Good day, everyone, and welcome to AMO's third quarter 2008 Earnings Call. For a copy of the press release issued this morning, call 714-247-8455, or visit www.amo-inc.com. This call is being recorded, and a replay will be available at approximately noon Eastern Time today through midnight November 14, 2008. To access the replay, dial 888-203-1112 and enter the pass code 4595795, or visit www.amo-inc.com. I am pleased to introduce Sheree Aronson, Corporate Vice President of Corporate Communications and Investor Relations.

Good morning, everyone. Joining me are Chairman and CEO, Jim Mazzo; President and COO, Randy Meier; and CFO, Michael Lambert. After prepared remarks by Jim and Michael, all three will be available to take your questions. During the call, certain statements, such as forecasts of financial information, guidance, financial targets and goals, currency effects, cash flow and debt levels, strategies for growth, expected product performance, technology adoption and market share, expectations for markets and procedures, and the impact of the economic downturn, projected regulatory approvals, benefits and launch dates of new products, expectations for markets, share recovery in the multi-purpose solution re-launch, and for initiatives to increase efficiency and reduce costs, and any other statements that refer to AMO's plans or estimated future results are forward-looking statements. As such, they reflect our current analysis of existing trends and information and represent our judgment only as of the date of this call. Actual results may differ based on various factors affecting our businesses. Review today's press release and our recent SEC filings for more information about these risk factors, specifically the discussion under the heading 'Risk Factors' in our 2007 Form 10-K. You will find these and other documents in the Investors section at www.amo-inc.com, or by calling 714-247-8455. Let me remind you that, beginning in 2008, we changed the way we breakdown our sales in the global sales table accompanying our earnings releases. For detail, review slide three of the presentation. Please note that our adjusted EPS guidance is provided on a non-GAAP basis and excludes the impact of charges and write-offs related to acquisitions, reorganizations, restructuring and recapitalizations, impairments, unrealized gains or losses on derivative instruments, and other periodic or one-time charges or gains. Refer to the Investors section of our website under 'Historical Financials' for more information on our use of non-GAAP measures. Unless we identify a number as adjusted in our remarks or in the accompanying slides, you can assume that it is a GAAP number. Remember too that any reference to pro forma growth rate reflect comparisons that include IntraLase performance as if the acquisition had occurred in all periods presented. With that, I will pass the call to Jim.

Thank you, Sheree, and good morning. As our results reflect, we met very tough challenges in the third quarter, due predominantly to the deteriorating economy. Throughout, we remain disciplined with strict attention to execution of our four key priorities in order to preserve and strengthen the business. This will allow us to be well-positioned when economic conditions improve. Let me briefly summarize our progress in each area, before I go into the businesses. Number one, leveraging our global refractive leadership and advancing our complete refractive solution business model. Our refractive business is facing serious headwinds, which intensified toward the end of the quarter as sharp declines in consumer discretionary spending slowed not only US excimer procedures, but US femtosecond procedures as well. Despite this dynamic situation which drove US procedure revenues down, we believe our share of the US excimer and femtosecond procedure markets held steady. We also saw our procedure sales decline in Europe, and our global laser system sales drop substantially, as LASIK providers postponed equipment purchases. However, we continue to post solid gains in Asia Pacific and Japan, so much so that Japan is now our second largest procedure revenue stream, behind the United States. Overall, our international refractive procedure implant and related sales were up 33%, versus the year-ago quarter, demonstrating continued share gains. Number 2, achieving on time delivery of critical pipeline products across all three of our businesses. The new products are key to our third quarter cataract sales, which rose nearly 9% on growth in all major product categories. During the quarter, we continued the rollout of our new Tecnis 1-piece intraocular lens, an ELLIPS Transversal phaco feature. We also launched our Healon V viscoelastic in Europe and received FDA approval for the product, allowing for our fourth quarter launch in the US,…

Thanks, Jim, and good morning, everyone. I will begin with a review of our third quarter consolidated financial results. Sales grew 1% to $275.6 million, including an estimated 2.7% increase related to currency impacts. In terms of sales mix, slide 16 shows that cataract accounted for 47%, refractive represented 35%, and eye care was 18%. These shifts versus the year ago period reflect primarily the mix impact of the eye care recall last May, and the effects of the weakening economy on the refractive business. Geographically, sales in the US declined 14% and accounted for 36% of our total sales, due to domestic refractive declines. Sales in all other markets rose 12% and represented 64% of sales. Gross profit rose 8.5% versus the year ago period to $165.1 million, including $5.7 million in manufacturing, inventory and other items related to our restructuring initiative that under accounting rules, must stay in cost of sales. Gross profit in last year's third quarter was $152.2 million and included about $21 million in direct impacts due to the recall. Our third quarter gross profit margin was 59.9% compared to 55.7% in the year ago quarter. Sequentially, beyond the restructuring related manufacturing and inventory items mentioned earlier, our gross margin improved as revenues shifted away from lower margin refractive equipment and toward higher margin refractive procedures and cataract offerings. This positive impact was partly offset by a higher femto [weighting] to our procedure revenues. Third quarter SG&A expense declined 14.4% to $118.1 million, including a $1.8 million non-cash charge for accelerated depreciation on the IntraLase headquarters building we exited as part of our restructuring initiative, and $17.1 million of intangible amortization. SG&A in the year ago quarter included about $5.1 million in acquisition related charges, $16.8 million of intangible amortization and about $9.3 million in…

Thanks, Michael. To wrap up, we are remaining diligent in our efforts to focus on what [we can control] as we manage through the challenging economic environment. That means executing plans to drive growth in our cataract and eye care businesses while minimizing the downside risk to our refractive business. It also means delivering new products on time, reducing our spending, maximizing our cash flows, and taking proactive steps to reduce debt. With that, I will open the call to questions. Operator?

