Good day, and welcome everyone to the Vital Signs Fiscal 2008 Second Quarter Earnings Results Conference Call. This call is being recorded as well as simultaneously webcasted. At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Mark Mishler, CFO. Please go ahead, sir.

Thank you, Nathan. Welcome to the Vital Signs 2008 Fiscal Second Quarter Conference Call. I'm Mark Mishler, Chief Financial Officer of Vital Signs. Here with me today is Terry Wall, Chief Executive Officer; Alex Chanin, Chief Information Officer; and Jay Sturm, General Counsel. By now you should have received our press release for the fiscal second quarter ended March 31, 2008. To access the press release online, please go to www.vital-signs.com, and then click on Investor Relations, then click Press Releases. Before getting started, let me read our required disclaimer. All statements in this press release other than historical statements constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from such statements as a result of a variety of risks and uncertainties including unanticipated delays in bringing new products to market, regulatory approval of new products, market conditions, and competitive responses, as well as other factors referred to by Vital Signs in its annual report on Form 10-K for the year ended September 30, 2007. The format will be as follows. I will provide a financial review, Terry will then provide comments, and then we will open up the call for your questions. Let's begin. Fiscal second quarter revenue of $58.9 million, increased by 11.9% over the prior year revenue of $52.6 million. Individual segment revenue and growth figures are Anesthesia $19.8 million, growth of 5% over $18.9 million in the prior year. Respiratory and Critical Care revenues of $12.3 million, representing growth of 3% over $12 million in the prior year. Sleep/Ventilation revenues of $16.6 million, representing a 36.9% increase over $12.2 million in the prior year. Interventional Cardiology/Radiology revenues of $7.2 million, which is 4% over $7 million in the prior year. The Sleep/Ventilation segment revenue growth is due to…

Thank you, Mark. Our Anesthesia segment continues to grow according to plan. Our Pediatric Limbo anesthesia circuit grew in double digits, and we're very pleased with the early adoption of our three new products. The enFlow blood/fluid warmer should be the largest revenue contributor of our new products, having already reached an annual run rate of over $1 million. Fluid warming is currently $60 million market that we believe will grow quickly in the future. Several studies have shown that keeping a patient normothermic perioperatively substantially reduces hospital-acquired infections. Additionally, the American Society of Anesthesiologists has proposed a pay-per-performance initiative in which anesthesiologists will receive a portion of their fee tied directly to maintaining a patient's temperature above 36 degrees centigrade. Our steel light laryngoscope blade has the largest potential of our new products. With this product we are seeking to convert the predominantly reusable the laryngoscope blade market to single patient use by demonstrating the infection control benefits and cost effectiveness to single use products. We have data showing that it's less costly to purchase steel light blade for $5 than to properly disinfect or sterilize a reusable blade. We are planning an independent study to confirm our previous studies and conclusions. The other obstacle in increasing as fast as we would like our laryngoscope blade sales is that the Anesthesia budget is basically impacted negatively by the sale of the laryngoscope blades where sterilization is actually a part of the hospital budget. Therefore, we need to help the anesthesiologist, the purchasing agents and administration to see the same cost benefit relationship, which does take time. Our third product, RediTube, is also progressing nicely and fills out an important piece of our airway management line. Teaching facilities, which are large institutions, are particularly interested in the product, because it…

(Operator Instructions). And we'll go first with Dalton Chandler with Needham & Co

Good afternoon and congratulations on a nice quarter. Let me first start with the guidance. I know, of course, you only give guidance on an annual basis. We don't know exactly how you're thinking about the quarters, but you did beat the consensus this quarter by $0.05, but you're only raising your full year number by $0.02. Can you reconcile that for us?

Always conservative.

Okay. So, you're leaving yourself some breathing room?

There has been potholes we found in the past. We like to make sure we have some room to steer around them this year.

Okay. Fair enough. Then to come back to the Hamilton distribution deal, you mentioned, of course, the $800,000 potential for this year, but what do you think longer term that sort of deal could mean for you on an annual basis?

I'd really not like to comment on that. I mean, we obviously are hoping for much bigger things, but we really need to see, if in fact, we think there is really an identifiable product niche that is below other competitors in the bi-level ventilation field, meaning price-wise, we think $3,000 to $7,000 bi-level ventilation market is available in the US. In Europe, they treat the COPD patients, quite frankly, at home, and they treat them earlier than we do in the US. This is so successful. It's pretty hard to believe that this is not going to come in to the US.

Okay.

So, we're optimistic, but we like the fact that Hamilton is also sort of validating this product niche for us, I think, a very good partner for us in the future. But I think we both need to take both Hamilton and ourselves, one step at a time, get out there, show us that they can do it. It could be a partnership long-term.

Okay. And then just a housekeeping. I think you gave us the cash from operations in CapEx for the first half of the fiscal year, but do you have those two numbers for the quarter?

