of total AHS and TSS revenue		31.5	%		36.9	%	(540	bps)		34.3	%		37.4	%	(310	bps)

Rental, or field, expenses are comprised of both fixed and variable costs including facilities, field service, sales force compensation and royalties associated with our rental products. Rental expenses as a percent of total AHS and TSS revenue during the third quarter of 2011 decreased from the prior-year period due primarily to lower product royalty costs on AHS revenue associated with our previous license agreement with Wake Forest University and lower rental fleet depreciation, partially offset by the impact of unfavorable foreign currency movements. The year-to-date rental expenses decrease as a percent of total AHS and TSS revenue was lower than the current quarter resulting primarily from increased selling expenses related to additional investment in our AHS sales force during the second half of 2010 and first nine months of 2011.

Cost of Sales

The following table presents cost of sales and the sales margin (calculated as sales revenue less cost of sales divided by sales revenue for the period indicated) comparing the ~~second~~third quarter of 2011 to the ~~second~~third quarter of 2010 and the first ~~six~~nine months of 2011 to the first ~~six~~nine months of 2010 (dollars in thousands):

	Three months ended June 30,								Six months ended June 30,
	Three months ended September 30,								Nine months ended September 30,
	2011			2010			Change		2011			2010			Change
Cost of sales	$	6062,~~418~~925		$	6261,~~307~~551		(32.02	)%	$	~~122~~185,~~137~~062		$	~~123~~184,~~231~~782		(0.92	)%
Sales margin		7475.91	%		71.07	%	~~390 bps~~340	bps		7374.61	%		7071.70	%	~~290 bps~~310	bps

Cost of sales includes manufacturing costs, product costs and royalties associated with our “for sale” products. The increase in sales margins over the prior-year periods was due primarily to growth and improved yields in our LifeCell business unit and lower product royalty costs on AHS revenue associated with our previous license agreement with Wake Forest University.

Gross Profit Margin

The following table presents the gross profit margin (calculated as gross profit divided by total revenue for the periods indicated) comparing the ~~second~~third quarter of 2011 to the ~~second~~third quarter of 2010 and the first ~~six~~nine months of 2011 to the first ~~six~~nine months of 2010:

	Three months ended June 30,					Six months ended June 30,
	Three months ended September 30,					Nine months ended September 30,
	2011		2010		Change	2011		2010		Change
Gross profit margin	6062.24	%	5657.21	%	~~400~~530 bps	5960.01	%	56.14	%	~~290~~370 bps

The ~~increase in~~ gross profit margin ~~over~~increase during the third quarter of 2011 compared to the prior-year ~~periods~~period was due primarily to lower royalty expense associated with our previous license agreement with Wake Forest University, higher gross margins associated with our LifeCell business unit, ~~and~~ lower rental fleet depreciation, ~~partially~~and ~~offset~~favorable byproduct mix. The year-to-date gross profit margin increase was lower than the current quarter resulting primarily from increased selling expenses related to additional investment in our AHS sales force during the second half of 2010 and ~~the~~ first ~~half~~nine months of 2011. During the ~~second~~third quarter and first ~~six~~nine months of 2011, ~~the~~we ~~Company~~ recorded $0 and $13.1 million, respectively, in royalty expense associated with our previously-existing licensing agreement with Wake Forest University compared to $23.09 million and $4266.64 million, respectively, during the prior-year periods.

Selling, General and Administrative Expenses

The following table presents selling, general and administrative expenses and the percentage relationship to total revenue comparing the second quarter of 2011 to the second quarter of 2010 and the first six months of 2011 to the first six months of 2010 (dollars in thousands):

	Three months ended June 30,								Six months ended June 30,
	2011			2010			Change		2011			2010			Change
Selling, general and administrative expenses	$	152,155		$	147,212		3.4	%	$	296,522		$	282,591		4.9	%
As a percent of total revenue		29.3	%		29.6	%	(30 bps)			29.0	%		28.7	%	30 bps

Selling, general and administrative (“SG&A”) expenses include administrative labor, incentive and sales compensation costs, insurance costs, professional fees, depreciation, bad debt expense and information systems costs, but excludes rental sales force compensation costs. SG&A increases included the impact of unfavorable foreign currency rate movements, selling costs associated with our LifeCell division, higher costs associated with geographic expansion and new product launches, and acquisition-related costs, partially offset by reduced litigation costs and prior-year charges associated with our TSS portfolio rationalization and our Global Business Transformation.

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Selling, General and Administrative Expenses

The following table presents selling, general and administrative expenses and the percentage relationship to total revenue comparing the third quarter of 2011 to the third quarter of 2010 and the first nine months of 2011 to the first nine months of 2010 (dollars in thousands):

	Three months ended September 30,								Nine months ended September 30,
	2011			2010			Change		2011			2010			Change
Selling, general and administrative expenses	$	155,855		$	139,512		11.7	%	$	452,377		$	422,103		7.2	%
As a percent of total revenue		29.3	%		27.5	%	180	bps		29.1	%		28.3	%	80	bps

Selling, general and administrative (“SG&A”) expenses include administrative labor, incentive and sales compensation costs, insurance costs, professional fees, depreciation, bad debt expense and information systems costs, but excludes rental sales force compensation costs. SG&A increases during the third quarter of 2011 compared to the prior-year period included the impact of foreign currency movements, transaction-related costs associated with our recently-announced acquisition, higher selling costs associated with our LifeCell division and higher costs associated with geographic expansion. The year-to-date percentage increase in SG&A expenses was lower than the current quarter resulting primarily from reduced litigation costs and prior-year charges associated with our TSS portfolio rationalization and our Global Business Transformation in the second quarter.

Research and Development Expenses

The following table presents research and development expenses and the percentage relationship to total revenue comparing the ~~second~~third quarter of 2011 to the ~~second~~third quarter of 2010 and the first ~~six~~nine months of 2011 to the first ~~six~~nine months of 2010 (dollars in thousands):

	Three months ended June 30,								Six months ended June 30,
	Three months ended September 30,								Nine months ended September 30,
	2011			2010			Change		2011			2010			Change
Research and development expenses	$	23,~~411~~530		$	2120,~~718~~873		712.87	%	$	4468,~~594~~124		$	4667,~~502~~375		(41.1	)%
As a percent of total revenue		4.54	%		4.41	%	~~10 bps~~30	bps		4.4	%		4.75	%	(~~30 bps)~~10	bps)

Research and development expenses relate to our investments in clinical studies and the development of new and enhanced products and therapies. Our research and development efforts include the development of new and synergistic technologies across the continuum of wound care, including tissue regeneration, preservation and repair, new applications of negative pressure technology, as well as upgrading and expanding our surface technologies in our TSS business. Our research and development program is also leveraging our core understanding of biological tissues in order to develop biosurgery products in our LifeCell business. Research and development expenses ~~for the first half of 2011~~ were ~~lower than the prior-year period due primarily to~~ higher ~~costs in the first quarter of 2010 as we prepared for new product launches including V.A.C.Via and Prevena. Research and development expenses were higher~~ during the ~~second~~third quarter of 2011 compared to the prior-year period due to increased headcount following the 2010 formation of our Center for Advanced Research and Technology ~~(“ART”)~~. The goal of ART is to identify, develop and acquire new technologies to support product development in our AHS, LifeCell and TSS businesses to broaden our existing portfolio with future advanced technologies.

Acquired Intangible Asset Amortization

In connection with the LifeCell acquisition, we recorded $486.7 million of identifiable definite-lived intangible assets during the second quarter of 2008. Amortization expense associated with these acquired intangible assets was $8.9 million and $1726.76 million in the ~~second~~third quarter and first ~~six~~nine months of 2011, respectively, compared to $98.69 million and $1928.76 million in the corresponding prior-year periods.

Operating Margin

The following table presents the operating margin, defined as operating earnings as a percentage of total revenue, comparing the second quarter of 2011 to the second quarter of 2010 and the first six months of 2011 to the first six months of 2010:

	Three months ended June 30,					Six months ended June 30,
	2011		2010		Change	2011		2010		Change
Operating margin	24.7	%	20.4	%	430 bps	23.8	%	20.6	%	320 bps

The increase in operating margin resulted from a combination of lower royalty expense, favorable product mix and certain charges recorded in the second quarter of 2010 not recurring in 2011 as discussed above. During the second quarter of 2011, the Company recorded $1.2 million in expenses associated with the recently-announced leveraged buyout transaction.

Interest Expense

Interest expense decreased to $17.2 million and $38.0 million in the second quarter and first six months of 2011, respectively, compared to $22.3 million and $45.8 million in the corresponding prior-year periods, due to scheduled and voluntary debt payments made over the last twelve months, as well as lower interest rates due, in part, to our debt refinancing completed in the first quarter of the year. Interest expense includes write-offs of $3.2 million in the second quarter and first six months of 2011 as compared to $648,000 and $1.9 million, respectively, for the same periods of 2010 for unamortized deferred debt issuance costs associated with the refinancing of our senior credit facility during 2011 and optional prepayments on our senior credit facility during 2010. In addition, we recorded $5.7 million and $11.3 million of additional non-cash interest expense related to amortization of the discount on our convertible senior notes in the second quarter and first six months of 2011, respectively, as compared to $5.3 million and $10.4 million for the same periods of 2010.

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~~Foreign~~Operating ~~Currency Loss~~Margin

WeThe ~~recognized~~following ~~foreign~~table ~~currency~~presents ~~exchange~~the ~~rate~~operating ~~losses of $206~~margin,~~000~~ ~~and~~defined ~~$25,000~~as ~~for~~operating ~~the~~earnings ~~second~~as ~~quarter~~a ~~and~~percentage ~~first six months~~ of ~~2011,~~total ~~respectively~~revenue, ~~compared~~comparing ~~to $2.7 million and $5.3 million in~~ the ~~corresponding~~third ~~periods~~quarter of ~~the~~2011 ~~prior~~to ~~year. The decrease in~~ the ~~losses~~third ~~incurred~~quarter ~~during~~of ~~the~~2010 ~~second quarter~~ and the first ~~six~~nine months of 2011 ~~were~~to ~~due~~the ~~primarily~~first tonine ~~reduced~~months ~~foreign~~of ~~currency exposures.~~2010:

	Three months ended September 30,					Nine months ended September 30,
	2011		2010		Change	2011		2010		Change
Operating margin	27.0	%	23.7	%	330 bps	24.9	%	21.7	%	320 bps

The increase in operating margins resulted from a combination of lower royalty expense, favorable foreign currency movements and prior-year charges associated with our TSS portfolio rationalization and Global Business Transformation, partially offset by higher costs associated with our recently-announced acquisition. During the third quarter and first nine months of 2011, we recorded $6.0 million and $7.2 million, respectively, in expenses associated with our recently-announced acquisition.