(Operator Instructions) We'll take our first question from Peter Bye from Jefferies & Co.

Thanks, guys, I appreciate it. Just on the guidance, even since you announced the currency has moved quite a bit and you are able to hold your guidance on the top-line, am I just thinking too much that its kind of a rounding error, or are you feeling somewhat more confident about some of your other parts of the business?

Well, I think it's a combination of things, Peter. Again, we are growing US in the cataract business. We expect growth, obviously, in our eye care business. So you see strong growth in things like Japan and Asia Pacific, where really its non-euro, so I think we have enough flexibility to continue to hit the '08 timeframe. I think the key is obviously what are the currency levels in '09? And that's why we are planning now for and will give you more illustration on our '09 numbers at the end of the fourth quarter for next year.

Okay, Great. Just with the liquidity and some of the other just even changes against that you've reported. Have you seen any further disruption on the capital equipment cycle, either here in the US or overseas, or it's pretty much still status quo?

I will let Michael add to it. I will tell you I still think its pretty status quo. I don't think I've seen anybody accelerating capital equipment, although we are continuing to place excimers and femto; it's just not at the rate we expected. Again, with iFS, that will help. Do you anything to add there, Michael?

No, Peter, I think Jim covered it.

Okay, great. Just two quick ones then, Michael, your guidance is pro forma but you don't give sort f a schedule. We backed into sort of $0.14 on a pro forma in Q3. Is that right or about right, or is that better to talk about offline?

Yes, I think, if you think about it, Peter, let me sort of talk through it for people. If you think about that sort of adjusted Q3 '08 EPS, right, diluted GAAP of $0.11, and we were reduced by about $4 million on the combined effect of the following things; the restructuring items, which was about $0.11, reduced by $0.11; the unrealized gain on derivatives, which was a $0.06, and gain on investment of about [$1 million or $0.01]. So it does net out to about a $0.04 delta.

Okay, thanks. In Q4, when do you expect to realize these hedging gains, or when do they come up? Then when you look for your CapEx for sort of '09 through '012, does this step-back into the $35 million to $40 million range?

Peter, what was the first part of your question? You got [clipped off] a little bit.

The hedging, when do you realize the gain you have? Is it next quarter, or is it next year, or is it just roll forward? And then, CapEx over the next three, four years, I'm assuming it steps down for a bit for quite a period of time.

Yes, so on the hedging side actually, those auction and forward contracts designed to cover both income statement and balance sheet areas that are exposed to currency risk, those actually flow through both realized and unrealized virtually in every given quarter. So there are pieces, as I mentioned, in each quarter. On the CapEx side, that's certainly part of what we're looking and working on, on the cost reduction and restructuring side. We do expect to come in under $40 million for this year, relative to that original guidance of $45 million to $55 million we've been holding. We will be obviously monitoring and watching and planning, probably, for a reduced level of CapEx, as we think about '09, given the restructuring comments.

Great, thanks. I will jump back in queue.

Moving on, we'll take our next question from Chris Cooley from FTN Midwest.

Chris?

Chris, your line is open.

Thank you. Can you hear me okay?

Yeah, we can hear you now, Chris.

Sorry about that. Two quick questions, first, I realize you're not going to be giving guidance for '09 now, and it looks like that's going to be a little bit further out, but can you give us some ballpark expectations you have in terms of the rollout of the iFS upgrade, just in terms of the existing installed base? What would be some tangible type bogies on that program as we look at '09, in terms of that rollout? Then I have a similar type follow-up. You had previously given us some guidance on [MPS] share globally. It looks like, unless you have just a great fourth quarter, you're going to fall short of that here for the '08 period. Help us kind of rethink about it, maybe a rebasing of expectations for the MPS side as well. Thank you.

Alright, I will talk about the iFS and give a little MPS and Randy, if you have anything to add to it. On the iFS standpoint, Chris, we are obviously real pleased. We're going to be rolling that out towards the end of the quarter. As I said we're going to go directly to the people that currently have femtosecond technology and will do the iFS upgrade kits and then throughout '09, we will rollout continued upgrade kits, as well as any new femtosecond laser will have the iFS already on it. So we are pleased with that. I think, as I said we rolled it back a bit based on capital equipment this quarter. We even believe next year will be somewhat slow but we do know because we do have some orders already for this upgrade. With regard to the MPS share, I think I said a couple of quarters ago, that 16 to 18 that we were expecting towards the end of the year, we felt, with various challenges, specifically in Japan, that we weren't going to be able to hit that and we pushed that out into the '09 timeframe. As you saw, we continue to grow about 8% in the US. I think, once we are resurrecting our Japan business, which is one of our largest share businesses, that's going to allow us to attain that, but that won't be accomplished towards the end of the year. That will be more in the '09 timeframe. Anything to add on that, Randy?

