Good day ladies and gentlemen, and welcome to the second quarter 2008 Masimo Corporation earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today's call, Mr. Steve Moran, Executive Vice President, and General Counsel of Masimo; please proceed sir.

Welcome to Masimo Corporation second fiscal quarter 2008 earnings release conference call. Our press release was distributed about an hour ago. If you have not seen the release and would like to, a copy is posted on the Investor Relations page of our website at www.masimo.com. On the call today will be Joe Kiani, Masimo’s President and Chief Executive Officer, and Mark de Raad, Executive Vice President and Chief Financial Officer. In just a few moments Joe and Mark will deliver remarks on our results achieved during the 2008 second quarter and general comments regarding our business including an update of our fiscal 2008 financial guidance. After Joe and Mark offer their comments there will be a question-and-answer session during which they will answer your questions. Before we begin, let me remind you that this call may contain forward-looking statements. While these forward-looking statements reflect Masimo’s best current judgment they are subject to risks and uncertainties that could cause our actual results to vary. Risk factors that could cause Masimo’s actual results to materially differ from our forecast are discussed in detail in our filings with the Securities and Exchange Commission. With that I would like to turn the call over to Joe Kiani, President and CEO.

Thank you so much Steve and thank you ladies and gentlemen for joining us on our second quarter 2008 business update and earnings call. With me on the call today is Mark de Raad, our Chief Financial Officer. Earlier today we announced our financial results for our second quarter. We are happy with the continued adoption of our Masimo SET and Masimo Rainbow SET technology as evidenced by the shipment of an additional 29,000 new drivers into the marketplace. In fact for the first half of 2008 our unit shipments on an annualized basis grew 24% from a net installed base at the end of December, 2007. Given the current challenging economic environment we were happy by the strength in the second quarter product revenues and in general we are happy with our financial results including our reported $0.18 per common share, well above our expectations. In addition to our strong second quarter financial results which Mark will review with you in more detail the second fiscal quarter also included some important business and operational milestones including the May, 2008 FDA clearance of our noninvasive continuous hemoglobin measurement via Rainbow SET which took away one of the risks with our expected launch date. This FDA clearance came nearly three months earlier then we anticipated. We expect the major US introduction of our new noninvasive continuous hemoglobin measurement to be at the ASA meeting this October which will be in Orlando, Florida. I would like to note that while we have received clearance for noninvasive continuous hemoglobin and the associated reusable sensor, we are still awaiting FDA clearance for our single patient adhesive Rainbow hemoglobin sensor which we filed after we received FDA clearance for the SpHb or continuous noninvasive hemoglobin technology. Later in this call I will discuss our current…

Thank you Joe, hello everybody. Please keep in mind that all my comments will relate to financial results on a GAAP basis. As a reminder in fiscal 2007 prior to our initial public offering, Masimo was required to report GAAP earnings per share under the two class method. For the benefit of our investors we have continued to include in our quarterly earnings releases as we did today, the non-GAAP 2007 financial statements with 2007 earnings per share computations as if the current if converted method had been used in the prior periods. As Joe noted earlier today we reported record total second quarter revenues of $74.8 million which consisted of record product revenues of $61.9 million and royalty revenues of $12.9 million. This represented an approximate 30% increase in year-over-year product revenue growth. We shipped 29,000 new Pulse Oximeters and Pulse CO-Oximeter units in the marketplace and based on these shipments we now estimate that our total worldwide installed base net of estimated retirements to be approximately 515,000 units. Importantly this is up 21% from the estimated 424,000 units of net units installed just one year ago. As you know the shipment of these new units is important because once installed these units generate future sensor sales which continue to represent the most significant component of our total product solution revenues. During the second quarter we generated approximately $2.9 million in Rainbow related product revenues compared to $2.1 million in the prior year quarter. This represented an approximate 40% increase in year-over-year Rainbow revenue growth. Of the record $2.9 million in Rainbow revenues, Rad-57 revenues accounted for approximately $2.4 million and other Rainbow revenues including sales of carbon-monoxide methemoglobin and PBI totaled approximately 500,000. Second quarter 2008 product revenues generated from our direct and distribution channel totaled $48.1 million…

