UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

þ		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended September 30, 2009

OR

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File No. 1-6651

Registrant’s telephone number, including area code: (812) 934-7777

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

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, without par value		New York Stock Exchange

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

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

Yes þ      No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o      No þ

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 þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 o      No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

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

Yes o      No þ

State the aggregate market value of the common stock held by non-affiliates of the registrant.

Common Stock, without par value — $604,096,035 as of March 31, 2009

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

Common Stock, without par value — 62,672,447 as of November 16, 2009.

Documents incorporated by reference.

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on March 4, 2010 are incorporated by reference into Part III.

 

 

HILL-ROM HOLDINGS, INC.

Annual Report on Form 10-K

September 30, 2009

TABLE OF CONTENTS

		Page
PART I
Disclosure Regarding Forward Looking Statements			3
Item 1. Business			3
Item 1A. Risk Factors			14
Item 1B. Unresolved Staff Comments			20
Item 2. Properties			20
Item 3. Legal Proceedings			21
Item 4. Submission of Matters to a Vote of Security Holders			21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			22
Item 6. Selected Financial Data			25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			56
Item 8. Financial Statements and Supplementary Data			57
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			103
Item 9A. Controls and Procedures			103
Item 9B. Other Information			103
PART III
Item 10. Directors, Executive Officers and Corporate Governance			104
Item 11. Executive Compensation			104
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			104
Item 13. Certain Relationships and Related Transactions, and Director Independence			104
Item 14. Principal Accountant Fees and Services			104
PART IV
Item 15. Exhibits and Financial Statement Schedules			105
SIGNATURES			107
Exhibit 10.1
Exhibit 10.30
Exhibit 10.40
Exhibit 10.41
Exhibit 21
Exhibit 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K (“Form 10-K”) contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 regarding our future plans, objectives, beliefs, expectations, representations and projections. We have tried, whenever possible, to identify these forward-looking statements by using words such as “intend,” “anticipate,” “believe,” “plan,” “encourage,” “expect,” “may,” “goal,” “become,” “pursue,” “estimate,” “strategy,” “will,” “projection,” “forecast,” “continue,” “accelerate,” “promise,” “increase,” “higher,” “lower,” “reduce,” “improve,” “expand,” “progress,” “potential” or the negative of those terms or other variations of them or by comparable terminology. The absence of such terms, however, does not mean that the statement is not forward-looking. We caution readers that any such forward-looking statements are based on assumptions that we believe are reasonable, but are subject to a wide range of risks.

It is important to note that forward-looking statements are not guarantees of future performance, and our actual results could differ materially from those set forth in any forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include but are not limited to the factors discussed under the heading “Risk Factors” in this Annual Report on Form 10-K. We assume no obligation to update or revise any forward-looking statements.

Business Segment Information

Net revenues, segment profitability and other measures of segment reporting for each reporting segment are set forth in Note 15 to the Consolidated Financial Statements.

Our operating structure contains the following reporting segments:

•

North America Acute Care

•

North America Post-Acute Care

•

International and Surgical

Products and Services

Patient Support Systems. Our innovative patient support systems include a variety of electrically adjustable and manual bed systems and integrated and non-integrated therapeutic surfaces for use in high, mid and low acuity settings. Bed systems are one of the most visible and important medical devices in health care and play a significant role in improving patient outcomes and caregiver safety. Improved outcomes are frequently enabled by the interoperability among bed frames, surfaces and clinical information technologies. Specifically, our advanced patient support systems can provide patient data reporting (e.g., weight and therapy statistics), real time caregiver decision support, patient safety alarms and caregiver alerts concerning such things as bed exit, bed height, patient positioning, wound healing and prevention, pulmonary treatment, point of care controls, and patient turn assist and upright positioning. These features and functions, when combined with caregiver training and treatment protocols, have been demonstrated to reduce a number of the most frequent adverse events associated with patient stays, including bedsores (or pressure ulcers), ventilator-associated pneumonia and patient falls.

Our primary patient support systems include the following:

We also provide multiple surface/mattress offerings to meet the needs of customers across the continuum of care. Tempur-Pedic ^® , a jointly branded, premium, non-powered, comfort mattress, is available to our North America acute care customer base. Surgical table accessories from our Allen Medical business include the FlexFrame™ device, which converts a standard operating room table into a surgical table for spine procedures.

We sell patient support systems, including surgical accessories, primarily to acute and extended care health care facilities worldwide through both a direct sales force and distributors. An emerging business involves the direct to consumer (“DTC”) sale of patient support systems and other selected accessories for patients and families desiring the same level of product while at home. Approximately 45 percent, 53 percent and 53 percent of our revenues during fiscal 2009, 2008 and 2007, respectively, were derived from patient support systems.

Non-Invasive Therapeutic Products. We rent and sell non-invasive therapeutic products and surfaces for a variety of acute and chronic medical conditions, including pulmonary, wound and bariatric conditions, primarily to acute, extended and home care customers. Our primary non-invasive therapeutic products and surfaces include the following:

We rent and sell non-invasive therapeutic products and surfaces primarily in the United States, Canada and Europe through a clinical sales force comprised of professionals primarily with a background in nursing or respiratory therapy. In November 2009, we formed a joint venture with Encompass Group, LLC to focus on the sale and distribution of a comprehensive range of surface replacement systems that are intended to be sold separate from a bed frame. Surface replacement systems are generally purchased by our customers to replace existing surfaces that are technologically obsolete or at the end of their useful life.

Technical support for non-invasive therapeutic products and services is made available through an extensive network of technicians and service personnel who provide maintenance and technical assistance from approximately 220 service centers located in the United States, Canada and Europe. Certain therapy systems are also sold directly to customers. Approximately 30 percent, 27 percent and 24 percent of our revenues were derived from these therapeutic products and surfaces in fiscal 2009, 2008 and 2007, respectively.

Medical Equipment Management Services. We provide peak-need rentals and health care provider asset management for a wide variety of moveable medical equipment, also known as MME, such as ventilators defibrillators, intravenous pumps, and patient monitoring equipment. Our medical equipment and management services business also includes equipment service contracts for our capital equipment. We provide these products and services primarily to acute and extended health care facilities through a network of over 220 service centers and approximately 1,700 service professionals throughout the United States, Canada and Europe.

We believe our rental business model offers our customers a number of advantages. A rental option provides health care professionals rapid and affordable access to clinical products and therapies that address the unique needs of a variety of temporary or long-term patient specific situations, including life saving applications. Examples include surfaces to treat wound or burn patients or specialty designed patient support systems to manage obese patients. We also use our rental capabilities to enable our customers to evaluate new technologies. This allows them to carefully evaluate a product before they choose to own the product versus rent it. In addition, our rental offerings allow customers to meet their peak-need, high-census requirements for certain technologies such as infusion pumps, ventilators and patient monitors, thereby facilitating more effective asset management. For example, health care suppliers may turn to MME rental suppliers in the face of unanticipated MME shortages, when there is a surge in patients in need of care and insufficient equipment on hand to meet that need.

We also provide asset management services through various business models to health care providers. Customers seek our services in order to optimize use of their capital investment, as well as a means of introducing new technologies to the hospital and improving utilization by controlling the deployment of their assets.

Approximately 10 percent, 9 percent and 10 percent of our revenues were derived from these products and services in fiscal 2009, 2008 and 2007, respectively.

Patient Environment and Mobilization Solutions. These products include mobility solutions, architectural products and health care furniture. Patient mobilization solutions include patient lifts, slings and other patient transfer technology ranging from compact, lightweight mobile lifts to high capacity overhead and freestanding systems. Patient lifts are widely utilized by professional and non-professional caregivers in acute care hospitals and post-acute care settings to safely facilitate the movement and transfer of patients. Health care furniture solutions include bedside cabinets, adjustable-height overbed tables and patient room furniture. Architectural products include headwalls and power columns, such as the intensive care architectural arm platform called the Latitude ^® system and the Elements™ headwall system , which both enable medical gases, communication accessories and electrical services to be distributed in patient rooms. We sell patient environment and mobility solutions primarily to acute and extended care health care facilities worldwide through both a direct sales force and distributors.

Health Information Technology Solutions. We develop and market a variety of communications technologies and software solutions that are designed to improve patient safety, drive efficiency at the point of care, and integrate the health care enterprise. These products include our suite of clinical communication and productivity solutions, our NaviCare ^® platform, patient safety and our NaviCare ^® Nurse Call. These solutions enable patient-to-staff and staff-to-staff communications to improve patient outcomes and caregiver safety and efficiency. By aggregating messages, alarms and data from patient platforms or other integrated communication devices we can provide real-time alerts to caregivers and construct post-event analyses. Through our WatchChild ^® Obstetric Data Management System, we also provide a perinatal safety solutions suite that focuses on maternal and fetal monitoring and data archiving.

Additionally we compete with a large number of small regional manufacturers.

We compete on the basis of clinical expertise and resulting product clinical utility and ability to produce favorable outcomes, as well as value, quality, customer service, innovation and breadth and depth of product offerings.

Regulatory Matters

FDA Regulation

We design, manufacture, install and distribute medical devices that are regulated by the Food and Drug Administration (“FDA”) in the United States and similar agencies in other countries. The regulations adopted and standards imposed by these agencies evolve over time and require us to make changes in our manufacturing processes and quality systems to remain in compliance. These agencies routinely inspect our facilities, as with other medical device manufacturers. If we fail to comply with applicable regulations and standards, determined by inspections or otherwise, we may be subject to compliance measures, including the recall of products and cessation of manufacturing and/or distribution.

As necessary, we engage in voluntary product recalls and other corrective actions, including voluntarily ceasing shipment of devices. Additionally, within our medical equipment rental fleet, we are responsible for extending these types of actions to our customer base when the actions are initiated by the original equipment manufacturer. We also have implemented an extensive program designed to ensure our quality systems continue to comply with the FDA Quality System Regulation requirements and the regulatory equivalents under the Medical Device Directive in the European Union.

Over the past twelve months, the FDA performed a follow-up inspection at our Batesville headquarters and additional inspections at our Pennsauken, Fayetteville and Charleston facilities. The Batesville inspection was a follow-up to a Warning Letter we received in early 2008. A Notice of Inspectional Observations (also known as 483 reports) report was issued with a minor comment and we implemented corrective action. The FDA has classified the inspection as Voluntary Action Indicated (“VAI”), which means no further regulatory action will be taken by the FDA on this matter; hence, we consider the matter resolved. Our Pennsauken and Fayetteville locations were issued no 483 reports. Our Charleston location was issued a 483 report with one minor finding corrected by the Company and acknowledged by the FDA. The Charleston inspection was also classified Voluntary Action Indicated by the FDA and we consider the matter resolved. Audits conducted by foreign agencies have resulted in some observations resulting in our implementation of corrective actions. We believe we have responded fully to all findings and have implemented appropriate corrective actions. Any future determination by the FDA or similar foreign agency that our products or quality systems do not comply with applicable regulations could result in future compliance activities, including product recalls, import detentions, injunctions preventing the shipment of products, or other enforcement actions that could have a material adverse effect on our financial condition, results of operations and cash flow.

Health Care Regulation

Our customers include hospitals and other acute and extended care facilities that receive reimbursement for certain products and services they provide from various third-party payors including Medicare, Medicaid, managed care organizations, such as health maintenance organizations and preferred provider organizations, and traditional indemnity insurers. In our home care business and a small portion of our extended care business, we are reimbursed directly by such third-party payors. Accordingly, our home care business is significantly affected by changes in reimbursement practices of such third-party payors. In addition, our customers are significantly affected by changes that may result in reduced utilization and downward pressure on prices across our health care businesses. See “Item 7 Management Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends” for further details on the impacts to our business of changes in health care regulations and the pending health care reform legislation.

We have been advised of a qui tam (whistleblower) action filed against us in 2005 under the federal False Claims Act. We are not yet a party to that case, having not been served, and the government has not yet reached a decision as to whether or not to intervene in that matter. See “Item 3. Legal Proceedings — Office of Inspector General Investigation” for further details.

Raw Materials

Principal materials used in our products include carbon steel, aluminum, stainless steel, wood and laminates, petroleum based products, such as foams and plastics, and other materials, substantially all of which are available from several sources. Motors and electronic controls for electrically operated beds and certain other components are purchased from one or more manufacturers.

When prices fluctuate for raw materials and sub-assemblies used in our products, based on a number of factors beyond our control, such fluctuations affect our profitability. We generally have not engaged in hedging transactions with respect to raw material purchases, but do enter into fixed price supply contracts at times. Additionally, although most of the raw materials and sub-assemblies used in our products are generally available from several sources, certain of these raw materials and sub-assemblies currently are procured only from a single source.

Over the past several years, the fluctuating prices of certain raw materials, including metals, fuel, plastics and other petroleum based products in particular, and fuel related delivery costs, had a direct and material negative effect on our profitability. We have acted and will continue to act to mitigate the impact of unfavorable fluctuations in raw material and fuel prices, including through continuous improvement, investments in state-of-the-art and more efficient production equipment, the centralization of the global supply chain to optimize manufacturing operations and purchasing power with suppliers, increased utilization of low cost region sourcing through our sourcing office in China, and increased utilization of the manufacturing facility in Monterrey, Mexico. However, there can be no assurance that we will be able to anticipate and react quickly enough to all changing raw material and sub-assembly prices in the future or that the actions taken will be sufficient to offset the effects of the higher prices.

Most of our extended contracts with hospital group purchasing organizations (“GPOs”) and customers for the sale of North American products permit us to institute annual list price increases. While there are certain limitations in some of those contracts, their provisions generally allow us to raise prices to offset some, but not necessarily all, raw material cost inflation.

Distribution

We have extensive distribution capabilities and broad reach across all health care settings. We have relationships with a large number of acute care hospitals, extended care facilities, community health settings and home health care agencies. Through our network of approximately 200 North American and 20 international service centers and approximately 1,350 North American and 350 international service professionals, we are able to rapidly deliver our products to customers. This extensive network is critical to securing contracts with GPOs and serving our other customers.

Research and Development

Research is conducted to develop new products and improve existing products, as well as to enhance manufacturing and production methods and improve service. Research and development is expensed as incurred. Research and development expense included with continuing operations for the fiscal years ended September 30, 2009, 2008 and 2007, was $55.7 million, $57.3 million and $47.8 million, respectively.

In addition, certain software development technology costs are capitalized as intangibles and are amortized over a period of five to ten years once the software is ready for its intended use. The amortization expense for fiscal years 2009, 2008 and 2007 was approximately $3.6 million, $2.0 million and $0.1 million, respectively.

Patents and Trademarks

We own, and from time-to-time license, a number of patents on our products and manufacturing processes that are of importance, but we do not believe any single patent or related group of patents is of material significance to our business as a whole.

We also own a number of trademarks and service marks relating to our products and product services which are of importance to us, but, except for the mark “Hill-Rom,” we do not believe any single trademark or service mark is of material significance to our business as a whole.

Our ability to compete effectively depends, to an extent, on our ability to maintain the proprietary nature of our intellectual property. However, we may not be sufficiently protected by our various patents, trademarks and service marks. Additionally, certain of our existing patents, trademarks or service marks may be challenged, invalidated, cancelled, narrowed or circumvented. Beyond that, we may not receive the pending or contemplated patents, trademarks or service marks for which we have applied or filed.

In the past, certain of our products have been copied and sold by others. We vigorously try to enforce our intellectual property rights. However, we cannot ensure that the copying and sale of our products by others would not materially adversely affect the sale of our products.

Employees

As of September 30, 2009, we employed approximately 6,500 persons, including approximately 150 incremental Liko employees. Approximately 500 of these individuals, as part of our logistics and manufacturing operations in the United States, work under collective bargaining agreements. We are also subject to various collective bargaining arrangements or national agreements outside the United States. In the United States, the collective bargaining agreements have expiration dates of January 2010 and January 2013. Outside of the United States, negotiations take place as determined by country level requirements, with some elements of employment being negotiated annually.

Although we have not experienced any significant work stoppages in the past 40 years as a result of labor disagreements, we cannot ensure that such a stoppage will not occur in the future. Inability to negotiate satisfactory new agreements or a labor disturbance at one of our principal facilities could have a material adverse effect on our operations. However, we have no reason to suspect that we will have significant difficulties in negotiating new collective bargaining agreements to replace those that will expire in the future and we will continue to prepare contingency plans as part of routine preparation for negotiations to minimize the impact of any potential work stoppages.

Regulatory Matters — Environmental

We are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to environmental and health and safety concerns, including the handling, storage, discharge and disposal of hazardous materials used in or derived from our manufacturing processes. We are committed to operating all of our businesses in a manner that protects the environment. In the past, we have voluntarily entered into remediation agreements with various environmental authorities to address onsite and offsite environmental impacts. When necessary, we provide for reserves in our financial statements for environmental matters. We believe we have appropriately satisfied the financial responsibilities for all currently known offsite issues. Based on the nature and volume of materials involved regarding onsite impacts, we do not expect the cost to us of the onsite remediation activities in which we are currently involved to exceed $2 million. Future events or changes in existing laws and regulations or their interpretation may require us to make additional expenditures in the future. The cost or need for any such additional expenditures is not known.

Foreign Operations and Export Sales

Information about our foreign operations is set forth in tables relating to geographic information in Note 15 to the Consolidated Financial Statements, which statements are included herein under “Item 8 — Financial Statements and Supplementary Data.”

Our foreign operations are subject to risks inherent in doing business in foreign countries. Risks associated with operating internationally include political, social and economic instability, increased operating costs, changes in income taxes, expropriation and complex and changing government regulations, all of which are beyond our control. Further, to the extent we receive revenue from United States export sales in currencies other than United States dollars, the value of assets and income could be, and have in the past been, adversely affected by fluctuations in the value of local currencies.

Executive Officers of the Registrant

Our executive officers are elected each year by the Board of Directors at its first meeting following the Annual Meeting of Shareholders, and from time-to-time as necessary, to serve during the ensuing year and until their respective successors are elected and qualified. There are no family relationships between any of our executive officers or between any of them and any of the members of the Board of Directors. The following is a list of our executive officers and certain other key personnel as of November 16, 2009.

Peter H. Soderberg, 63, was elected as President and Chief Executive Officer of the Company effective March 20, 2006. Mr. Soderberg, a Company board member since 2002, was most recently President and Chief Executive Officer of Welch Allyn, Inc., Skaneateles Falls, N.Y. He held that position since January, 2000. Mr. Soderberg was previously Group Vice President and Chief Operating Officer of Welch Allyn, Inc. His prior experience includes 23 years at Johnson & Johnson where he served in a variety of operations, marketing and management positions in four of its over-the-counter and professional product companies. Most recently, he was President of Johnson & Johnson Health Management, a Johnson & Johnson portfolio company. His career also includes roles as President and Chief Executive Officer of an industrial technology company and the founder and President of a venture capital business. He is on the Boards of Directors of Greatbatch, Inc. (NYSE:GB), Constellation Brands, Inc. (NYSE:STZ), the Advanced Medical Technology Association, and, before his move to Indiana, was on the boards of the Syracuse Symphony Orchestra (as its Vice Chairman), the Metropolitan Development Authority of Central New York (as its Vice Chairman) and CNYMedtech (as its Chairman).