No. I guess you covered it.

If I may just one quick follow-up, just going back to the iFS any targets though, just in terms of the existing installed base, in terms of conversion rates there that you have for like the first half, second half, next year?

Right now, with the capital equipment slowing, I think that changed our initial feelings of what was going to happen. So I would tend to tell you that you're going to see the high performers, and we continue to see LASIK obviously, but the high performers in the US, Europe, Japan, will be the ones that obviously will probably the first ones to target. Some of the other ones that put capital equipments on a slower basis, so I think we will see those early adopters be the first ones to adopt, but I think it probably won't progress as fast as we had hoped, but again, the good news is we still have the only femtosecond out there and they will just utilize the existing product.

Okay, thank you. I will get back in the queue.

Thanks, Chris.

Moving on, we'll take our next question from Joanne Wuensch from BMO Capital Markets.

Thank you very much for taking my question. You mentioned on the call that you are in compliance with your covenants. Could you help us understand where you are in relationship to the [5 to 1] EBITDA-to-debt ratio?

Joanne, yes, we did. As we commented we were in compliance in Q3. Now, we don't provide sort of the specific details of every adjustment to the [calc] or those calcs externally. People can actually get pretty close to it, though, by working through the definition that's specified in our credit agreement, and that of course is publicly available. It's been filed online with the SEC.

Okay. When you talk about cuts, I heard a lot about staffing and manufacturing, but I didn't hear about research and development. Is that off the table, or are you re-evaluating which programs and priorities?

Well I think, Joanne, first off, technology and direct customer interfaces are always the most critical and the ones that tend not to be heavily impacted, but I think we all can do further belt-tightening and re-examination of our priorities. So the answer is we're going to look at everything. However, the most critical element of AMO is obviously always the product line, and focusing and ensuring we hit the new products we've illustrated with you.

When it comes to contact lens solutions, you mentioned that execution issues were in Japan. Could you give us an update on what you may be doing to address that from the managerial level?

Hi, Joanne, this is Randy. We took action late in the second quarter to begin to change the management structure in Japan. We have completed probably the majority of that, and we will be back in the alignment that we want probably by mid-November. So, we are very optimistic about recovering from sort of the shortfall in the third quarter and continued improvement in Japan. This would include new leadership in Japan, as well as, again, as we indicated, sort of a realignment of the sales force to more appropriately address how we were facing the market.

Okay. I don't fully understand what happened there. Is it more a matter of wrong products, wrong places, wrong marketing?

No, I think, in short, the centralized management that we had there probably was our relationships were too concentrated at the top of the organization, and we wanted to push that down to more directly to the sales force so we can get better execution basically a daily basis and have better closer customer contacts. So we've realigned management to really adjust it that way. We broadened our customer relationships and certainly have better ongoing relationships with the wholesalers, distributors, and certainly the merchandisers in the Japanese market today.

No, Joanne, it wasn't anything from a standpoint of irregularities. It was purely an execution issue. As we looked at what we were expecting from Japan from a market share, I think they were not focusing, as Randy said, to the same strategy we had with the rest of the markets, unfortunately not promoting the products and the strategy that we had illustrated here, which caused a slowdown in where we would expect them to be. So with Japan being a large market for us, we had to make those changes and we made them, and that's why we feel much better about what's occurring now and in the future.

Could you give us some idea of any color you may feel comfortable sharing on where your Board opinion is of management execution, stock price, sort of an oversight commentary, given the turmoil that's happened over the last couple of weeks, months?

I think the Board is fully supportive. I know the Board is fully supportive of the strategy and the execution. I think many Boards are challenged with the economic environment that we are facing. We fully have discussions with the Board on an ongoing basis and very supportive of the actions we've taken and what we're doing.

Okay, thank you very much.

You are welcome

Moving on, we'll take our next question from Jared Holz from Thomas Weisel Partners.

Thanks, good morning. Jim, in your experience, can you just talk about, when the economy starts to get better, what you would predict for the lag time in which your refractive business recovers? I mean, clearly there's going to be some delay in which you see some improvement there, but what would be your estimate for how long that could take if we do see a turnaround, call it mid-second half of '09 or who knows?

