Good day everyone and welcome to the SonoSite's third quarter 2008 results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Anne Bugge. Please go ahead.

Thank you, operator, and good afternoon. This is Anne Bugge, Vice President of Corporate Communications for SonoSite. Before we begin, SonoSite issued its news release on October 23, 2008 regarding financial results for the third quarter ended September 30, 2008. You can access the release on SonoSite's web site at www.sonosite.com under the Investors section, or call SonoSite Investor Relations at 425-951-1375 for a copy. A replay of the call will be available beginning at 4:30 PM Pacific Time today and available through midnight Pacific Time, November 13, 2008. The replay number for US participants is 719-457-0820 or toll-free 888-203-1112. The confirmation code is 4566842. Additionally, this call is being broadcast over the Internet and can be accessed via the company's web site at sonosite.com. I would like to remind you that this conference call contains certain projections or forward-looking statements regarding future events or the future financial performance of the company. Except for historical information discussed in this conference call, the statements made today contain forward-looking statements that involve substantial risks and uncertainties. Actual results could differ materially because of factors listed in the Management Discussion and Analysis section of the company's 2007 Form 10-K and in other filings and reports with the SEC. We do not undertake any duty to publicly update any forward-looking statements. Now, I would like to turn the call over to Mr. Kevin Goodwin, President and Chief Executive Officer of SonoSite.

Thanks, Anne, and good afternoon everyone. Thank you for joining us on the call today. Also with us is Mike Schuh, our CFO, who's returning from an encore [ph] performance. I'm going to review the third quarter highlights as well as make a few comments on year-to-date and cover the current financial market environment. Our momentum continued in the third quarter. Overall performance was solid in revenue, profitability, and cash flow. At 23% growth, third quarter revenue was driven by continued strong demand for our new products, the M-Turbo and the S Series, as well as international growth of 30%. The US also came in with respectable growth of 18%. This time around, foreign exchange only added 0.6% to the growth rate for the third quarter. We achieved operating income of $10 million for the quarter which was a record. We reported net income of $4.7 million for the quarter or $0.27 per share. Speaking for a moment on year-to-date. For nine months, worldwide revenue is up 24% to $173 million. Foreign currency added 2.7% to that growth rate. Year-to-date net income grew to $8.5 million or $0.49 per share. Covering a few balance sheet items which are being compared with December 31, '07, cash and investments were $330.5 million as compared with $309.8 million, that's at the end of Q3. Our days sales outstanding were 83 days compared to 85, and inventory turns were level at 2.4. Cash flow from operations for the nine months was $18 million compared with $13.5 million in '07 reflecting improved operating results. Now for some commentary on the key drivers of our business. For the international group, this was the eighth consecutive quarter with growth rates of better than 20%. In the US, they grew 18% which we thought was solid overall. We…

Thank you. (Operator instructions) And we’ll go to Alan Robinson, Royal Bank of Canada.

Hello.

Hello, Alan.

Hi. You’ve mentioned delays in sales trends at US hospitals. Can you comment or expand on any similar delays with European sales?

I haven’t seen those at all, Alan. Our book of business in Europe is on track as of today. So we haven’t had that happen to us at all.

And back on the US sales picture, are you seeing significant differences between sales to the hospital channel and sales to the physician’s office channel?

Well, the delays that we’ve seen are almost all on the hospital side; let me say it that way, and the trend line in the office is good, but certainly there is uncertainty out there. So we haven’t quantified any delays in private office buying but certainly on the hospital side.

Have you got any sort of color with respect to some of the causes for these delays, whether they are just a general conservatism on the part of office administrators or whether the difficulty in obtaining financing is coming into play?

No, it is mostly temporary freezes. So a lot of the items that are on the shelf so to speak, are 30, 45, 60-day freezes; some are longer; a few are indefinite. The majority are short-term freezes, so it appears that a lot of hospitals are just taking a little pause here. I can’t tell you what’s going to happen to all those but it does not seem related to any shortage of getting financing but rather just a more conservative posture which I think is understandable.

Okay. And then just finally, you’ve got my attention Kevin in your prepared remarks where I think you observed that interesting point-of-care imaging is on the rise perhaps at the expense of more expensive ultrasound system, did I get that right? Could you perhaps expand on that?

We’re seeing more and more clinicians start to vocalize the benefits of high-resolution point-of-care ultrasound is one example and where they don’t need in certain cases, when they’re managing patients to order X-rays and CTs and such as much as they have in the past because they were able to get the answers they want. That’s not a commentary on substitution one way or the other what’s clinically appropriate, but I definitely see us heading into an era where people are starting to look more carefully at whether they can get the answers they need clinically and immediately with point-of care ultrasound and avoid these confirmatory, sometimes perhaps unnecessary other tests. So I find that encouraging to hear it as a dialog point coming out of the recent trade shows.