Interest Expense

Interest expense decreased to $17.3 million and $55.3 million in the third quarter and first nine months of 2011, respectively, compared to $21.5 million and $67.4 million in the corresponding prior-year periods, due to debt payments made over the last twelve months, as well as lower interest rates due, in part, to our debt refinancing completed in the first quarter of 2011. Interest expense includes write-offs of $0 and $3.2 million, respectively, during the third quarter and first nine months of 2011 as compared to $374,000 and $2.3 million, respectively, during the corresponding prior-year periods for unamortized deferred debt issuance costs associated with the refinancing of our senior credit facility during 2011 and optional prepayments on our senior credit facility during 2010. In addition, we recorded $5.8 million and $17.1 million of additional non-cash interest expense related to amortization of the discount on our convertible senior notes in the third quarter and first nine months of 2011, respectively, as compared to $5.4 million and $15.8 million for the same periods of 2010.

Foreign Currency Gain (Loss)

We recognized foreign currency exchange rate losses of $2.1 million during both the third quarter and first nine months of 2011 compared to foreign currency exchange rate gains of $2.1 million during the third quarter of 2010 and foreign currency exchange rate losses of $3.1 million during the first nine months of 2010. The variance from the prior-year periods is due primarily to significant volatility in the foreign currency markets.

Net Earnings

For the ~~second~~third quarter of 2011, we reported net earnings of $8190.47 million, an increase of 5119.97% compared to $5375.68 million in the prior-year period. For the first ~~six~~nine months of 2011, we reported net earnings of $~~149~~240.86 million, an increase of 4032.91% compared to $~~106~~182.31 million in the prior-year period. The effective income tax rate for the ~~second~~third quarter and first ~~six~~nine months of 2011 was 27.0% and 27.1%, respectively, compared to 3025.0% and 28.0%, respectively, for ~~both~~the corresponding periods in 2010. The ~~decrease~~increase in the effective income tax rate for the ~~second~~third quarter ~~and~~of ~~first~~2011 ~~six~~as ~~months~~compared ofto ~~2011~~the prior-year period was due primarily to athe ~~higher~~favorable ~~percentage~~resolution of ~~taxable~~certain ~~income being generated in lower-~~tax ~~foreign~~contingencies ~~jurisdictions~~during 2010.

Net Earnings per Diluted Share

Net earnings per diluted share for the ~~second~~third quarter and first ~~six~~nine ~~month~~months of 2011 were $1.0916 and $23.0421, respectively, as compared to net earnings per diluted share of $01.7506 and $12.4854, respectively, in the corresponding prior-year periods. The dilutive effect associated with our ~~convertible~~Convertible ~~senior~~Notes ~~notes~~and ~~was~~related ~~$0.02~~warrants ~~and~~were $0.0106 ~~per~~during ~~diluted~~both ~~share for~~ the ~~second~~third quarter and first ~~six~~nine months of 2011~~, respectively~~.

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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. Additionally, from time to time, we may use capital for acquisitions, share repurchases and other investing and financing activities. Our capital expenditures consist primarily of manufactured rental assets, manufacturing equipment, computer hardware and software, and expenditures related to leasehold improvements. 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 the ~~six~~nine months ended ~~June~~September 30, 2011 and 2010, 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 ~~six~~nine months ended ~~June~~September 30, 2011 and 2010 (dollars in thousands):

	Six months ended
	Nine months ended
	June 30,
	September 30,
	2011			2010
Net cash provided by operating activities	$	~~236~~423,~~461~~160		$	~~137~~233,~~900~~115
Net cash used by investing activities		(90113,~~440~~983	)		(3961,~~951~~559	)
Net cash provided (used) by financing activities		3231,~~672~~738			(~~111~~170,~~134~~932	)
Effect of exchange rates changes on cash and cash equivalents		~~3,128~~(725	)		(~~2,904~~484	)
Net increase (decrease) in cash and cash equivalents	$	181,821		$	(16,089	)
Net increase in cash and cash equivalents	$	340,190		$	140

31As of September 30, 2011, our principal sources of liquidity consisted of $656.8 million of cash and cash equivalents and $638.0 million available under our revolving credit facility, net of $12.0 million in undrawn letters of credit. During the first nine months of 2011, we made scheduled repayments on the $550.0 million term A facility due in January 2016 totaling $20.6 million from cash-on-hand. The increase in net cash provided by operating activities was due primarily to higher net earnings and lower cash outlays for royalty payments, inventory purchases, interest and income taxes, partially offset by higher capital expenditures.

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As of June 30, 2011, our principal sources of liquidity consisted of $498.4 million of cash and cash equivalents and $638.0 million available under our revolving credit facility, net of $12.0 million in undrawn letters of credit. During the first six months of 2011, we made scheduled repayments on the $550.0 million term A facility due in January 2016 totaling $13.8 million from cash-on-hand. The increase in net cash provided by operating activities was due primarily to higher net earnings and lower cash outlays for royalty payments, inventory purchases, interest and income taxes, partially offset by lower cash collections.

As of December 31, 2010, our principal sources of liquidity consisted of $316.6 million of cash and cash equivalents and $288.4 million available under our revolving credit facility, net of $11.6 million in undrawn letters of credit. During 2010, we made scheduled and voluntary net repayments on the senior credit facility totaling $222.7 million from cash-on-hand.

Working Capital

As of ~~June~~September 30, 2011, we had current assets of $1.~~155~~28 billion, including $~~411~~404.10 million in net accounts receivable and $~~168~~160.68 million in net inventory, and current liabilities of $~~320~~349.40 million resulting in a working capital surplus of $~~834~~932.64 million. As of December 31, 2010, we had current assets of $967.5 million, including $414.1 million in net accounts receivable and $172.6 million in net inventory, and current liabilities of $455.2 million resulting in a working capital surplus of $512.3 million.

As of ~~June~~September 30, 2011 and December 31, 2010, we had $~~411~~404.10 million and $414.1 million, respectively, of receivables outstanding, net of realization reserves of $79.27 million and $97.0 million, respectively. Americas receivables, net of realization reserves, were outstanding for an average of 6160 days at ~~June~~September 30, 2011 compared to 63 days at December 31, 2010. EMEA and APAC net receivables were outstanding for an average of 9996 days and 6872 days, respectively, at ~~June~~September 30, 2011, compared to 93 days and 72 days, respectively, at December 31, 2010. The increase in EMEA days outstanding compared to December 31, 2010 was due primarily to the ~~weakening~~timing of ~~the U~~collections.~~S. dollar compared to other currencies.~~

Capital Expenditures

During the first six months of 2011 and 2010, we made capital expenditures of $66.8 million and $46.2 million, respectively. Capital expenditures during 2011 related primarily to expanding the rental fleet, the purchase of land and the construction of our global headquarters building, and information technology purchases. Capital expenditures during 2010 related primarily to expanding the rental fleet and information technology purchases.

Senior Credit Facility

In January 2011, we entered into a new senior credit facility consisting of a $550.0 million term A facility and a $650.0 million revolving credit facility due January 2016 (“2016 Senior Credit Facility”). The following table sets forth the amounts owed under the term loan and revolving credit facility, the effective interest rates on such outstanding amounts, and the amount available for additional borrowing thereunder, as of June 30, 2011 (dollars in thousands):

		Effective					Amount Available
	Maturity	Interest			Amount		for Additional
Senior Credit Facility	Date	Rate			Outstanding		Borrowing
Revolving credit facility	January 2016	-			$	-	$	637,952	(1)
Term loan facility	January 2016	2.455	%	(2)		536,250		-	(3)
Total					$	536,250	$	637,952
(1) At June 30, 2011, the amount available under the revolving portion of our credit facility reflected a reduction of $12.0 million for letters of credit issued on our behalf, none of which have been drawn upon by the beneficiaries thereunder. (2) The effective interest rate includes the effect of interest rate hedging arrangements. Excluding the interest rate hedging arrangements, our nominal interest rate as of June 30, 2011 was 2.000%. (3) The Company also has the right at any time to increase the total amount of its commitments under the 2016 Senior Credit Facility by an aggregate additional amount up to $500.0 million.

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AsCapital of June 30, 2011, we were in compliance with all covenants under the senior credit agreement. For further information on the 2016 Senior Credit Facility, see Note 3 of the notes to the condensed consolidated financial statements.Expenditures

During the first nine months of 2011 and 2010, we made capital expenditures of $89.0 million and $63.3 million, respectively. Capital expenditures during 2011 related primarily to expanding the rental fleet, the purchase of land and the construction of our global headquarters building, and information technology purchases. Capital expenditures during 2010 related primarily to expanding the rental fleet and information technology purchases.

Senior Credit Facility

		Effective					Amount Available
	Maturity	Interest			Amount		for Additional
Senior Credit Facility	Date	Rate			Outstanding		Borrowing

Revolving credit facility	January 2016	-			$	-	$	637,952	(1)
Term loan facility	January 2016	2.156	%	(2)		529,375		-	(3)

Total					$	529,375	$	637,952


(1) At September 30, 2011, the amount available under the revolving portion of our credit facility reflected a reduction of $12.0 million for letters of credit issued on our behalf, none of which have been drawn upon by the beneficiaries thereunder. (2) The effective interest rate includes the effect of interest rate hedging arrangements. Excluding the interest rate hedging arrangements, our nominal interest rate as of September 30, 2011 was 1.740%. (3) KCI also has the right at any time to increase the total amount of its commitments under the 2016 Senior Credit Facility by an aggregate additional amount up to $500.0 million.

As of September 30, 2011, we were in compliance with all covenants under the senior credit agreement. For further information on the 2016 Senior Credit Facility, see Note 3 of the notes to the condensed consolidated financial statements.

Convertible Senior Notes

In 2008, we issued $690.0 million aggregate principal amount of 3.25% convertible senior notes due April 2015 (the “Convertible Notes”). The Convertible Notes are governed by the terms of an indenture dated as of April 21, 2008 (the “Indenture”). As of ~~June~~September 30, 2011, we were in compliance with all covenants under the Indenture and the Convertible Notes were not yet convertible by the holders thereof. For further information on our Convertible Notes and related Note Hedge and Warrants, see Note 3 of the notes to the condensed consolidated financial statements.

Interest Rate Protection

At ~~June~~September 30, 2011 and December 31, 2010, we had 1719 and 18 interest rate swap agreements in effect, respectively, pursuant to which we have fixed the rate on an aggregate of $~~475~~525.0 million and $444.5 million, respectively, in notional amounts of our outstanding variable rate debt at weighted average interest rates of 0.~~750~~789% and 1.226%, respectively, exclusive of the Eurocurrency Rate Loan Spread as disclosed in the senior credit agreement. At ~~June~~both September 30, 2011 and December 31, 2010, the aggregate fair value of our interest rate swap agreements was negative and was recorded as a liability of $~~2.2 million and $~~1.7 million~~, respectively~~. This amount was also recorded in other comprehensive income, net of tax. If our interest rate protection agreements were not in place, interest expense would have been approximately $0.76 million and $12.73 million lower for the ~~second~~third quarter and first ~~six~~nine months of 2011, respectively, and $2.70 million and $5.7.6 million lower induring the same periods of the prior year.

For further information on our interest rate protection agreements, see Note 4 of the notes to the condensed consolidated financial statements.

