Good day, ladies and gentlemen, and welcome to the third quarter 2008 Stratasys earnings conference call. My name is [Dan] and I'll be your coordinator for today. (Operator Instructions) I would now like to turn the call over to your host for today's call, Shane Glenn, Director of Investor Relations at Stratasys. Please proceed, sir.

Good morning and welcome to the Stratasys conference call to discuss third quarter financial results. Representing Stratasys executive management on the conference call today is the Chairman and CEO of Stratasys, Scott Crump, and CFO Bob Gallagher. A quick reminder that today's conference call is being transmitted over the web and can be accessed through our Investor section of our website at www.Stratasys.com. We'll begin with the safe harbor statement: All statements herein that are not historical facts or that include such words as expects, anticipates, projects, estimates, vision, planning, believes or similar words are forward-looking statements that we deem to be covered by and to qualify for the safe harbor protection covered by the Private Securities Litigation Reform Act of 1995. Our belief that we have the largest part building service is based on the total number of dedicated machines. Except for historical information herein, the matters discussed in this conference call are forward-looking statements that involve risks and uncertainties. These include the continued market acceptance and growth of our Dimension 3D printer line, FDM 200mc, 360mc, 400mc, 900mc, Maxim, Titan, and Vantage product lines, the size of the 3D printer market, our ability to penetrate the 3D printing market, our ability to maintain the growth rates and positive momentum experienced in this and preceding quarters, our ability to introduce and market new material such as ABSplus and ABS-M30 and the market acceptance of these and other materials, the impact of competitive products and pricing, the timely development and acceptance of new products and materials, the success of our recent R&D initiative to expand the direct digital manufacturing capabilities of our core FDM technology, the success of our RedEye RPM and other paid parts services, and the other risks detailed from time to time in our SEC reports, including our quarterly reports filed on Form 10-Q that we filed throughout 2008 and our annual report on Form 10-K filed for the year ended December 31, 2007. The information discussed within this conference call also includes financial results and forward-looking financial guidance in accordance with U.S. generally accepted accounting principals or GAAP. In addition, non-GAAP financial guidance is included that excludes certain expenses. The non-GAAP financial measures are provided in an effort to give information that investors may deem relevant to the company's operations and comparative performance, primarily the identification and exclusion of expenses associated with share-based compensation required under SFAS 123R. I'd like to confirm today our fourth quarter earnings release and conference call. Stratasys' fourth quarter results will be released on or before the morning of February 18, 2009, followed by a conference call on the date of the release. We will release the conference call time and details about two weeks prior to that date. Now I'd like to turn the call over to our CEO, Scott Crump.

Good morning and thank you for joining us. We are pleased to announce our record third quarter financial results. We are especially pleased given the current economic environment. Revenue grew by 20% for our proprietary products and services in the third quarter. Operating profit increased by 30% over last year, and this was the fastest growing in operating profit since the first quarter of 2007. Our high-end FDM system business grew by an impressive 68% during the quarter, driven by new products and the positive impact of our direct digital manufacturing initiatives. This growth was helped by the first commercial shipments of our new FDM 900 manufacturing center, our largest and fastest system every produced. Our consumables and paid parts businesses also contributed to our growth during the quarter, increasing by 20% and 22%, respectively. In September we announced that Jeff DeGrange joined Stratasys as Vice President of New Business Creation for our direct digital manufacturing initiatives. Jeff was a Senior Technology Manager with The Boeing Company and has more than 20 years experience in advanced maintaining, so we're excited to have him join our team. Okay, I'll return later to discuss some of our strategic initiatives but first I'd like to turn the call over to our CFO, Bob Gallagher, who will further highlight our third quarter results. Here's Bob.

Thanks, Scott. Prior to discussing the details of the financial results we would like to outline the relative impact of discontinuing our product distribution agreements in 2007. As we have previously outlined, we have discontinued the distribution of Eden and Arcam products, which created certain issues when conducting year-over-year comparative analysis of our financials. In the third quarter of 2008 we recognized no revenue related to those discontinuing distribution products compared to approximately $1 million in the same period last year. Total revenue increased by 16% to $30.6 million for the third quarter of 2008 compared to $26.5 million for the same period last year. Revenue from proprietary products and services, which excludes all distributive product-related revenue, increased by 20% in the third quarter over the same period last year. The company shipped 497 systems during the third quarter versus 521 last year. The decline in units resulted from lower 3D printer unit volume compared to last year. As expected, the issues we identified last quarter within 3D printing continued into the third quarter; 3D printer sales have been impacted by a more recent focus on higher-priced printers and a weaker manufacturing environment. Despite the weaker economic conditions, our three highest-priced 3D printers - the 1200 SST, Elite, and 768 SST - represented approximately 70% of our 3D printer unit volume during the third quarter. Third quarter product revenue as reported increased by 16% to $24 million when compared to $20.7 million for the same period last year. We recognized no distributive product revenue during the third quarter compared to $784,000 in revenue we recognized during the same period last year. Excluding this revenue, proprietary product revenue increased by 20% over the same period last year. Two main factors drove our proprietary product revenue in the third quarter. First, proprietary…