Gregory N. Miller, 46, was elected Senior Vice President and Chief Financial Officer of the Company effective July 14, 2005. He previously held the positions of Vice President — Controller and Chief Accounting Officer for the Company from May 16, 2002 to July 14, 2005 and Vice President — Controller from November 9, 2001 to May 16, 2002. Prior to joining the Company he held a number of positions with Newell Rubbermaid, Inc., a manufacturer and marketer of name-brand consumer products and its divisions including Group Vice President and Controller, Photo Fashions and Juvenile Products Groups, Newell Rubbermaid from 2000 to 2001; Vice President and Controller, Little Tikes Company, a Newell Rubbermaid division from 1999 to 2000; Vice President and Controller and various positions of increasing responsibility in finance for Newell Window Furnishings/Kirsch from 1993 to 1999. Prior to his Newell positions, he held positions with the accounting firms of Deloitte & Touche LLP and Grant Thornton.

Abel Ang, 36, has served as the Chief Technology Officer and Vice-President of Global Product Platforms for Hill-Rom since May 2008. In that role he has overall responsibility for Hill-Rom’s global R&D operations which are distributed across sites in the U.S., Mexico, France, and Singapore. Since joining the company in 2006, he has held the positions of Vice-President and General Manager of Hill-Rom’s Global Surfaces and Therapy Business Unit; and Vice-President for International Business and Technology Development. He formerly headed the global Medical Technology and Biotechnology industry groups in the Singapore Economic Development Board’s (EDB) Biomedical Division. Ang has implemented more than 25 greenfield manufacturing, supply chain, and R&D facilities with an investment value in excess of $500 million. Ang sits on the Industry Advisory Board for the Center for the Business of Life Sciences of the Kelley School of Business at Indiana University and the Advisory Board for the Singapore-MIT Alliance for Research and Technology. Ang teaches at the MBA program of the Nanyang Business School, which has been consistently ranked as one of the top MBA schools in Asia. He has also lectured at the Kelley School of Business at Indiana University and the Krannert School of Management at Purdue University.

Mark D. Baron, 53, was elected Senior Vice President, Global Supply Chain of the Company effective October 2006. Since joining the Company in 2001, he has held the positions of Vice President and General Manager of the Company’s Care Environment Business Unit for Europe, Middle East, & Africa and Vice President, Global Supply Chain. Prior to joining the Company, he held a number of positions with the Lockheed Martin Corporation, a developer and manufacturer of technology systems and products, including Vice President, Material Acquisition from 1998 to 2001 and various leadership positions in Operations and Quality from 1993 to 1998. Prior to his Lockheed Martin positions, he progressed through positions of increasing responsibility in Operations with the General Electric Company.

Earl DeCarli, 53, has served as Group Vice President Care Continuum Services since March 2008. Prior to joining the Company Mr. DeCarli was most recently President and Chief Executive Officer of The Hygenic Corporation, a private equity owned provider of solutions for the rehabilitation and wellness markets. He held that position since August, 2007 and previously served as Hygenic’s President and Chief Operating Officer from March 2005. Mr. DeCarli served as Group Vice President of Welch Allyn, Inc. from May 2000 to early 2005. His prior experience includes eleven years (1989-2000) at Elekta Instruments AB, a Swedish supplier of advanced medical technology for neurosurgery and radiation oncology. While at Elekta he served in a variety of general management roles including Vice President, Surgical Instruments Division; President, Precision Therapy International, Inc. and Chief Operating Officer, Elekta, Inc. Mr. DeCarli began his career in the health care field in 1983 with Baxter Healthcare Corporation where he progressed through positions of increasing responsibility in sales, marketing and sales management. Mr. DeCarli currently serves as a member of the Board of Directors of Reichert, Inc., a portfolio company of the private equity firm Beecken, Petty, O’Keefe & Company.

Patrick D. de Maynadier, 49, has served as Senior Vice President General Counsel and Secretary of the Company since October 1, 2007. Prior to that he served as Vice President, General Counsel and Secretary of the Company starting on January 28, 2002. From May 2000 to October 2001, he was Executive Vice President, General Counsel and Corporate Secretary for CombiMatrix Corporation, a biotechnology company that develops software addressable biochips for drug researchers. From May 1999 to May 2004, he was the President and Chief Executive Officer of SDI Investments, LLC, a spin-off of Sterling Diagnostic Imaging, Inc. He served as Senior Vice President, General Counsel and Corporate Secretary of Sterling Diagnostic Imaging, Inc. from June 1996 to May 1999. Prior to that he was Associate General Counsel of Falcon Seaboard Resources, Inc., a cogeneration and oil and gas company, and a corporate, mergers and acquisitions and securities partner at the law firm Bracewell & Giuliani LLP.

Kimberly K. Dennis, 42, was elected Senior Vice President, North America Post-Acute Care on October 1, 2006. Previous to that, she served vice president roles at Hill-Rom leading its Turnaround Program, shared services and information technology efforts from August 2005 to October 2007 and at Hillenbrand leading shared services and information technology since August 5, 2003. She was Vice President, Business Information Systems for Batesville Casket Company from August 2001 to August 2003 and Director, Enterprise Systems for Batesville Casket Company from January 2000 to August 2001. Her career with the Company started in 1989 with Batesville Casket Company. During her tenure, she held positions of increasing responsibility in finance, planning, operations, logistics, and information technology in assignments at Batesville Casket Company, Hillenbrand and Hill-Rom.

John H. Dickey, 55, was elected Senior Vice President of the Company effective October 1, 2007. Prior to that he served as Vice President of Human Resources of the Company starting on January 1, 2006 and had served as the Vice President of Human Resources and Administration for Batesville Casket Company prior to that since October 22, 2001. Mr. Dickey previously held the position of Vice President of Human Resources for Forethought Financial Services from 1997 to 2001. Prior to that, he was Director of Human Resources — Field Operations and Sales for Hill-Rom, from 1990 to 1997. His career started with the Company in 1976 where he held positions of increasing responsibility in logistics, operations and human resources.

Sheri H. Edison, 52, was elected Senior Vice President and Chief Administrative Officer of the Company, effective October 1, 2007, with responsibility for U.S. commercial legal operations, information technology, government affairs, regulatory affairs, quality assurance, supplier quality, enterprise transportation and guest services. She has served as Assistant General Counsel and Assistant Secretary for the Company since October 1, 2005 and served as Vice President and General Counsel for Hill-Rom from November 3, 2003 until October 1, 2007. Prior to that, Ms. Edison served as Vice President and General Counsel of Batesville Casket Company beginning in early 2003, and before joining the Company, Ms. Edison was Assistant General Counsel at LTV Steel and spent several years in private practice at Jones Day as a mergers and acquisitions attorney.

Michael J. Grippo, 40, was elected Vice President of Business Development and Strategy of the Company on June 12, 2006. Prior to joining the Company, Mr. Grippo led the Business Development function for Welch Allyn, Inc., a privately held medical products company based in Skaneateles, NY. Prior to Welch Allyn, Mr. Grippo spent 12 years in the investment banking industry primarily with SunTrust Robinson Humphrey, SG Cowen and UBS Securities. Mr. Grippo received a joint degree in Economics and Political Science from Princeton University and an MBA from New York University.

Jeffrey Kao, 42, has served as President of the Company’s North America Acute Care division since January 2008. Previously, he had been Senior Vice President of Sales, Clinical & IT Solutions for Hill-Rom since May 24, 2007. He previously held the position of President and Chief Executive Officer at Systems and Software, a Vermont based software firm focused on Municipal Government Revenue Cycle Solutions, from October 2006 to May 2007. Prior to Systems and Software, Mr. Kao served as the Senior Vice President for Flowcast, a division of IDX Systems Corporation, from October 2004 to October 2006. Mr. Kao held a number of positions with GE Healthcare previous to IDX, including General Manager of Functional Imaging and General Manager of Nuclear Medicine, and served as a 6 Sigma Master Black Belt and Quality Leader for GE Healthcare.

Richard G. Keller, 48, was elected Vice President, Controller and Chief Accounting Officer of the Company effective August 4, 2005. He had served as Executive Director — Controller of Hill-Rom since March 2004 and as Director, Financial Planning and Analysis of the Company from May 2002 to March 2004. Prior to joining the Company, Mr. Keller served as a Director in the Audit and Business Advisory Services group of PricewaterhouseCoopers LLP.

Blair A. (Andy) Rieth, Jr., 51, was hired as Vice President of Investor Relations, Communications, and Global Brand Development of the Company on June 7, 2006. Prior to joining the Company, he held a number of positions for Guidant Corporation, a former subsidiary of Eli Lilly and Company, from 1994 to 2006. Most recently he held the position of Investor Relations Officer from 2000 to 2006. Prior to Guidant, Mr. Rieth held a variety of management positions within sales, product management, mergers and acquisitions and business development for Eli Lilly and Company. Mr. Rieth received a degree in Economics magna cum laude from DePauw University and a Master’s in Business Administration from the Amos Tuck School at Dartmouth College.

Gregory J. Tucholski, 48, has served as President of the Company’s International and Surgical division since January 2008. He was elected Senior Vice President, International and Surgical of Hill-Rom effective October 2006. He previously held the position of Vice President, North America Sales and Vice President North America Marketing of Hill-Rom since April 2003. Previously, he held a number of positions at GE Medical Systems (now GE Healthcare) during his 15 year career with GE Medical Systems. GE Healthcare, a unit of General Electric Company, is a provider of medical technologies and services, including medical imaging and information technologies, medical diagnostics, patient monitoring systems, drug discovery, and biopharmaceutical manufacturing technologies. Prior to his GE positions, Mr. Tucholski began his career with Technicare, formerly a Johnson and Johnson subsidiary.

Availability of Reports and Other Information

Our website is www.Hill-Rom.com. We make available on this website, free of charge, access to our annual, quarterly and current reports and other documents we file with or furnish to the Securities and Exchange Commission (“SEC”) as soon as practicable after such reports or documents are filed or furnished. We also make available on our website position specifications for the Chairman, Vice Chairman, members of the Board of Directors and the Chief Executive Officer, our Code of Ethical Business Conduct, the Corporate Governance Standards of our Board of Directors and the charters of each of the standing committees of the Board of Directors. All of these documents are also available to shareholders in print upon request.

All reports filed with the SEC are also available via the SEC website, www.sec.gov , or may be read and copied at the SEC Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Item 1A.		RISK FACTORS

Our business involves risks. The following information about these risks should be considered carefully together with the other information contained herein. The risks described below are not the only risks we face. Additional risks not currently known or deemed immaterial also may result in adverse effects on our business.

We face significant uncertainty in the industry due to government health care reform. In addition, capital equipment sales and rental revenues may be adversely affected by Medicare and state government Medicaid funding cuts that could affect customers in every segment of our health care business.

Political, economic and regulatory influences are subjecting the health care industry to fundamental changes. We anticipate that the current presidential administration, Congress and certain state legislatures will continue to review and assess alternative health care delivery systems and payment methods with an objective of reducing health care costs and expanding access. The uncertainties regarding the final legislation and its implementation could continue to have an adverse effect on our customers’ purchasing decisions regarding our products and services. Any legislation enacted could represent opportunities and challenges. The potential exists that Medicare and Medicaid reimbursement in a variety of health care settings could be negatively impacted. Additionally, proposals to tax the sale of medical device technologies are being considered in Congress. The House of Representatives passed legislation that calls for a 2.5 percent sales-based excise tax beginning in 2013. The Senate is considering a market-share based excise tax of approximately $2 billion annually on medical device manufacturers beginning in 2010. At this juncture in the legislative process, it is not possible to determine the final magnitude of the tax or its precise structure and implementation. Negotiations are underway with the industry relative to these important details. However, should a medical device manufacturers’ tax be enacted into law its impact, along with the impact of health care reform to Medicare and Medicaid reimbursement as well as other aspects of the various reform plans to our industry, could have a material adverse effect on our financial condition, results of operations and cash flow. At this time, we cannot predict with certainty which, if any, health care reform proposals will be adopted, when they may be adopted or what impact they may have on us.

In addition to health care reform, Medicare, Medicaid and managed care organizations, such as health maintenance organizations and preferred provider organizations, traditional indemnity insurers and third-party administrators are increasing pressure to both control health care utilization and to limit reimbursement. Changes in reimbursement programs or their regulation, including retroactive and prospective rate and coverage criteria changes and other changes, intended to reduce the program expenditures, could adversely affect our third-party reimbursement business. Historical changes to Medicare payment programs from traditional “cost-plus” reimbursement to a prospective payment system resulted in a significant change in how our customers acquire and utilize our products. This resulted in reduced utilization and downward pressure on prices. Similarly, future revenues and profitability will be subject to the effect of possible changes in the mix of our customers’ patients among Medicare, Medicaid, third-party and private payor categories, increases in case management and the review of services or reductions in coverage or reimbursement rates by such payors.

Failure by us or our suppliers to comply with the Food and Drug Administration (“FDA”) regulations and similar foreign regulations applicable to the products we manufacture or distribute could expose us to enforcement actions or other adverse consequences.

We design, manufacture, install and distribute medical devices that are regulated by the FDA in the United States and similar agencies in other countries. Failure to comply with applicable regulations could result in future product recalls, injunctions preventing the shipment of products or other enforcement actions that could have a material adverse effect on our revenues and profitability. Additionally, certain of our suppliers are subject to FDA regulations, and the failure of these suppliers to comply with regulations could adversely affect us. Moreover, our moveable medical equipment rental business is subject to product modifications executed by us on behalf of original medical equipment manufacturers that can result in unanticipated costs and temporary product shortages. Additionally, regulatory actions taken by the FDA against those manufacturers can result in product shortages, recalls or modifications.

We could be subject to substantial fines or damages and possible exclusion from participation in federal health care programs if we fail to comply with the laws and regulations applicable to our business.

We are subject to stringent laws and regulations at both the federal and state levels governing the participation of durable medical equipment suppliers in federal and state health care programs. We are subject to numerous legal requirements related to supplying our products to patients, billing and claims submission processes, and our relationships to referral sources.

From time to time, the government seeks additional information related to our claims submissions, and in some instances government contractors perform audits of payments made to us under Medicare, Medicaid, and other federal health care programs. On occasion, these reviews identify overpayments for which we submit refunds. At other times, our own internal audits identify the need to refund payments. We anticipate that the frequency and effectiveness of the government audits and review processes will intensify in the future, due to increased resources allocated to these activities at both the federal and state Medicaid level, and greater sophistication in data review techniques.

Federal and state fraud and abuse laws are also complex and numerous. In the durable medical equipment field, fraud and abuse risks arise most frequently in the claims submission process and in dealings with potential referral sources. With respect to the former, we have recently been advised of a qui tam (whistleblower) action filed against us in 2005 under the federal False Claims Act. We are not yet a party to that case, having not been served, and the government has not yet reached a decision as to whether or not to intervene in that matter. In the meantime, we are cooperating with the government in its investigation. Because qui tam (whistleblower) cases are filed under seal, there may be other whistleblower cases filed against us of which we are currently unaware. There is also a risk that the government itself would in the future file a False Claims Act case against us alleging improper claims activity. We are currently not aware of the existence of any such action or intention.

Under federal (and many state) laws, it is a crime to offer or pay remuneration for the referral of any federal health care program business. These activities are prosecuted under the federal criminal anti-kickback statute and parallel civil authorities. Durable medical equipment suppliers’ relationships with physicians, home health agencies and other referral sources are subject to anti-kickback scrutiny. We are not aware of any pending investigation or enforcement action against us relating to these statutes.

If we are deemed to have violated these laws and regulations, we could be subject to substantial fines or damages and possible exclusion from participation in federal health care programs such as Medicare and Medicaid. While we believe that our practices materially comply with applicable state and federal requirements, the requirements may be interpreted in a manner inconsistent with our interpretation. Failure to comply with applicable laws and regulations, even if inadvertent, could adversely impact our business.

Our future financial performance will depend in part on the successful introduction of new products into the marketplace on a cost-effective basis. The financial success of new products could be adversely impacted by competitors’ products, lack of differentiation or willingness of customers to pay for such differentiation, customer acceptance, difficulties in product development and manufacturing, quality issues and warranty claims, certain regulatory approvals and other factors. The introduction of new products may also cause customers to defer purchases of existing products, which could have an adverse effect on sales.

Our future financial performance will depend in part on our ability to influence, anticipate, identify and respond to changing consumer preferences and needs. We cannot assure that our new products will achieve the same degree of success that has been achieved historically by our products. We may not correctly anticipate or identify trends in consumer preferences or needs, or may identify them later than competitors do. Any strategies we may implement to address these trends may prove incorrect or ineffective. In addition, difficulties in manufacturing or in obtaining regulatory approvals may delay or prohibit introduction of new products into the marketplace. Further, we may not be able to develop and produce new products at a cost that allows us to meet our goals for profitability, particularly since downward pressure on health care product prices is expected to continue. Warranty claims and service costs relating to our products may be greater than anticipated, and we may be required to devote significant resources to address any quality issues associated with our new products, which could reduce the resources available for further new product development and other matters. For example, as part of the tradeoff between clinical effectiveness and comfort, which is inherent in most clinical products, we have at times dedicated research and development efforts to improving the comfort and customer acceptance of certain of our products. These efforts, together with the foregoing focus on enhancing the competitiveness of our core products, have sometimes resulted in the dedication of new product development resources to sustaining development efforts.

Failure to successfully introduce new products on a cost-effective basis, or delays in customer purchasing decisions related to the evaluation of new products, could cause us to lose market share and could materially adversely affect our business, financial condition, results of operations and cash flow.

Further adverse developments in general domestic and worldwide economic conditions and instability and disruption of credit markets could have further adverse affects on our operating results, financial condition, or liquidity.

We are subject to risks arising from adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of credit markets. The credit and capital markets experienced extreme volatility and disruption over the past year, leading to recessionary conditions and depressed levels of consumer and commercial spending. These recessionary conditions have caused customers to reduce, modify, delay or cancel plans to purchase our products and services. While recent indicators suggest modest improvement in the United States and global economy, we cannot predict the timing or extent of any economic recovery or the extent to which our customers will return to more normalized spending behaviors. If the recessionary conditions continue or worsen, we would expect our customers to further scrutinize costs resulting from pressures on operating margin due to rising supply costs, reduced investment income and philanthropic giving, increased interest expense, reimbursement pressure, reduced elective health care spending and uncompensated care. Additionally, further disruption in the credit markets could impede our access to capital, which could be further adversely affected if we are unable to maintain our current credit ratings. Should we have limited access to additional financing sources, we may need to defer capital expenditures or seek other sources of liquidity, which may not be available to us on acceptable terms if at all.