Thank you Mark, as a reminder I wanted to reiterate a couple of important messages regarding Masimo and our position within the marketplace. In 1995 we revolutionized Pulse Oximetry with our measure Though Motion and Lower Profusion Masimo SET technology Pulse Oximetry. Today Masimo SET is helping caring clinicians save numerous lives and eyes and Masimo SET is the gold standard for Pulse Oximetry. In 2005 we revolutionized noninvasive monitoring again with the introduction of Rainbow SET. Masimo Rainbow SET allows clinicians and emergency professionals to measure carbon-monoxide, methemoglobin, PVI, and now hemoglobin and oxygen content continuously and noninvasively for the first time in addition to our revolutionary SpO2 and pulse rate NPI performance. Analysts have projected that or noninvasive continuous hemoglobin will be a billion dollar plus market bringing Masimo’s total potential market opportunity to between $3 billion and $4 billion a year. Rainbow is exciting beyond what it will do for us in terms of growth. With it we hope to help clinicians to save and improve the lives of even more people. I’d like to now provide you with some information regarding how we see the SpHb opportunity. We see two primary markets for SpHb; hospitals and doctors’ offices. We have completed a significant amount of SpHb market research. I’ll provide an overview of the application in each care area as well as some of the market research findings that clinically and financially supported its use. First let’s talk about the hospitals, the initial response to SpHb has been even higher then we anticipated. Overall our market research indicates that over 70% of the hospital physicians we surveyed believed that their hospital will obtain SpHb measurement capability. There are three primary markets in the hospital; the operating room, intensive care unit, and the emergency department. The operating…

(Operator Instructions) Your first question comes from the line of Matthew Dodd - Citigroup Matthew Dodd – Citigroup: From a gross margin standpoint how we should start thinking about how dilutive if at all the initial ramp and manufacturing for total hemoglobin reusable’s and for the disposable sensors might be and if they are at all dilutive how long will it take for them to be accretive to the gross margin going forward?

They will not be dilutive. Matthew Dodd – Citigroup: Would you care to characterize perhaps how accretive they would be to margins?

I don’t believe they will be accretive as well. They’re in line with the current margin for now. As efficiencies grow perhaps the margins will improve but for now they’ll be neither dilutive nor accretive. Matthew Dodd – Citigroup: If you could go into more detail between the hospital and doctors office opportunity clearly the hospital is where you are at today. The doctors’ office is a new opportunity where you don’t necessary have the touch points, what do you consider to be a realistic timeframe to go after that market opportunity and what would be the best way to pursue that?

One of the things that I should probably bring up is that in the first half of the year we have brought together a very great bunch of good new hires with [Paul Janzen] as our EVP of Marketing, Dr. Michael O’Reilly as our EVP of Medical Affairs, Steve Moran who you met on the phone today is our EVP and General Counsel and Secretary, and we are in the process of some other key hires including the VP of Physician Offices as well as our head of international sales and head of business development. So we think as far as timing is concerned, we hope to have the new VP of Physician Offices onboard with us in the next two months and our plan is to hopefully recruit a handful of sales people across the country to manage important territories and subject to clearance of our spot check device which is pending right now, we have a specific device in build for doctors’ offices for spot check of hemoglobin. We could be rolling into the market Q1 2009 with that device. Matthew Dodd – Citigroup: You did mention the OEM sales were down year to year, can you discuss what was driving that and is that more of a secular trend or maybe just a little more insight.

I will do my best to answer that question, what I may say to you may not be the true answer but it’s the best answer we know. It seems that the OEMs especially the ones selling the more expensive patient monitors have had slowdown in their business due to the tightening of the capital markets that’s affected hospital purchases of their types of instruments. So what we believe is that that trend might continue. Fortunately because the majority of our business comes from our own direct business which is not a business that requires capital equipment expenditure that’s why we’ve seen a continued rise in our business while unfortunately many of our OEMs have not done so well.

Your next question comes from the line of Bill Quirk - Piper Jaffray

Just to expand on your comments about SpHb in terms of the full launch for both the US and Europe in 2009 should we be thinking about the front part, i.e. the first quarter here?

I sure hope so.

So that’s what the plans are in other words.