Well, I think sometimes people try to compare this to what happened in 2001. I always say it's really not a fair comparison because the market was in a total different place. I think that the lag will take a period of time only because you have pent-up demand, but [rich] audience will come back. I've always said that, you really have two audiences that have been affected in the economy. At the beginning, it was the patient who was really looking at somewhat of a lower-priced model for them to be able to afford LASIK. Then really, what hit us later in the year or in the middle part of the year was really almost everyone that was considering it, anything that was a disposable income, even people that had the (inaudible) to have it. I think that group will come back quicker. The consumer that is still very cost conscious will be a bit slower. So I think you'll see independents probably come back a bit quicker, and then the chains will take a bit of a longer period. Is it three months? Is it four months? I think it all depends on what's the status of the economic recovery and what people believe. I think it will take a period of time before you really see people coming back, but I think we look at it from a patient's standpoint and who and when and how. The good news is we continue to see strong growth in markets like Japan and Asia Pacific and you might see a little quicker recovery in Europe only because of where the market is. The market is in a totally different place outside the United States, meaning penetration of Custom and IntraLase are far less than you have here in the United States. So, thus, we will probably see a quicker recovery outside the United States because of the penetration of LASIK as well as femto.

Okay, great. Then just, on the multi-purpose solution, I'm just a little bit confused. It would seem like, logically speaking, that the Japan situation would be getting better, not worse, off of the first quarter and second quarter numbers. So, I'm just trying to think why that trajectory went down. I would think that Japan would be improving, not getting worse. So something happened in that third quarter that just doesn't seem to add up. Can you kind of run us through what has taken place in Japan over the course of the full year?

Sure, this is Randy. Again, as we re-entered the market after pulling the multi-purpose solution off last year, we continued to do very nicely in the marketplace. Again, as we continue to evaluate performance, we weren't getting the market penetration we had originally anticipated, nor were we seeing the performance that we were looking for. Upon further evaluation of that performance, we realized that the relationships were very highly concentrated at the top of the organization and we weren't seeing the broad based penetration at the sort of retail level that we had experienced in the past. We also saw that some of the strategies that we had begun to implement on a global basis were not being executed in a fashion that was consistent with what we wanted to in terms of pricing and messaging out in the marketplace. We felt very strongly that we needed to replace management so that we could get greater continuity in that marketplace. And as a result of that change, some of those relationships that we had, had to be reestablished throughout the third quarter, so that we could continue with a number of the programs. And really that what has caused sort of the timing issue in terms of revenue pull through. Reestablishing relationships in Japan is a much more lengthy process than in most of the other markets. Confidence and trust is held at a premium over there. So, we dispatched a number of management people from the US to go over and again explain what we were doing, what our strategy was, what our placement strategy was at the retail, on the merchandising level, what our pricing strategy was. We have reestablished and again have very good relationships with wholesalers. That combined with some continued wholesaler consolidation in Japan and…

Okay. So Randy, it would be fair to say that even though the sales looked or came in better in the first half of the year in Japan, you didn't see that much upside with the current strategy or the mechanisms that were in place. So, you were willing to take a near-term hit to realign things so that going forward the situation would improve. Is that correct?

Fairly accurate. I think what we started noticing in the second quarter as we weren't seeing the leverage that we had expected in the Japanese marketplace and the incremental increase. And again, as I mentioned, when we started getting into it, we weren't executing some of the pricing strategies, some of the messaging strategies. They basically had decided to embark on a somewhat different strategy that was inconsistent with our standard of care messaging and certainly some of the pricing strategies that we had begun implementing around the world. From a position of strength, we thought it was appropriate to act sooner rather than later so that we continue to capture market share around the world. So it wasn't from a position of weakness. We just felt that, if we weren't going to get the continuity that we were looking for, it was time to make a change.

Okay. Thanks. I appreciate it.

Moving on. We’ll take our next question from Larry Keusch from Goldman Sachs.

Hi. Good morning.

HI, Larry.

So Jim, I guess the one question that I have is can you just help us think about since the Asia-Pacific region certainly help to offset, in the refractive area, some of the declines that you saw in the US and Europe. How do you guys think about again the global economic picture right now, as this issue in the US continues to spread globally and we look at a potential global recession? How exposed, do you think you are in those regions?

Sure. Let's break out a couple of things. First off, I think the Asia-Pacific, which includes Japan, and Japan is really the largest portion of that. There are many factors that help offset any economic impact in Japan. The first factor is, it's a very myopic population. So the pool of patients is extremely large in Japan. Number two, the penetration of LASIK and Femtosecond lasers are still fairly low. And number three, the delivery mechanism in Japan is predominantly what we call chain-related very focused, very growing the markets like meaning rather than trying to attack each other. So it's concentrated by chains, who have done a great job of growing the Gen Y and Baby Boomer population. Now if you look at October as a good example, you can see actually, in the US and in Europe the US I gave you data points it's tracking exactly what we said. And remember, we expected that would be a little worse in Q4 and through October, it's actually tracking to similar to Q3 levels. So, I think we've got a pretty good model now going forward, Larry, on what's happening to the economy. And as we've stated, we have projected that the economy would be hitting the European region, which it's doing. Now, let me add one other point. What's changed since really the mid year and what's changed and why we came out about a month ago was the capital equipment really slowed down, the actual acquisition of capital equipment. We still see growth in procedures, as evidenced by our increase on a quarter-over-quarter basis. So, I think what's happening is people are really pulling back on the capital equipment, but it's tracking to what we've said and here in the United States actually a little better than what we believe was going to happen in Q4. So I think we've clearly planned for that. And obviously, we will be tracking November and December to give us a good feel for what we believe could happen next year.