Long-Term Commitments

The following table summarizes our long-term debt obligations, excluding the convertible debt discount, as of June 30, 2011 for each of the periods indicated (dollars in thousands):

	Long-Term Debt Obligations
Year Payment Due	2011		2012		2013		2014		2015		Thereafter		Total
Long-term debt	$	13,750	$	27,500	$	41,250	$	55,000	$	745,000	$	343,750	$	1,226,250

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For further information on our interest rate protection agreements, see Note 4 of the notes to the condensed consolidated financial statements.

Long-Term Commitments

The following table summarizes our long-term debt obligations, excluding the convertible debt discount, as of September 30, 2011 for each of the periods indicated (dollars in thousands):

	Long-Term Debt Obligations
Year Payment Due	2011		2012		2013		2014		2015		Thereafter		Total

Long-term debt	$	6,875	$	27,500	$	41,250	$	55,000	$	745,000	$	343,750	$	1,219,375

OTHER MATTERS

We continue to see signs of weakness in the U.S. and global economies. We believe the economic downturn may generally decrease hospital census and the demand for elective surgeries. Also, the global financial crisis, continuing high levels of unemployment and general economic uncertainties have made it more difficult and more expensive for hospitals and health systems to obtain credit which may contribute to pressures on their operating margins. We believe that rising unemployment reduces the number of individuals covered by private insurance which has resulted in a noticeable increase in our charity-care placements and may increase the cost of uncompensated care for hospitals. Higher unemployment may also result in a shift in reimbursement patterns as unemployed individuals switch from private plans to public plans such as Medicaid or Medicare. If the economic downturn persists and unemployment remains high or increases, any significant shift in coverage for the unemployed may have an unfavorable impact on our reimbursement mix and may result in a decrease in our overall average unit prices.

From time to time, the Center for Medicare and Medicaid Services (“CMS”) publishes reimbursement policies and rates that may unfavorably affect the reimbursement and market for our products. In July 2008, NPWT was removed from the initial round of Medicare’s durable medical equipment competitive bidding program, which was effective January 1, 2011. ~~CMS~~In ~~has~~August ~~not~~2011, ~~yet~~CMS announced ~~categories~~that ~~and~~NPWT ~~areas~~will be included in round two of the competitive bidding program, which will be effective no earlier than July 2013. We have communicated to CMS our strong belief that the selection of NPWT suppliers to Medicare patients under the competitive bidding program should be based on each supplier’s ability to provide prompt quality service and timely therapy to patients in areas subject to the program which KCI has done effectively for over a decade. Additionally, we believe ~~selection~~CMS ofshould require NPWT suppliers ~~under the competitive bidding program should~~ be ~~based~~accredited ~~on each supplier’s ability~~ to ~~deliver~~ NPWT-specific ~~systems~~quality ~~cleared~~standards byto ~~the~~ensure ~~Food~~only ~~and~~competent ~~Drug~~suppliers ~~Administration~~are ~~(“FDA”)~~awarded ~~for~~a ~~safe use in the home~~contract. The importance of training and support for caregivers and patients has been validated by the recent Food and Drug Administration (“FDA”) initiative focused on the migration of complex medical devices into the home. KCI has a significant body of evidence supporting the safety and efficacy of our products in the home setting which differentiates us from other manufacturers and suppliers of NPWT products. ~~Future~~Inclusion ~~inclusion~~ of our NPWT products in the Medicare competitive bidding program could result in ~~increased competition and~~ reduced reimbursement for our Medicare placements. For the fiscal year ended 2010, U.S. Medicare placements of our NPWT products represented approximately 8.1% of our total revenue.

In September 2010 and February 2011, we conducted a corrective field action with respect to our RotoProne product which included clarified labeling and written notifications to existing customers regarding operational and safety features of the RotoProne and an update to the buckles used to secure patients to the Therapy System. KCI reported these voluntary corrections to the FDA. We do not expect this corrective action will have a material impact on our results of operations.

Recently, the FDA ~~issued~~ proposed ~~rules~~certain regulatory reforms, which may result in substantial changes to the 510(k) clearance process for medical devices. ~~Among~~The ~~the~~ proposed ~~changes,~~reforms ~~the~~include: pre-510(k) clearance; facility inspections to ensure compliance with FDA Quality System Regulation requirements; creation of ~~certain~~a ~~medical~~Class IIb subset of devices ~~may~~that beare subject to ~~facility~~more ~~inspections~~rigorous todata ~~ensure~~requirements ~~compliance~~than ~~with~~other ~~Good~~Class ~~Manufacturing~~II ~~Practices~~devices; ~~rules~~new guidance for consideration of device modifications requiring submission of new 510(k) notifications; and ~~regulations~~establishment of an “assurance case” framework for 510(k) submissions requiring demonstration of the validity of all claims. If any of the FDA’s proposed ~~rules~~reforms are ~~made~~established ~~final~~by instatute ~~their~~or ~~current form~~regulation, we expect that ~~obtaining~~ 510(k) ~~clearances~~submissions for KCI medical devices in the future may require significantly more data, including clinical data, and that obtaining 510(k) clearance may become more ~~difficult~~costly and time consuming. Any substantial increase in requirements which are imposed on KCI as a result of new ~~rules~~statutory or regulatory requirements could potentially delay our development and commercialization of new medical device products.

In November 2009, the FDA issued a Preliminary Public Health Notice (“PHN”) notifying caregivers and patients of potential complications associated with the use of NPWT products. The FDA updated the notice in February 2011. The complications cited by the FDA and the recommendations for care-givers and patients are consistent with the labeling and training we provide in our professional education programs. We believe that our demonstrated commitment to the safety and efficacy of our products is consistent with the FDA’s messaging in the PHN. In our educational programs, we give detailed guidance to practitioners regarding the selection of patients, contraindications, patient risk factors and the warnings included in our labeling. In addition, V.A.C. Therapy patients receive detailed instructions on how to use our products as well as information on possible complications, patient risk factors, and warnings associated with using our products. These efforts, combined with our nation-wide 24-hour clinical support and service, as well as our provision of a continuum of care between care settings, set us apart as a leading NPWT provider in the United States and around the world. We continue to provide our customers with the highest level of clinical support and education to minimize the incidence of complications associated with our products. However, when complications associated with our products do occur, we file Medical Device Reports with the FDA consistent with the highest standards of quality, compliance and complaint reporting. V.A.C. Therapy is designed to safely treat complicated wounds, often on patients with severe comorbidities; reported complications are extremely rare. Although the FDA did not specifically tie KCI or V.A.C. Therapy to safety issues in the PHN, we have received and responded to several inquiries from customers and professional associations concerned about the notice. We will continue to monitor and respond to the concerns of our customers regarding the PHN and any similar communications by the FDA in the future.

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In April 2011, LifeCell Corporation initiated a voluntary recall of specified lots of human-tissue based products because of information received indicating that the tissue may not have been suitable for transplant. We have notified the FDA of the voluntary recall and have recovered all affected product from the sole affected customer. We have also initiated communications with the customer for the replacement of the product. We do not expect the recall to materially impact our revenue or cost of goods sold. Any defects that warrant material or widespread product recalls in the future could have a material adverse effect on our operating results.

InOn ~~February~~May ~~2009~~9, we2011, LifeCell Corporation received a ~~subpoena~~warning letter dated May 5, 2011 from the ~~U.S.~~FDA ~~Department~~following ofan ~~Health~~inspection ~~and~~by ~~Human~~the ~~Services~~FDA ~~Office~~at ofLifeCell ~~Inspector~~in ~~General~~November ~~("OIG")~~2010. The ~~seeking~~Warning ~~records~~Letter ~~regarding~~primarily ~~our~~related ~~billing~~to ~~practices~~LifeCell’s ~~under~~failure ~~the~~to ~~local~~submit ~~coverage~~required ~~policies~~documentation ofto the ~~four~~FDA ~~regional~~prior ~~Durable~~to ~~Medical~~conduct ~~Equipment~~of ~~Medicare~~certain ~~Administrative~~clinical ~~Contractors (“DMACs”)~~studies. The ~~Company~~FDA ~~cooperated~~also identified certain observed non-compliance with ~~the~~FDA ~~OIG’s~~regulations ~~inquiry~~covering ~~and~~the ~~provided~~promotion ~~substantial~~of ~~documentation~~LifeCell’s toStrattice/LTM ~~the~~product ~~OIG~~for ~~and~~use ~~the~~with Ubreast implants.S. LifeCell ~~Attorneys’~~submitted ~~office~~a inwritten response to ~~its~~the ~~request. On~~FDA on May 931, 2011,. LifeCell is cooperating with the ~~Company~~FDA ~~received~~and ~~notice~~believes that the ~~U.S.~~corrective ~~Attorneys’~~actions ~~office~~it ~~had~~is ~~declined~~taking towill ~~intervene~~resolve inthe ~~qui~~FDA’s ~~tam~~concerns ~~actions~~without ~~filed~~a ~~against~~material ~~the~~impact ~~Company~~on bythe ~~two~~LifeCell’s ~~former~~business. However, ~~employees~~we incannot ~~Federal~~give ~~Court~~any inassurances ~~California. The~~that ~~complaints~~the ~~were~~FDA ~~recently~~will ~~unsealed,~~be ~~and~~satisfied ~~KCI~~with ~~intends~~its response to ~~defend~~the ~~itself~~warning inletter ~~these~~or ~~matters~~as ~~vigorously,~~to ~~including~~the ~~seeking~~expected date of the ~~dismissal~~resolution of ~~these~~the ~~allegations~~matters included in the warning letter.