Our pension plans invest in a variety of equity and debt securities, including securities that have been adversely affected by the recent disruption in the credit and capital markets. Our pension plans were underfunded at September 30, 2009 by approximately $93.4 million. Continued market volatility and disruption could cause further declines in asset value. If this occurs, we may need to make additional pension plan contributions and our pension expense in future years may increase.

All of these factors related to the global economic situation, which are beyond our control, could negatively impact our business, results of operations, financial condition, and liquidity.

Our business is significantly dependent on major contracts with group purchasing organizations, or GPOs, and integrated delivery networks, or IDNs. Our relationships with these organizations pose several risks.

A majority of our North American hospital sales and rentals are made pursuant to contracts with hospital group purchasing organizations (“GPOs”). At any given time, we are typically at various stages of responding to bids and negotiating and renewing expiring GPO agreements. Failure to be included in certain of these agreements could have a material adverse effect on our business, including capital and rental revenues.

The contracting practices of GPOs change frequently to meet the needs of their member hospitals. An emerging trend is for GPOs to offer committed programs or standardization programs, where one supplier may be chosen to serve designated members that elect to participate in the program. Participation by us in such programs may require increased discounting, and failure to participate or to be selected for participation in such programs may result in a reduction of sales to the member hospitals. In addition, the industry is showing an increased focus on contracting directly with health systems or IDNs (which typically represents influential members and owners of GPOs). IDNs and health systems often make key purchasing decisions and have influence over the GPO’s contract decisions. This presents an opportunity to have more contracts directly with customers, but customers may request additional discounts or other enhancements.

GPOs, IDNs, and large health care providers have communicated that their member hospitals are under cost pressure, and they have increased their focus on pricing and on limiting price increases. Some of our sales contracts contain restrictions on our ability to raise prices, therefore limiting our ability, in the short-term, to respond to significant increases in raw material prices or other factors.

Increased prices for, or unavailability of, raw materials or sub-assemblies used in our products could adversely affect profitability or revenues. In particular, our results of operations continue to be adversely affected by high prices for metals, fuel, plastics and other petroleum based products.

Our profitability is affected by the prices of the raw materials and sub-assemblies used in the manufacture of our products. These prices may fluctuate based on a number of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel related delivery costs, competition, import duties, tariffs, currency exchange rates and, in some cases, government regulation. Significant increases in the prices of raw materials or sub-assemblies that cannot be recovered through increases in the prices of our products could adversely affect our results of operations. We experienced unprecedented higher prices in fiscal 2008 on numerous commodities, including metals, fuel, plastics and other petroleum based products, which continued throughout much of fiscal 2009. Although we have to some extent historically been able to offset such rising costs with increases in the prices of our products, there can be no assurance that the market place will continue to support the higher prices or that such prices will fully offset such commodity price increases in the future. Any further increases in prices resulting from a tightening supply of these or other commodities or fuel could adversely affect our profitability. We generally have not engaged in hedging transactions with respect to raw material purchases, but do enter into fixed price supply contracts at times. Future decisions not to engage in hedging transactions or ineffective hedging transactions may result in increased price volatility, with resulting adverse effects on profitability.

Our dependency upon regular deliveries of supplies from particular suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Several of the raw materials and sub-assemblies used in the manufacture of our products currently are procured only from a single source. If any of these sole-source suppliers were unable or unwilling to deliver these materials for an extended period of time as a result of financial difficulties, catastrophic events affecting their facilities or other factors, or if we were unable to negotiate acceptable terms for the supply of materials with these sole-source suppliers, our business could suffer. We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs. Disruption and volatility in the credit markets could adversely affect our suppliers’ access to capital and therefore their ability to continue to provide an adequate supply of the materials we use in our products. Extended unavailability of a necessary raw material or sub-assembly could cause us to cease manufacturing one or more products for a period of time.

We face significant competition as a result of low cost competitors entering the market as well as consolidation among competitors, which could reduce our share of the market and our net sales. Competition could also cause us to increase expenditures or cause us to reduce our prices thereby negatively impacting our margins.

Over the past several years, consolidation and the entrance of new low cost competitors has greatly increased competition in the United States and abroad. These companies have competed in all areas, but most effectively in our most price sensitive segments such as extended care. During the same time period, they have grown in size and scale. If we are unable to effectively differentiate ourselves from our competitors, our market share, sales and profitability could be adversely impacted.

Our agreements with Hillenbrand, Inc. may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.

The agreements related to the separation of Hillenbrand, Inc. from us, including the Distribution Agreement, Judgment Sharing Agreement, Employee Matters Agreement, Tax Sharing Agreement, Shared Services Agreements and Transitional Services Agreements, were prepared in the context of the separation and, accordingly, may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of these agreements relate to, among other things, allocation of assets, employees, liabilities, rights, indemnifications and other obligations between us and Hillenbrand, Inc. For descriptions of these agreements, see Note 3 to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data.”

The distribution of shares of Hillenbrand, Inc. stock to our shareholders or unfavorable outcomes related to uncertain tax positions could result in significant tax liabilities.

We received a private letter ruling from the Internal Revenue Service (“IRS”) that the distribution of shares of Hillenbrand, Inc. stock to our shareholders in connection with the separation of Hillenbrand, Inc. from us would qualify for tax-free treatment under Internal Revenue Code Sections 355 and 368(a)(1)(D). The IRS ruling relies on certain representations, assumptions and undertakings, including those relating to the past and future conduct of our and Hillenbrand, Inc.’s businesses. Although we believe that all of these representations, assumptions and undertakings were correct, the IRS ruling would not be valid if the representations, assumptions and undertakings were incorrect. Moreover, the IRS private letter ruling does not address all the issues that are relevant to determining whether the distribution will qualify for tax-free treatment, although we received an opinion of counsel with respect to the legal and tax issues not addressed in the private letter ruling. Notwithstanding the IRS private letter ruling, the IRS could determine that the distribution should be treated as a taxable transaction if it determines that any of the representations, assumptions or undertakings that were included in the request for the private letter ruling were false or had been violated.

If the distribution fails to qualify for tax-free treatment, we would be subject to tax as if we had sold the common stock of Hillenbrand., Inc. in a taxable sale for its fair market value and Hillenbrand, Inc.’s initial public shareholders would be subject to tax as if they had received a taxable distribution equal to the fair market value of Hillenbrand, Inc.’s common stock that was distributed to them.

We have also recorded tax benefits related to various uncertain tax positions taken or expected to be taken in a tax return. While we believe our positions are appropriate, the IRS could disagree with our positions, resulting in a significant tax payment.

Our strategic initiatives may not produce the intended growth in revenue and operating income.

We have disclosed operational strategies and initiatives. These strategies include making significant investments to achieve revenue growth and margin improvement targets both organically and through strategic acquisitions. If we do not achieve the expected benefits from these investments or otherwise fail to execute on our strategic initiatives, we may not achieve the growth improvement we are targeting and our results of operations may be adversely affected.

We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions, and may experience business disruptions, associated with announced restructuring, realignment and cost reduction activities.

Over the past few years we have announced several restructuring, realignment and cost reduction initiatives, including significant realignments of our businesses, employee terminations and product rationalizations in North America, continued restructuring, realignment and continuous improvement initiatives at our French manufacturing facility and shifting a portion of our manufacturing capacity to a facility in Mexico, efforts to improve our medical equipment management services business and other streamlining initiatives. While we have started to realize the efficiencies of these actions, these activities may not produce the full efficiency and cost reduction benefits we expect. Further, such benefits may be realized later than expected, and the ongoing costs of implementing these measures may be greater than anticipated. If these measures are not successful or sustainable, we may undertake additional realignment and cost reduction efforts, which could result in future charges. Moreover, our ability to achieve our other strategic goals and business plans may be adversely affected and we could experience business disruptions with customers and elsewhere if our restructuring and realignment efforts prove ineffective.

Product liability or other liability claims could expose us to adverse judgments or could affect the sales of our products.

We are involved in the design, manufacture and sale of health care products, which face an inherent risk of exposure to product liability claims if our products are alleged to have caused injury or are found to be unsuitable for their intended use. Any such claims could negatively impact the sales of products that are the subject of such claims or other products. We, from time-to-time, and currently, are a party to claims and lawsuits alleging that our products have caused injury or death or are otherwise unsuitable. It is possible that we will receive adverse judgments in such lawsuits, and any such adverse judgments could be material. Although we do carry insurance with respect to such matters, this insurance is subject to varying deductibles and self-insured retentions and may not be adequate to cover the full amount of any particular claim.

An adverse outcome in the ongoing antitrust litigation in which we are a defendant could materially adversely affect our results of operations, financial position and liquidity.

We are a codefendant with Batesville Casket Company, a subsidiary of Hillenbrand, Inc., and certain customers of Batesville, in a purported antitrust class action lawsuit. See “Item 3. Legal Proceedings.” The Federal District Court denied class certification in that matter, and the Fifth Circuit denied the plaintiffs’ petition to appeal. Further requests for reconsideration by the plaintiffs have also been denied. Despite these rulings, the plaintiffs may continue to seek reversal of the Fifth Circuit’s ruling by filing for an appeal with the United States Supreme Court or through other procedural avenues. Should the plaintiffs succeed in their efforts to obtain a reversal of the District Court order denying class certification and a class is certified in this matter and if the plaintiffs prevail at trial, the damages awarded to the plaintiffs, which would be trebled as a matter of law, could have a significant material adverse effect on our results of operations, financial condition and/or liquidity. In antitrust actions the plaintiffs may elect to enforce any judgment against any or all of our codefendants, who have no statutory contribution rights against each other.

Although we have entered into a Judgment Sharing Agreement with Hillenbrand, Inc. intended to allocate any potential liability that may arise from this case and any other case that is consolidated with this case, there can be no assurance that Hillenbrand, Inc. will be able to satisfy its potential obligations under this agreement. Moreover, negative covenants contained in the Distribution Agreement related to the spin-off of Hillenbrand, Inc., intended to preserve the credit capacity of each of Hillenbrand, Inc. and us and to support our ability to perform our respective obligations under the Judgment Sharing Agreement, impose restrictions on us that, among other matters, limit our ability to use debt to consummate certain acquisitions, repurchase shares or pay dividends. For a description of the Judgment Sharing Agreement and the Distribution Agreement, see Note 3 to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data.”

We are involved on an ongoing basis in claims, lawsuits and governmental proceedings relating to our operations, including environmental, antitrust, patent infringement, business practices, commercial transactions, and other matters.

The ultimate outcome of the various other claims, lawsuits and governmental investigations in which we are involved cannot be predicted with certainty but could have a material adverse effect on our financial condition, results of operations and cash flow. We are also involved in other possible claims, including product and general liability, workers compensation, employment-related matters and auto liability. While we maintain insurance for certain of these exposures, the policies in place are high-deductible policies resulting in our assuming exposure for a layer of coverage with respect to such claims.

We may not be able to grow if we are unable to successfully acquire and integrate, or form business relationships with, other companies.

Although we plan to continue to grow certain of our businesses by acquiring or forming partnerships, joint ventures and alliances with other companies, we expect to compete against other companies for acquisitions and may not be able to identify suitable acquisition candidates or business relationships, negotiate acceptable terms for such acquisitions or relationships or receive necessary financing for such acquisitions or relationships on acceptable terms. Moreover, once an acquisition, partnership, alliance or joint venture agreement is signed, various events or circumstances may either prevent the successful consummation of the contemplated acquisition or transaction, or make it unadvisable. Additionally, we may become responsible for liabilities associated with businesses that we acquire to the extent they are not covered by indemnification from the sellers or by insurance. Therefore, if we are able to consummate acquisitions, such acquisitions could be dilutive to earnings, and we could overpay for such acquisitions. Additionally, we may not be successful in our integration efforts or fully realize expected benefits from the integration. Our integration efforts may divert management and other resources from other important matters, and we could experience delays or unusual expenses in the integration process. Ineffective integration may also result in intangible asset impairments which could result in significant charges in our Statements of Consolidated Income (Loss).

We may not be able to attract, retain and develop key personnel.

Our future performance depends in significant part upon the continued service of our executive officers and other key personnel. The loss of the services of one or more of our executive officers or other key employees could have a material adverse effect on our business, prospects, financial condition and results of operations. This effect could be exacerbated if any officers or other key personnel left as a group. Our success also depends on our continuing ability to attract, retain and develop highly qualified personnel. Competition for such personnel is intense, and there can be no assurance that we can retain our key employees or attract, assimilate and retain other highly qualified personnel in the future.

In September 2009, we announced plans for the succession of Peter H. Soderberg, our President and Chief Executive Officer. We are currently engaged in a search for a new President and Chief Executive Officer to succeed Mr. Soderberg for which succession is anticipated to occur during 2010. Although our Board of Directors has taken steps to ensure an orderly succession, we cannot assure that we will be able to identify and hire a suitable successor in the anticipated time period or that the succession process will not cause disruptions in our business or other difficulties.

If we are unable to convert our portfolio of auction rate securities to cash, our liquidity and earnings could be adversely affected .

At September 30, 2009, we held $43.6 million of investment securities, which consisted primarily of AAA rated student loan auction rate securities. The market for auction rate securities, of which a key characteristic has historically been a high degree of liquidity, experienced auction failures in fiscal 2008 as the supply for auction rate securities in the market exceeded demand. Our portfolio of auction rate securities also experienced auction failures, effectively eliminating the liquidity of our holdings. Although currently we believe we have the ability and the intent to hold these assets until market conditions are more favorable or our investment advisors satisfy the conditions of certain announced settlements to repurchase these securities at par value, if current market conditions do not improve or worsen, or our advisors do not follow through on their repurchase commitments, the result could be further temporary unrealized losses or impairments, and liquidity and earnings could be adversely affected. See Note 1 to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data.”

A substantial portion of our workforce is unionized, and we could face labor disruptions that would interfere with our operations.

Approximately 8 percent of our employees, as part of our logistics and manufacturing operations in the United States, work under collective bargaining agreements. We are also subject to various collective bargaining arrangements or national agreements outside the United States covering approximately 6 percent of our employees. Although we have not experienced any significant work stoppages in the past 40 years as a result of labor disagreements, we cannot ensure that such a stoppage will not occur in the future. Inability to negotiate satisfactory new agreements or a labor disturbance at one of our principal facilities could have a material adverse effect on our operations Beyond our existing union relationships, political influences are subjecting the labor arena to risk of potential instability as labor law reform legislation, coined the “Employee Free Choice Act (“EFCA”),” is presently being debated by Congress and the current presidential administration. The primary objective of EFCA is to replace secret ballot elections as the means by which most workers can choose union representation, with a process whereby unions can secure recognition by simply demonstrating that a majority of workers have signed cards authorizing the union to act as their representative. A secondary objective is to empower a government-appointed arbitrator to impose terms of a first collective bargaining agreement when management and labor are unable to reach agreement on all terms within a limited period of time. Various uncertainties exist regarding the features of EFCA and its implementation. Any labor law reform legislation enacted could pose challenges. The potential exists that these reforms could result in increased union organizing activity at our facilities which, in turn, could increase the changes of work stoppages. However, we continue to educate our non-represented work force on the potential impact of EFCA and unionization to manage the risks posed by these reform efforts.

PART II

Issuer Purchases of Equity Securities

														Maximum
										Total Number				Number of
										of Shares				Shares That
		Total								Purchased as				May Yet Be
		Number				Average				Part of Publicly				Purchased
		of Shares				Price Paid				Announced Plans or				Under the Plans
Period		Purchased (1)				per Share				Programs (2)				or Programs (2)
July 1, 2009 – July 31, 2009			12			$	12.09				—				3,000,000
August 1, 2009 – August 31, 2009			—			$	—				—				3,000,000
September 1, 2009 – September 30, 2009			223			$	16.73				—				3,000,000
Total			235			$	16.50				—				3,000,000

Stock Performance Graph

The following graph compares the return on the Company’s common stock (as Hillenbrand Industries, Inc. (HB) through March 31, 2008) with that of Standard & Poor’s 500 Stock Index (“S&P 500 Index”), and the Company Peer Group* for the five years ended September 30, 2009. The graph assumes that the value of the investment in our common stock, the S&P 500 Index, and our peer group was $100 on October 1, 2004 and that all dividends were reinvested. The spin-off of our funeral services business at March 31, 2008 is treated as a reinvestment of a special dividend effective April 1, 2008 pursuant to SEC rules. The special dividend was based on the value of one share of Hillenbrand, Inc. (the holding company for the funeral services business) which was distributed as part of the spin-off.

The following graph compares the return on the Company’s common stock with that of the S&P 500 Index, and the Company Peer Group* for the period of April 1, 2008 (date of spin-off) through September 30, 2009. The graph assumes that the value of the investment in our common stock, the S&P 500 Index, and our peer group was $100 on April 1, 2008 and that all dividends were reinvested.

Certain other information required by this item will be contained under the caption “Equity Compensation Plan Information” in the Company’s definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on March 4, 2010, and such information is incorporated herein by reference.

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

Overview

Hill-Rom is a leading worldwide manufacturer and provider of medical technologies and related services for the health care industry, including patient support systems, safe mobility and handling solutions, non-invasive therapeutic products for a variety of acute and chronic medical conditions, medical equipment rentals and information technology software and communications solutions. Hill-Rom’s comprehensive product and service offerings are used by health care providers across the health care continuum in hospitals, extended care facilities and home care settings worldwide, to enhance the safety and quality of patient care.

Industry Trends, Strategy and Other Factors Impacting Our Business

We previously communicated our long-term goal to grow revenue by an average of eight to twelve percent, six to eight percent through organic means and two to four percent through strategic acquisitions and, operating income by an average of twelve to fifteen percent. Throughout most of fiscal 2009, our progress against these financial objectives has been adversely impacted by significant economic pressures that have caused hospitals and other health care institutions in North America to materially reduce their levels of capital spending. Recently, these pressures have shown some signs of easing and our interpretation of independent market research suggests expectations for growth in capital spending by our customers for 2010 will range from approximately flat trends to high single digit increases. There remains some uncertainty in the 2010 outlook as a major downward movement in equity markets, tightening in credit markets, or adverse developments as the legislative process progresses toward a final health care reform bill could result in tightening of spending behavior by our customers leading us to believe a flat to mid-single digit increase in capital spending by our customers to be more realistic. Internationally, the impact of the global recession on our customers has been less significant and has varied widely by country and by region. We expect the varying demand to continue depending on country-specific public health funding and reform, macroeconomic recovery and foreign currency fluctuations against the dollar.