Yes, assuming the rollout to select customers is successful without any major changes required, we expect to roll it out fully commercially in Q1, 2009.

So we’re not looking for any more particular approvals once we get beyond the single sensor, correct?

In the US, no, in Japan we would have to get approval and in China we still would have to have approval for hemoglobin.

Can we talk a bit about launch in Asia for hemoglobin?

Yes, of course, I just in fact returned from a long trip to Asia. Was happy to see our progress in both Japan and the rest of Asia. Japan we have a great group of people that are supporting us clinically for the most expeditious regulatory approval as well as reimbursement in Japan. These are the leadership in anesthesiology and emergency in Japan. So I’m very proud that these groups have assembled and are assisting us. Typically approval in Japan takes about 14 months. We submitted our application several months so we should get approval in 2009 but I will caution you that Rad-57 which was our first Rainbow technology that we sought approval for in Japan took two years.

So we should probably be thinking late 2009?

Yes.

Just as we think about the overall list pricing it does appear to be coming in better than expected, is $1 million to $2 million still a pretty good number to be thinking about in terms of the contribution for 2008?

I think so. I think we obviously have to finish the process validation and roll the product out as we hope in Q3, Q4 but assuming we do there seems to be pretty good demand from the customer then we should be able to meet that. But the good news is from what I understand out projections do not include today the hemoglobin revenues.

So we should be thinking about $1 to $2 million but the guidance that you just gave us does not include that?

Correct.

Your next question comes from the line of Tao Levy - Deutsche Bank

Did you mention the price of the hemoglobin or what we should be thinking of that?

I did not. I think the price, I always fear I’m talking to my competitors, but the price on the hemoglobin is ranging between $2,000 to $8,000 depending on volume. On the sensors it’s ranging between $90 to $130 depending on volume and that’s once the adhesive sensors get approved. Currently we’re not quoting prices on the adhesive sensors because we don’t have approval in the US although we are doing it in Europe. And then as far as the reusable sensors, its roughly under $1,000 and it does have some limited life as far as how many hours it can be used. So I think for now that hopefully will cover it. As far as the spot check device given the reimbursement for hemoglobin is $3.31 we’re looking at a spot check sensor that will cost roughly between $2.00 and $2.50 per test.

In terms of the hemoglobin launch what the [inaudible] from your partners perspective. Obviously you’ve incorporated SET into your OEMs and GE etc. how do we get Rainbow to that level and any updates on getting hemoglobin incorporated there?

We are making good progress with our OEMs I think it would be a fair statement to say just about every one of our OEMs want hemoglobin, want Rainbow. We’re just looking at what kind of agreements make sense to give our OEMs the Rainbow technology. So while to date we’ve signed up about over 10 companies, a few of the big ones like [Draeger] that we have announced. We have not announced any other agreements with some of the larger companies.

Do you have agreements with—or you just haven’t announced them or they’re in the works.

Well we do have some agreements with a couple of large companies that we’ve not yet announced but we don’t have any agreements at this point with the two biggest patient monitoring companies.

The right way to think about it then is its not going to be in the hospital’s hands at least into September, is that the right timeframe or maybe even a little bit thereafter, and then you have a big sort commercial or big launch at ASA in October, but the hospitals really aren’t going to be using it until October, November timeframe?

That’s sounds like the probable timeframe, yes.

Your next question comes from the line of Sara Michelmore - Cowen & Company Sara Michelmore - Cowen & Company: On the hemoglobin, it sounds like in the course of your market research you did so some cost analysis is there an intention on your part to do some more formal cost benefit analysis or clinical trials that would examine that certain setting?

Yes in fact we have commissioned such an independent study; [Cap Gemini] is the group that’s going to do it. We should hopefully be rolling that out with the product in Q3/Q4 timeframe. Sara Michelmore - Cowen & Company: Do you have the foreign exchange impact in the quarter in terms of the revenue impact there and can you talk us through how that works with the P&L, is that actually a negative gross margin dynamic for you?