Okay. That's really helpful. And he OUS procedure growth which you reported, which I believe was in the low to mid 30s --

33%.

33%, what is that --?

That's in dollars, remember, too.

Right. And what is that on a constant-currency basis?

It's a good question and we've got everybody looking at that. I think maybe we can follow-up with you on that one.

Yes. The only reason, again, I ask, because if Japan is the largest segment there, obviously the dollar has weakened quite a bit against the Yen. So, I was just trying to --

Actually you're right, Larry, but really the euro has been the major impact to us, not as much as the yen. So you're right. There has been some benefits but (inaudible) go ahead.

Larry, currency on that was very, very small, de-minimus.

Okay, okay, so--

So it's still strong, strong growth.

I got you, okay. And then the last question for you guys -- the two last ones, perhaps for Michael are on the revolver that you drew down, what is your thought on sort of timing for repayment of that because I know that you are obviously, as you indicated, in compliance with your covenants now. But I'm just wondering how quickly you think you can get that paid off again.

Yeah. A couple of comments on it, Larry. We do have incremental access to the revolver to do more. And so, we are thinking about that, as we think about the different options, to actively manage the situation and try and de-lever the balance sheet, in attractive ways, where we can. In terms of paying it back, I think, you look at Q3 even in an incredibly difficult economy with all of the negative impacts both on procedures, femto, Europe, refractive equipment, all that stuff, we generated $29 million in operating cash flow and that is a very positive story under pretty bad circumstances And so we do expect to continue to generate cash. Without putting an exact number out there in terms of paying off the full $100 million you could look at the year-to-date view this year and with some of the negative or tough impacts we've had we've generated through nine months about $89 million in operating cash flow. Now $20 million of that or so was from the Alcon IP settlement, but that profile, as you think about it, can give everybody some sense of how soon we could payback that revolver piece.

Okay. But again you may drawdown some more at this point?

As we mentioned, we're looking at sort of all the tactical options and alternatives that we have to de-lever. Modifying the capital structure to do that is an important thing at this point. And so we've got various work activities underway to explore the full range of things that we can do. That's one of them.

Obviously Larry two, is what we want always, we’re looking at, as Michael illustrated, free cash flow is a critical element and as long as things continue to stay in the realm of what we've been predicting our goal is to get that upwards into and we are trying to do everything to get upwards of $100 million as we can, as we go forward.

Okay. And then the last one for you, DSOs are obviously up. Clearly, I understand the international mix going up. But is there anything you can do to get those back down. Can you change your payment terms overseas or do we just have to live with that given the declines in the US business for the time being, just again in the mix shift?

That's a good question. I think, Larry, there are a couple of countries where it feels like you have to live with it, right, Spain and Italy as an example. You do the public hospital thing over there, where we sell to them. And at the end of the day, in 6 and 12 months we get paid, we feel pretty good about that because those payments can go on for extended periods of time. But at the end of the day, we are trying to be far more active, and we think that's critical in a tough economy like we are in order to try and manage that DSO number and not necessarily have the impact of the internationalization affect our DSO. For a couple of quarters actually prior to Q3, as you've seen the international components to the revenue stream grow, you actually had not seen it in DSO. And that was that in some of that active management I'm talking about. It did catch up with us a bit in Q3, so that the majority of the three day increase was just the internationalization component.

Larry, I will tell you, as Japan continues to grow; they are tend to be one of the best countries to pay. So, really as Michael said, having lived overseas, you tend to have southern European, which is very consistent across all industries. But I will tell you that, if you look like-to-like because it's always when we close the quarter, we've actually been very diligent and very pleased on our DSOs. And certain markets are always going to be issues. But all other markets Japan, US, Asia Pacific, very strong and we are getting that paid on a consistent basis.

Okay. Great. Thanks, guys, for the comments.

Thank you, Larry.

Moving on. We will take our next question from Marc Goodman from Credit Suisse.

Good morning, Marc.

Good morning. Could you talk about R&D a little bit? There was a previous question but I'm not sure we got into it in the way that I wanted to hear which was I guess, number one talk about the key products that you are working on excluding the Tecnis multifocal which we know is coming to the US next year excluding the upgrades that you're talking about to LASIK this year? What are some of the things, the projects that are going to be coming in over the next, let's say, two years? You're committed to; you're not going to back off from and that we should expect to come in and be additive to the top line? And then let's talk about some of the lesser priorities where these are things that we should probably say well, they might be put on the back burner, just given what's going on today and maybe they come back in 18 months?'