OnIn ~~May~~November 92010, ~~2011~~KCI USA, ~~LifeCell~~Inc.’s ~~Corporation~~Raleigh, ~~received~~North aCarolina ~~warning~~office ~~letter~~was ~~dated~~the ~~May~~subject 5,of ~~2011~~a ~~from~~Medicare ~~the~~audit ~~FDA~~of ~~following~~31 anclaims ~~inspection~~conducted by the ~~FDA~~Zone atProgram ~~LifeCell~~Integrity inContractor ~~November 2010~~(“ZPIC”). ~~The~~ In ~~Warning~~May ~~Letter~~2011, ~~primarily~~based ~~related~~on toan extrapolation of the ~~Company~~ZPIC’s ~~failure~~audit toresults, ~~submit~~the ~~required~~ZPIC ~~documentation~~determined tothat KCI USA, Inc. had been overpaid by Medicare in the ~~FDA~~amount ~~prior~~of $5.8 million. KCI appealed these claims to ~~conduct~~Redetermination ofand ~~certain~~reduced ~~clinical~~the ~~studies~~overpayment to $5. ~~The~~1 ~~FDA~~million. KCI ~~also~~has ~~identified~~appealed ~~certain~~these ~~observed~~claims ~~non-compliance~~to ~~with~~the ~~FDA~~next ~~regulations~~level ~~covering~~of review. Recoupment of the ~~promotion~~overpayment ofwas ~~LifeCell’s~~stayed ~~Strattice/LTM~~pending ~~product~~appeal ~~for~~and ~~use~~interest ~~with~~will ~~breast~~accrue ~~implants. The~~on ~~Company~~the ~~submitted~~overpayment aunless ~~written~~it ~~response~~is overturned on appeal. In addition to challenging the ~~FDA~~underlying onclinical ~~May~~basis 31for the claims denials, ~~2011. LifeCell~~KCI isintends ~~cooperating~~to ~~with~~challenge the ~~FDA~~validity ~~and~~of ~~believes~~the ~~that~~sampling used to extrapolate the ~~corrective~~overpayment. If ~~actions~~the itextrapolation is ~~taking~~found ~~will~~to ~~resolve~~have been invalid, the ~~FDA’s~~extrapolation ~~concerns~~may ~~without~~be arejected ~~material~~even ~~impact~~if the actual claims denials on which the ~~Company’s~~extrapolation ~~business. However,~~was ~~the~~based ~~Company~~are ~~cannot~~not ~~give~~overturned. ~~any~~We ~~assurances~~cannot ~~that~~predict the ~~FDA~~outcome ~~will~~of betheses ~~satisfied~~appeals. ~~with~~However, ~~its~~we ~~response~~do tonot expect that the ~~warning~~final ~~letter~~determination orwith asrespect to the ~~expected~~audit ~~date~~will ofhave ~~the~~a ~~resolution~~material ofimpact ~~the~~on ~~matters~~our ~~included~~results inof ~~the~~operations ~~warning~~or ~~letter~~financial position.

Critical Accounting Estimates

For a description of our critical accounting estimates, please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 under the heading Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates.”

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Recently Issued Accounting Principles

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this update result in common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRSs”). Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this update will be effective prospectively during interim and annual periods beginning after December 15, 2011. The adoption of this update is not expected to have a material impact on our results of operations, financial position or disclosures.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The objective of this update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update should be applied retrospectively and will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Upon adoption of this update, we will no longer present the components of other comprehensive income as part of the consolidated statements of shareholders’ equity or within the associated footnotes and instead will present these items either in a single continuous statement of comprehensive income or in two separate but consecutive statements.

35In July 2011, the FASB issued Accounting Standards Update No. 2011-07 “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities.” The objective of this update is to provide financial statement users with greater transparency about a health care entity’s net patient service revenue and the related allowance for doubtful accounts. This update provides information to assist financial statement users in assessing an entity’s sources of net patient service revenue and related changes in its allowance for doubtful accounts. The amendments require health care entities that recognize significant amounts of patient service revenue at the time the services are rendered, to present the provision for bad debts related to patient service revenue as a deduction from revenue on their statement of operations. The amendments in this update should be applied retrospectively and will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Upon adoption of this update, we will reclassify the provision for bad debts associated with patient service revenue from selling, general and administrative expense to a deduction from revenue. The adoption of this update is not expected to have a material impact on our results of operations, financial position or disclosures.

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ITEM 3. 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 that could have a negative impact on our business if not managed properly. We have a risk management policy which is designed to reduce the potential negative earnings effect arising from the impact of fluctuating interest rates. We manage our interest rate risk on our borrowings through interest rate swap agreements which effectively convert a portion of our variable rate borrowings to a fixed rate basis through March 2013, thus reducing the impact of changes in interest rates on future interest expenses. Effective October 2011, we elected to use one-month LIBOR for amounts outstanding under the 2016 Senior Credit Facility. As a result of this election, the ineffective portion of the interest rate swaps will likely increase. We do not use financial instruments for speculative or trading purposes.

The table below provides information as of June 30, 2011 about our long-term debt and interest rate swaps, both of which are sensitive to changes in interest rates. For long-term debt, the tables present principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the tables present notional amounts and weighted average interest rates by expected (contractual) maturity dates. Weighted average interest rates of our interest rate swaps are based on the nominal amounts which are used to calculate the contractual payments to be exchanged under the contract (dollars in thousands):

	Expected Maturity Date as of June 30, 2011
	2011			2012			2013			2014			Thereafter			Total			Fair Value
Long-term debt
Fixed rate	$	—		$	—		$	—		$	—		$	690,000		$	690,000		$	884,166	(1)
Average interest rate		—			—			—			—			3.250	%		3.250	%
Variable rate	$	13,750		$	27,500		$	41,250		$	55,000		$	398,750		$	536,250		$	536,250
Weighted average interest rate (2)		2.000	%		2.000	%		2.000	%		2.000	%		2.000	%		2.000	%
Interest rate swap (3)
Variable to fixed-notional amount	$	225,000		$	375,000		$	100,000		$	—		$	—		$	700,000		$	(2,210	)
Average pay rate		0.736	%		0.757	%		0.993	%		—			—			0.784	%
Average receive rate (4)		0.250	%		0.247	%		0.247	%		—			—			0.248	%
(1) The fair value of our 3.25% Convertible Senior Notes due April 2015 is based on a limited number of trades and does not necessarily represent the purchase price of the entire convertible note portfolio. (2) The weighted average interest rate for all periods presented represents the nominal interest rate as of June 30, 2011. This rate resets quarterly. (3) Interest rate swaps relate to the variable rate debt under long-term debt. The aggregate fair value of our interest rate swap agreements was negative and was recorded as a liability at June 30, 2011. (4) The average receive rates for future periods are based on the current period average receive rates. These rates reset quarterly.

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The table below provides information as of September 30, 2011 about our long-term debt and interest rate swaps, both of which are sensitive to changes in interest rates. For long-term debt, the tables present principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the tables present notional amounts and weighted average interest rates by expected (contractual) maturity dates. Weighted average interest rates of our interest rate swaps are based on the nominal amounts which are used to calculate the contractual payments to be exchanged under the contract (dollars in thousands):

	Expected Maturity Date as of September 30, 2011
	2011			2012			2013			2014			Thereafter			Total			Fair Value
Long-term debt
Fixed rate	$	—		$	—		$	—		$	—		$	690,000		$	690,000		$	970,002	(1)
Average interest rate		—			—			—			—			3.250	%		3.250	%
Variable rate	$	6,875		$	27,500		$	41,250		$	55,000		$	398,750		$	529,375		$	526,066
Weighted average interest rate (2)		1.740	%		1.740	%		1.740	%		1.740	%		1.740	%		1.740	%

Interest rate swap (3)
Variable to fixed-notional amount	$	175,000		$	375,000		$	100,000		$	—		$	—		$	650,000		$	(1,681	)
Average pay rate		0.758	%		0.757	%		0.993	%		—			—			0.794	%
Average receive rate (4)		0.370	%		0.370	%		0.369	%		—			—			0.370	%

(1) The fair value of our 3.25% Convertible Senior Notes due April 2015 is based on a limited number of trades and does not necessarily represent the purchase price of the entire convertible note portfolio. (2) The weighted average interest rate for all periods presented represents the nominal interest rate as of September 30, 2011. Effective October 2011, this rate resets monthly. (3) Interest rate swaps relate to the variable rate debt under long-term debt. The aggregate fair value of our interest rate swap agreements was negative and was recorded as a liability at September 30, 2011. (4) The average receive rates for future periods are based on the current period average receive rates. These rates reset quarterly.

Foreign Currency and Market Risk

We have direct operations in the United States, Canada, Western Europe, Australia, New Zealand, Japan, 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 generally 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.

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 existing intercompany receivables and payables arising from intercompany purchases of manufactured products. KCI enters into foreign currency exchange contracts to mitigate the impact of currency fluctuations on transactions and anticipated cash flows denominated in nonfunctional currencies, thereby limiting risk that would otherwise result from changes in exchange rates. The periods of the foreign currency exchange contracts correspond to the periods of the exposed transactions and anticipated cash flows but generally do not extend beyond 12 months.

At ~~June~~September 30, 2011, we had outstanding foreign currency exchange contracts to sell or purchase approximately $5650.51 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 foreign currency exchange contracts.

International operations reported operating profit of $5690.74 million for the ~~six~~nine months ended ~~June~~September 30, 2011. We estimate that a 10% fluctuation in the value of the U.S. dollar relative to these foreign currencies as of and for the ~~six~~nine months ended ~~June~~September 30, 2011 would change our net earnings for the period by approximately $34.36 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 United States or the foreign countries or on the results of operations of our foreign entities.

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ITEM 4. 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 ~~second~~third fiscal quarter of 2011 that have materially affected, or are reasonably likely to materially affect, KCI’s internal control over financial reporting.

3738

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Litigation Relating to the Proposed Merger

Following the announcement on July 13, 2011 that KCI had entered into a definitive merger agreement under which a consortium of funds advised by Apax ~~Partners~~ will acquire KCI ~~(the “Merger”)~~, ~~two~~four purported shareholders of KCI initiated legal actions challenging the Merger. OnBetween July 20 and August 23, 2011, these purported ~~shareholder~~shareholders ~~John~~filed ~~Chevedden~~four ~~sent~~separate aputative ~~letter~~derivative toand/or class action petitions in the District Court of Bexar County, Texas. The petitions in these actions asserted claims against KCI’s ~~Board~~directors and against KCI as a nominal defendant, and certain of ~~Directors~~these ~~demanding~~actions ~~that~~additionally named as defendants Apax, CPPIB, PSP Investments, Chiron Holdings, Inc., Chiron Merger Sub, Inc., and John Does 1-25 (unidentified associates and affiliates forming the ~~Board~~consortium ~~take~~to purchase KCI) (collectively, “Apax Partners”). The petitions generally alleged that KCI’s directors breached their fiduciary duties by their actions toin ~~remedy~~approving the Merger and that Apax Partners aided and abetted in these alleged breaches of fiduciary duties. The petitions additionally alleged that the Schedule 14A Preliminary Proxy Statement filed with the Securities and Exchange Commission in connection with the ~~Board’s~~proposed ~~approval~~transaction ofcontained ~~the~~material ~~Merger~~omissions and misstatements. The ~~purported~~petitions ~~shareholder~~all ~~stated~~requested that if the ~~Board~~Merger be enjoined. The District Court of ~~Directors~~Bexar ~~does~~County, ~~not~~Texas ~~take~~consolidated these actions asinto ~~demanded~~a insingle ~~his~~action ~~letter,~~styled he“In ~~will~~re ~~prosecute~~Kinetic aConcepts, ~~shareholder~~Inc. ~~derivative~~Shareholder ~~action~~Litigation” ~~against~~ (the ~~Company~~“Consolidated Action”). KCI and its directors filed motions to dismiss the petitions pending in the Consolidated Action. ~~The~~On ~~Board~~October 6, 2011, the District Court of ~~Directors~~Bexar ~~will~~County, ~~review~~Texas ~~this~~held ~~purported~~a ~~shareholder’s~~hearing ~~demand~~on ~~and~~the ~~determine~~KCI ~~how~~defendants’ motions to ~~proceed~~dismiss. At inthe ~~response~~conclusion toof the ~~allegations~~hearing, the court dismissed all of the claims asserted in the Consolidated Action, without prejudice.