We have responded to these uncertainties by taking a number of actions to better balance our capacity with demand and reducing the overall cost structure of our business as outlined in our strategy section. At the same time, we have remained committed to our new product development efforts and have continued to make selective investments in our sales channel. We believe the strategy we have been following since early 2007 remains fundamentally sound and that our strategy, along with the recent actions we have taken, will position us to resume our predicted long term growth rates in sales and profitability once the underlying fundamentals of demand for our products are restored.

Industry Trends

General Trends. The medical technology industry remains diverse and highly competitive. We believe that over the long term, patient and provider demand for health care products and services will continue to rise as a result of a number of factors, including an aging population, longer life expectancies, and an increasing number of sicker patients across all care settings, including hospitals, extended care facilities and in the home. These patients have more complex co-existing diseases, or co-morbidities, such as diabetes, heart failure, obesity, pulmonary and vascular disease, immobility issues and chronic wounds. Patients and their families are becoming increasingly discerning consumers who demand solutions that enhance their quality of life in all settings of care. At the same time, health care providers across the care continuum are under continued pressure to improve efficiency, control costs, improve the quality of care, maintain good relations with physicians and caregivers and comply with a complex and demanding reimbursement and regulatory environment. We believe these general trends will continue for the foreseeable future due to demographic trends, economic uncertainty, the impact of health care reform, increasing numbers of uninsured patients, reimbursement pressures from third party payors, continuing nurse and physician shortages, facility capacity constraints and increasing technology and supply costs.

Legislative. Our customers include hospitals and other acute and extended care facilities that receive reimbursement for certain products and services they provide from various third-party payors including Medicare, Medicaid, managed care organizations, such as health maintenance organizations and preferred provider organizations, and traditional indemnity insurers. In our home care business and a small portion of our extended care business, we are reimbursed directly by such third-party payors. Accordingly, our home care business is significantly affected by changes in reimbursement practices of such third-party payors. In addition, our customers are significantly affected by changes that may result in reduced utilization and downward pressure on prices across our health care businesses.

We continually monitor reimbursement developments and their implications particularly in the United States. The Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”) contained a delay of the durable medical equipment prosthetics, orthotics and supplies (“DMEPOS”) competitive bidding program. The initiative is now scheduled to commence in January of 2011. The competitive bidding program marks the gradual transition from a fee schedule reimbursement model to one based on competitive bidding. A primary objective of the program is to reduce Medicare’s outlay for medical equipment and services provided in the home. In exchange for the delay, products originally included in the initial round of bidding last summer received a reimbursement cut of 9.5 percent that commenced on January 1, 2009. Medical beds and accessories and certain support surfaces we provide to home care settings were included in this reduction. Because the primary goal of the program is to reduce spending, it is reasonable to expect pricing for products included in the program to be lower in the future. Further, a more severe repercussion beyond payment reductions would be the possibility that the bidding process could completely exclude certain vendors from program participation if their bids are deemed too high. However, given the fluid nature of program developments and current legislative proposals that could further impact the program, the overall effect of these actions on our business is not yet known.

Beyond the competitive bidding program, political, economic and regulatory influences are subjecting the health care industry to potential fundamental changes as health care reform legislation is presently being debated by Congress and the current presidential administration. The objective of health care reform is to reduce health care costs and expand access to health care; however, various alternatives and uncertainties exist regarding the features of legislation and its implementation. Any legislation enacted could represent opportunities as well as a challenge. The potential exists that Medicare and Medicaid reimbursement in a variety of health care settings could be negatively impacted. Additionally, proposals to tax the sale of medical device technologies are being considered in Congress. The House of Representatives passed legislation that calls for a 2.5 percent sales-based excise tax beginning in 2013. The Senate is considering a market-share based excise tax of approximately $2 billion annually on medical device manufacturers beginning in 2010. At this juncture in the legislative process, it is not possible to determine the final magnitude of the tax or its precise structure and implementation. Negotiations are underway with the industry relative to these important details. However, should a medical device manufacturers’ tax be enacted into law its impact, along with the impact of health care reform to Medicare and Medicaid reimbursement as well as other aspects of the various reform plans to our industry, could be significant.

Capital Expenditures and Construction. Prior to fiscal 2009, United States hospitals and health systems were breaking ground on new facility projects and renovation at increasing rates. This construction activity was generated by the need to modernize aging facilities and to effectively compete for more demanding consumers. Over half of the renovation or new construction was to increase inpatient bed capacity. A majority of the hospital capital spending was focused on this construction activity as well as information technology, imaging, outpatient development and the addition of new service lines. During fiscal 2009, the turbulence in the financial markets, liquidity crisis and general economic uncertainties have contributed to pressures on operating margins for hospitals and health systems, resulting from rising supply costs, reduced investment income and philanthropic giving, increased interest expense, reimbursement pressure, reduced elective health care spending and uncompensated care. As a result, many of our customers have scrutinized costs more carefully and have looked for opportunities to further reduce or slow capital spending. At the same time, competition for the share of capital expenditure dollars has become more significant. While there remains an increasing need to modernize aging facilities, we expect hospitals and health systems in the United States to remain cautious while health care reform remains unresolved.

Rising Acuities in All Care Settings. As a result of the growing population of the elderly, health care systems are challenged to treat rising incidences of complex diseases and conditions such as obesity, diabetes, congestive heart failure and respiratory disease. Patients are being moved through the hospital faster and generally desire to rapidly move to lower acuity settings, and consequently, we see a progression of sicker patients who are being moved to lower acuity care settings. These trends are putting pressure on caregivers across all care settings and increasing the need for more sophisticated means to care for these patients. Improved medical technologies, communication tools and information technologies will likely be an integral part of helping increasingly challenged providers care for these sicker patients with more complex diseases and conditions.

Patient Safety & Quality. An increasing emphasis is being placed within United States hospitals to assure quality of care through increased accountability and public disclosure. Quality indicators surrounding patient safety and clinical outcome measurements are increasingly being publicized, and improvement of institutional performance is a matter of focus by many hospital executives and their boards. The “pay for performance” initiative by the Centers for Medicare and Medicaid Services (“CMS”) aims to better align reimbursement with improved patient outcomes and the reduction of adverse events including bedsores (or pressure ulcers), ventilator associated pneumonia, patient falls, deep vein thrombosis and patient entrapment. Transparency through public reporting of quality data continues to accelerate, as well as the focus to increase accountability through penalties or rewards resulting from whether quality measures are reported. During fiscal 2008, CMS issued and put into effect its Final Rule for inpatient payment, a continuation in the agency’s efforts to align reimbursement more closely with cost of care and severity of illness. Within this measure, hospitals may experience reduced reimbursement for hospital acquired adverse events, marking a stronger connection with these adverse events and revenue levels. A number of the top adverse events and preventable medical errors in United States hospitals, including those listed above, can be mitigated in part by our technologies, processes and services. We are well positioned to benefit from the emphasis being placed on patient safety due to our strong clinical capabilities, products and technologies that are designed to assist providers in materially improving outcomes associated with patients confined to beds across all care settings.

Caregiver Safety. Caregiver shortages, worker related injuries, the aging work force, and other staffing requirements have led to increasing emphasis on caregiver injury prevention. Nurses and rehabilitation therapists face an unusually high incidence of back injury and have among the highest levels of worker’s compensation claims of any occupation. We believe that this problem will exacerbate as nurses age and patients’ in every care setting become less mobile and larger. Certain countries in Europe have established legislation that has mandated that patient lifts be available in hospitals. In the United States several states have enacted or introduced legislation and, most recently, the Nurse and Health CareWorker Protection Act of 2009 was introduced in Congress aimed at eliminating manual patient lifts and transfers. We believe that our products and services seek to address these concerns through novel application of technology, clinical and ergonomic science, and customer feedback.

Patient Consumerism and Satisfaction. Patients and their families are becoming increasingly discerning consumers and are increasingly approaching health care as they do other free-market goods and services, basing decisions on price, quality and services. Open access to and exchange of information empower patients to make more informed decisions concerning their health care. As a result of these trends, health care providers are actively competing for these consumers through enhanced services, quality initiatives, amenities and improved aesthetic design of their facilities. We believe we are well positioned to enhance the experience of the patient through our initiatives in patient comfort, patient room design, and safe patient handling.

Growing Desire Among Developed and Developing Countries to Invest in Health Care. While industry growth rates in more mature geographic markets such as western and northern Europe and Japan have moderated, in many other geographic markets, where the relative spending on health care is increasing, we are experiencing increasing demand for medical technologies. New hospital construction and hospital refurbishments have continued in regions such as Latin America, the Middle East and many parts of Asia. We believe that we are moving appropriately to establish the products and resources in these regions that will help to improve the standard of care available to their citizens and caregivers.

Strategies

Our mission is to provide patients and those who care for them across all patient care settings and around the world with clinically superior and cost-effective patient support and related therapy and information platforms that promote safer and more effective patient care. Management believes we can achieve this mission and our sales and profit growth goals by fully utilizing our knowledge of care processes, our global sales and distribution channels, our US and European capital sales and rental service center networks, and our market-leading position and brand in hospital patient support systems. In North America, our Acute Care organization uniquely focuses on hospital patient support and near-patient technologies, as well as on health information communications technology solutions. Our Post-Acute Care organization focuses on a variety of settings outside of the hospital, including long-term acute care, extended care and home care, offering patient support systems and respiratory care products. Our International and Surgical Division offers similar products as our North America businesses, but also surgical accessories business.

We believe that we have opportunities for growth in all of the patient care settings and businesses where we currently compete, and are either number one or number two in virtually every market segment we elect to compete in. We believe that the North American acute care patient support systems marketplace, while most significantly impacted by the recent economic downturn, will continue to provide opportunity for growth once the underlying fundamentals of demand for our products are restored. We plan to increase our strength in this core business through innovation and business and customer development. We believe there is substantial opportunity for us to increase our heretofore relatively low participation level in the North American and international post-acute care segments. Finally, we also believe that we have high growth potential in our smaller, but more rapidly growing, entrepreneurial businesses.

Differentiate Our Core North America Acute Care Business. In order to maintain strong leadership in our North American acute care patient support systems and rental businesses, we plan to continue to increase our competitiveness by focusing on the launch of a number of new products as well as extensions of important core products across the price/feature continuum. We intend to continue to augment our selling and marketing capabilities by adding sales representatives in territories that will enable us to expand our coverage and by adding sales specialists to focus on certain product categories such as stretchers, surface replacements, patient lifts, architectural products and our therapeutic and medical equipment management services rental equipment. We will continue to focus on sales effectiveness and will seek to partner in new ways with our customers to help them improve clinical outcomes by reducing adverse clinical events and alleviate financing pressures through development of financing and leasing solutions to provide access to Hill-Rom technologies earlier than might otherwise be possible.

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New Product Development. The commitment we made in fiscal 2006 to a better focused and resourced new product development pipeline has resulted in the commercialization in the past three years of several new products and extensions of (or improvements to) important core product lines across the price/feature continuum. During 2009, despite the pressures on margins and operating expenses, we have selectively invested in product innovation and research and development in areas that we expect to have a long term return while still addressing our core value propositions to patients and their caregivers. In addition to various improvements to core product lines, our most significant recent launches include:

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In October 2009, we launched our Advanta 2 med-surg bed. Advanta 2 sets a new standard for med-surg beds, offering improved ease of use, safety and data connectivity through innovative approaches to address the daily challenges of providing care. The design has been developed from caregiver input and existing Hill-Rom designs with proven performance and reliability, so caregivers can spend more time with patients.

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During our second quarter of 2009, we launched the innovative Elements™ headwall system, a flexible and adaptable headwall system designed to bring electric power, data and gases to the patient care arena.

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The VersaCare ® P500 wound care surface is designed to improve removal of excess heat and moisture from the surface for cooler, dryer skin. This surface was added to our rental fleet in our second quarter and was launched for sale during our fourth quarter.

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At the end of fiscal 2008, we launched the NaviCare ® Nurse Call Platform, an all digital platform designed to improve communication and keep caregivers in touch with their patients. We have continued to receive positive feedback from this launch.

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Our therapy business has realized strong growth and margin expansion in fiscal 2009 as a result of our launches of innovative products, including the TotalCare ® Bariatric Plus system, and Envision ® wound therapy product.

We believe that these products will address unique, growing and underserved patients with more complex and co-existing diseases and conditions that should have broad application throughout the care continuum.

Another noteworthy area of progress with respect to our product offerings include alliances that we have entered into recently as well as our acquisition earlier in fiscal 2009. In April, we announced a strategic development arrangement with TeleTracking Technologies, Inc. (“TeleTracking”) to invest in and commercialize the next generation of patient flow and nurse communication solutions designed to enhance efficiency, improve patient safety and integrate communications within the health care environment. In addition, Hill-Rom and TeleTracking have established a joint sales and marketing arrangement to leverage the combined market reach of the two companies as they take patient flow and nurse communications solutions to market. As part of the agreement, TeleTracking purchased the assets of Hill-Rom’s Patient Flow product line, thereby bringing the complete work flow solution into TeleTracking’s software and service offerings. This arrangement will allow for each company to focus on and leverage its core competencies and support the companies’ commitment to pursue initiatives and opportunities that leverage their combined strengths in delivering greater value to hospital customers.

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Business Development. In October 2008, we completed the acquisition of Liko. Based in Lulea, Sweden, Liko is a leading supplier and developer of lifts and slings that facilitate the safe movement and transfer of patients. Patient lifts are widely utilized in acute and post-acute care settings to safely facilitate the movement and transfer of patients. We have begun to benefit from synergies created by combining Liko’s product platforms, engineering capabilities, clinical competencies and sales channel capabilities with our established brands, reputation for high quality products and service, and our large and established sales and service organizations in North America. We believe there are opportunities to accelerate the growth of Liko’s products across the care continuum in 2010.

In November 2009, we announced a joint venture with Encompass Group LLC to provide acute care institutions with a broader range of surface replacement systems for our large installed base of hospital frames as well as competitors’ frames. The joint venture will provide incremental revenue to Hill-Rom and combine existing and new products into a highly competitive portfolio of therapy surfaces.

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Remarket to our Installed Base. We believe we have the opportunity to maintain or grow our installed base, extend product lifecycles and drive incremental revenues by offering remanufactured and reconditioned patient support systems, replacement capital surfaces, and service contracts and other service related offerings. In order to establish focus on these after-market opportunities within our existing installed base of customers, we realigned our sales force over the past two years to increase the number of sales territories in North America. We believe our investment in this model has improved the effectiveness of our North American acute care sales and marketing programs and increased accountability and execution. We intend to continue to focus on the continued improvement of selling and contracting processes and customer relationship management with both new and existing customers.

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Focus on Patient Safety. We are committed to improving patient safety and the reduction of adverse events associated with patient stays, such as pressure ulcers, hospital acquired infections, ventilator-associated pneumonia and patient falls; and, as such, we employ clinicians and nurses throughout our business. Our technologies are frequently used to avoid and mitigate such adverse events potentially leading to favorable economic and clinical outcomes for patients and customers. We believe that improving clinical outcomes is best achieved by combining technologies, people and processes through close alliances with our customers and jointly developed training tools and protocols. Our patient safety solutions are embodied by our No Falls™, Clear Lungs™, and Safe Skin™ programs. These programs address three of The Joint Commission’s National Patient Safety Goals established for 2007. The No Falls™, Clear Lungs™, and Safe Skin™ programs take a comprehensive approach that include working with health care providers to help optimize safety protocols and enable change management, as well as offering a technology portfolio of innovative software, patient support systems, communication technologies and reporting tools that are designed to work together to improve patient safety and outcomes. Moreover, the addition to our portfolio of patient lifts, slings and other patient transfer technology from our recent acquisition of Liko has further expanded our portfolio of products designed to improve the safety of patients.

To that end, we have begun to work in partnership with certain of our customers to assist them in developing best practices, standardization, training and education related to certain adverse event categories. Our commitment is evidenced by our long-term strategic alliances with leading systems such as Ascension Health, the largest not for profit independent delivery network in North America, and New York Presbyterian hospitals. The objective of these alliances is to reduce and eventually eliminate certain adverse events occurring within the patient care environment.

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Maintain Growth of our Therapy Rental Business. Improvements related to sourcing, manufacturing, production, logistics and sales channel resulted in growth of our therapy rental business by double-digits in 2008. In 2009, our recent launches of innovative products, including the TotalCare ® Bariatric Plus system, VersaCare ® P500 wound care surface and Envision ® wound therapy product, continued our momentum and have yielded revenue growth and margin expansion throughout our fiscal year. In 2010, we expect to build on our momentum towards achieving sustainable competitive advantage through superior design and expansion of our product portfolio, continuous process improvement efforts and cost improvements.

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Revitalizing our Medical Equipment Management Services Business. In recent periods our MEMS business has faced increasing competitive pressures, including pricing pressures, resulting in some customer losses. To counter these pressures, on September 30, 2008, our Board of Directors approved a management-recommended plan to restore growth and improve the profitability of the MEMS business. Implementation of the plan has included a more strategic focus on customers, a limited rationalization in our service center footprint to align and consolidate resources and better serve our customers and the rationalization and disposal of select assets and asset groups. The implementation of this plan, along with the more aggressive management of capital expenditures, has resulted in improved gross margins and increased cash flows for this business, despite a planned reduction in revenue. We expect these actions to begin to yield top-line growth in 2010.

Achieve a Leadership Position in our Post-Acute Care Business. We believe there is substantial opportunity to increase our relatively low participation level in the North American post-acute care marketplace for patient support systems, surfaces, furniture and accessories. These products are available for both rental and capital sale, which positions us to address changing economic conditions and any resulting impact to customer purchase preferences. As we seek to increase our presence across the North America care continuum, we have made investments in new products, new business models and improved business systems that we believe will enable us to profitably participate in the large and growing home care and extended care segments.

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New Product Development. The Hill-Rom ® 70 and 80 beds (Home Care and Extended Care) were recently launched and our long time frame leader, the Resident ® Bed, was refreshed and re-launched. We have also experienced excellent acceptance of our 300 Wound Surface launched late last year.

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Expanded Sales Channel. Our Respiratory Care and Home Care business units have continued to grow. Changes made during fiscal 2008 in all businesses in terms of sales channel, product offering and account development have continued to deliver strong results to the bottom line. Respiratory Care continues to grow in additional Medicare covered disease states such as neuromuscular and our Home Care business continues to increase rentals of our differentiated therapy platforms, frames and bariatric products as well as sales of products directly to consumers.

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Compliance Excellence. Our Third Party billing function is subject to compliance with laws and regulations applicable to our business and is the basis for government reimbursement. We continue to enhance both our staff and processes to support this, most recently initiating a project to implement a document imaging system that will be completed over the next two quarters. These systems are widely recognized as best in class and it is anticipated they will enable increased efficiency and effectiveness of the Third Party billing function by reducing claims processing time and improving document integrity throughout the filing process.