All right. Thank you. I’ll get back in line.

And we’ll go next to Raj Denhoy, Thomas Weisel Partners.

Great, thanks. What if I could ask a little about the foreign currency, you mentioned you're taking a bit more of a conservative tax upon that as well. Can you give us some sense of how much of your sales are denominated in foreign currencies versus US dollars and then also how much of that impacts the bottom line?

Yes, we’ll have Mike Schuh take that. Mike?

Yes. In terms of our view, we’re sort of just taking the rate as they stand today. So I think that’s a conservative approach. And then in terms of the impact, I would estimate that the impact as it stands today, is about 4% in terms of the impact to revenue growth rate in the fourth quarter.

Okay, so you’re saying that foreign currency will have 4 negative points of growth in your fourth quarter.

Yes, if the rates stand as they are today.

Okay. And then the question about how hedged you are either naturally or otherwise. So that how much of impact will that currency have on the bottom line?

Well, in terms of our inter-company balances, we’re fully hedged. So, on the other income line that wouldn't impact us this quarter. Where it impacts us is just whatever the revenue growth rate reduction is and how that flows through the gross margins, and that’s why when we forecast 70% gross margin for the year, that may imply a slightly reduced margin in the fourth quarter taken into account the reduction in the currency rates.

Okay. And then can I ask one just about ’09? You’re taking a pretty conservative tack [ph] here. It sounds like on the fourth quarter and I think you mentioned that some of these freezes and delays you’re seeing may be temporary in nature. Have you given any thought to what you think ’09 might look like at this point?

Well, we have some very detailed plans already done for ’09. Certainly the current situation to us feels like a temporary problem. Whether we've hit the bottom of it or not is unknown to us, but we’re in a position where for ’09 we have a number of things working in our favor. You’ll see some new product innovations that’ll be very appropriate for the times we’re in and continued strength in the other business model in terms of things we do. So we’re bracing for a tougher year but yet we’ve done a lot of planning and we’re going to just power through and I think you’ll find us to be in very good shape when it’s all said and done.

Okay and just one last one. The one piece of guidance you have put out there for ’09 is that you think you can get to 15% operating margins. Do you still think that’s doable next year?

Well, we’re still planning on going for it, if that’s your question. We’re not abandoning that goal. Obviously, the number one issue for us will be to get a good fix on what we think the revenue line’s going to do, but I can tell you that the objective for next year is to try to land the business at about 15% op margins. Based on what that revenue turns out to be, that’ll be a little harder because of the fact that the year has more uncertainty, but that’s still the goal.

Okay. Thank you.

And we’ll go next to Charley Jones, Barrington Research.

Good afternoon. Welcome back, Mike. Thank you, Kevin. Did you guys have these delays that you had prior to or subsequent to your issuing of revised guidance of 19% to 20%? I guess my question really is, did you have all this information that you talked about today when you gave your guidance or are you feeling differently than you even did last week due to some delays that have occurred?

No, we didn’t. We’ve been following the trend weekly in October and we decided to widen that guidance up this week based on the trend. So what we thought we were going to book in October were coming in a little late. It’s not a catastrophe but nonetheless it’s lightened and the numbers get bigger in November, December, so we’re trying to take a conservative approach. But we always – when know something and feel it's material, we’ll bring it out right away but not until we’re firm with it.

And also Charley I would just add that certainly the foreign currency environment changed radically since that time, not that that’s going to stay that way but we certainly saw a deterioration that I wasn’t expecting.

Thank you, Mike. Kevin, given your buyback of converts, I think it’s fair to say – is it fair to say that an acquisition is off the table for the medium term?

We’re still open-minded and thinking strategically. It’s fair to say that in the short, medium-term, there’s nothing that we’re actively working on, but we’re open-minded. That’s probably a good assumption on your part.

All right, thank you. And then it was my understanding that your convertible notes were not very easily retireable. Obviously, today’s announcement goes in the face of that thought. Can you tell us a little bit about – does somebody have to come to you with this or is this something that you have to negotiate each time or is there a fairly simple math you get to and if you can’t get people to come back and allow you to retire these convertible notes, would you be open to a buyback to prevent the dilution?

Well, I think Mike should probably cover the mechanics of this. I would say that the move was made opportunistically given the decision to discontinue discussions on an acquisition and the obvious excess cash we had. Mike can give you more color on the mechanics of all this.