On ~~July~~October 2218, 2011, ~~purported~~certain ~~shareholder~~of ~~Sharon~~the M.plaintiffs ~~Dunn~~who commenced the initial litigation relating to the Merger filed a ~~putative~~new ~~class~~complaint ~~action~~relating ~~petition~~to the Merger in the District Court of Bexar County, Texas, ~~288th~~styled ~~Judicial~~“Ross ~~District,~~et inal. ~~an action styled Dunn~~ v. Apax Partners, et al., ~~Case~~ No. 2011-CI-~~11943~~16858” (the “Second Shareholder Action”). The ~~action~~complaint ~~asserts~~in ~~claims~~the ~~against~~Second ~~KCI’s~~Shareholder ~~directors~~Action ~~and~~raised ~~against~~issues ~~KCI~~substantially assimilar ato ~~nominal~~those ~~defendant,~~raised ~~and~~in ~~additionally~~the ~~names~~Consolidated asAction ~~defendants~~and ~~Apax~~also ~~Partners,~~requested ~~Chiron~~that ~~Holdings,~~the ~~Inc., Chiron~~ Merger ~~Sub,~~be ~~Inc~~enjoined., On ~~and~~October ~~John~~26, ~~Does~~2011, ~~1-25~~the ~~(unidentified~~District ~~associates~~Court ~~and affiliates~~ of ~~Apax~~Bexar ~~Partners~~County, ~~forming~~Texas ~~the~~held ~~consortium~~a tohearing ~~purchase~~on the ~~Company) (collectively, “Apax Partners”). The petition in this putative class action alleges that~~ KCI defendants’s ~~directors~~motions ~~breached their fiduciary duties~~ to ~~shareholders~~dismiss ~~and~~the ~~committed~~Second ~~gross~~Shareholder ~~mismanagement~~Action. At ~~and~~the ~~waste~~conclusion of ~~corporate~~the ~~assets~~hearing, bythe ~~their~~court ~~actions~~dismissed inall ~~approving~~of the ~~merger~~claims ~~agreement. The~~asserted ~~petition~~in ~~further~~the ~~alleges~~Second ~~that~~Shareholder ~~Apax~~Action, ~~Partners~~without ~~aided and abetted these alleged breaches of fiduciary duties~~prejudice. ~~The petition requests that the Merger be enjoined.~~

On August 2, 2011, purported shareholder Michael Ross filed a putative class action petition in the District Court of Bexar County, Texas, 224th Judicial District, in an action styled Ross v. Kinetic Concepts, Inc. et al., Case No. 2011-CI-12497. This action asserts claims against KCI and its directors and additionally names as defendants Apax Partners, the Canada Pension Plan Investment Board, the Public Sector Pension Investment Board, Chiron Merger Sub, Inc., and Chiron Holdings, Inc. The petition in this putative class action alleges that KCI and its directors breached their fiduciary duties to shareholders by their actions in approving the merger agreement. The petition further alleges that the remaining defendants aided and abetted these alleged breaches of fiduciary duties. The petition requests that the Merger be enjoined.

Although it is not possible to predict the outcome of these litigation matters with certainty, KCI and its directors believe that the claims raised by these purported shareholders are without merit, and the defendants intend to defend their positions in these matters vigorously. Currently we cannot determine whether the ultimate outcome of these legal actions will have a material impact on the Company’s financial position, results of operations, or cash flows.

Intellectual Property Litigation

U.S. Intellectual Property Litigation

For the last several years, KCI and its affiliates have been involved in multiple patent infringement suits where claims under certain Wake Forest Patents were asserted against providers of competing NPWT products. In October 2010, the Federal District Court for the Western District of Texas entered an order in the Smith & Nephew case described below, invalidating the Wake Forest patent claims asserted in the case. In light of the ruling, KCI has determined that continued payment of the royalties scheduled under the Wake Forest license agreement was inappropriate. On February 28, 2011, KCI filed suit in the Federal District Court for the Western District of Texas seeking a declaratory judgment that KCI no longer owes royalties to Wake Forest based on the patents in suit because the relevant patent claims are invalid or not infringed. Historical royalties under the license agreement were accrued through February 27, 2011 and are reflected in our condensed consolidated financial statements. For the year ended December 31, 2010, royalty payments to Wake Forest under the licensing agreement were approximately $86 million. No royalty payments were made to Wake Forest during the first ~~six~~nine months of 2011.

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On March 18, 2011, Wake Forest provided written notice of termination under the license agreement with KCI and filed suit in Forsyth County Superior Court, North Carolina, alleging breach of contract by KCI. In its termination notice, Wake Forest is demanding that KCI cease manufacturing and selling licensed products. KCI subsequently removed the action from state court to the Federal District Court for the Middle District of North Carolina, after which Wake Forest amended its complaint to add allegations of patent infringement. That action was stayed pending a ruling by the Federal District Court in Texas on a motion to dismiss or transfer filed by Wake Forest there. On July 26, 2011, the Federal District Court in Texas denied Wake Forest’s motions and stayed the action pending a decision by the Court of Appeals for the Federal Circuit in the Smith & Nephew litigation described below. KCI believes that it does not infringe any valid claims of the Wake Forest Patents and that our defenses to any claims are meritorious and we intend to vigorously defend against any such claims and KCI will continue to manufacture and sell V.A.C. ® Therapy products. It is not possible to estimate damages that may result if we are unsuccessful in the litigation. In addition, as a result of the Wake Forest royalty litigation, KCI will not join Wake Forest in the continued enforcement of the Wake Forest Patents against alleged infringers. KCI intends to withdraw from each of the cases described below that involve the Wake Forest Patents, ~~including~~and ~~any~~has withdrawn from the appeal of the Smith & Nephew litigation.

International Intellectual Property Litigation

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In July 2009, KCI and its affiliates filed a patent infringement lawsuit against Smith & Nephew in France alleging infringement of KCI’s ‘504 Patent and KCI’s ‘950 Patent. KCI also filed a request for a preliminary injunction with the Paris District Court in France to prevent commercialization of Smith & Nephew’s NPWT system that KCI believes infringes the French counterpart of KCI’s ‘504 Patent. A hearing on KCI’s request for preliminary injunction was held in October 2009 in France. In November 2009, the Paris District Court denied KCI’s request for a preliminary injunction. On April 29, 2011, the Paris District Court upheld the validity of key claims of KCI’s ‘504 patent but ruled KCI’s ‘504 patent was not infringed by Smith & Nephew’s NPWT systems. The Paris District Court also ruled the asserted claims of KCI’s ‘950 patent invalid. KCI ishas ~~considering~~filed ~~its~~an ~~options, including whether to~~ appeal of this decision.

LifeCell Litigation

In September 2005, LifeCell Corporation recalled certain human-tissue based products because the organization that recovered the tissue, Biomedical Tissue Services, Ltd. (“BTS”), may not have followed FDA requirements for donor consent and/or screening to determine if risk factors for communicable diseases existed. LifeCell Corporation promptly notified the FDA and all relevant hospitals and medical professionals. LifeCell Corporation did not receive any donor tissue from BTS after September 2005. LifeCell Corporation was named, along with BTS and many other defendants, in lawsuits relating to the BTS donor irregularities. These lawsuits generally fell within three categories, (1) recipients of BTS tissue who claim actual injury; (2) suits filed by recipients of BTS tissue seeking medical monitoring and/or damages for emotional distress; and (3) suits filed by family members of tissue donors who did not authorize BTS to donate tissue.

LifeCell Corporation resolved all of those lawsuits which have now been dismissed. The resolution of those lawsuits did not have a material impact on our financial position or results of operations. Subsequently, LifeCell Corporation was served with approximately ten new suits filed by other family members of tissue donors who also allege no authorization was provided. ~~These~~All ~~cases are in the early stages~~ of ~~discovery~~these ~~and~~cases have ~~not~~ been ~~set~~settled for ~~trial. Although~~amounts ~~it is not possible to reliably predict the outcome of the litigation, LifeCell Corporation believes~~ that ~~its defenses to these claims are meritorious and~~ will ~~defend them vigorously. We do~~ not ~~expect these new cases to~~ have a material impact on our results of operations or our financial position.

40LifeCell Corporation is also a party to approximately 60 lawsuits filed by individuals alleging personal injury and seeking monetary damages for failed hernia repair procedures using LifeCell Corporation’s AlloDerm products. All of these cases are in the early stages of litigation and have not yet been set for trial. Although it is not possible to reliably predict the outcome of the litigation, we believe that the defenses to these claims are meritorious and will defend them vigorously. We have insurance that we believe covers these claims and lawsuits and believe that after the application of our self-insured retention relating to products liability claims, such policies will cover litigation expenses, settlement costs and damage awards, if any, arising from these suits. However, the insurance coverage may not be adequate if we are unsuccessful in our defenses. We do not expect these cases to have a material impact on our results of operations or our financial position.

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Other Litigation

In February 2009, we received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General (“OIG”) seeking records regarding our billing practices under the local coverage policies of the four regional ~~DMACs~~Durable Medical Equipment Medicare Administrative Contractors (“DME MACs”). ~~The~~ ~~Company~~KCI cooperated with the OIG’s inquiry and provided substantial documentation to the OIG and the U.S. Attorneys’ office in response to its request. On May 9, 2011, ~~the~~KCI ~~Company~~ received notice that the U.S. Attorneys’ office had declined to intervene in qui tam actions filed against ~~the~~KCI ~~Company~~on March 20, 2008 and September 29, 2008 by two former employees in ~~Federal~~the U.S. District Court, inCentral District of California, Western Division. These cases are captioned United States of America, ex rel. Geraldine Godecke v. Kinetic Concepts, Inc., et al. and United States of America, ex rel. Steven J. Hartpence v. Kinetic Concepts, Inc. et al. The complaints contend that KCI violated the Federal False Claims Act by billing in a manner that was not consistent with the Local Coverage Determinations issued by the DME MACs and seek recovery of monetary damages. Under the Federal False Claims Act, a defendant determined to be liable by a court of law must pay three times the actual damages sustained by the government, plus civil penalties of between $5,500 and $11,000 for each separate false claim. Potential damages arising from these non-intervened cases are not currently probable and not reasonably estimable. These cases were ~~recently~~originally filed under seal pending the government’s review of the allegations contained therein. Following the completion of the government’s review and their decision to decline to intervene in such suits, the live pleadings were ordered unsealed on May 3, ~~and~~2011. KCI intends to vigorously defend itself in these matters ~~vigorously~~, including seeking the dismissal of these ~~allegations~~suits.

ITEM 1A. RISK FACTORS

Except with respect to the following updated ~~risk factors~~ and ~~the~~ new risk factors ~~under “Risks Relating to our Pending Merger with Apax”~~ described below, there have been no material changes from the risk factors disclosed in ~~the~~our ~~Company’s~~ Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011 and June 30, 2011.