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Business Development. Our Liko™ products are being well received in the Extended Care and Home Care businesses through our indirect sales channels. We believe there are opportunities to further broaden the Liko product portfolio in our post-acute segment and further develop our sales channels.

Expand our International and Surgical Business. Our goal has been to grow this business at double digit rates, in spite of a relatively flat European Acute Care segment. To accomplish this, we decided to focus on maintaining or moderately growing our leadership positions in the developed markets we serve, to continue to establish leadership positions in emerging international segments and new care segments and to execute selective acquisitions. Our International and Surgical division continues to experience growth across most major segments despite the impact of the economic downturn in certain parts of the world and the unfavorable impact of currency exchange rates throughout the year. To continue to grow, we must continue to focus on maintaining leadership positions while selectively establishing leadership positions in niche markets in the developed geographic markets we serve and establish leadership positions in emerging international markets.

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Maintain Leadership Position in Europe. We have continued to successfully leverage our existing European Acute Care sales channel capacity to maintain sales volume, despite capital spending pressures on our customers, as well as to integrate Liko patient lifts into our Acute and Post-Acute sales channel. We have also successfully launched a new architectural product line in Europe.

In addition, in Europe, we believe that the extended care environment is growing more rapidly than the Acute Care segment as lower hospital reimbursement levels are driving the need to more frequently transfer patients out of higher acuity hospitals into medicalized long term care (“MLTC”) facilities that care for chronically ill patients that need lower acuity care. We have validated that MLTC is growing at high single digit rates. Prior to 2008, we had minimal presence in MLTC. In late 2007, we launched new products tailored to this customer segment, and we have made substantial progress in our initiatives to grow our presence within MLTC in Europe. Recently introduced patient support and furniture products have continued to drive significant revenue growth. Specifically, derivatives of our AvantGuard ^® patient support system (our AvantGuard ^® 801 and AvantGuard ^® 802) and our Meltis furniture lines have been particularly well-received by MLTC customers. Additionally, in the third quarter of fiscal 2008, we launched another version of our AvantGuard ^® patient support system, the AvantGuard ^® 1600, for use in mid- to high-acuity acute care settings throughout Europe .

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Expand Emerging Growth Regions. We believe we can achieve substantial growth in under-penetrated regions and leverage additional channel capacity. We believe that the demand for frames, surfaces, architectural products and patient lifts in select countries in Latin America, Asia, and the Middle East and Africa is growing despite the recent economic downturn. We have continued to invest in direct selling resources and establishing additional distribution channels in order to rapidly and profitably penetrate these international geographies. As a result, we experienced strong growth in Latin America and the Middle East and Africa during 2009. For 2010, we are expecting continued regional expansion across all product categories in the Middle East and Africa, as well as Asia, Australia and Latin America .

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Business Development. The Liko acquisition has most significantly impacted our International segment. Similar to our North American segments, we have begun to benefit from synergies created by combining Liko’s product platforms, engineering capabilities, clinical competencies and sales channel capabilities with our established brands, reputation for high quality products and service, and our large and established sales and service organizations. We believe Liko will be a significant driver of growth in our MLTC business. We also intend to utilize this acquisition to leverage our European acute care sales channel and further develop the market for patient lifts in Western Europe and in the rest of the International segment. In 2010, we plan to further leverage the Liko acquisition and build on the momentum we started in 2009.

Improve Gross Margins and Sustain Operating Efficiencies. We continue to execute strategies to improve our long-term cost position and mitigate cost pressures and the impact of the global economic environment. We have various ongoing initiatives throughout our organization to improve manufacturing productivity and drive sustainable improvements throughout our supply chain and business processes. In addition, we continue to focus on leveraging the centralization of our global supply chain and increased utilization of low cost region manufacturing and sourcing. We have executed various streamlining initiatives aimed at sustainable reductions in discretionary and operational spending that resulted in significant reductions throughout 2009. During the year we also refined our strategies and plans for execution in research and development and innovation.

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Region Manufacturing and Sourcing. A key component of our global manufacturing strategy is to establish a manufacturing presence in regions of the world where we sell products. Since many of our products are highly configurable, this strategy takes advantage of our configure-to-order model and allows us to better manage lead times, inventory and logistics costs. For example, in 2008, we completed the build out of welding, assembly, and painting lines and we have fully transitioned a portion of our manufacturing capacity for products used in lower acuity care settings and selected post-acute care settings from Batesville, Indiana and Pluvigner, France to the new facility in Mexico. We continued to expand production in our Monterrey, Mexico facility in 2009 and look for additional opportunities into 2010. Inspite of the economic downturn, output during 2009 has increased by 45 percent for our Mexico facility versus the same period in 2008 while conversion costs on lines transferred to Monterrey versus pre-transfer levels are 50 percent better.

To further reduce our cost structure, we continue to leverage our Suzhou, China sourcing center to access suppliers of components, sub-assemblies and finished products throughout the Pacific Rim. We have also continued other low-cost region efforts to source raw materials, components and sub-assemblies from Mexico (primarily for use in our Monterrey facility), Eastern Europe and India (primarily for products sold in Europe, Middle East and Africa), as well as from various Asian markets. Expansion of our low-cost region sourcing, which we have increased to nearly 30 percent of our total direct material spend, has helped in managing various market and supply base pressures.

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Product Platform Design. We continue to accelerate the pace of product platforming efforts to provide even further efficiencies and reduce product costs. Product platforming relates to the building of common modules and components that can be reused across several product families thereby driving volume opportunities that would not have otherwise been afforded to us. With the development and recent launch of new patient support platforms, we have continued to implement our initial platforming efforts designed to increase the use of common subassemblies and modules across multiple frame, surface and electronics platforms which will enable us to meet customer needs faster, provide consistent styling in our products and improve our overall gross margin rates.

Also reflecting our increasing focus on new product development and platforming, we changed the top two layers of our research and development organization early in the fiscal year to improve speed and execution. We have eliminated most of our outside temporary and contracted resources and brought the work inside, at a significant savings as well. We are also working much more extensively with outside development partners to share the development risk and increase our access to enabling technologies. These various initiatives have helped us to manage our costs while continuing to progress our technology platforming efforts. We believe we have a strong product pipeline that will improve sales momentum when normal buying patterns return.

We have recently expanded our commitment and resources in Singapore, where we enjoy engineering cost advantage, including local government incentives. During our fourth quarter, we established a new Respiratory Care Development Center (“RCDC”) in collaboration with the Singapore Economic Development Board (“EDB”). The RCDC, our third center in Singapore, will join our Asia-Pacific Innovation and Patient Support Development Centers to continue our research and product development efforts in partnership with the Singaporean government. Our goal for the new RCDC is to identify, develop and commercialize innovative global respiratory care products to expand our franchise beyond our leading high velocity chest wall oscillation therapy known as The Vest ^® Airway Clearance System.

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Universal Lines. In Pluvigner, implementation of a new universal manufacturing line is complete. The universal line will allow us to run several platforms down the same assembly line, and enables much more optimized use of human resources and capital resources. The new line has provided greater than 20 percent improvement in labor productivity. We have recently begun a similar initiative in Batesville, Indiana aimed at revitalizing the productivity of our most significant manufacturing facility.

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Continuous Improvement. Throughout the year, we have refocused and reenergized our Continuous Improvement efforts. Utilizing standardized continuous improvement tools we are driving sustainable improvements throughout the supply chain and in our business processes. These efforts have led to margin growth in our rental business due to productivity gains and a customer partnering initiative that has allowed us to meet customer needs at a lower cost. In our Post-Acute segment, initiatives have been focused on product cost reductions, fulfillment cost reduction initiatives, and third party billing efficiency projects. We believe our efforts here have been and will continue to be a critical part of preparing for any reimbursement reform that may affect this segment as it has already helped offset Medicare reimbursement changes that took place earlier this year.

To further drive these efforts, we recently established a Continuous Improvement organization to facilitate and assist in the development and execution of a strategy of operational excellence within all business units and functions on a global basis

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Streamlining. During the third quarter, in an effort to streamline our manufacturing processes and leverage existing fixed assets, we completed the transition of certain surface and frames manufacturing from our Charleston, South Carolina facility to our Batesville, Indiana facility. This transition has met or exceeded the related pre-established metrics.

On January 14, 2009, we announced a plan to manage our cost structure through consolidation of certain manufacturing and selected back office operations; redeployment of U.S. sales and service resources to increase our customer presence and support; reduction in non-sales, non-research and development discretionary spending; a voluntary early retirement program, and involuntary job eliminations. These actions were completed during our third quarter and are expected to result in annual savings of $12 to $14 million. For additional information related to these actions, see Note 11 included in our Notes to Consolidated Financial Statements.

During August of 2008, we completed a review of our organizational structure aimed at creating a more streamlined organization. This process resulted in the elimination of approximately 160 professional, salaried and non-exempt employee positions. The implementation of this restructuring plan was substantially completed by the end of our first fiscal quarter.

Other Factors Impacting Our Business

GPO and IDN Contracts. A majority of our North American hospital sales and rentals are made pursuant to contracts with GPOs. GPOs strive to achieve significant health care savings for their members by aggregating buying volume and negotiating for the best value in their purchase of medical devices and other supplies and services. At any given time, we are typically at various stages of responding to bids and negotiating and renewing expiring GPO agreements. In the case of GPO contracts, our sales are generally made on a competitive basis because actual purchasing decisions are made by health systems that are members of GPOs and not by the GPOs themselves. Because of this, the award of a sole-source or dual-source GPO agreement does not generally result in exclusivity for all of that GPO’s member organizations. Likewise, the loss of a sole-source agreement or change of an agreement from sole or dual to multi-source agreement does not generally result in the inability to make continued sales to any of the applicable GPO member organizations. Most GPO agreements are terminable by the GPO on short notice. It is, therefore, impossible to predict with certainty the effect on our business and results of operations if sole or dual-source contracts are replaced with multi-source agreements or if contracts are terminated by a GPO, although such a change could reduce our sales to members of the applicable GPOs and could have a material adverse effect on our business, including capital and rental revenues.

The contracting practices of GPOs change frequently to meet the needs of their member hospitals. In addition, the industry is continuing to show an increased focus on contracting directly with health systems or IDNs (which are organizations that align health care facilities). IDNs and health systems make key purchasing decisions and have influence over the GPOs contract decisions. This presents an opportunity to have more contracts directly with customers, but customers may request additional discounts or other enhancements.

GPOs represent an important source of economies of scale for hospitals and aim to reduce health care costs by reducing product prices. GPOs, IDNs and large health care providers have communicated that their member hospitals are under cost pressure, and they have increased their focus on pricing and on limiting price increases. Some of our sales contracts contain restrictions on our ability to raise prices, therefore limiting our ability, in the short-term, to respond to significant increases in raw material prices or other factors.

Competition and Consolidation. Over the past several years, consolidation and the entrance of new low cost competitors has greatly increased competition in the United States and abroad. These companies have competed in all areas, but most effectively in our most price sensitive segments such as extended care. During the same time period, they have grown in size and scale. We believe our strategic initiatives will help us compete more effectively with these competitors through differentiated features, as well as with a broadened frames and surfaces and capital and rental product portfolio.

Sales Timing. Our sales and profitability have historically been disproportionately weighted toward the latter part of each quarter and generally weighted toward the latter part of each fiscal year. This weighting is due to a combination of sales incentives, which influence certain customers to accelerate purchases otherwise planned for future periods, compensation practices and customer capital equipment buying patterns. However, there is no assurance that these patterns will continue in the future.

RESULTS OF OPERATIONS

The following table presents comparative operating results for the years discussed within Management’s Discussion and Analysis:

The financial results presented herein include a number of items which impact the comparability between periods. A summary of these items is as follows:

Fiscal Year Ended September 30, 2009 Compared to Fiscal Year Ended September 30, 2008

In the following section, we provide a high level summary of our consolidated results of operations for fiscal 2009 compared to fiscal 2008. Immediately following this summary section is a more comprehensive discussion of revenues and divisional income by operating segment.

Consolidated revenues in 2009 decreased $120.8 million, or 8.0 percent to $1,386.9 million, compared to the prior year, including an unfavorable impact of foreign exchange rates of $41.7 million. On a constant currency basis, consolidated revenues decreased 5.2 percent. Fluctuations in revenues during the year were largely driven by volume changes and the impact of foreign currency as pricing was only modestly favorable.

Capital sales revenues declined by $122.5 million, or 11.7 percent, from the prior year, including the unfavorable impact of foreign exchange rates of $31.6 million. On a constant currency basis, capital revenues decreased 8.7 percent. The main driver of this decrease was North America Acute Care capital sales, where beginning in the second half of our first fiscal quarter we experienced unfavorable volumes resulting from the tightening in provider capital spending budgets in the United States resulting from unprecedented economic pressures and reduced access to capital. To a lesser extent, this trend extended to other parts of the world during the second half of our fiscal year. These declines were partially offset by incremental revenue from our acquisition of Liko in October 2008. We also realized strong growth in the Middle East and Africa and Latin America, as well as within the Home Care portion of our North America Post-Acute Care segment.

Rental revenues increased $1.7 million, or 0.4 percent, over the prior year, including the unfavorable impact of foreign exchange rates of $10.1 million. On a constant currency basis, rental revenues increased 2.5 percent. The increase in rental revenues was mainly due to North America Acute Care growth in therapy rental revenues, despite a relatively weak influenza season compared to the prior year, led by our Bariatric frames and Envision ^® wound surface, accompanied by solid growth in our Respiratory Care business. The growth in rental revenue was partially offset by lower rentals in both extended care, and in moveable medical equipment, due mainly to the rationalization of unprofitable business and the loss of select extended care contracts during our 2008 fiscal year.

In fiscal 2010, we expect revenues to increase at a mid-single digit rate.

Consolidated gross profit decreased $41.6 million, or 6.2 percent, but increased as a percentage of revenues to 45.3 percent, as compared to 44.4 percent in the prior year.

Capital sales gross profit decreased $59.6 million, or 14.0 percent, due to lower volumes within our North America Acute Care segment. Offsetting this decrease was the effect of the Liko acquisition and the strong performance of our International and Surgical segment. Gross margin (as a percentage of sales) for capital sales also decreased during the year, dropping 100 basis points to 39.7 percent. The decline was largely due to fixed cost components decreasing at a lower rate than sales volume, unfavorable geographic and product mix, costs related to performance issues associated with a discontinued product of $4.8 million, as well as the $2.9 million impact from the step-up of acquired Liko inventories sold during the year. Partially offsetting the decline were favorable fuel costs of $3.5 million in the current year.

Rental revenue gross profit increased $18.0 million, or 7.4 percent, led by strong therapy rental revenues within our North America Acute Care segment. Gross margin for rental revenues increased 370 basis points to 56.3 percent related to the higher margins on recent product introductions, strong leverage and reduction of our field service costs, lower fuel costs, cost improvement initiatives and the effects of lower depreciation on our rental fleet.

In fiscal 2010, consolidated gross margins are expected to increase slightly due to our cost structure improvements discussed previously in the “Strategies” section.

Other operating expenses, which consist of selling, marketing, research and development and general administrative costs, decreased $26.6 million in 2009 compared to the prior year. As a percentage of revenues, other operating expenses were slightly higher than prior year as other operating expenses decreased, but at a slightly slower rate compared to revenue. The decline in the overall expense is a result of August 2008 and January 2009 workforce reduction actions, performance-related compensation savings and other general and administrative continuous improvement activities aimed at reducing core operating expenses. These declines were also due in part to a favorable impact of foreign exchange rates of $8.5 million, offset by incremental expenses related to Liko of $32.6 million. Research and development expense for the year has decreased by $1.6 million but has increased as a percentage of revenue as we have continued to make appropriate investments in product development. Going forward, we expect increases in performance-related compensation and continued investments in our product development and sales channel to be partially offset by savings from our continuous improvement activities.

During fiscal 2009, we recorded a charge of $472.8 million related to the impairment of goodwill and other intangibles as a result of the decline in our market capitalization during the second quarter related to the overall macro-economic climate and its resulting unfavorable impact on hospital capital spending and our operating results. The significance of the charge was reflective of the significant value in our unrecorded intangible assets such as the Hill-Rom trade name, technology and know-how and customer lists which reduce the value of our implied goodwill when calculating the impairment charge. There could be an additional adjustment of this charge in fiscal 2010 upon the finalization of the working capital and net debt adjustment associated with the Liko acquisition, with any such adjustment expected to be favorable and not material. For further information regarding the charge, refer to Note 5 to the Consolidated Financial Statements.

Special charges of $20.5 million were recognized in 2009 related primarily to a restructuring plan that we announced on January 14, 2009 to aggressively manage our cost structure through the consolidation of certain manufacturing and selected back office operations; redeployment of U.S. sales and service resources to increase our customer presence and support; reduction in non-sales, non-research and development discretionary spending; a voluntary early retirement program, and involuntary job eliminations. In total, the plan resulted in a charge of $11.9 million related to severance, early retirement packages and discontinued use of a building under an operating lease. Additionally, postretirement health care costs, the waiver of an early retirement pension penalty offered in conjunction with the voluntary early retirement incentive and plan curtailments resulted in a charge of $4.2 million. Operating asset write-offs and other charges associated with these actions were also taken in the amount of $4.4 million. In fiscal 2008 we incurred special charges of $22.8 million. For explanation of fiscal 2008 charges see “Fiscal Year Ended September 30, 2008 Compared to Fiscal Year Ended September 30, 2007” below. See Note 11 to the Consolidated Financial Statements for more detail on these actions.

During the third quarter of fiscal 2009, we completed two separate sales of non-strategic assets that resulted in a gain of $10.2 million, net of transaction related costs. A majority of the gain resulted from the sale of patents and intellectual property related to our Negative Pressure Wound Therapy technology. We also sold certain assets and liabilities related to our NaviCare ^® Patient Flow product line in connection with a strategic development agreement with TeleTracking Technologies, Inc.

Interest expense decreased $3.9 million in 2009 compared to the prior year primarily due to a reduction of debt in the prior year of $224.3 million in connection with the spin-off of the funeral services business. Investment income decreased $6.4 million compared to 2008 due to lower interest rates and cash balances related to cash paid for the Liko acquisition in the current year. Other income was $1.2 million in 2009 compared to an expense of $5.5 million in the prior year due primarily to favorable foreign currency effects, as well as a prior year $3.2 million loss on the early extinguishment of debt and the termination of our previous credit facility.

Income Tax Expense

The effective tax rate for 2009 is unusual in light of the significance of the non-cash intangible impairment charge and the lack of deductibility of this charge for income tax purposes. Income tax expense of $26.2 million in 2009 represented an effective tax rate of (6.9) percent, which compares to a tax rate of 27.3 percent in 2008. Both years were favorably affected by a number of discrete tax benefits.