Well, let me make sure I address your overall arching question. I don't think I addressed that. I think it was [Joanne] that asked me. As I've said, when we look at R&D, we are continuing to accelerate and focus on the ones that make measurable difference. All I said is, when we look at any cost cutting, there is things such as travel, some of the discretionary spend that we can all look at. But when it comes to key projects, those are not being impacted at all. Let's talk about we are still always going to be pushing 6% to 6.5% range of R&D. So let me talk about it. You mentioned Tecnis multifocal that's critical. We talked about our insertion technology as we previewed one. We're going to continue to come out with a new one. We are having a next generation, one bottle, as I mentioned last time. We are working with our friends down in Australia (inaudible) Group to help get that out. We have the iDesign, which again will leverage our whole LASIK marketplace with regards to being able to get more custom penetration and also using the iDesign to help as a diagnostic tool. We have what's called a VSS that we've talked about before, which is a nomogram to increase capture rates. We are working on atoric in our pipeline and, again always looking to improve the cataract offering, building off our strong Tecnis franchise. There are other things there that will be coming out that are clearly differentiatable. So I will tell you that in dry eye, as I mentioned, we've already come out with three. We're going to have something fairly new in the near future as well. So I think I can tell you in every key category, there are one to two discernible differences to the pipeline. Those are on track, not being impacted. And again, when I look at any cost reductions, when it comes to R&D, my requirement to Leonard and his team is to obviously look at belt tightening from a standpoint of discretionary spend, but not impacting the overall opportunities that we have with our market leadership in laser, our strong growth in cataract and definitely penetrating further our dry eye and one bottle systems.

Thanks.

All right.

Moving on. We’ll take our next question from Larry Biegelsen from Wachovia.

Good morning, Larry.

Good morning. Thank you for taking my question. The gross margin has been pretty resilient. It was, I think, excluding charges about 62% in the third quarter despite refractive volume being down. Is that kind of a bottom? Is that how we should be thinking about? For example, the fourth quarter and maybe, I know, you're not giving '09 guidance, but for 2009, I guess, is the kind of the bottom here?

Let me give you an over-arching then I will let Michael get into the specifics. First off, on a positive, one of the things I have to say, when you don't sell a lot of capital equipment, it does help you because capital equipment obviously is a revenue, but very little on the bottom line. But as you see, custom continued to grow quarter-over-quarter that helps. The Tecnis 1, although still not to the level that we are looking for because obviously it's still in its infancy that move to the Tecnis Franchise is very important for us. We continue to grow contact lens care, obviously not at the rate we wanted but we are obviously looking at growth there. You've got Phaco packs which are very high margin. You've got Healon D now entering the marketplace. So our product mix, which is also helping obviously the margin. And then as we look to be better and more effective in our manufacturing arena that is helping us now, but will further help us next year. Michael, any other specifics or color on that?

Yeah. Larry, let me talk you through. And it sounds like you do the same math obviously that we do. You try and think about it restructuring-adjusted and recall adjusted. If you think about the year-over-year results, we saw about a 4% to 5% shift in revenues again year-over-year away from refractive to cataract. But when you think about what happened on the gross margin line there, the average gross margins seen between those two business units, given the mix of products was actually similar. So, on a year-over-year, gross margin was roughly flat. Now, we know, we have a gross margin profile in the refractive business that has some very, very high margin stuff, there were procedures and some very, very low margin stuff, the equipment and that was the comment that Jim mentioned earlier. Sequentially, when you look at it, what you're seeing in that side is really I think what you hinted at, a revenue mix shift away from the refractive equipment and towards the higher margin refractive procedures and cataract products that contributed to the gross margin gains. Now, there was a small offset against those gains, because there were slightly lower margins in procedures. Gross margins in procedures this quarter because there was a higher Femto weighting to the procedure revenue mix. As you think about Q4, to your comment, a lot of moving parts from a product category standpoint. But really the issue there that we see is gross margins actually could be down a little bit there maybe a point or so. That's really driven by the fixed manufacturing cost absorption issues that we are experiencing on the lower volumes.

But Michael, so 61 to 62 that seems to be kind of where it's bottoming out, is that fair?

Well, no. As I mentioned, I think we're going to dip a little bit in Q4. And then we will have to see about next year as mix shifts up. But really that Q4 impact is a volume centric impact related to the drop in procedure volumes and the drop in equipment.

Okay. Then on SG&A, it looks like SG&A for full-year '08 will come in at about $495 million, adjusting for one-time charges. Given FX and the restructuring program you just announced, do you think you could have down absolute SG&A in 2009?

Yes, given the targeting Jim mentioned and talked about earlier, I think the answer is yes.

Yes, very diligent efforts going after that, Larry.

And obviously still a work in process.

Okay. On the October 9 call, you said that Q4 eye care revenues would be back at the $58 million to $60 million run rate we saw in the second quarter. You said you expect a rebound. What gives you the confidence that that's true? What more do you know now versus when you said the third quarter eye care sales would be up sequentially on the second quarter call in August? Thanks.

Well, as we've said, the biggest issue we're facing and that we've addressed has been Japan. It's a large market for us, Larry, so with the changes that Randy illustrated earlier in the call and I talked about, that's what gives us confidence that we are returning the revenue to the levels that we discussed. We also did not anticipate, earlier in the year, the economy to have such a dramatic impact, and I think we've seen it across all industries. I'm sure you're listening to other calls outside of our industry where the retailer has contracted inventories. Although that impacts you a little bit, it gets adjusted over a period of time, it does impact you at the point of a quarter or less when there is time left in the year. So, I think we've illustrated what we've done to fix it and why we have confidence. Again, I go back to it's not to the level that we had anticipated at the beginning of the year, but every market is growing in market share even in Japan, and that's pretty significant levels of market share that I talked about.