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

We face significant and increasing competition in each of our businesses, which are intensely competitive and are characterized by rapid technological change. We compete with many companies, some of which have longer operating histories, better brand or name recognition, broader product lines and greater access to financial and other resources. Our customers consider many factors when selecting a product, including product reliability, clinical outcomes, product availability, price and services provided by the manufacturer, and market share can shift as a result of technological innovation and other business factors. Our ability to compete with other developers of advanced therapies and technologies will depend in large part on our ability to develop and acquire new products and technologies as well as anticipate technology advances. Product introductions or enhancements by competitors which have advanced technology, better features or lower pricing may make our products or proposed products obsolete or less competitive. Our competitive position can also be adversely affected by product problems, physician advisories and safety alerts, reflecting the importance of product quality in the medical device industry. For additional information regarding our competitive positioning, see Item 1: “Business—Information Related to Business Units—Active Healing Solutions—Competition; LifeCell—Competition; and Therapeutic Support Systems—Competition” in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

We expect competition in our AHS business to increase over time as competitors introduce additional competing products in the advanced wound care market. As our patents in the field of NPWT expire over time, we expect increased competition with products adopting basic NPWT technologies. In October 2010, certain patent claims licensed to KCI by Wake Forest University were held to be invalid in litigation with Smith & Nephew by the U.S. District Court for the Western District of Texas. On February 28, 2011, we filed suit in the Federal District Court for the Western District of Texas seeking a declaratory judgment that KCI no longer owes royalties based on the patents in suit because the relevant patent claims are invalid or not infringed. On March 18, 2011, Wake Forest provided written notice of termination under the license agreement with KCI and filed suit in Forsyth County Superior Court, North Carolina, alleging breach of contract by KCI. In its termination notice, Wake Forest is demanding that KCI cease manufacturing and selling licensed products. KCI subsequently removed the action from state court to the Federal District Court for the Middle District of North Carolina, after which Wake Forest amended its complaint to add allegations of patent infringement. That action was stayed pending a ruling by the Federal District Court in Texas on a motion to dismiss or transfer filed by Wake Forest there. On July 26, 2011 the Federal District Court in Texas denied Wake Forest’s motions and stayed the action pending a decision by the Court of Appeals for the Federal Circuit in the Smith & Nephew litigation. KCI believes that it does not infringe any valid claims of the Wake Forest Patents and that our defenses to any claims are meritorious and we intend to vigorously defend against any such claims and KCI will continue to manufacture and sell V.A.C. ® Therapy products. It is not possible to estimate damages that may result if we are unsuccessful in the litigation. In addition, as a result of the Wake Forest royalty litigation, KCI will not join Wake Forest in the continued enforcement of the Wake Forest Patents against alleged infringers. KCI intends to withdraw from each of the cases that involve the Wake Forest Patents, including any appeal of the Smith & Nephew litigation. Smith & Nephew or third parties may become more aggressive in the marketing of competitive NPWT systems in light of the various invalidity rulings around the world and the Wake Forest royalty litigation. For additional information regarding our patent litigation, see Part II, Item 1: “Legal Proceedings.”

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Our NPWT 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 United States and internationally. Our LifeCell business is facing increasing competition from providers of autologous tissue and various commercially available products made from synthetic materials or biologic materials of human or animal tissue origin. In addition, consolidation and the entrance of new low-cost competitors to our TSS business have greatly increased competition and pricing pressure in the United States and abroad. These companies have competed in all areas, but most effectively with our most price sensitive customers such as extended care facilities, and have grown in size and scale. If we are unable to effectively differentiate our products from those of our competitors, our market share, sales and profitability could be adversely impacted.

If we are unsuccessful in protecting and maintaining our intellectual property, our competitive position could 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 validity or enforceability of our intellectual property rights in various countries. Changes in either the intellectual property laws or in interpretations of intellectual property laws in the United States and other countries may diminish the value of our intellectual property. For instance, the U.S. Supreme Court has recently modified some tests used by the U.S. Patent and Trademark Office in granting patents during the past 20 years which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license. In addition, the U.S. recently enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act (“AIA”), including changes that would transition the U.S. from a “first-to-invent” system to a “first to file” system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States, if at all. We own or license numerous patents on our existing products and processes, and we file applications as appropriate for patents covering new technologies as such technologies 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. We often retain certain knowledge that we consider proprietary as confidential and elect to protect such information as trade secrets, as business confidential information or as know-how. In these cases, we rely upon trade secrets, know-how and continuing technological innovation to maintain our competitive position. Our intellectual property rights may not prevent other companies from developing functionally equivalent products, developing substantially similar proprietary processes, or otherwise gaining access to our confidential know-how or trade secrets.

When we seek to enforce our intellectual property rights, we may be subject to claims that our rights are invalid, are otherwise unenforceable or are already 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 intellectual property rights of its own against us, which may adversely impact our business. 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. Since 2007, multiple requests for reexamination of patents owned or licensed by KCI relating to our AHS business were granted by the U.S. Patent and Trademark Office. If we are unable to enforce our intellectual property rights our competitive position could be harmed. For more information on our current intellectual property litigation, see Part II, Item 1: “Legal Proceedings.”

We have agreements with third parties pursuant to which we license patented or proprietary technologies. These agreements commonly include royalty-bearing licenses. If we lose the right to license technologies essential to our businesses, or the costs to license these technologies materially increase, our businesses could be adversely impacted.

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~~KCI~~When ~~and~~we ~~its~~seek ~~affiliates~~to ~~are~~enforce ~~involved~~our ~~in multiple~~ intellectual property ~~litigation suits in the United States and Europe~~rights, aswe ~~described~~may inbe ~~Part~~subject ~~II,~~to ~~Item~~claims 1:that ~~“Legal Proceedings.” If any of~~ our ~~key~~rights ~~patent claims~~ are ~~narrowed in scope or found to be~~ invalid ~~or unenforceable~~, orare we otherwise dounenforceable ~~not~~or ~~prevail,~~are ~~our~~already ~~share~~licensed ~~in the markets where we compete could be negatively impacted due~~ to ~~increased competition and pricing of our products could decline significantly, either of which would negatively affect our financial condition and results of operations. For example, in~~ the ~~United~~party ~~Kingdom~~against ~~and~~whom ~~Germany, where certain patent claims relating to NPWT were invalidated in 2009 litigation,~~ we ~~have~~are ~~experienced~~asserting ~~increased competition and reduced growth rates in AHS revenue as~~ a ~~result~~claim. ~~Also,~~When inwe ~~October~~assert ~~2010,~~our ~~the~~intellectual ~~Federal~~property ~~District Court for the Western District of Texas entered an order in the Smith & Nephew case invalidating the patent claims involved in the lawsuit. In light of the ruling~~rights, ~~KCI~~it ~~believes that continued payment of the royalties scheduled under the Wake Forest license~~ is ~~inappropriate. On~~likely ~~February 28, 2011, we filed suit in the Federal District Court for the Western District of Texas seeking a declaratory judgment~~ that ~~KCI no longer owes royalties based on~~ the ~~patents~~other inparty ~~suit~~will ~~because~~seek ~~the relevant patent claims are invalid or not infringed. This legal action also follows protracted but unsuccessful negotiations with Wake Forest~~ to ~~reach~~assert aintellectual ~~reduced~~property ~~royalty~~rights ~~rate~~of or its ~~equivalent~~own ~~due~~against tous, ~~the~~which ~~various~~may ~~invalidity~~adversely ~~rulings~~impact ~~around~~our ~~the world~~business. ~~Going~~All ~~forward,~~patents ~~during~~are ~~the~~subject ~~pendency of the Wake Forest royalty litigation, KCI does not plan~~ to ~~pay~~requests orfor ~~accrue~~reexamination ~~royalties~~by ~~under~~third ~~the~~parties ~~license agreement with Wake Forest. Historical royalties under the license agreement were accrued through February 27, 2011~~ and ~~are reflected in our condensed consolidated financial statements. For the year ended December 31, 2010, royalty payments to Wake Forest~~ under the ~~licensing agreement were approximately $86 million. No royalty payments were made to Wake Forest during the first six months of 2011. On March 18~~AIA, ~~2011,~~additional ~~Wake~~methods ~~Forest provided written notice~~ of ~~termination~~challenging ~~under~~ the ~~license~~validity ~~agreement~~or ~~with~~enforceability ~~KCI and filed suit in Forsyth County Superior Court, North Carolina, alleging breach~~ of ~~contract~~issued bypatents ~~KCI. In~~will ~~its~~be ~~termination notice, Wake Forest is demanding that KCI cease manufacturing and selling licensed products~~implemented. ~~KCI~~When ~~subsequently~~such ~~removed~~requests ~~the action from state court to the Federal District Court~~ for ~~the~~reexamination ~~Middle~~are ~~District of North Carolina~~granted, ~~after~~some ~~which~~or ~~Wake~~all ~~Forest~~claims ~~amended~~may ~~its~~require ~~complaint~~amendment toor ~~add allegations of patent infringement~~cancellation. ~~That~~Since ~~action~~2007, ~~was~~multiple ~~stayed~~requests ~~pending~~for areexamination ~~ruling~~of bypatents ~~the~~owned ~~Federal District Court in Texas on a motion to dismiss~~ or ~~transfer~~licensed ~~filed~~ by ~~Wake~~KCI ~~Forest~~relating ~~there. On~~to ~~July~~our ~~26,~~AHS ~~2011~~business ~~the~~were ~~Federal~~granted ~~District Court in Texas denied Wake Forest’s motions and stayed the action pending a decision~~ by the ~~Court of Appeals for the Federal Circuit in the Smith & Nephew litigation~~U. ~~KCI~~S. ~~believes~~Patent ~~that it does not infringe any valid claims of the Wake Forest Patents~~ and ~~that~~Trademark ~~our defenses to any claims are meritorious and we intend to vigorously defend against any such claims and KCI will continue to manufacture and sell V~~Office.~~A.C. ® Therapy products.~~ ItIf ~~is not possible to estimate damages that may result if~~ we are ~~unsuccessful~~unable in the litigation. In addition, as a result of the Wake Forest royalty litigation, KCI will not join Wake Forest in the continued enforcement of the Wake Forest Patents against alleged infringers. KCI intends to ~~withdraw~~enforce ~~from~~our ~~each~~intellectual ofproperty ~~the~~rights ~~cases~~our ~~that~~competitive ~~involve~~position ~~the~~could ~~Wake~~be ~~Forest Patents, including any appeal of the Smith & Nephew litigation~~harmed. For ~~additional~~more information ~~regarding~~on our ~~patent~~current intellectual property litigation, see Part II, Item 1: “Legal Proceedings.”