The rate in fiscal 2009 reflects favorable discrete period tax benefits of $6.4 million recognized for the year. The favorable benefit relates primarily to the release of valuation allowance on capital loss carryforwards, a deferred tax benefit associated with the non-cash intangible impairment charge and the “catch-up” related to the retroactive reinstatement of the research and development tax credit which had previously expired.

The rate in fiscal 2008 was favorably impacted by favorable discrete period tax benefits of $8.3 million recognized for the year. These tax benefits related primarily to the net release of valuation allowances on our foreign tax credit carryforwards and the net release of certain federal and state tax liabilities, including interest, associated with the completion of the federal audit of the Company’s fiscal years 2004 through 2006 and the expiration of certain state statutes.

The effective tax rate without the non-deductible impairment charge or discrete tax benefits would have been 34.7 percent and 36.2 percent in 2009 and 2008, respectively. The lower rate in 2009 is due primarily to the reinstatement of the research and development tax credit and a more favorable foreign rate differential, offset by less tax benefit this period from tax-exempt municipal interest and a lower deduction for qualified domestic production activities.

Income (Loss) from Continuing Operations

Income (loss) from continuing operations decreased $472.1 million to a loss of $405.0 million in fiscal 2009 primarily due to the impairment charge of goodwill and other intangibles. This equated to a diluted loss per share from continuing operations of $6.47 compared to diluted earnings per share from continuing operations of $1.07 in fiscal 2008.

Reconciling differences between total divisional income and income from continuing operations before taxes include the impairment of goodwill and other intangibles, special charges and other income/expense. See Note 15 in the Consolidated Financial Statements for a reconciliation.

North America Acute Care

Total North America Acute Care revenues decreased $143.1 million, or 15.3 percent, in 2009 compared to the prior year, including $8.5 million of unfavorable exchange rate movements. Capital sales revenues decreased $151.6 million, or 22.1 percent, while rental revenues were higher by $8.5 million, or 3.4 percent. The decline in capital sales revenues during 2009 was the result of reductions in capital spending by our U.S. hospital customers partially offset by incremental capital sales revenue associated with our Liko acquisition. Rental revenue increased due to growth in our therapy rental revenues, despite a relatively weak influenza season compared to the prior year, led by new product offerings in our rental fleet including our bariatric bed frames and wound surface products. Partially offsetting favorability in therapy rentals was lower rentals of our moveable medical equipment due mainly to our previously announced product rationalization.

Divisional income for North America Acute Care decreased $54.9 million, or 22.2 percent, in 2009 compared to the prior year. Capital sales gross profit was down on a percentage basis somewhat in excess of revenues due to fixed cost components decreasing at a lower rate than sales volumes, unfavorable product mix, the impact of $4.8 million of costs incurred related to performance issues associated with a discontinued product and the impact of the step-up of acquired Liko inventories sold during the first half of the year of $2.9 million. Rental gross profit improved due to higher margins on new product offerings, increased leverage of our field services infrastructure, cost improvement initiatives, lower fuel costs and lower rental depreciation. Operating expenses declined by $9.1 million as incremental expenses related to Liko and investments in our sales channels were more than offset by cost improvement actions, favorability in variable compensation, including commissions, and other cost controls.

North America Post-Acute Care

North America Post-Acute Care revenues increased $3.8 million, or 1.9 percent, in 2009 compared to 2008. Capital sales revenues increased by $6.9 million, or 18.1 percent, primarily due to an increased sales channel focus, improved frame and therapy sales to our home care customers, the acquisition of Liko, and increased sales of The Vest ^® respiratory products. Rental revenues decreased by $3.1 million, or 2.0 percent, compared to 2008. The rental revenue reflected lower extended care rentals due to a loss in business during the second and third quarters of our 2008 fiscal year and rationalization of low profit offerings. Increases in rental revenues in Respiratory Care partially offset the decreased rentals to our extended care customers.

Divisional income for North America Post-Acute Care increased $2.3 million, or 4.1 percent, for fiscal year 2009 compared to the prior year and increased as a percentage of revenue for the second year in a row. The increase was partly due to the higher revenues and the resulting increase in gross profit. The growth of respiratory care and home care revenues also led to a higher gross margin rate for the year. Partially offsetting this increase were higher operating expenses, primarily related to Liko.

International and Surgical

International and Surgical revenues increased $17.4 million, or 4.6 percent, in 2009 compared to 2008, inclusive of unfavorable exchange rates of $33.2 million. Excluding the unfavorable impact of exchange rates, revenues increased 13.3 percent. Capital sales revenues were up $21.1 million, or 6.5 percent, compared to prior year due to the acquisition of Liko and growth in the Middle East, Africa, Latin America and Allen Medical. These were partially offset by a decline in Europe due to unfavorable foreign exchange rates and slightly lower volumes. Rental revenues decreased $3.7 million, or 6.4 percent, due to the unfavorable foreign exchange rates more than offsetting volume increases in Europe.

Divisional income for International and Surgical increased $9.9 million, or 19.9 percent, in 2009 compared to the prior year period. As a percentage of revenue, divisional income margins increased 190 basis points. Gross profit increased due to the Liko acquisition and the fact that the prior year was negatively impacted by unfavorable inventory adjustments and allowances for rental revenue reserves. Operating expenses increased $12.4 million, due primarily to the Liko acquisition, partially offset by the favorable impact of exchange rates on cost.

Fiscal Year Ended September 30, 2008 Compared to Fiscal Year Ended September 30, 2007

In the following section, we provide a high level summary of our consolidated results of operations for fiscal 2008 compared to fiscal 2007. Immediately following this summary section is a more comprehensive discussion of revenues and divisional income by operating segment.

Consolidated revenues in 2008 increased $151.2 million, or 11.1 percent, to $1,507.7 million, compared to the prior year, including a favorable impact of foreign exchange rates of $29.6 million. On a constant currency basis, consolidated revenues increased 9.0 percent.

Capital sales revenues grew by $103.3 million, or 11.0 percent, over the prior year, including the favorable impact of foreign exchange rates of $23.0 million (8.5 percent growth on a constant currency basis). On a constant currency basis, the increase in revenue resulted largely from higher volumes and to a lesser degree from improved price realization. The primary growth driver was our International and Surgical segment, where higher volumes were experienced, particularly in Europe, as a result of the AvantGuard ^® 800 and 1200 bed products, increased furniture sales and an increased presence in the medicalized long-term care area. In our North America Acute Care segment, higher capital sales were generated by higher volumes in our high-acuity bed platforms, therapy capital products and parts and services, while volumes were somewhat lower in our mid-acuity bed platforms. Also, we saw growth in our North America Post-Acute Care segment from increased sales of frames and surfaces and positive sales growth of The Vest ^® respiratory care system.

Rental revenues increased $47.9 million, or 11.5 percent, over the prior year, including the favorable impact of foreign exchange rates of $6.6 million (9.9 percent growth on a constant currency basis). The year-over-year double digit growth demonstrates continued traction from various initiatives we have undertaken over the last two years designed to revitalize our rental business. The higher rental revenues for the year were driven, in large part, by volume increases in our bariatric and wound care surface rental fleet, both of which benefited from recent new product introductions and the refocusing of sales efforts by our Account Clinical Directors after adding the MEMS sales channel. Additionally, rental revenues benefited from an increased incidence of influenza and pneumonia during the first half of the year and from lower customer allowances and related collection reserve adjustments for such allowances, which were favorable to the prior year by $11.9 million. Therapy rental revenues have been strong all year, while volumes within our MEMS product lines have declined.

Consolidated gross profit increased $67.0 million, or 11.1 percent, and remained at the same percentage of revenues, 44.4 percent, as compared to the prior year, despite strong inflationary pressures.

Capital sales gross profit increased $31.6 million over the prior year due to the effects of the higher volumes and, to a lesser extent, improved pricing. Although gross profit dollars increased, gross margin declined by 120 basis points to 40.7 percent for the year, largely due to the increasing percentage of our overall revenues coming from our International and Surgical segment and from the fact that our cost initiatives could not fully offset the commodity cost pressures (primarily from plastics, steel and fuel) experienced during the year. Of those cost pressures, commodity inflation increased our costs by $6.8 million from the prior year while fuel costs increased $4.8 million. Gross margin improved in both our North America Acute Care and Post-Acute Care segments during the year. While pleased with our continuing strong international growth, that growth had the impact of reducing our overall gross margin percentage as products sold in those regions generally provide relatively lower margins than in North America and as we also experienced some deterioration in gross margin rates year-over-year within our International and Surgical segment.

Rental revenues gross profit increased $35.4 million over the prior year. This increase was driven by new products and higher volumes as we leveraged the generally fixed cost nature of our field service organization and rental fleet, as well as from benefits associated with our continuing profit improvement activities. Reflecting that better leverage and the lower customer allowances and reserve adjustments when compared to the prior year, gross margin for the year increased 240 basis points to 52.6 percent.

Other operating expenses, which consist of selling, marketing, research and development and general administrative costs, increased $60.9 million in 2008 compared to the prior year. Specific nonrecurring costs incurred during fiscal 2008 relating to the spin-off of the funeral services business included a non-cash stock modification charge of $5.8 million (see Note 14 to the Consolidated Financial Statements for more detail) and $1.6 million of other separation related costs. Excluding these specific nonrecurring costs, other operating expenses, in total, remained unchanged as a percent of revenue compared to the prior year. The year over year increase in other operating expenses was a result of the continued execution of our strategic plan, led by higher spending for research and development (up 19.9 percent over the prior year to $57.3 million) and higher sales and marketing expenses. As a percentage of revenue, research and development increased 0.3 percent from the prior year to 3.8 percent, while sales and marketing expenses were essentially flat. Sales and marketing expenses increased 11.8 percent, driven by increased revenues, higher sales compensation costs from additional sales representatives, higher costs associated with the commercial launch of a significant number of new products and other sales channel development expenditures incurred across all segments. Other general and administrative expenses increased 11.9 percent over the prior year, but as a percentage of revenue remained constant.

Special charges of $22.8 million were recorded in fiscal 2008. Of this amount, $2.3 million resulted from a voluntary termination package offered to certain members of the Company’s manufacturing organization, which resulted in a special termination benefit charge for those employees who accepted such offers. The other $20.5 million of special charges in fiscal 2008 related to a global streamlining of the organization ($6.0 million) and a management initiated plan to restore growth and improve profitability of our MEMS business ($14.5 million). Special charges, which netted to a credit of $0.2 million in 2007, reflected a $1.0 million special termination benefit charge recorded in the second quarter of fiscal 2007 associated with reductions in force at our Batesville, Indiana manufacturing plant related to the start-up of manufacturing at our new low-cost region facility in Monterrey, Mexico. This charge was more than offset by the net reversal of $1.2 million of excess reserves from prior activities determined to no longer be necessary. See Note 11 to the Consolidated Financial Statements for more detail on these actions.

Interest expense decreased $7.9 million in 2008 compared to the prior year primarily due to our March 2008 repurchase of $224.3 million of debt. Investment income increased $3.4 million compared to 2007 due to higher average cash and investment securities balances, despite the distribution of $181.2 million in conjunction with our March 31, 2008 spin-off of the funeral services business, along with higher investment returns on our auction rate securities. Other expense increased significantly primarily the result of negative foreign currency effects and a $3.2 million loss on the early extinguishment of debt and the termination of our previous credit facility.

Income Tax Expense

Income tax expense of $25.2 million in 2008 represented an effective tax rate of 27.3 percent, which compares to a tax rate of 33.8 percent in 2007. Both years were favorably affected by a number of discrete tax benefits. The lower rate in fiscal 2008 is due principally to favorable discrete period tax benefits of $8.3 million recognized for the year. These tax benefits related primarily to the net release of valuation allowances on our foreign tax credit carryforwards and the net release of certain federal and state tax contingencies, including interest, associated with the completion of the federal audit of the Company’s fiscal years 2004 through 2006 and the expiration of certain state statutes. Favorably impacting the 2007 tax rate, we recognized a benefit from the retroactive reinstatement of the federal research and development credit, which had previously expired.

The effective tax rate without discrete tax benefits would have been 36.2 percent and 34.9 percent in 2008 and 2007, respectively. The higher rate in fiscal 2008 is due primarily to the reduced benefit of the research and development tax credit and higher state income tax expense partially offset by an increase in tax exempt interest and the continued phase-in of the deduction for qualified domestic production activities. The research and development tax credit expired December 31, 2007. The credit was reinstated retroactively by the Emergency Economic Stabilization Act of 2008, however we could not recognize the benefit of this law change in fiscal 2008 as the bill was signed into law after the close of our fiscal year.

Income from Continuing Operations

Income from continuing operations decreased $3.3 million to $67.1 million in 2008 reflecting primarily higher special charges with respect to certain restructuring actions. This equated to diluted earnings per share from continuing operations of $1.07 compared to $1.13 in 2007.

Income from Discontinued Operations

As a result of the spin-off of Hillenbrand, Inc., the funeral services business and certain other costs were classified within discontinued operations in our Consolidated Statements of Income (Loss) for all periods presented herein. The following table presents certain summary income statement information related to the discontinued funeral service operations and the spin-off transaction for the fiscal years ended September 30, 2008 and 2007. Due to the timing of the spin-off, activities of the funeral services business are only included through March 31, 2008.

Expenses classified within discontinued operations for fiscal 2008, as further discussed below, primarily related to non-recurring legal and professional costs related to the completion of the spin-off. For details of relative performance of the funeral services business during the first two quarters, please see our Quarterly Report on Form 10-Q for the period ended March 31, 2008.

Other costs included in discontinued operations were non-recurring costs directly related to the spin-off transaction ($24.5 million), one-time, non-cash stock-based compensation charges ($4.5 million in the second quarter) and a charge recorded upon the renegotiation of notes receivable and preferred stock distributed to Hillenbrand, Inc. in the spin-off ($6.4 million in the second quarter). The non-recurring separation costs were primarily for investment banking fees, legal, accounting and other professional and consulting fees. The one-time stock-based compensation charges were the result of the modification of stock options and the accelerated vesting of certain restricted stock awards held by employees of the funeral services business in connection with the spin-off. Finally, we renegotiated the terms of seller financing instruments provided to Forethought Financial Group, Inc. (“FFG”) in conjunction with the divestiture of our pre-need funeral insurance business in 2004. As a result, we received cash payments during the second quarter of fiscal 2008 of $39.0 million in exchange for the FFG Preferred Stock and the debt service note receivable. In connection with the renegotiation and the early redemption of the preferred stock and debt service note receivable, the estimate as to the timing of future expected cash flows associated with the remaining seller note receivable was revised, which resulted in an adjustment as to the timing of recognition of the unamortized discount on the seller note. This adjustment was included as part of total expense above.

Reconciling differences between total divisional income and income from continuing operations before taxes include litigation and special charges/credits and other income/expense. See Note 15 in the Consolidated Financial Statements for a reconciliation.

North America Acute Care

Total North America Acute Care revenues increased $51.5 million, or 5.8 percent, in 2008 compared to the prior year, including $4.8 million of favorable exchange rate movements. Capital sales revenues increased $28.9 million, or 4.4 percent. The improvement in capital sales revenues during 2008 was generated primarily by higher volumes in our high-acuity bed platforms, therapy capital products, and parts and services, while volumes were lower somewhat in our mid-acuity bed platforms. Favorable price realization also contributed to the higher capital sales, but to a lesser degree. Rental revenues increased by $22.6 million, or 10.1 percent, due to higher therapy rental volumes. This strong result was due to prior year initiatives to increase fleet investments, the launch of new bariatric and wound products, and the conversions of hospital accounts under a new national group purchasing organization contract in 2008. An increased incidence of influenza and pneumonia in the first half of the year also contributed to the strong rental performance, along with lower customer allowances and related customer reserve adjustments of $7.8 million. Partially offsetting favorability in therapy rentals was continued lower rentals of MEMS equipment, which led to the fourth quarter plan to restore growth and improve profitability of the business and the resulting special charge.

Divisional income for North America Acute Care increased $20.8 million, or 9.2 percent, in 2008 compared to the prior year due primarily to higher gross profit. Capital sales gross profit was up $19.1 million, driven by our strategic initiatives towards improved price realization and a favorable shift in revenues towards more profitable products. For our rental business, gross profit improved by $14.3 million, taking advantage of the increased leverage of our field service organization in a period of increasing revenues. This performance was partially offset by increased operating expenses for sales channel expansion, marketing, and product development, all in line with our current year strategy. Operating expenses were essentially flat as a percentage of revenues.

North America Post-Acute Care

North America Post-Acute Care revenues increased $24.1 million, or 13.9 percent, in 2008 compared to 2007. Capital sales revenues increased by $8.8 million, or 30.0 percent, due to increased sales in the home and extended care environments of frames, surfaces and furniture as we expanded our product offerings in these areas, as well as increased sales of The Vest ^® respiratory care system into acute care settings with a recently introduced model specific for this care setting. Rental revenues increased $15.3 million, or 10.7 percent, primarily related to an increase in activity of our standard therapy rentals to the home and higher revenue on The Vest ^® system, partially offset by decreased activity on rentals to our extended care customers. North America Post-Acute Care rental revenues also benefitted by lower customer allowances and related customer reserve adjustments of $4.1 million.

Divisional income for North America Post-Acute Care increased $13.2 million, or 31.1 percent, for fiscal year 2008 compared to the prior year primarily due to higher gross profit, most notably in the rental business. Gross margins were also up 320 basis points due to changes in sales mix and cost initiatives. Operating expenses increased by $8.5 million, due primarily to increased sales, marketing and new product development initiatives as we continue to focus on growth in this market segment, but declined slightly as a percentage of revenues.

International and Surgical

International and Surgical revenues increased $76.5 million, or 25.1 percent, in 2008 compared to 2007, inclusive of favorable exchange rates of $24.8 million. Capital sales revenues, up $66.5 million, were positively affected by increased sales over the prior comparable period in Europe as a result of the AvantGuard™ 800 and 1200 bed products, increased furniture sales, an increased presence in the medicalized long-term care area and the effect of favorable exchange rates. Rental revenues were also higher by $10.0 million due to the favorable exchange rates and higher volumes, which we attribute to an increase in market share. In addition to significant growth in Europe, we also experienced growth in Asia and within our surgical products, offsetting weaker results in Latin America and Australia.