Charley, on the mechanics, the notes are openly traded in the market. So you can go into the market and buy those notes. The issue has always been at what price and with the dislocation in the market, it made that attractive to go into the open market and make some purchases.

All right, thanks. That’s very helpful. And then I guess finally, I have been modeling the 15% in operating margin and I guess I’ve got my sales assumptions in the low double-digits, Kevin, and I’m just wondering can you get there in the low double-digits or do you need to be more in the mid-double digits or high-double digits of revenue growth to get to that 15%? I’m just kind of curious what you were thinking when you put out that goal for revenue estimates. When I was looking at this last year, just to be a little bit verbose, I was looking at a new product cycle and that ending kind of in ’09, which would bring down revenue a little bit but I’m curious what your thoughts were about revenue growth when you put out that 15% EBIT margin goal?

Well, you’ll see new products from SonoSite in 2009 and 2010, just like you saw them in 2008 and 2007. Remember as we exited ’06 and entered ’07, we amped up our R&D spending a lot. The idea was to really continue to segment the market, drive more innovation, and drive more products to market for different customers to drive growth. So that will continue. We are not slowing that down at all. It’s obviously a period of uncertainty given what’s happening in world financial markets and in product markets and we’re just subjected to that like everyone else. So I’d say that the mindset we have remains one where we’re going to try to drive 15% op margin next year out of whatever revenue we get. Certainly there are some limits to that and certainly we’ll continue to invest in our business for the long-term. The fundamentals look great to us and we only have really upward to go from here. So I think it’s important to understand, we’re still going to go after 15%. We’re not imagining much expansion on our SG&A but we’ll give you some commentary on that in February or actually earlier than that in the January timeframe. So, yes, I think it’s more of a mindset. Management is not shying off or shying away from that goal and we’ll continue to report things as things develop. But generally, other than this economic situation which are going to be tough for everyone, we feel good.

Great. I am going to throw in one last one, sorry. That’s very helpful, Kevin. I guess lastly, do you feel that there could actually be a trade-down from these more expensive cards [ph] to hand carried, you’re starting to get the ear of maybe even radiology, cardiology, labs whatever, that might have bought a card in the past, and you’re maybe starting to see some cannibalization here?

If you take over three to five years, yes for sure. That time is about to arrive. One year forward, hard to predict that. But I’d say that in general, as the performance of our devices improves, the obvious reliability, durability advantages show up in operating costs, we have an opportunity to expand our footprint. Our credibility is rising. So I’d say over three to five years, definitely, and that to us just opens up a greater footprint opportunity.

Thanks again.

(Operator instructions) We got Charles Chon, Goldman Sachs.

Hi everybody. Thanks for taking the question. So, just going through the guidance, as we think about the implied revenue guidance for the fourth quarter, we’re talking about pretty wide range here, if I am not mistaken, of 6% growth to as high as 12% growth. Could you help us understand a little bit more about what assumptions have been baked in to the low end and the high end of this guidance range?

Sure. Charlie, the high end is the forecast that we have entered the quarter with and which itself was I think relatively conservative but still strong. The low end, we have tried to quantify to the best our ability what we think the bottom could be if current trends held and currencies were as adverse as Mike mentioned they have been assumed to be and so we’re trying to give you, the investor or the analyst, some boundaries. Obviously we’re not perfect, but we did a lot work on that. And our point of view is just to try to give you a sense of what we think the boundaries are, to the best of our ability and to bake in the variables that matter. Let me just give you a quick summary. The international channel which is doing great, they could be adversely affected by translation as well as perhaps some order delays. So far, as of now, they are right on track for their number in our chug along well [ph]. So there is no negative or positive components to talk about there; they’re on track. US enterprise is expected to be on or above its forecast; it is tracking that way as of today. And then US direct, which is our hospital office channel is tracking with a negative variance to their going-in forecast, presently ranging between 10% and 15% of the orders forecasted are in a delay category. If all those are delayed beyond 90 days, we have to see what happens, so that’s the way we started and we thought we should give you some decent boundaries and hopefully and most likely, we’re right.

That’s extremely helpful. Thanks, Kevin. In terms of geographic mix, maybe could you give us a little better understanding of what the low ends could look like. Is it possible that we can actually have a higher international mix with that low-end scenario?

Well, let’s see here. Let’s just take a look at the numbers. Mike, why don’t you handle that question? You’ve got that right in front of you.

Yeah, I still would expect that the US will exceed international in terms of the mix.

Okay.

In either scenario.

Great. That’s fantastic. And so – then in terms of gross margins, we should actually see the seasonal uplift from the – at least the stronger contribution coming from the US, correct?

Yes. They’ll come by as the bigger portion of the mix, so yes.