Other net line in the fourth quarter in 2009, Michael, how should we think about it with exchange rates today? Thanks.

Larry, there's a lot of factors and impacts in there. Interest rates are bouncing all over the place, as you see on the LIBOR trend line. So if you think about the Q4 number roughly on that other non-operating line, probably on the order of about $5 million to $6 million give or take, in expense in aggregate, below interest expense.

Okay, thank you.

Moving on, we'll take our next question from Matt Miksic from Piper Jaffray. Matt your line is open.

Hi, can you hear me?

Clearly, Matt.

Thanks for taking the question. I think a lot of quick questions have been answered, but I think, like a lot of folks having trouble or looking to understand maybe the (inaudible) of the environment, particularly in the equipment side, and also as it affects your consumer solutions. So, just a couple of follow-ups on some of these environmental questions. On consumer, you talked about these inventory adjustments last quarter sort of personal destocking and a retailer response to that maybe as consumers lower their personal inventory in these products. Is that's something that sort of came and went in the third quarter, or is that something you expect to affect you in the fourth quarter and beyond?

I think it's a combination of the third and the fourth quarter. I mean, retailers tend to always adjust inventory into Q4 because it doesn't have a [bow or a ribbon] on it for Christmas, they tend to not carry a lot of inventory, but it was pretty well across, both Q3 and Q4, primarily in the US and Japan. Europe doesn't tend because of the distribution there, and Asia Pacific is a bit different. But it's primarily US and Japan phenomena.

Okay, but by Q1, we should have that behind us?

Well, that's what we talked about. It tends to adjust itself over a period of time because obviously, the consumer is still purchasing. There is a need, but just like I was listening to another consumer goods type of call, people just don't carry the same type of inventory that they used to in their homes as they are looking to adjust their budgets, but they have to, they are still acquiring the contact lens care products and the dry eye products, so that's why over a period of time, that adjusts itself.

Okay, that's helpful. Then on the cap equipment side, I'm wondering if you're getting any sense from your guys in the field as to whether this slowdown is in equipment purchases represents something like a three to six month delay, something maybe more driven by the credit and financing environment. Are these folks sort of gearing up to hold off until there are signs of improvement in the overall economy, more like a 12 month potentially or longer in terms of consumer downturn-driven hold back?

I think what we're forecasting is that I think, until people see the economy coming back, they are just not willing to put their cash out. It's not a financing issue. I mean, they can get the financing, but I think you've seen across, again, all industries that capital equipment has slowed down. Now, in my comments, the positive for us is that we have the largest installed base across the globe, so they are still doing procedures. The good news for us is that the procedure is going to be done on our equipment. We are just obviously always trying to displace, because you've seen healthy gains for us in market share across the globe, but with custom growing, femtosecond laser continuing to penetrate. Those are the things that still help us offset this equipment slowdown, but I think until people start to see some kind of rationale behind the economy, I don't think you're going to see huge capital equipment purchases. We are still expecting growth, just not at the level we had expected.

Okay, and then you talked a little bit about what you're doing with your capital structure and sort of improving your cost structure, maybe thinking about this right as we think about '09 and beyond, particularly on the P&L, as you get your costs into the right size for this environment. Are we going to start seeing some sort of leverage or improvements to that sometime next year, mid-next year? Is leverage going to be tough through the end of next year?

Yes, that really is a function of, in many respects, when the revenue stream comes back. As you can see, we are managing very actively to get costs and expenses down anywhere and everywhere we can. As we do that, and we've been very successful at it this year, as Larry mentioned earlier, well under $500 million in SG&A. As we do that, we open up the opportunity for very significant operating leverage to show in the income statement once the economy eventually improves and the revenue starts to come back. That's really what we're trying to do.

Okay, but we shouldn't expect that until we're at inflection point?

Yes, I think that's right, because we are very operating-leverage-centric as a company.

Okay. Then Michael, the last question here on the capital structure. I think I understand what you're looking to do maybe opportunistically and tactically as you think about your covenants and your financing position, but is it that you have access to this revolver, there's obviously some dislocation in the credit markets. It would strike me that there's opportunities here that are attractive to you to sort of take down some of this longer-term debt with your revolver even though some folks might look at that as saying you're ramping your revolver, you need to pay that down. From your standpoint, it's much more efficient to do this here than say a year from now or year and a half when the credit markets rebound.

Yes. As I mentioned, it's something we are continuing to monitor and think about. I think you referred to the fact that we actually did this recently. Let me just cover that quickly. We made a lot of progress tactically on debt reduction in early Q4. We drew down about $97 million or so on the revolver. That allowed us to repurchase $181 million in convertible debt. That is a net debt reduction of about $84 million. So we are trying to be very active in managing that situation, and we are continuing to look at what's happening out there.