Mark is shuffling through his papers.

The cash flow from operating activities for the quarter was at $3.9 million, and the property plant and equipment expenditures were $1.3 million.

Okay, thanks a lot, guys.

Thank you.

We'll go next to Taylor Harris with JPMorgan.

Thank you. First question is just gross margin. You obviously had a really strong gross margin quarter here, and items that you mentioned appear to me to be sustainable drivers of that. So, I want to make sure that that's the case, and would you direct us for the second half of the year? Do you think you can stay at this gross margin level?

This is Terry. I'll answer first and I'll let Mark comment. The two things are definitely sustainable. The non-latex breathing bag is a product we brought out of Malaysia in to the US. It's in our own plant New Jersey. We have identified additional cost savings; quite frankly, it will take place primarily in '09. We may get a little, a small amount of that benefit this fiscal year yet through even additional savings through changing material suppliers. On the facemask, the anesthesia facemask, that's a result of our joint venture in China, and as that process and their experience continues, I expect to get not major, but minor improvements as we go along. So, not only do I think we can maintain it, I think we can slightly expand those two in addition to other cost savings. So, we're very optimistic as to our overall performance going forward.

Okay. And it was most, because we saw a big step up from the first quarter to the second quarter, and is that really just the timing of these initiatives?

The first quarter, you have to remember we were getting Respironics facemask in here until January, and we had a supply of theirs to go through, so Chinese mask savings really didn't impact us that much until then. The breathing bag has been the three liter was probably spread over a longer period of time. We still haven't received the impact from the half and some of the one liter bags. So, that's still in process, although thee liter is the bulk of the savings. I say, the bulk of that project is behind us, but there is no reason to think as we gain experience, our history is we get better at things.

If I put in the same gross margin for the back half of the year that you guys had in the second quarter, it should give you some pretty good room for spending initiatives SG&A and R&D. Are you looking at it that way? Are there things that you may want to increase investment in the back half of the year?

We certainly going, we are evaluating. I don't know exactly when we'll pull the trigger, but I am evaluating expanding our sales force for fiscal '09. I think the jump in R&D will probably stay roughly where it is.

Okay.

There may be some tweaks on the upside of that. We have a new product, an important one coming out in the fourth quarter. Whenever you launch a product, sometimes there's some additional costs associated with that.

Okay, that helps.

I would add that from a G&A side; we're looking to move in the opposite direction through cost improvements.

Okay, great. Then just a set of operational questions on the Sleep business. Terry, if I heard you right, you said Breas grew 34% in Europe. So, is my math right that you did about $10 million of Sleep sales in Europe, with the balance $6.5 million or so the SSA business?

Yes, Breas was $10.1 million in sales.

Okay.

Good, Taylor. I'm impressed.

That was some quick multiplication there. So, SSA, can you just tell us may be some of the underlying dynamics, what were the number of beds, what are you seeing in terms of utilization rate? And if you could give us a number for the CPAPs you sold in the quarter?

I'm going to let Alex do that. He got too much detail for me.

Okay. I'll start with the number of beds. We ended the '08 quarter with 248 beds total. That includes the SSA business and our two acquisitions. And the number of CPAP units, we've ended the same quarter at 959 CPAP units.

Okay. 959 is that what you said?

959, yes.

Okay. And are you still getting the same pricing on those that you have the first few quarters?

Yes.

Okay. All right. And how about just in utilization trends on the beds in SSA, any material changes there?

It's been similar, comparatively.

Okay, great. Thank you guys very much, and congrats on a good quarter.

We'll go next with Mark Mullikan with Piper Jaffray.

Hi, this is actually John [Carter] on for Mark. Quick question, you guys mentioned on the call your shift in cash, or some of your short-term investments to long-term investment, because of auction rate securities. And then I also saw that most of your short-term investments were to cash. Is this going to have any impact on your interest income going forward? And specifically in the auction rate securities on the long-term investments, how long do you see that being in that category?

We wanted to get out of those auction rate securities as soon as we can. At the beginning of the second quarter we had $86 million auction rate securities. Started to get out in January and now we're down to $31 million at cost. So, as soon as we can get out of those, we will. When the auctions started failing, there was a brief kick-up in interest rates as they were max rates that were impacted, but those have come down a bit.

Okay. And then in terms of use of cash, so you've got all this here. What is your view on acquisitions right now, any update on that? And then I know you guys were focusing on may be something in Europe as a distribution channel for your products. Any update there?

We're continuing to work very hard to find an appropriate acquisition, but we don't have anything at all to report on.

Okay. And then just kind of one quick clean-up question, on the Sleep business, you kind of broke out Breas and SSA. Any chance we can get an organic growth rate for Sleep, and then organic for SSA?