The range of the numbers for the most recent quarter was we benefited to the extent of about $700,000 or when I mentioned the movement year-over-year from 25% to 27%, ballpark about 1% of that improvement was actually—we received that benefit courtesy of the foreign exchange benefit. We don’t actually have that much or that significant a foreign exchange impact on our revenue line primarily because literally half of our European revenues are actually dollar denominated. However to the other side of your question our operating expenses are in local currency and so we actually do receive the full brunt, the negative impact of the exchange rate on our operating expenses. The net impact of the two on the bottom line was almost negligible this quarter. Sara Michelmore - Cowen & Company: In terms of the set units that were shipped out this quarter at 29,000 should we think about that plus or minus being a good run rate for you going forward?

Traditionally we’ve talked about a 25,000 to 30,000 unit range as being the range that we’re very pleased with every quarter because remember those are new drivers being loaded on top of the already huge installed base of drivers. We’d like to be towards the high end of that 25,000 to 30,000 but I think 25,000 to 30,000 is the right range to be thinking about.

Your next question comes from the line of Philip Legendy - Thomas Weisel Partners

I wanted to ask if you can give the number of folks that you sampled in some of those marketing studies that you did. How many people were involved in these market research studies?

For the information that I gave you on the hospital we surveyed 200 physicians and for the doctors offices we surveyed 600 physicians.

How confident are you that you’re going to have adequate manufacturing capacity when you are ready to go into your full push with the hemoglobin parameter?

Frankly that’s what we’re working through right now because obviously we know how to make low volume prototypes so we’re not going to roll it out until we are confident that we can make it in the volumes necessary. I don’t expect we’ll be able to meet the entire order if everything came in at once but based on our modeling we believe capacity will not be an issue.

On the OEM partners what proportion of drivers today are placed by those OEM partners?

Normally I would say its 80% OEMs, 20% Masimo but I think in the past couple of quarters it’s probably been more like 70/30.

What proportion of or just the unit number, how many units out there are currently easy to upgrade to Rainbow capabilities?

The answer about 30,000 to maybe 50,000 are easy to upgrade. Another 50,000 require a hardware upgrade but its important to note that that is not what we think will be the limitation of our success with hemoglobin. We’re not seeing a differentiation between hospitals that already have our devices that have a very easy upgrade solution versus hospitals that don’t have our devices at all and would need to purchase a device along with hemoglobin.

Your next question comes from the line of Joanne Wuensch– BMO Capital Markets Joanne Wuensch– BMO Capital Markets: On R&D in the quarter R&D dipped a bit as a percentage of sales and that looks like something that may reoccur in the second quarter, could you tell us why that happened and how we might think about R&D as a percentage of sales going forward?

In the second quarter we actually had about $300,000 or so of engineering expenses that was capitalized pursuant to FAS 86, the software capitalization requirement. As soon as we received FDA approval our policy is that any future development expenses related to bringing that product to market are actually capitalized under that FAS 86. So about $300,000 essentially came out of the Q2 engineering expense and went on to our balance sheet to be amortized over the life of the product once it’s actually introduced. So that’s something that we expect to continue through this quarter but then as soon as we actually ship the product that will discontinue. So we’ll see a little bit of a pickup in that in the fourth quarter. Going forward in terms of percent of revenues we’ve traditionally hovered in the low double-digit range of engineering as a percent of revenues. If you were to go out two, three, four years we expect that will probably remain right around 10%, 11%. That’s what we’re modeling, that’s where we expect to be. That’s where we think we need to be frankly to continue to deliver the kind of technology that Masimo is bringing to the marketplace. Joanne Wuensch– BMO Capital Markets: On cash, as you begin generate and build some more cash here, how do you think about the best uses of cash sort of in the near-term and then the medium to long-term?

We of course like to have the cash for a rainy day but also one of the things that we’re going to look at, we’re going to look at bringing in technology into the company and sometimes we think those can be done with cash acquisition because typically those are not very high valuation acquisitions. We’ve done a few of those in the past couple of years and we anticipate doing some more of them.

Your next question comes from the line of Spencer Nam – Summer Street Research Spencer Nam – Summer Street Research: You outlined the opportunities in the hospital segment, the three areas that the SpHb could go into, which of those areas would be the largest opportunity or are they pretty similar in terms of the total opportunity?

The hospital market is bigger then the physicians’ offices market opportunity. Spencer Nam – Summer Street Research: What about within the hospital, the surgical versus ICU versus ED?