Divisional income for International and Surgical increased $8.9 million, or 21.8 percent, in 2008 compared to the prior year, including the impact of favorable exchange rates of $2.4 million. While gross profit was up $20.7 million on the higher revenues, we experienced a decline in gross margin resulting from a number of factors, including an unfavorable mix impact associated with the higher level of revenues in medicalized long-term care, a one-time impact associated with a negotiated distributor settlement in the first quarter, the negative impact of adjustments to our allowance for rental revenue reserves in Italy in our second quarter, unfavorable inventory adjustments associated predominantly with periodic physical inventories taken at various operations within Europe and in Australia as well as the negative impact of currency movements on product costs in certain geographic regions. Operating expenses increased $11.9 million, reflecting our ongoing investments in sales channel, marketing and new product development, as well as the unfavorable impact of exchange rates on our costs, but were lower as a percentage of revenues.

SPECIAL CHARGES

2009 Actions

Special charges of $20.5 million were recognized during fiscal 2009 related to a restructuring plan that we announced on January 14, 2009 to aggressively manage our cost structure. The plan impacted approximately 450 salaried, hourly and temporary employees, and necessitated the consolidation of certain manufacturing and selected back office operations; redeployment of U.S. sales and service resources to increase our customer presence and support; reduction in non-sales, non-research and development discretionary spending; a voluntary early retirement program, and involuntary job eliminations. In total, the plan resulted in a charge of $11.9 million related to severance and early retirement packages. Additionally, postretirement health care costs, the waiver of an early retirement pension penalty offered in conjunction with the voluntary early retirement incentive and plan curtailments resulted in a charge of $4.2 million. Operating asset write-offs and other charges associated with those actions were also taken in the amount of $4.4 million. The majority of the cash expenditures will be substantially completed by the end of fiscal 2011.

2008 Actions

During the fourth quarter of fiscal 2008, we completed a review of our organizational structure aimed at creating a more streamlined organization. The process resulted in the elimination of approximately 160 professional, salaried and non-exempt employee positions, including the elimination of management positions, but somewhat fewer personnel actually left the Company as some affected personnel filled other open positions. Positions affected were distributed similarly among employee locations. About one-third of the positions affected involved associates based at our global headquarters in Batesville, Indiana. The remaining affected positions were based in other North American locations and international sites throughout our global organization.

Affected associates were offered severance and other enhanced benefits. The result was a one-time charge of approximately $6.0 million in the fourth quarter of fiscal 2008. Cash expenditures associated with severance are expected to be completed by the end of the first quarter of fiscal 2010.

During the fourth quarter of fiscal year 2008, management initiated a plan to restore growth and improve profitability of the Company’s MEMS business, which is engaged in the management, delivery, pick-up and maintenance of peak needs moveable medical equipment. This action resulted in a limited rationalization in the current service center footprint and the disposal of select assets and asset groups.

As a result of the plan, the Company recorded a charge of $14.5 million during the fourth quarter of fiscal 2008. This charge mainly related to the impairment of equipment with a net book value prior to the plan of $16.0 million that is held for sale. This equipment had a fair value at September 30, 2008 of $2.2 million which has been recorded in Other current assets in the Consolidated Balance Sheets. The remainder of the charge related to lease termination and employee severance costs. During the fourth quarter of fiscal 2009, we completed the actions related to this plan.

Special charges of $2.3 million were recognized in the first quarter of fiscal 2008 as voluntary termination packages were offered to certain members of our manufacturing organization related to the transfer of select operations to Mexico, which resulted in a special termination benefit charge for those employees who accepted such offers. Additionally, approximately 15 other positions were eliminated in a related action in an effort to better align fixed manufacturing costs. This action is now complete.

2007 Actions

During the second quarter of fiscal 2007, we initiated restructuring actions, in anticipation of the commencement of manufacturing capabilities in Monterrey, Mexico, to reduce Hill-Rom’s Batesville, Indiana manufacturing organization. The restructuring action took the form of an early retirement option offered to select members of our Batesville manufacturing organization, of which 27 accepted. Accordingly, a special termination charge of $1.0 million was recognized in the second quarter of fiscal 2007, $0.3 million of which related to additional pension benefits. This action is now complete.

See Note 11 of the Notes to Consolidated Financial Statements for more information pertaining to these actions.

While our capital sales have been unfavorably impacted by the current macro-economic climate and its resulting unfavorable impact on hospital capital spending, strong expense controls and working capital improvement have resulted in strong conversion to cash. Working capital improvements were led by strong collection of receivables and a reduction in inventory, offset by a decrease in trade payables related to lower production levels and the timing of payments, the payout of prior year incentive compensation, the timing of tax payments and payments made on our restructuring accruals. The recognition of the goodwill and intangible asset impairment charge of $472.8 million, which resulted in the net loss in the current year, is non-cash in nature and therefore had no impact on our cash flows from operations.

The reduction in operating cash flows in comparison to the prior year was driven by the impact of our previously owned funeral services business which provided operating cash flows of $56.8 million in the first half of fiscal 2008. Absent the cash flows from our previously owned funeral services business, cash flows from operations have increased as our strong expense controls and conversion to cash have more than offset reductions in capital sales and higher pension funding of $11.7 million.

For the fiscal year ended September 30, 2008, net cash provided by operating activities totaled $270.5 million, compared to $285.3 million in the prior year. Operating cash flows in 2008 were driven primarily by net income of $115.8 million, further adjusted by depreciation and amortization of $112.8 million. Impacting the operating cash flow reductions were gross nonrecurring separation-related costs of $26.1 million, which provided little income tax benefit as such costs were largely nondeductible. Additionally, the funeral services business generated approximately $136 million of operating cash flows in fiscal 2007. As noted, above, through March 31, 2008 the funeral services business had generated approximately $57 million of operating cash flows. Comparing a full year of the funeral business’s operating cash flows in 2007 with only 6 months in 2008 there was a negative impact on our operating cash flows by approximately $80 million. Working capital improvements were reflected by an increase in inventory turns from 5.7 in 2007 to 6.8 in 2008 and collections of accounts receivable with days sales outstanding reduced from 96.4 days in 2007 to 81.8 days in 2008. This was partially offset by significantly higher sales in the fourth quarter.

Another item that positively impacted operating cash flows in fiscal 2008 when compared to fiscal 2007 was the collection of $11.2 million of earnings on previously held seller financing instruments. See Note 3 of Notes to Consolidated Financial Statements for more detail on the previously held seller financing instruments which were contributed to Hillenbrand, Inc. in the spin-off of the funeral services business.

Investing Activities

Net cash used in investing activities in fiscal 2009 totaled $234.2 million, compared to $56.3 million in fiscal 2008. Use of cash for investing activities during the period was driven primarily by our purchase of Liko for $187.2 million, net of cash acquired, and capital expenditures of $63.9 million. Offsetting the uses of cash were proceeds from the sale of non-strategic assets of $11.9 million. The increased usage of cash for investing activities when compared to the same prior year period relates to the acquisition of Liko, a decline in net distributions from our investment portfolio and proceeds from seller financing provided on a previously disposed business received in the prior year, offset by proceeds received on our sale of non-strategic assets. Capital spending was down $38.7 million compared to the prior year. The main reason for this decrease in capital spending was $4.3 million related to our former funeral services business being included within the 2008 amount and $34.4 million associated with the timing of new product introductions into rental fleet and our efforts to preserve cash and liquidity in response to our decreasing capital sales.

Net cash used in investing activities in fiscal 2008 totaled $56.3 million, compared to $241.2 million in fiscal 2007. Capital expenditures were $32.6 million lower in fiscal 2008 due to our purchase of the Monterrey, Mexico manufacturing facility in early fiscal 2007, fewer additions to our rental fleet during 2008 and only six months of capital expenditures related to our former funeral services business. In addition, during 2007 $21.2 million was spent for the acquisition of Medicraft and a small regional funeral services distributor, and a significantly higher amount of cash, net of sales and maturities, was used to purchase investment securities. Investment activity in fiscal 2008 included $325.6 million of purchases and capital calls, which was more than offset by $343.5 million provided from sales and maturities. We have historically invested a portion of our excess cash into auction rate securities, but discontinued this practice in the prior fiscal year when liquidity issues with these securities surfaced. Investing cash flows in 2008 also benefited from proceeds from the renegotiation and early settlement of seller financing notes receivable and preferred stock, which provided positive investing cash flows of $27.8 million (that is, the total $39.0 million proceeds less amounts included in operating cash flows) during the second quarter of 2008.

Financing Activities

Net cash used in financing activities totaled $45.3 million for the fiscal year ended September 30, 2009 compared to $63.8 million for the fiscal year ended September 30, 2008.

The use of cash for financing activities in fiscal 2009 consisted mainly of our scheduled repayment of $25.7 million of our outstanding senior notes and our payment of dividends. Changes in our use of cash for fiscal 2009 compared to fiscal 2008 relate mainly to the distribution of $141.3 million of cash to Hillenbrand, Inc. in conjunction with the spin-off of the funeral services business at the end of the second quarter of fiscal 2008. Also impacting the difference from prior year was a reduction of proceeds from stock option exercises, changes in debt associated with the spin-off of the funeral services business and the pending acquisition of Liko and a reduction in dividend payments. Cash dividends paid decreased to $25.6 million in 2009, compared to $48.2 million in 2008. Quarterly cash dividends per share were $0.1025 in all four quarters of 2009. Quarterly cash dividends per share were $0.1025 in the last two quarters of 2008 and $0.285 in the first two quarters of the year, declining following the consummation of the spin-off of the funeral services business effective March 31, 2008.

Proceeds on the exercise of stock options decreased to $0.1 million in 2009, from $16.5 million in 2008. Treasury stock acquired was $0.6 million in 2009 compared to $1.4 million in 2008.

Our debt-to-capital ratio was 24.9 percent at September 30, 2009 compared to 17.1 percent at September 30, 2008. The change was driven by the impairment of goodwill and other intangibles, which reduced shareholders’ equity and the repayment of debt during fiscal 2009.

Net cash used in financing activities totaled $63.8 million for the fiscal year ended September 30, 2008 compared to $47.2 million for the fiscal year ended September 30, 2007. This higher use of cash in fiscal 2008 compared to fiscal 2007 was driven primarily by the distribution of $141.3 million of cash to Hillenbrand, Inc. in conjunction with our spin-off of the funeral services business. Also related to the spin-off, a number of transactions occurred during the second quarter of 2008 impacting cash flows from financing activities. The most significant of these transactions were (a) drawing down $250 million on a new Hillenbrand, Inc. revolving credit facility and then (b) paying nearly $225 million to repurchase certain long-term debt. In addition to the spin-off transaction, $90.0 million was drawn on the revolver near the end of September 2008 in anticipation of the acquisition of Liko on October 1, 2008.

Other Liquidity Matters

Net cash flows from operating activities and selected borrowings have represented our primary sources of funds for growth of the business, including capital expenditures and acquisitions.

As of September 30, 2009, we held investment securities with a fair value of $43.6 million, which consisted primarily of AAA rated student loan auction rate securities. The market for auction rate securities, of which a key characteristic has historically been a high degree of liquidity, began to experience auction failures in our second fiscal quarter of 2008 as the supply for auction rate securities in the market exceeded demand. Accordingly, our portfolio of auction rate securities has experienced auction failures and a lower level of liquidity. During our first quarter of fiscal 2009, we entered into a settlement agreement requiring UBS to repurchase $26.9 million of these securities at par value (“Put”).

We have estimated the current fair value of our portfolio of auction rate securities based upon guidance provided by our investment advisors, including consideration of the credit quality of the underlying securities and the provisions of the respective security agreements. At September 30, 2009, we have recorded both temporary unrealized losses and realized losses totaling $2.7 million on these securities to reflect the estimated decline in fair value associated with the current illiquidity in the auction rate market. See Notes 1 and 9 of Notes to Consolidated Financial Statements for more information pertaining to these securities and the fair value of our portfolio. If current market conditions do not improve or worsen, however, or UBS does not follow through on its repurchase commitment, the result could be further realized or unrealized losses or impairments and liquidity and earnings could be adversely affected.

We have a $500.0 million five-year senior revolving credit facility with a syndicate of banks led by Citibank, N.A. and Bank of America, N.A. As of September 30, 2009, we had outstanding borrowings of $90.0 million and $5.6 million of outstanding, undrawn letters of credit under the facility, leaving $404.4 million of borrowing capacity available. In October 2009, the Company made a payment of $45 million to retire a portion of our short term debt associated with the Liko acquisition. See Note 7 of Notes to Consolidated Financial Statements for more details on the credit facility.

We also have trade finance credit lines and uncommitted letter of credit facilities. These lines are associated with the normal course of business and do not currently, nor have they historically, been of a material size to the overall business.

We have $95.8 million of senior notes outstanding at various fixed rates of interest as of September 30, 2009, which are classified as long-term in the Consolidated Balance Sheets. We repaid $25.7 million of senior notes outstanding in June 2009, which had previously been classified as short-term debt.

Our pension plans invest in a variety of equity and debt securities, including securities that have been adversely affected by the disruption in the credit and capital markets. At September 30, 2009, our latest measurement date, our pension plans were underfunded by approximately $93 million. Given the adverse performance of our plan assets, we expect increased contributions to fund the plan over the next several years. We are currently assessing several funding alternatives for 2010, and depending on which one is selected, we could fund up to $15 million. Future contributions will also be impacted based on these decisions.

As previously disclosed, we intend to continue to pay quarterly cash dividends comparable to those paid following the completion of the spin-off of the funeral services business. However, the declaration and payment of dividends by us will be subject to the sole discretion of our Board of Directors and will depend upon many factors, including financial condition, earnings, capital requirements, covenants associated with debt obligations, legal requirements and other factors deemed relevant by the Board of Directors.

We intend to continue to pursue selective acquisition candidates, like the Liko acquisition completed on October 1, 2008, in certain areas of our business, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We expect to fund future acquisitions primarily with cash on hand, cash flow from operations and borrowings, within our set limits. The Distribution Agreement executed in conjunction with our spin-off of the funeral services business contains certain restrictions with respect to additional indebtedness we may take on to make acquisitions. We do not anticipate, however, such restrictions will limit our ability to execute our current growth strategy.

As our focus has been on investing in strategic initiatives and, more recently, on maintaining our liquidity in these unprecedented economic times, and in conjunction with certain restrictive covenants from the Distribution Agreement with Hillenbrand, Inc., during fiscal 2008 and through the fourth quarter of fiscal 2009, we have not repurchased any shares of our common stock in the open market. As of September 30, 2009, we had Board of Directors’ approval to repurchase 3.0 million additional shares of our common stock. We may consider repurchases of shares if justified by the stock price and after considering the current environment, our desire to preserve liquidity and the needs of the business. Repurchased shares are used for general business purposes.

We believe that cash on hand and generated from operations, along with amounts available under our credit facility, will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations. However, disruption and volatility in the credit markets could impede our access to capital. Our $500.0 million credit facility is with a syndicate of banks. The syndication group consists of 11 financial institutions, which we believe reduces our exposure to any one institution and would still leave us with significant borrowing capacity in the event that any one of the institutions within the group is unable to comply with the terms of our agreement. We have not experienced any failure of the lenders under our credit facility to fund, however, it is possible that additional financial institutions, including those that are lenders under our credit facility, could become insolvent or seek bankruptcy protection, which could affect our ability to access available borrowing capacity under our credit facility. If credit markets do not improve and we need additional sources of capital, whether as a result of reduced cash generated by operations, unavailability of borrowings under our credit facility, adverse results in litigation matters or increased cash requirements to fund acquisitions or pension obligations, such sources of capital may not be available to us on acceptable terms if at all.

Credit Rating

For fiscal 2009 both Standard and Poor’s Rating Services and Moody’s Investor Service left our ratings unchanged at BBB- with stable outlook and Baa3 with negative outlook, respectively. There was no impact on these ratings as a result of the Liko acquisition.

Other Uses of Cash

We expect capital spending in 2010 to be at a level comparable to years prior to 2009, as the 2009 amount was lower than historical amounts. Capital spending will be monitored and controlled as the year progresses.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations, Contingent Liabilities and Commitments

To give a clear picture of matters potentially impacting our liquidity position, the following table outlines our contractual obligations as of September 30, 2009:

We also had commercial commitments related to standby letters of credit at September 30, 2009 of $5.8 million.

In addition to the contractual obligations and commercial commitments disclosed above, we also have a variety of other agreements related to the procurement of materials and services and other commitments. While many of these agreements are long-term supply agreements, some of which are exclusive supply or complete requirements-based contracts, we are not committed under these agreements to accept or pay for requirements which are not needed to meet production needs. Also, due to the adoption of an accounting pronouncement in fiscal 2008, we have an additional $42.3 million of other liabilities as of September 30, 2009, which represents uncertain tax positions for which it is not possible to determine in which future period the tax liability might be paid out.

In conjunction with our acquisition and divestiture activities, we have entered into certain guarantees and indemnifications of performance with respect to the fulfillment of our commitments under the respective purchase and sale agreements. The arrangements generally indemnify the buyer or seller for damages associated with breach of contract, inaccuracies in representations and warranties surviving the closing date and satisfaction of liabilities and commitments retained under the applicable contract. Those representations and warranties which survive closing generally survive for periods up to five years or the expiration of the applicable statutes of limitations. Potential losses under the indemnifications are generally limited to a portion of the original transaction price, or to other lesser specific dollar amounts for certain provisions. With respect to sale transactions, we also routinely enter into non-competition agreements for varying periods of time. Guarantees and indemnifications with respect to acquisition and divestiture activities, if triggered, could have a materially adverse impact on our financial condition and results of operations.

Shareholders’ Equity

Cumulative treasury stock acquired in open market and private transactions remained at 22.7 million shares throughout 2009. As of September 30, 2009, we had Board of Directors’ authorization to repurchase up to a total of 3.0 million additional shares of our common stock. Repurchased shares are to be used for general business purposes. From the cumulative shares acquired, 0.2 million shares, net of shares converted to cash to pay withholding taxes, were reissued during fiscal 2009 under provisions of our various stock-based compensation plans.

CRITICAL ACCOUNTING POLICIES

Our accounting policies, including those described below, require management to make significant estimates and assumptions using information available at the time the estimates are made. Such estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenues and expenses. If future experience differs materially from these estimates and assumptions, results of operations and financial condition could be affected. Our most critical accounting policies are described below. A more detailed description of our significant accounting policies is included in the Notes to our Consolidated Financial Statements included in this Form 10-K.

Revenue Recognition

Net revenues reflect gross revenues less sales discounts and allowances and customer returns for product sales and a provision for uncollectible receivables for rentals. Revenue is evaluated under the following criteria and recognized when each is met:

•		Evidence of an arrangement: An agreement with the customer reflecting the terms and conditions to deliver products or services serves as evidence of an arrangement.
•		Delivery: For products, delivery is considered to occur upon receipt by the customer and the transfer of title and risk of loss. For rental services, delivery is considered to occur when the services are rendered.
•		Fixed or determinable price: The sales price is considered fixed or determinable if it is not subject to refund or adjustment.
•		Collection is deemed probable: At or prior to the time of a transaction, credit reviews of each customer are performed to determine the creditworthiness of the customer. Collection is deemed probable if the customer is expected to be able to pay amounts under the arrangement as those amounts become due. If collection is not probable, revenue is recognized when collection becomes probable, generally upon cash collection.