The Breas business actually is all organic growth. So, the 34% that Terry had reported, we're very pleased with. That's all organic. On the SSA side, the organic business was roughly flat, up about 4%. And the rest of it was acquisitions.

If you take out the Sleep acquisitions, however, our earnings go up and our sales go down by less than percentage point, or roughly a percentage point.

Yes, there was a small impact on sales.

Great, well, thank you very much.

And Joshua Zable with Natexis has our next question. Joshua Zable - Natexis Hey, guys. Congrats on a great quarter and great outlook, and thanks for taking my questions here. I'm just going to piggyback on some of the other questions. I know, I think it was Taylor asked about spending later in the year. You made a comment both in the press release and in your prepared remarks about potentially looking to go overseas to manufacture some Breas units. Can you just kind of talk about some spending there or what the plan is, or potential hiccups associated with that?

I'm not sure I understand your question. I'll just tell you what we're doing. I think as a result of our JV in China, John Easom our Business Development Manager, and myself, have now been over there three times. John may have been four times. We were just to one of their large medical conventions. Every time I go over there my eyes get bigger. You have to understand that the cost savings that we have accomplished, one of them is really by bringing product out of Asia and back in to New Jersey. The other one is a result of switching from Respironics to our own JV. We see the opportunity to move may be one or two other JVs over there. We see some sourcing of material that we buy right now from third parties. So we're not going to impact any of our jobs in the US and still save significant money. Very impressed with what they're doing over there. I like their energy, you've got to invest a little bit to help them on the quality side, but once you do that, you get a good return. So, we're very excited about what the potential for Vital Signs is in China. Joshua Zable - Natexis I guess just to clarify there. I mean, obviously you guys have done a great job here moving the Respironics to the JV. Just so I understand, so Breas, if it's being manufactured in Europe now, basically, you would take that manufacturing and move it to China, correct?

That's the plan. We have identified a number of potential partners for us over there; I guess John is leaving Sunday to go back. We have a country manager over there, who is knowledgeable on CPAP and is assisting John in the selection process. Joshua Zable - Natexis Okay. And the manufacturing in Europe is yours, so you can control that supply, and you obviously will have a handle on when you guys are going to be up in running and how much inventory you need to build?

Correct. Joshua Zable - Natexis Okay, cool. Just clarification on that grade. And then just going back to the respiratory product, you kind of alluded to an important product coming down later in the year. I don't know if you didn't mention it for competitive reasons…

That's exactly right. Joshua Zable - Natexis All right, fair enough. And then just on the sales force regarding that, clearly, the sales force is going to be focused with Anesthesia, new products and great new products and doing very well with it. If I recall correctly, about a year ago or may be a little bit more, you guys actually had sort of reevaluated how the sales force was getting compensated relative to anesthesia and respiratory. I think you had upped the respiratory. Again, I may be wrong on this, but that's what I recall. Any thoughts of that, or is that sort of still the same setup? Anything changed there? Just trying to get a little bit more color.

I don't like to change the horse race in the middle of the race, so that stay the same, but we do feel we need with these new products that more salespeople will help us. It will take us a month or so to do all the proper analyzation, and we've got to go find the people. So, first quarter '09 is our target point to be adding the people. Could we move that up slightly, if everything goes a little faster? Joshua Zable - Natexis Great and then just clarity, this question was asked on the gross margin. Just to understand, basically, as the mix of the cheaper manufactured stuff comes through, that's what's going to be improving your gross margin. Plus, obviously, all these other programs, but basically when you're thinking about the gross margin expansion, it's really a function of sort of just a flow through of mix, of costs effectively?

Let see, if I say it over slightly differently. What accounted for the majority of our gross profit improvement this quarter, we really found two items only, our Anesthesia mask joint venture and the breathing bags that we moved to New Jersey. So, those two were really by and large 85%, 90% of the cost savings. We also had some cost savings from our resuscitator product that we have like three phases, and I think we're finished four phases. We're halfway through that project. So, we've got some cost savings in the Respiratory segment primarily from the resuscitator, a little help from the mask, because we do sell some mask in the resuscitator product as well. And the bulk of the Anesthesia and the breathing bags go in to Anesthesia. Now, we have a lot of projects identified for the rest of '08, but they're smaller in nature, and there is no reason to think that the savings we have gained in the bag and the mask are going to go backwards. They may not have to get 190 basis points in a quarter. We're not looking to do that again, but we're not looking to slip backwards, either. Joshua Zable - Natexis Right. So, I guess just year-over-year, when I think about next quarter, this coming quarter versus last year's quarter, the mix of products, I guess, you're having sort of cheaper manufactured stuff flow through, so that's the boost that you're looking at. Again, aside from the other projects?