Great. Thanks for taking the questions.

Just one thing to add to the prior question that you had about operating leverage, even with a modest revenue outlook, the cost reductions that we've implemented should continue to yield significant benefits as we get into the fourth quarter and early next year, as we right-size the corporation relative to the revenues. So while I agree with Michael in terms of when revenue begins to move up, we will be tremendously leveraged to that to see a lot of earnings drop to the bottom-line. We will continue, though to benefit in the near-term from a lot of the actions that we've already taken.

The next question, operator?

Moving on, that will come from Eric Lo from Merrill Lynch.

Good morning, guys.

HI, Eric.

A quick question on restructuring, you guys have planned to try to save another $10 million to $15 million in annualized savings.

Right.

I was just trying to get a greater appreciation of how much of that you could potentially recognize over the next six to nine months versus a year out?

As I said earlier, our goal is to implement these actions this year, so that we can get the true benefit in '09 as early as possible. So, this tends to be more of an annual savings. Again, we haven't broken it out but we're going to be doing that this year, looking at everything from discretionary spend to positions, and might even get some little short-term benefit in '08, but we're going to do that this year, Eric, to get the benefit in '09.

Okay, great. In terms of your debt covenants, have you guys started renegotiation with the banks to try to loosen up those covenants?

Eric, as I think Michael clearly stated, we are looking at all options, but I think the thing, as I said on the previous call, for us to look at various options is important; for us to kind of communicate our next tactics doesn't really help us because, again, it works against us when we illustrate what we're trying to do. So, I think we've shown very prudent actions in what we did a couple of weeks ago. I think we've shown very prudent actions in reducing our cost structure, which leads us to feeling very strong on our ability to continue to move forward without any issues.

Eric, we've been proactive on that before. We would always try and be proactive on it.

A question on your capital equipment sales, you guys sort of did a little over $18 million in laser vision correction system sales this quarter. I'm just trying to better understand your forecast for Q4. Are you guys forecasting a sequential decline in sales or a sequential increase? How much does the iFS upgrade kits contribute to revenues in the next quarter?

As I said I think about three weeks ago, we will have a little increase in Q4. There is couple of factors to that. First off, Q3 always tends to be a smaller quarter because you have a very small market in Europe. Number two, we are going to see some iFS, but we don't break out how much iFS is. Again, the one part of the equipment business that's not being impacted by the economy, as you've seen in every quarter, is our phaco. So you're going to still see phaco growth which is obviously in our capital equipment, but I think, as you look at laser and femto, we have modulated back Q4 as well as we're looking out into next year, but we would see some sequential growth simply because of the size of the quarter, the Europe situation and some iFS penetration.

The last question on your launch of Healon D in the US in the fourth quarter, what type of contribution do you think that product will have to your sales, and how much would inventory build had an impact on the quarter?

Well, first off, there's hardly any inventory build. We are just launching it in the US now, so you do a lot of trialing first off. This is not a product that they hold a lot of. The real benefit for us in Healon D is it definitely gives us revenue, but it also completely surrounds the whole standpoint of a procedure now. So there is no reason for a doctor not to utilize our package, because we have cohesive, diversive, a 1-piece, a new inserter, and the phacoemulsification system. So, there's no inventory, even after we launch a product to a grand degree. Really, this is one that's going to help our whole business, because we've had that gap and practitioners don't like to have to order something from another company if they can get one supply from everyone.

Great. Thanks, guys.

Operator, I think we have time for one more question.

That will come from Steve Willoughby from Cleveland Research.

Okay. Steve Willoughby - Cleveland Research Hi, good morning. Thanks for taking my question here. Following up on the last question, talking about the surgical packs, when do you expect to have the new one inserter widely available in the US?

We showed it at the ESCRS, which I think you were there, Steve; you saw it. Then we are currently trialing it now, so we will have a full roll-out in '09. Practitioners are very pleased with our 1-piece and are using our 1-piece, and are having no issues with our current inserter, but we obviously want to have in inserter that makes it even a little easier, so we are testing it now with practitioners and full rollout in the beginning of '09. Steve Willoughby - Cleveland Research Is that something you need to get FDA approval for, or not really?

No. We already have the 510K in the United States. Steve Willoughby - Cleveland Research Got you. Are there any thoughts or expectations on the new competition in monofocal IOLs that is expected in the next couple of months?

Well, if you are specifically talking about [BNL or Raner] that's not new because they are obviously somewhere outside the United States in the various markets. We know about it, and we haven't lost any share because of those products outside the United States. So, there's nothing new that we don't know about, we've already been selling about. Again you need a 1-piece that has an aspheric design with an [NT IOL] designation in the United States. Without that NT IOL, there's really no financial incentive for a practitioner as well. Steve Willoughby - Cleveland Research Very good. Thank you very much.

Okay, I want to thank everyone for joining us. I appreciate it. We let it go a little longer to get all your questions. We appreciate your support and time and have a very nice weekend. Thank you.

That will conclude today's conference. We thank everyone for their participation. At this time, the phone audience may now disconnect.