Excellent. And just to better understand, what sort of FX impact should we expect on operating margins for the quarter, if you’re thinking of 4% negative headwind on the top line?

Basically that probably just – we counterbalance the reduction on the margin side with the decrease in expenses. It’s not perfect but probably 0.5% or so.

Okay. Great. Thanks. And then just to actually segue into expenses, the company has done a tremendous job of controlling expenses throughout the year and this is especially the case in the third quarter where we saw SG&A only grow 1% year-over-year. So, aside from the typical seasonality that we would see throughout the year for expenses, can you frame for us how the base level of spend should trend going forward here?

That’s a good question, Charlie. Let me jump on that. We’ve been tracking that very carefully and obviously the company continues to make investments, but we’re also making offsets as the year goes on. So at this stage, separating out any decisions we make to do anything more aggressively which presently we have nothing to talk about, our run rates look pretty stable. There’s the seasonality factor which you mentioned, but other than that there’s no upward trend; there’s been some offsets and departures in terms of headcount. There’s been some reductions throughout this year in terms of what I call non-essential spending that was discretionary. And then there’s been ads here and there. So, we’ll give you a greater clarity in early January, but I don’t see a big uptick in the run rate in SG&A. We’ll still have an eye on investing in our business, let me say, so you know we’ll do that. But nonetheless, at this stage, I think the trend line in SG&A looks right about where it’s going to be. And then I’m talking about heading forward now. R&D, we will continue to be churning out products, so we might see a little bit of an uptick in R&D, but certainly not double-digit growth by any stretch. And we’ll be very careful in trying to land the plane on the 15% line next year to the best of our ability.

So going forward, could there be opportunities for continued expense reductions and if so, where can we see some of those reductions come?

Well, I think you’re going to see a couple of things happening simultaneously. Things that we’ve done in the past, cost structures including people that have not been replaced will be taken to the bank and saved. We’ll see some benefit from hopefully reduced litigation spending, but that’s not always guaranteed. And then at the same time, we’ll be putting some of those dollars against opportunity. So if we can hold our SG&A level or relativity level, we certainly feel we’re going to get some growth out of this business next year, and that the gross margins are protectable, and we ought to be able to create value. But there's spending that we’ve been able to take out this year that won’t repeat and we continue to be very focused on connecting the dots in terms of how we create demand and convert to revenue and if we can get more efficient at that, you’ll see some benefits. So people are focused on it, I’ll tell you that much.

Excellent. Thank you very much.

And we’ll go next to Alan Robinson, Royal Bank of Canada

Mike, I’ve got a quick follow-up question regarding the convertible; I just wanted to get this straight. So you’re going to report a pre-tax of $11 million in the current fourth quarter? And then there was mention of $400,000, so is the $400,000 just the cash upfront fee you will get and the $11 million is the accounting difference?

Yes, the $11 million is the accounting gain and the $400,000 is a balance sheet item, just to unwind the call spread that we entered into.

Right. Got you. And then would you care to have a stab at the potential impact of this proposed accounting change for interest on convertible debt? Clearly, your balance has gone down, but have you done a scenario analysis whereby you've figured what the EPS impact might be on charging higher interest costs next year?

Well, I would answer that this way. First of all, yes, we’ll be impacted by the accounting change. It is a non-cash item and it won't affect operating income as it will be interest expense on the other income line. So operating income will stay the same. Also, prior periods would be re-stated, so that comparability will be achieved from year-over-year. It won’t be like the change when the stock comp was implemented and (inaudible) with and without. So there’ll be comparability. And as far as the amount, right now – so just quickly kind of running through the numbers with the purchases that we’ve done, we are probably somewhere in the neighborhood of $5.5 million to maybe $6 million in terms of additional interest expense that we would need to record.

Annual [ph] additional interest expense?

Yes.

All right. Okay. Just going back slightly, the $11 million gain that you expect, what’s the tax treatment about it? Is it taxed at your regular rate?

Yes.

Okay. That’s all. Thank you.

Okay.

(Operator instructions) It does appear there are no further questions at this time, so I'll turn the call back to management for any additional or closing remarks.

Okay. Well, thank you everyone. I’d like to remind all of you that even though the macro and market environment may be difficult to adhere now, we feel that’s really going to be a temporary problem. Our value proposition and our financial position are as strong as ever. Product line and organization is performing as good as it ever has and we think we’re in a very good position to weather any challenges that are thrown at us and candidly, despite all this, we’re pretty optimistic that we'll end up being the solution to healthcare’s problems which we feel certain will become more and more important in the next five years. So thanks for your time today and we will be in touch.

And that does conclude today’s conference. Thank you for your participation. You may disconnect at this time.