That's correct. Our new projects got very nice gross profits as well. Joshua Zable - Natexis Okay, great. And then just one final question, just getting back to Sleep here. Terry, thanks, I think you did a great job outlining the different dynamics and sort of how it affects you guys, or could affect you guys. Can you just talk about, I think you sort of broke out, it seems like, SSA without Breas was flat. Can you just kind of talk about volumes a little bit? I guess they're flat because you said pricing was flat, so I imagine volumes are kind of flat. If you think that's a function. I mean, I know sort of it seems like there are a lot of questions in the industry now related to those two specific issues or changes you kind of alluded to. And then that's the first part. And then the second part of the question would be with home diagnostic testing kind of coming through, I definitely continue to believe there is a real look for the Sleep lab for not only titrating, but also for your patients with comorbidities, whether it's heart failure or diabetes. From the work I've done, it seems like those aren't the appropriate patients for home testing anyway. So, even on the testing side, but I guess what I'm getting at is if home diagnostic testing catches on like we all think it will in some way, shape or form, what role can you guys play as far as even though your SSA running a lab, can you play a role in doing some testing at home?

Yes, we can. I don't know how large a segment. Well, the first thing is that CMS reimbursement. We really need to do this either on a regional basis or give clarification. Right now, if there are no dollars attached to it, I can guarantee it nobody's going to do it, including us. So, they've got to first put some dollars on the table, and then we are, quite frankly, assessing a number of different strategies, because it's all really dependent on what the dollar figure is. Joshua Zable - Natexis Okay.

We have done home studies before. I f a physician or a particular patient has a particular problem, we still do home studies. It's not very profitable and therefore we don't love to do them, we will do them and we have experience doing them. So I think that is still pretty much up in the air. We'll see. I agree 100%, if the patient has comorbidities, a home study is probably not the appropriate treatment, and I think many of these patients do have comorbidities. And one of the ways you find out is through doing a multi-channel sleep study. Joshua Zable - Natexis Okay.

Kind of this why that's such a great idea unless the physician can really have adequate testing done that has ruled out all the comorbidities. I guess we're still in the wait-and-see category. Joshua Zable - Natexis Fair enough. We're all waiting and seeing. But I'm just getting back to the volumes of actual Sleep labs for the quarter, as far as what you're seeing and just trends like that. Can you give us a little color?

Do You Snore has been very time consuming, diverting management attention in SSA. Quite frankly, I want to see SSA step up this quarter. They need to get that Do You Snore resolved. They've got to build some new referral contacts down there. We have to get back to business as usual while we're waiting to resolve this legally. We can't continue to hope that that's going to be the only way to resolve this. We've got to roll up our sleeves and start working. I think the first step right step is hiring a Regional Manager. So, I think that's a step in the right direction. Identifying the cost savings is another step in the right direction. I'm looking to see more. Joshua Zable - Natexis And then one just quick follow-up and sorry this is the last one, I promise. Just with regards to acquisitions on the Sleep lab side, I know you've talked about in the past with all these changes going on, you're kind of taking care of your business right now in terms of the ones you have acquired, obviously, with changes going on. Is it safe to assume that you're not going to make any other DME acquisitions until sort of all this stuff is resolved?

I won't say all this stuff is resolved until we see a clearer picture, yes. Joshua Zable - Natexis Okay, fair enough. Thanks very much, guys, for taking all my questions. And, again, congrats on a great quarter.

And Greg Brash with Sidoti & Company has our final question.

Hi. Thanks for taking my call. Curious on the Maryland Sleep model. How many centers now are you selling CPAPs, and what's your plan to expand that model in to some of the other SSA labs?

We have five sleep centers in Baltimore that are routinely using our CPAP. It's really not ours Respironics.

And do you still plan to expand that to additional labs throughout the year?

Yes, we do. Absolutely. We've hired someone that's his job to focus now on CPAP. So, we're trying to get the message through that this is an extremely important issue is to grow that CPAP business.

You mentioned a number of CPAP units. I know it includes your acquisitions too and Do You Snore, 958 units. What is that on a revenue basis? I think you mentioned it was around $1.5 million last quarter.

It's about the same, Greg.

Okay.

I'm shuffling through to get you the right number.

So, $1.5 million?

Yes, just shy of it.

Okay. And then, Terry, some of the other hospital supply companies out there have talked about a slowdown in general for surgery procedures, specifically some elective procedures. I was just curious if you've seen any impact on your business?

I'm old enough to remember a couple of recessions. I'm not saying you don't get any people postponing electric procedures. But by and large, the general anesthetic procedures that we're involved in fall in to the more serious type of anesthetic procedures. This is not locals. It's not even regional that we're involved in. So, I don't really look for any real slowdown in our business.

Okay, all right, well, thank you for taking my questions.

And with no final questions, I'd like to turn the conference back over for any additional or closing remarks to our speakers.

I just want to thank everyone for participating in the call, and we look forward to talking to you next quarter. Thank you very much.

That does conclude today's presentation. Thank you for your participation and have a great day everyone.