~~Third~~We ~~parties~~have ~~may~~agreements ~~become~~with ~~more~~third ~~aggressive~~parties inpursuant ~~the~~to ~~marketing~~which ofwe ~~competitive~~license ~~NPWT~~patented ~~systems~~or inproprietary ~~the U~~technologies.S. These ~~and~~agreements ~~internationally~~commonly ~~due~~include ~~to the Wake Forest~~ royalty-bearing ~~litigation and the invalidation of Wake Forest patent claims around the world~~licenses. WeIf ~~derived~~we ~~approximately~~lose ~~69%~~the ofright ~~total~~to ~~revenue~~license ~~during~~technologies ~~the~~essential ~~year~~to ~~ended~~our ~~December 31~~businesses, ~~2010~~or ~~and~~the ~~68%~~costs ofto ~~total~~license ~~revenue~~these ~~during~~technologies ~~the~~materially ~~first~~increase, ~~six~~our ~~months~~businesses ofcould ~~2011~~be ~~from~~adversely ~~our NPWT products worldwide~~impacted.

WeKCI and its affiliates are involved in multiple intellectual property litigation suits in the United States and Europe, as described in Part II, Item 1: “Legal Proceedings.” If any of our key patent claims are narrowed in scope or found to be invalid or unenforceable, or we otherwise do not prevail, our share in the markets where we compete could be ~~subject~~negatively impacted due to ~~governmental~~increased ~~investigations~~competition ~~regarding~~and ~~the~~pricing ~~submission~~of our products could decline significantly, either of which would negatively affect our financial condition and results of operations. For example, in the United Kingdom and Germany, where certain patent claims relating to NPWT were invalidated in 2009 litigation, we have experienced increased competition and reduced growth rates in AHS revenue as a result. Also, in October 2010, the Federal District Court for the Western District of Texas entered an order in the Smith & Nephew case invalidating the patent claims involved in the lawsuit. In light of the ruling, KCI believes that continued payment of the royalties scheduled under the Wake Forest license is inappropriate. On February 28, 2011, we filed suit in the Federal District Court for ~~items~~the Western District of Texas seeking a declaratory judgment that KCI no longer owes royalties based on the patents in suit because the relevant patent claims are invalid or not infringed. This legal action also follows protracted but unsuccessful negotiations with Wake Forest to reach a reduced royalty rate or its equivalent due to the various invalidity rulings around the world. Going forward, during the pendency of the Wake Forest royalty litigation, KCI does not plan to pay or accrue royalties under the license agreement with Wake Forest. Historical royalties under the license agreement were accrued through February 27, 2011 and ~~services~~are ~~furnished~~reflected in our condensed consolidated financial statements. For the year ended December 31, 2010, royalty payments to ~~federal~~Wake Forest under the licensing agreement were approximately $86 million. No royalty payments were made to Wake Forest during the first nine months of 2011. On March 18, 2011, Wake Forest provided written notice of termination under the license agreement with KCI and filed suit in Forsyth County Superior Court, North Carolina, alleging breach of contract by KCI. In its termination notice, Wake Forest is demanding that KCI cease manufacturing and selling licensed products. KCI subsequently removed the action from state ~~healthcare~~court ~~program~~to ~~beneficiaries~~the Federal District Court for the Middle District of North Carolina, after which Wake Forest amended its complaint to add allegations of patent infringement. That action was stayed pending a ruling by the Federal District Court in Texas on a motion to dismiss or transfer filed by Wake Forest there. On July 26, 2011 the Federal District Court in Texas denied Wake Forest’s motions and stayed the action pending a decision by the Court of Appeals for the Federal Circuit in the Smith & Nephew litigation. KCI believes that it does not infringe any valid claims of the Wake Forest Patents and that our defenses to any claims are meritorious and we intend to vigorously defend against any such claims and KCI will continue to manufacture and sell V.A.C. ® Therapy products. It is not possible to estimate damages that may result if we are unsuccessful in the litigation. In addition, as a result of the Wake Forest royalty litigation, KCI will not join Wake Forest in the continued enforcement of the Wake Forest Patents against alleged infringers. KCI intends to withdraw from each of the cases that involve the Wake Forest Patents and has withdrawn from the appeal of the Smith & Nephew litigation. For additional information regarding our patent litigation, see Part II, Item 1: “Legal Proceedings.”

~~There~~Third ~~are~~parties ~~numerous~~may ~~rules~~become ~~and~~more ~~requirements~~aggressive ~~governing~~in the ~~submission~~marketing of ~~claims~~competitive ~~for~~NPWT ~~payment~~systems toin ~~federal~~the ~~and state healthcare programs~~U.S. ~~In many cases, these rules~~ and ~~regulations~~internationally ~~are~~due ~~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~~Wake ~~could~~Forest ~~allege~~royalty welitigation ~~are not entitled to payment for certain claims~~ and ~~may~~the ~~seek~~invalidation toof ~~recoup~~Wake ~~past~~Forest ~~payments~~patent ~~made. Governmental authorities could also take the position that~~ claims wearound ~~have submitted for payment violate~~ the ~~federal False Claims Act (“FCA”)~~world. ~~The~~We ~~recoupment~~derived ofapproximately ~~alleged~~69% ~~overpayments and/or the imposition~~ of ~~penalties~~total orrevenue ~~exclusions~~during ~~under~~ the ~~FCA~~year orended ~~similar~~December ~~state~~31, ~~provisions~~2010 ~~could result in a significant loss of reimbursement~~ and~~/or~~ ~~the~~68% ~~payment~~ of ~~significant~~total ~~fines~~revenue ~~and~~during ~~may~~the ~~have~~first anine ~~material~~months ~~adverse effect on our operating results. Even if we were ultimately to prevail, an investigation by governmental authorities~~ of ~~the~~2011 ~~submission~~from ~~of widespread claims in non-compliance with applicable rules and requirements could have a material adverse impact on~~ our ~~business~~NPWT asproducts ~~the costs of addressing such investigations could be significant~~worldwide.

In February 2009, we received a subpoena from the OIG seeking records regarding our billing practices under the local coverage policies of the four regional DMACs. In response to the request, we have produced substantial documentation to the OIG and have met with the U.S. Department of Justice and continue to assist the government in its review. The government made additional informal requests in November and December 2009. We cooperated with the OIG’s inquiry and provided substantial documentation to the OIG and the U.S. Attorneys’ office in response to its request. On May 9, 2011, we received notice that the U.S. Attorneys’ office had declined to intervene in qui tam actions filed against the Company by two former employees in Federal Court in California. The complaints were recently unsealed, and KCI intends to defend itself in these matters vigorously, including seeking the dismissal of these allegations. For a description of other risks relating to governmental review and investigation of our businesses, see the “Risk Factors” in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

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

There are numerous rules and requirements governing the submission of claims for payment to federal and state healthcare 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 (“FCA”). The recoupment of alleged overpayments and/or the imposition of penalties or exclusions under the FCA 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.

In February 2009, we received a subpoena from the OIG seeking records regarding our billing practices under the local coverage policies of the four regional DME MACs. KCI cooperated with the OIG’s inquiry and provided substantial documentation to the OIG and the U.S. Attorneys’ office in response to its request. On May 9, 2011, KCI received notice that the U.S. Attorneys’ office had declined to intervene in qui tam actions filed against KCI on March 20, 2008 and September 29, 2008 by two former employees in the U.S. District Court, Central District of California, Western Division. These cases are captioned United States of America, ex rel. Geraldine Godecke v. Kinetic Concepts, Inc., et al. and United States of America, ex rel. Steven J. Hartpence v. Kinetic Concepts, Inc. et al. The complaints contend that KCI violated the Federal False Claims Act by billing in a manner that was not consistent with the Local Coverage Determinations issued by the DME MACs and seek recovery of monetary damages. Under the Federal False Claims Act, a defendant determined to be liable by a court of law must pay three times the actual damages sustained by the government, plus civil penalties of between $5,500 and $11,000 for each separate false claim. Potential damages arising from these non-intervened cases are not currently probable and not reasonably estimable. These cases were originally filed under seal pending the government’s review of the allegations contained therein. Following the completion of the government’s review and their decision to decline to intervene in such suits, the live pleadings were ordered unsealed on May 3, 2011. KCI intends to vigorously defend itself in these matters, including seeking the dismissal of these suits. For a description of other risks relating to governmental review and investigation of our businesses, see the “Risk Factors” in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

We are exposed to product liability claims which may materially and adversely affect our revenues and results of operations.

Our businesses expose us to product liability risks inherent in the testing, manufacturing, marketing and use of medical products. We maintain product liability insurance; however, we cannot be certain that (i) the level of insurance will provide adequate coverage against potential liabilities, (ii) the type of claim will be covered by the terms of the insurance coverage, (iii) adequate product liability insurance will continue to be available in the future, or (iv) the insurance can be maintained on acceptable terms. The legal expenses associated with defending against product liability claims and the obligation to pay a product liability claim in excess of available insurance coverage would increase operating expenses and could materially and adversely affect our results of operations and financial position.

Some LifeCell products (AlloDerm, GRAFTJACKET, AlloCraft DBM and Repliform) contain donated human cadaveric tissue. The implantation of tissue products derived from donated cadaveric tissue creates the potential for transmission of communicable disease. LifeCell Corporation is accredited by the American Association of Tissue Banks and voluntarily complies with its guidelines. LifeCell Corporation and its tissue suppliers are registered with and regulated by the FDA and state regulatory bodies. These regulations have strict requirements for testing donors to prevent communicable disease transmission. However, there can be no assurance that our tissue suppliers will comply with such regulations intended to prevent communicable disease transmission, or even if such compliance is achieved, that our products have not been or will not be associated with disease transmission, or a patient otherwise infected with disease would not erroneously assert a claim that the use of our products resulted in disease transmission. LifeCell Corporation is currently named as a defendant in a number of lawsuits that are related to the distribution of its products, including multiple lawsuits relating to certain human-tissue based products because the organization that recovered the tissue, BTS may not have followed FDA requirements for donor consent and/or screening to determine if risk factors for communicable diseases existed. Although LifeCell Corporation intends to defend against these actions, there can be no assurance that LifeCell Corporation will prevail. Any actual or alleged transmission of communicable disease could result in patient claims, litigation, distraction of management’s attention and potentially increased expenses. LifeCell Corporation is also a party to approximately 5060 lawsuits filed by individuals alleging personal injury and seeking monetary damages for failed hernia repair procedures using LifeCell Corporation’s AlloDerm products. These cases have been consolidated for centralized management in Middlesex County, New Jersey. These cases ~~are in the early stages of litigation and~~ have not yet been set for trial. The law firms representing plaintiffs in these cases are actively soliciting and publicly advertising in an effort to recruit additional plaintiffs for hernia repair cases. The publicity around the BTS cases and the active solicitation of plaintiffs in the AlloDerm cases could potentially harm our reputation with our customers and disrupt our ability to market our products, which may materially and adversely impact the growth rates of our LifeCell business.

Risks Relating to our Pending Merger

The proposed merger with a consortium of funds advised by Apax, together with controlled affiliates of CPP and PSP, is subject to certain closing conditions that could result in the merger not being completed, which may in turn result in a decline in the price of our common stock.

The proposed merger with a consortium of funds advised by Apax, together with controlled affiliates of CPP and PSP, is subject to customary closing conditions, including the receipt of shareholder approval, but is not subject to any condition with regard to the financing of the transaction. Many of the conditions to closing are outside of our control. If any condition to the closing of the merger is not satisfied or, if permissible, waived, the merger will not be completed. Furthermore, certain lawsuits have been filed challenging the merger. These lawsuits could result in the merger not being completed or in a delay in the completion of the merger.