I think long-term ICU will be the biggest but I think initially OR will be a bigger revenue generation for us then the ICU and the ED. Spencer Nam – Summer Street Research: Just based on the descriptions of the survey, the results of the survey, it looks like there’s a pretty strong demand from the physicians and hospitals on the SpHb, what are you thoughts, and then you kind of mentioned at the end this is going to be a long-term adoption process, maybe even 10 yeas, how do you reconcile those two data points as many as 70% of the hospitals may be interested in bringing SpHb onboard, that sounds like it could be a fairly rapid adoption here.

Yes, it does and I’m basing the statement that it could take 10 plus years for market adoption as far as what it takes to get to standard of care, 70% to 80% of ORs, ICUs, EDs having SpHb, what I’ve seen in the past, it took Pulse Oximetry about 15 years to get there. It took defibrillators about 15 yeas to get there. I’m basing that statement not on the reaction of our customers but historical products that had a lot of benefit and the time it took for them to reach their maximum adoption. Spencer Nam – Summer Street Research: Based on your new guidance is there a different adoption behavior that’s going on in terms of Pulse Oximetry now versus six months ago when you provided your previous guidance, are you seeing an acceleration in the customers favoring the Masimo versus the competitors or is it just a revision bases on what your seeing as a steady growth that you had expected over the last six months.

I think I could give you two or three answers on that one. Number one we have been projecting 20% growth yet we’ve been delivering 30%. I’m not certain how long we’ll be able to deliver that. Things haven’t changed in a negative so don’t take my statement in a wrong way but we keep getting pleasantly surprised by the excitement and success of our sales force. The excitement of our customers and the success of our sales force, secondly with Masimo SET our technology was so much better then the competition that we’ve had for years, the guaranteed, that today its 500,000 over guarantee that we are better clinically then any other Pulse Oximeter technology. So certainly that level of confidence has meant that we keep winning every time clinically when there’s a true study done that compares products side by side in a scientific way, in a clinical way. But of course the add of Rainbow giving CO to customers in the emergency department area, methemoglobin throughout the hospitals and PVI, OR and now hemoglobin certainly has made Masimo a more compelling choice then ever before compared to any other Pulse Oximetry company. So we’re seeing benefits of that and I hope we’ll continue to see the benefits of that.

Your final question is a follow-up from the line of Matthew Dodd - Citigroup Matthew Dodd – Citigroup: Your guidance for gross margin is 64.5% to 65% implies a potential for a sequential decline in the margin, just wondering if you could comment on that.

Last quarter as I noted in my comments, we benefited from some unexpected favorable manufacturing variances. We believe the underlying gross margin improvement is what results in us being able to take our own internal projections up by those 70 basis points that I referred to. However taking those up will still bring us slightly below, you’re right, the current quarter and again the current quarter was benefited by some what we expect were probably unique one-time manufacturing variances. Matthew Dodd – Citigroup: If you give a little more insight as you work through getting some of the last big OEM accounts over, could you characterize maybe the conversations you had with, you’re having now with your OEM partners as far as volume commitments or what are the moving parts now as opposed to what they were the last time when you rolled out the Rainbow parameters?

Well all I can tell you is that these are confidential sensitive dialogues that I can’t get into the details of but I can tell you that some days we feel we’re very close to signing up with one or both of them and other days we feel like its never going to work out. These are just negotiations that is going to take place and we’re going to do what we think is in the best interest of Masimo. The good news is the Rainbow platform which with one sensor, now can measure eight different parameters and many people believe may be even more important then some of the parameters they’re measuring with a patient monitors today. It can stand on its own next to one of those machines. So unless we get agreements that we think are better then what we could do on our own, we’re not interested in licensing Rainbow to companies. Matthew Dodd – Citigroup: Would it be fair to say that you feel more comfortable taking a more aggressive stance in negotiations at this point compared to prior?

I wouldn’t say aggressive, we’re looking for really two scenarios, either a full partnership or vendor customer scenario where it doesn’t have some of the perks of a full partnership. We’re going to have to decide, some of our OEMs will have to decide what if any of those they choose.

This now concludes the Masimo second quarter 2008 earnings conference call.