As a general interpretation of the above guidelines, revenues for health care products in the patient care environment are generally recognized upon delivery of the products to the customer and their assumption of risk of loss and other risks and rewards of ownership. Local business customs and non-standard sales terms can sometimes result in deviations to this normal practice in certain instances; however, in no case is revenue recognized prior to the transfer of risk of loss and rewards of ownership.

For non-invasive therapy products and medical equipment management services, the majority of product offerings are rental products for which revenues are recognized consistent with the rendering of the service and use of products. For The Vest ^® product, revenue is generally recognized at the time of receipt of authorization for billing from the applicable paying entity as this serves as evidence of the arrangement and sets a fixed or determinable price.

For health care products and services aimed at improving operational efficiency and asset utilization, various revenue recognition techniques are used, depending on the offering. Arrangements to provide services, routinely under separately sold service and maintenance contracts, result in the deferral of revenues until specified services are performed. Service contract revenue is generally recognized ratably over the contract period, if applicable, or as services are rendered. Product-related goods are generally recognized upon delivery to the customer, similar to products in the patient care environment.

Revenues are presented in the Statements of Consolidated Income (Loss) net of certain discounts and allowances. For product sales, based on contractual discounts and rebates, as well as price concessions and product returns, we record reserves resulting in a reduction of revenue. Likewise, reserves for contractual and other routine billing allowances are recorded and reflected as a reduction of rental revenues.

An allowance for doubtful accounts is also recorded on capital products sales, but is not reflected as a reduction of revenues. Rather it is recorded as a component of operating expenses.

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest, unless the transaction is an installment sale with payment terms exceeding one year. Reserves for uncollectible accounts represent our best estimate of the amount of probable credit losses and collection risk in our existing accounts receivable. We determine such reserves based on historical write-off experience by industry and reimbursement platform. Receivables are generally reviewed on a pooled basis based on historical collection experience for each reimbursement and receivable type. Receivables for capital sales transactions are also reviewed individually for collectability. Account balances are charged against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers. If circumstances change, such as higher than expected claims denials, payment defaults, adverse changes in general economic conditions, instability or disruption of credit markets, or an unexpected material adverse change in a major customer’s or payer’s ability to meet its obligations, our estimates of the realizability of trade receivables could be reduced by a material amount.

Within rental revenues, the domestic third party payers’ reimbursement process requires extensive documentation, which has had the effect of slowing both the billing and cash collection cycles relative to the rest of the business, and therefore, increasing total accounts receivable. Because of the extensive documentation required and the requirement to settle a claim with the primary payer prior to billing the secondary and/or patient portion of the claim, the collection period for a claim in a portion of our business may, in some cases, be extended.

We generally hold our trade accounts receivable until they are paid. Certain long-term receivables (See Note 6 to the Consolidated Financial Statements) are occasionally sold to third parties; however, any recognized gain or loss on such sales has historically not been material.

Liabilities for Loss Contingencies Related to Lawsuits

We are involved on an ongoing basis in claims and lawsuits relating to our operations, including environmental, antitrust, patent infringement, business practices, commercial transactions and other matters. The ultimate outcome of these lawsuits cannot be predicted with certainty. An estimated loss from these contingencies is recognized when we believe it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, it is difficult to measure the actual loss that might be incurred related to litigation. The ultimate outcome of these lawsuits could have a material adverse effect on our financial condition, results of operations and cash flow.

We have entered into a Judgment Sharing Agreement with Hillenbrand, Inc. to allocate any potential liability that may arise with respect to certain antitrust litigation matters. We apply the same methodology as described in the immediate preceding paragraph in evaluating and accounting for the Judgment Sharing Agreement. See Note 3 to the Consolidated Financial Statements, for further details.

Legal fees associated with claims and lawsuits are generally expensed as incurred. Upon recognition of an estimated loss resulting from a settlement, an estimate of legal fees to complete the settlement is also included in the amount of the loss recognized.

We are also involved in other possible claims, including product and general liability, workers compensation, auto liability and employment related matters. Claims other than employment and related matters have deductibles and self-insured retentions ranging from $150 thousand to $1.5 million per occurrence or per claim, depending upon the type of coverage and policy period. Outside insurance companies and third-party claims administrators establish individual claim reserves and an independent outside actuary provides estimates of ultimate projected losses, including incurred but not reported claims, which are used to establish reserves for losses. Claim reserves for employment related matters are established based upon advice from internal and external counsel and historical settlement information for claims and related fees, when such amounts are considered probable of payment.

The recorded amounts represent our best estimate of the costs we will incur in relation to such exposures, but it is possible that actual costs could differ from those estimates.

Goodwill and Intangible Assets

Goodwill and certain other indefinite-lived intangible assets are no longer amortized, but instead are subject to periodic impairment evaluations. With the exception of goodwill, the majority of our intangible assets are subject to amortization.

We perform an impairment assessment on goodwill annually during the third fiscal quarter, or whenever events or changes in circumstances indicate that the carrying value of a reporting unit may not be recoverable. These events or conditions include, but are not limited to, a significant adverse change in the business environment; regulatory environment or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; a substantial decline in market capitalization of our stock; or a sale or disposition of a significant portion of a reporting unit.

The goodwill impairment test involves a two-step process. The first step, used to identify potential impairment, is a comparison of each reporting unit’s estimated fair value to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment. The second step requires us to calculate an implied fair value of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.

The fair value of our reporting units in the first step of our impairment process requires significant management judgment with respect to forecasted sales, gross margin and selling, general and administrative rates, capital expenditures, the selection and use of an appropriate discount rate, the selection of comparable public companies and the determination of an appropriate control premium. In addition, the use of third-party appraisals of significant tangible and intangible assets as part of the second step of the impairment test also requires management judgment related to certain inputs and assumptions. There are inherent uncertainties related to each of the above listed assumptions and inputs, and our judgment in applying them. The use of different assumptions, estimates or judgments in either step of the process could materially increase or decrease the related impairment charge.

As a result of the decline in our market capitalization during the second quarter related to the overall macro-economic climate and its resulting unfavorable impact on hospital capital spending and our operating results, we determined it was required to perform an interim impairment test with respect to goodwill and certain other intangibles outside of our normal third fiscal quarter test period. The interim impairment testing resulted in an impairment of goodwill and other intangibles in each of our three reportable segments in the following amounts — North America Acute Care $289.5 million, North America Post-Acute $68.6 million and International and Surgical $114.7 million, which represented a full impairment of goodwill in the applicable North America Acute Care and International reporting units. A further adjustment to this charge is likely upon finalization of the working capital and net debt adjustments associated with the Liko acquisition. There were no additional charges necessary based on our normal annual assessment made during our third quarter. See Note 5 to the Consolidated Financial Statements for further information related to the impairment charge.

Stock-Based Compensation

We account for stock-based compensation under fair value provisions. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. In order to determine the fair value of stock options on the date of grant, the Company utilizes a Binomial model. Inherent in this model are assumptions related to a volatility factor, expected life, risk-free interest rate, dividend yield and expected forfeitures. The risk-free interest rate is based on factual data derived from public sources. The volatility factor, expected life, dividend yield and expected forfeiture assumptions require significant judgment utilizing historical information, peer data and future expectations. Deferred stock (also known as restricted stock units (“RSUs”)) are measured based on the average fair market price of the Company’s common stock on the date of grant, as reported by the New York Stock Exchange, multiplied by the number of RSUs granted.

Retirement Benefit Plans

We sponsor retirement and postretirement benefit plans covering a majority of employees. Expense recognized in relation to these defined benefit retirement plans and the postretirement health care plan is based upon actuarial valuations and inherent in those valuations are key assumptions including discount rates, and where applicable, expected returns on assets, projected future salary rates and projected health care cost trends. The discount rates used in the valuation of our defined benefit pension and postretirement plans are evaluated annually based on current market conditions. In setting these rates we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, and then make adjustments to the respective indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of our obligations. Our overall expected long-term rate of return on pension assets is based on historical and expected future returns, which are inflation adjusted and weighted for the expected return for each component of the investment portfolio. Our rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments.

Changes in retirement and postretirement benefit expense and the recognized obligations may occur in the future as a result of a number of factors, including changes to any of these assumptions. Our expected rate of return on pension plan assets was 7.5 percent for fiscal 2009 and 8.0 percent for both fiscal 2008 and 2007. At September 30, 2009, we had pension plan assets of $152.8 million. A 25 basis point increase in the expected rate of return on pension plan assets reduces annual pension expense by approximately $0.4 million. Differences between actual and projected investment returns, especially in periods of significant market volatility, can also impact estimates of required pension contributions. The discount rate for our retirement obligation was 5.5 percent in 2009, 7.5 percent in 2008 and 6.5 percent in 2007. The discount rate for our postretirement obligation may vary up to 25 basis points from that of our retirement obligations. For each 50 basis point change in the discount rate, the impact to annual pension expense ranges from $1.5 million to $1.7 million, while the impact to our postretirement health care plan expense would be less than $0.1 million. Impacts from assumption changes could be positive or negative depending on the direction of the change in rates.

Income Taxes

We compute our income taxes using an asset and liability approach to reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. We have a variety of deferred tax assets in numerous tax jurisdictions. These deferred tax assets are subject to periodic assessment as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recognized. We have recorded valuation allowances against certain of our deferred tax assets, primarily those related to foreign tax attributes in countries with poor operating results and certain other domestic tax attributes. In evaluating whether it is more likely than not that we would recover these deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies are considered.

We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances. We currently have $37.5 million of valuation allowances on deferred tax assets, on a tax-effected basis, primarily related to foreign operating loss carryforwards and other tax attributes.

On October 1, 2007, we began accounting for uncertain income tax positions using a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The difference between the tax benefit recognized in the financial statements for an uncertain income tax position and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit.

The Company has on-going audits in various stages of completion in several state and foreign jurisdictions, one or more of which may conclude within the next 12 months. Such settlements could involve some or all of the following: the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of unrecognized tax benefits. It is reasonably possible that the Company and the IRS will resolve the tax matters currently under protest for fiscal years 2002 through 2008 in the next twelve months. The resolution of these matters with the IRS, in combination with the expiration of certain statutes of limitations in other jurisdictions, make it reasonably possible that our unrecognized tax benefits may decrease as a result of either payment or recognition by approximately $15 to $20 million in the next twelve months, excluding interest. See Note 12 in the Consolidated Financial Statements for further discussion related to income taxes.

Investments

At September 30, 2009, investment securities consisted primarily of AAA rated student loan auction rate securities (“ARS”). These securities are generally insured through the United States government’s Federal Family Education Loan Program, to the extent the borrowers meet certain prescribed criteria in their underlying lending practices. As of September 30, 2008, we classified these investment securities as available-for-sale and recorded them at fair value with unrealized holding gains and losses recorded in Accumulated Other Comprehensive Income (Loss). During the first quarter of 2009, we entered into an enforceable, non-transferable right (the “Put”) with UBS Financial Services (“UBS”), which allows the Company to exercise this Put at anytime during the period of June 30, 2010 through July 2, 2012. Additionally, UBS may redeem these securities at par value plus interest at any time prior to June 30, 2010 at their discretion.

We recorded the Put as an asset and made the election to report the Put at estimated fair value and record the income from initial valuation and the related changes in fair value as a component of “Investment income and other” within the Consolidated Statements of Income (Loss). Also, because we now intend to sell these securities to UBS at par value, during the first quarter of fiscal 2009 we reclassified the ARS related to the Put from “available-for-sale” to “trading” securities resulting in a reclassification of a previously unrealized loss into income. As trading securities, the changes in fair value corresponding to the UBS related ARS (previously recorded as a component of Accumulated Other Comprehensive Income (Loss)) are now also recorded as a component of “Investment income and other” within our Consolidated Statements of Income (Loss). We made these elections so that the effects of changes in the fair value of the UBS related ARS and the related Put would substantially offset within our Consolidated Statements of Income (Loss), thereby reducing the volatility we might otherwise experience. At September 30, 2009, the $16.7 million of our ARS not subject to the Put continue to be classified as available-for-sale and changes in their fair value are recorded in Accumulated Other Comprehensive Income (Loss).

Prior to the spin-off of the funeral services business, our investment portfolio also included investments in certain private equity limited partnerships and other minority investments obtained from seller financing provided upon the divestiture of Forethought Financial Services, Inc. We historically used the equity method of accounting for these investments, with earnings or losses reported within Investment income and other in the Statements of Consolidated Income (Loss). Essentially all of these investments were transferred to Hillenbrand, Inc. in conjunction with the spin-off as discussed in Note 3 of our Notes to the Consolidated Financial Statements.

We regularly evaluate these investments for possible impairment based on current economic conditions, credit loss experience and other criteria. If there is a decline in a security’s net realizable value that is other-than-temporary, the decline is recognized as a realized loss if we intend, or more likely than not will be required, to sell the security prior to recovery. For securities in which we have the intent and ability to hold until maturity, expected credit losses are recognized in earnings. Select criteria utilized in analyzing individual securities for impairment include:

	•		The extent and duration to which the market value of a security was below its cost;
	•		Downgrades in debt ratings;
	•		Significant declines in value, regardless of the length of time the market value was below cost;
	•		The status of principal and interest payments on debt securities;
	•		Financial condition, including economic and industry conditions, and recent events impacting companies underlying the securities;
	•		The historic and implied volatility of the security; and
	•		Recoveries or additional declines in fair value subsequent to the balance sheet date.

The evaluation of investments for impairment requires significant judgments to be made including (i) the identification of potentially impaired securities; (ii) the determination of their estimated fair value; and (iii) assessment of whether any decline in estimated fair value was other than temporary. If new information becomes available our judgment may change resulting in the recognition of an investment loss at that time. At September 30, 2009 Accumulated Other Comprehensive Income (Loss) included net unrealized losses of $0.8 million. These unrealized losses are considered to be temporary.

Environmental Matters

We are committed to operating all of our businesses in a manner that protects the environment. In the past, we have voluntarily entered into remediation agreements with various environmental authorities to address onsite and offsite environmental impacts. From time to time we provide for reserves in our financial statements for environmental matters. We believe we have appropriately satisfied the financial responsibilities for all currently known offsite issues. Based on the nature and volume of materials involved regarding onsite impacts, we do not expect the cost to us of the onsite remediation activities in which we are currently involved to exceed $2 million. Future events or changes in existing laws and regulations or their interpretation may require us to make additional expenditures in the future. The cost or need for any such additional expenditures is not known.

Recently Issued Accounting Guidance

For a summary of recently issued accounting guidance applicable to us, see Note 1 of our Notes to Consolidated Financial Statements.

Item 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including fluctuations in interest rates, impact of the current credit crunch and economic downturn, liquidity issues with respect to auction rate securities, collection risk associated with our accounts and notes receivable portfolio and variability in currency exchange rates. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.

We are subject to variability in foreign currency exchange rates in our international operations. Exposure to this variability is periodically managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the local currency. We, from time-to-time, enter into currency exchange agreements to manage our exposure arising from fluctuating exchange rates related to specific and forecasted transactions. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currencies.

Our currency risk consists primarily of foreign currency denominated firm commitments and forecasted foreign currency denominated intercompany and third-party transactions. At September 30, 2009, we had outstanding foreign exchange derivative contracts in notional amounts of $11.6 million with a fair value of these contracts approximately $0.1 million less than the original contract value. The maximum length of time over which the Company is hedging transactions exposure is 15 months. Derivative gains/(losses), initially reported as a component of Accumulated Other Comprehensive Income (Loss), are reclassified to earnings in the period when the forecasted transaction affects earnings.

A 10 percent appreciation in the United States dollar’s value relative to the hedged currencies would increase the derivative instruments’ fair value by $1.1 million. A 10 percent depreciation in the United States dollar’s value relative to the hedged currencies would decrease the derivative instruments’ fair value by $1.3 million. Any increase or decrease in the fair value of our currency derivative instruments would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying asset, liability or cash flow.

We hold auction rate securities, for which the market continues to experience auction failures as the supply for auction rate securities in the market exceeds demand. Due to these failures, we have gained guidance from our investment advisors on the current fair value of our portfolio. If current market conditions do not improve or worsen, or our advisors do not follow through on their repurchase commitments, the result could be further temporary unrealized losses or impairments and liquidity and earnings could be adversely affected. In our fiscal first quarter 2009, we entered into a settlement agreement with UBS Financial Services Inc. (“UBS”), one of the brokers we utilized to purchase auction rate securities. The primary terms of the settlement state that UBS will repurchase the securities at full par value on or after June 30, 2010. Currently, we hold auction rate investments issued through UBS with a par value of $26.9 million.

Our pension plan assets, which were approximately $153 million at September 30, 2009, are also subject to volatility that can be caused by fluctuations in general economic conditions. Our pension plans were underfunded at September 30, 2009 by approximately $93 million. Continued market volatility and disruption could cause further declines in asset values and if this occurs, we may need to make additional pension plan contributions and our pension expense in future years may increase. Investment strategies and policies are set by the plan’s fiduciaries. Long-term strategic investment objectives utilize a diversified mix of equity and fixed income securities to preserve the funded status of the trusts and balance risk and return. The plan fiduciaries oversee the investment allocation process, which includes selecting investment managers, setting long-term strategic targets and monitoring asset allocations. Target allocation ranges are guidelines, not limitations, and plan fiduciaries may occasionally approve allocations above or below a target range or elect to rebalance the portfolio within the targeted range.

Trust assets are invested subject to the following policy restrictions: short-term securities must be rated A2/P2 or higher; all fixed-income securities shall have a credit quality rating “BBB” or higher; investments in equities in any one company may not exceed 10 percent of the equity portfolio. Hill-Rom common stock represented 2 percent and 3 percent of master trust assets at year-end 2009 and 2008, respectively, and is subject to a statutory limit should it reach 10 percent of total trust assets.

Item 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Financial Statements:
Management’s Report on Internal Control Over Financial Reporting			58
Report of Independent Registered Public Accounting Firm			59
Statements of Consolidated Income (Loss) for the fiscal years ended September 30, 2009, 2008 and 2007			60
Consolidated Balance Sheets at September 30, 2009 and 2008			61
Statements of Consolidated Cash Flows for the fiscal years ended September 30, 2009, 2008 and 2007			62
Statements of Consolidated Shareholders’ Equity and Comprehensive Income (Loss) for the fiscal years ended September 30, 2009, 2008 and 2007			63
Notes to Consolidated Financial Statements			64
Financial Statement Schedule for the fiscal years ended September 30, 2009, 2008 and 2007:
Schedule II — Valuation and Qualifying Accounts			106