If we do not complete the merger, the price of our common stock may decline significantly from the current market price which reflects a market assumption that the merger will be completed with shareholders receiving $68.50 for each common share held. We also will be obligated to pay certain professional fees and related expenses in connection with the merger, whether or not the merger is completed. In addition, we have expended, and will continue to expend, significant management resources in an effort to complete the merger. If the merger is not completed, we will have incurred significant costs, including the diversion of management resources, for which we will have received little or no benefits. Further, upon termination of the merger agreement under certain specified circumstances, we will be required to pay a termination fee of $155.4 million to parties to the agreement.

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~~Whether~~U.S. orMedicare ~~not~~reimbursement ~~the~~of ~~proposed~~competitive ~~merger~~products ~~with~~and athe ~~consortium~~implementation of ~~funds~~the ~~advised~~Medicare bycompetitive ~~Apax,~~bidding ~~together~~program ~~with~~could ~~controlled~~reduce ~~affiliates~~the ofreimbursement ~~CPP~~we receive and ~~PSP,~~could isadversely ~~completed,~~affect the ~~merger~~demand ~~could~~for ~~cause disruptions in~~ our ~~operations,~~V.A.C. ~~which~~Therapy ~~could~~Systems ~~have~~in anthe ~~adverse~~United ~~effect on our business and financial results~~States.

~~Whether~~From ortime ~~not~~to ~~the~~time, ~~merger~~Medicare ~~with~~publishes areimbursement ~~consortium~~policies ofand ~~funds~~rates ~~advised~~that bymay ~~Apax,~~unfavorably ~~together~~affect ~~with~~the ~~controlled~~reimbursement ~~affiliates~~and ofmarket ~~CPP~~for ~~and~~our ~~PSP~~products. Since 2005, isMedicare ~~completed,~~has ~~there~~assigned ~~are~~NPWT ~~various~~reimbursement ~~uncertainties~~codes ~~and~~to ~~risks~~several ~~arising~~devices inbeing ~~connection~~marketed to compete with V.A.C. Therapy Systems. Due to the ~~announcement~~introduction of ~~the~~competitive ~~merger~~products, ~~including:~~CMS and other third–party payers could attempt to reduce reimbursement rates on NPWT or its various components through competitive bidding or otherwise, which could negatively impact our AHS revenue from U.S. Medicare placements.

·For ~~Management’s~~the ~~attention~~fiscal ~~may~~year ended 2010, U.S. Medicare placements of our NPWT products represented approximately 8.1% of our total revenue. In the future, our AHS revenue from U.S. Medicare placements of NPWT products is expected to be ~~diverted~~subject to ~~completion~~Medicare’s ofdurable medical equipment competitive bidding program. In 2008, the ~~merger~~Medicare competitive bidding program was delayed and ~~away~~significantly modified by the Medicare Improvements for Patients and Providers Act (“MIPPA”). MIPPA exempted NPWT from ~~execution~~the first round of ~~existing~~competitive ~~business~~bidding ~~plans~~and delayed implementation of the second round of competitive bidding. The law also imposed a 9.5% price reduction for all U.S. Medicare placements of our NPWT products as of January 2009. The 9.5% reduction in reimbursement resulted in lower Medicare reimbursement levels, which ~~could~~negatively ~~disrupt~~impacted ~~operations~~our 2010 and ~~have~~2009 atotal ~~material~~revenue ~~adverse~~by ~~effect~~less onthan 1%, compared to pre–2009 reimbursement levels. In August 2011, CMS announced that NPWT pumps and related supplies and accessories will be included in the next competitive bid process. Inclusion of NPWT products in the Medicare competitive bidding program could result in reduced reimbursement for our Medicare placements. In the event that CMS adopts policies or procedures that are unfavorable to us, any resulting reduction in reimbursement could materially and adversely affect our business and operating results;.

·The ~~Our~~initiation ~~employees~~by ~~may~~U.S. ~~experience~~and ~~uncertainty~~foreign ~~about~~healthcare, ~~their~~safety ~~future~~and ~~roles~~reimbursement ~~with~~agencies usof ~~which~~periodic ~~might~~inspections, ~~adversely~~assessments ~~affect~~or ~~our~~studies ~~ability~~of tothe ~~retain~~products, services and ~~hire~~billing ~~key~~practices ~~personnel~~we ~~and~~provide ~~other~~could ~~employees;~~lead to reduced public reimbursement or the inability to obtain reimbursement and could result in reduced demand for our products.

·Due ~~Vendors~~to the increased scrutiny and publicity of government efforts to contain rising healthcare costs, we may be subject to future assessments or ~~other~~studies ~~parties~~by ~~with~~U.S. and foreign healthcare, safety and reimbursement agencies which wecould ~~maintain~~lead ~~business~~to ~~relationships~~changes ~~may~~in ~~experience~~reimbursement ~~uncertainty~~policies ~~about~~that adversely affect our ~~future~~business. We ~~and~~are ~~seek~~also ~~alternative~~currently ~~relationships~~subject ~~with~~to ~~third~~multiple ~~parties~~technology orassessments ~~seek~~related to ~~alter~~our ~~their~~V.A.C. Therapy Systems in foreign countries where we conduct business. Any ~~relationships~~unfavorable ~~with~~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.

In March 2009, the OIG published a report on the comparative pricing of NPWT pumps. In that report, the OIG suggested that CMS is overpaying for NPWT pumps because the current price is based on the price of the V.A.C. Therapy System and did not consider the lower prices of new products added to the NPWT category since 2005. The OIG suggested that CMS should either competitively bid NPWT in the Second Round of DME Competitive Bidding or conduct an inherent reasonableness assessment. In August 2011, CMS announced it will include NPWT in Round Two of its DME Competitive Bidding program, which goes into effect July 1, 2013. This could negatively impact U.S. Medicare reimbursement of our products.

The 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 with respect to our 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.

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The success of many of our products depends heavily on acceptance by healthcare professionals who prescribe and recommend our products and by end users of our products, and our failure to maintain a high level of confidence in our products could adversely affect our business.

We maintain customer relationships with numerous specialized nurses, surgeons, primary care physicians, home healthcare providers, other specialist physicians and other healthcare professionals. We believe that sales of our products depend significantly on their confidence in, and recommendations of, our products. In addition, our success depends on end users’ acceptance and confidence in the effectiveness, comfort and ease-of-use of our products, including our new products. In order to achieve acceptance by end users and healthcare professionals alike, we seek to educate patients and the healthcare community as to the distinctive characteristics, perceived benefits, clinical efficacy and cost-effectiveness of our products compared to alternative products, including the products offered by our competitors. Acceptance of our products also requires effective training of patients and healthcare professionals in the proper use and application of our products. Failure to effectively educate and train our customers and end-users and failure to continue to develop relationships with leading healthcare professionals and new patients could result in a less frequent recommendation of our products, which may adversely affect our sales and profitability.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None

(b) Not applicable

Period	Total Number of Shares Purchased(1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Program	Approximate Dollar Value of Shares That May Yet be Purchased Under the Program
April 1 – 30, 2011	11,315	$ 54.98	N/A	N/A
July 1 – 31, 2011	659	$ 68.05	N/A	N/A
May 1 – 31, 2011	32,754	$ 59.01	N/A	N/A
August 1 – 31, 2011	243	$ 65.98	N/A	N/A
June 1 – 30, 2011	34	$ 55.34	N/A	N/A
September 1 – 30, 2011	823	$ 66.36	N/A	N/A
Total	441,~~103~~725	$ 5766.9795	N/A	N/A
(1) Shares purchased and retired in connection with the withholding of shares to satisfy minimum tax withholding obligations upon vesting of previously issued shares of restricted common stock.

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ITEM 6. EXHIBITS

A list of all exhibits filed or included as part of this quarterly report on Form 10-Q is as follows:

Exhibits		Description
2.1		Agreement and Plan of Merger, dated as of July 12, 2011, between Chiron Holdings, Inc., Chiron Merger Sub, Inc. and Kinetic Concepts, Inc. (filed as Exhibit 2.1 to our Form 8-K filed on July 14, 2011).
3.1		Amended and Restated Articles of Incorporation of Kinetic Concepts, Inc. (filed as Exhibit 3.5 to Amendment No. 1 to our Registration Statement on Form S-1, filed on February 2, 2004, as thereafter amended).
3.2		Fifth Amended and Restated By-laws of Kinetic Concepts, Inc. (filed as Exhibit 3.1 to our Form 8-K filed on February 24, 2009).
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated ~~August~~November 42, 2011.
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated ~~August~~November 42, 2011.
32.1		Certification of the 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 dated ~~August~~November 42, 2011.
*101.INS		XBRL Instance Document
*101.SCH		XBRL Taxonomy Extension Schema
*101.CAL		XBRL Taxonomy Extension Calculation Linkbase
*101.LAB		XBRL Taxonomy Extension Label Linkbase
*101.PRE		XBRL Taxonomy Extension Presentation Linkbase
*101.DEF		XBRL Taxonomy Extension Definition Linkbase
		* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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SIGNATURES

Pursuant to the requirements 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.

	KINETIC CONCEPTS, INC.
	(REGISTRANT)
Date: August 4, 2011	By: /s/ Catherine M. Burzik
Date: November 2, 2011	By: /s/ Catherine M. Burzik
	Catherine M. Burzik
	President and Chief Executive Officer
	(Duly Authorized Officer)
Date: August 4, 2011	By: /s/ Martin J. Landon
Date: November 2, 2011	By: /s/ Martin J. Landon
	Martin J. Landon
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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INDEX OF EXHIBITS

Exhibits		Description
2.1		Agreement and Plan of Merger, dated as of July 12, 2011, between Chiron Holdings, Inc., Chiron Merger Sub, Inc. and Kinetic Concepts, Inc. (filed as Exhibit 2.1 to our Form 8-K filed on July 14, 2011).
3.1		Amended and Restated Articles of Incorporation of Kinetic Concepts, Inc. (filed as Exhibit 3.5 to Amendment No. 1 to our Registration Statement on Form S-1, filed on February 2, 2004, as thereafter amended).
3.2		Fifth Amended and Restated By-laws of Kinetic Concepts, Inc. (filed as Exhibit 3.1 to our Form 8-K filed on February 24, 2009).
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated ~~August~~November 42, 2011.
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated ~~August~~November 42, 2011.
32.1		Certification of the 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 dated ~~August~~November 42, 2011.
*101.INS		XBRL Instance Document
*101.SCH		XBRL Taxonomy Extension Schema
*101.CAL		XBRL Taxonomy Extension Calculation Linkbase
*101.LAB		XBRL Taxonomy Extension Label Linkbase
*101.PRE		XBRL Taxonomy Extension Presentation Linkbase
*101.DEF		XBRL Taxonomy Extension Definition Linkbase
		* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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