Thank you, Bob. Stratasys is providing the following information regarding its financial guidance for the fiscal year ending December 31, 2008: Maintaining revenue guidance of $125 million to $130 million. Maintaining our non-GAAP earnings guidance, which excludes stock-based compensation expense required under SFAS 123R, of $0.79 to $0.84 per share. Maintaining GAAP earnings guidance of $0.75 to $0.80 per share. Share-based compensation expense required under SFAS 123R is estimated at $0.04 to $0.05 per share. In conducting your year-over-year analysis for the fourth quarter, we would like to remind you of the approximately $1.4 million in distributive product revenue recognized in the fourth quarter last year relating to products that we now no longer distribute. In addition, the fourth quarter of 2007 includes approximately $700,000 in previously unrecognized tax credits. This amounted to approximately $0.03 per share in fourth quarter earnings in 2007. Our earnings growth projections remain strong, but we are cautious given the current economic environment. While we're experiencing some deferred orders, our guidance incorporates our current growth in product mix expectations coupled with the inherent limitations created by the current dynamic economic conditions. While the economy has clearly weakened from the second quarter, our 900mc orders remain strong and our high-end systems are reaching new markets. Our paid parts business has continued its positive momentum. Consumable revenue is tracking our growing installed base and maintenance is relatively predictable over the next three months. We would be foolish not to be concerned about our system sales in the fourth quarter, but not to the extent to adjust our guidance given what we know today. Appropriate reconciliations between the non-GAAP and GAAP financial measures are provided in the table at the end of the press release. We are providing the non-GAAP financial estimates for those analysts and shareholders that want to use that information in evaluating our performance. Now I'd like to turn the call back to Scott Crump.

Thank you, Shane. Once again, our quarterly results reflect our ongoing success with our new high-end precision systems, the FDM 200, 360, 400, and 900 manufacturing centers. Following the introduction of the 900mc last December we began commercial production and shipment of the systems during the third quarter. The performance of the 900mc in the field has definitely exceeded our expectations. In addition, orders for the 900mc remain strong and this product is on track for exceeding our original 2008 sales estimate. Growth in the high-end business continues to defy conventional expectations given the current economic environment. This is a testament to the successful new product and market strategy our team initiated this last year. Our strategy, which targets new applications for direct digital manufacturing or DDM is driving incremental sales for the high-end systems. Our initial success within DDM has come from a targeted application in the manufacturing industry for fabrication and assembly tools. Fabrication and assembly tools are unique jigs and fixtures that are not incorporated directly into a finished product but are critical to a specific manufacturing process. These tools enable the efficient manufacture of a product and are essential for almost any size manufacturing operation. In fact, we use them extensively in our own manufacturing processes. These tools are ideal for DDM because they are often produced in single or limited quantity and maintain complex designs which need to change easily and repeatably. BMW is a great example of a DDM application. They have used our technology as a standard practice in product development for a number of years for prototyping their designs; however, BMW has more recently expanded the use of our technology beyond prototyping, incorporating FDM into their manufacturing processes. With every new car model, their department of jigs and fixtures will use FDM…

(Operator Instructions) Your first question comes from Andrew Nowinski - Piper Jaffray.

Can I get some color on the gross margin side? It looks like gross margin was fairly in line with your historical kind of Q3 seasonality, but given that high-end sales, consumables and paid parts were all off and 3D printers were flat, I guess I would have expected to see it a little bit higher than it was. Can you just maybe give a little more color on that?

We have, I think - probably a misnomer out there is we have a wide variation in our product gross margins, not only on our 3D printers because essentially the products that we sell - 3D printers from $18,900 to $34,900 - but on our high-end systems we have a price range from probably about $50,000 up to $400,000. There's just as much variation in our gross margins on the high end systems as there are in 3D printers. So it's not necessarily a correlation that you can make from high-end to 3D printers. So obviously the quarter data's influenced because it's a high quarter for education for us, as typically is the case in the third quarter, but we're happy to show margin improvement year-over-year.

On the high-end side, high-end were up 68% year-over-year. How much of that was driven by your shipments to that Fortune 100 customer?

Well, the high end is a global market - it's a global opportunity - so I think the answer is it basically went globally.

We [don't] break out the percentage as it relates to a specific customer in any quarter.

Your next question comes from Eric Martinuzzi - Craig-Hallum Capital.

The high-end systems, I assume most of this is coming from the 900. What's the runway there? We've just seen our first quarter of real commercial shipments of these. Is this a four-quarter phenomenon, a two-quarter phenomenon, 18 months? What's your sense?

We have a strong sales activity that definitely carried over into the fourth quarter. Our commercial launch, as I mentioned, was very successful. The customers really love it. And the product's on track to exceed our original 2008 sales estimates. Since it is a new product, both from a launch as well as from a commercial standpoint it's been out, well, since the beginning of the third quarter - it's fairly difficult to estimate or forecast for 2009. But from what I can see so far, it's definitely a homerun.

But just from a sense like a backlog sense, how does it compare to 90 days ago?

What we're seeing from a - we had good strong orders at the beginning of the fourth quarter for the 900, so the momentum that we had in the third quarter has continued into the fourth quarter for us.

Eric, as you know, we still have backend-loaded quarters and it's still going to depend on - we'll have to see what kind of carry through we have through the rest of the quarter.

And then just one more on the Dimension. When I see the zero percent comp for that product  and I just took a look at last year's press release, the September '07 - it was a 50% growth number in the Dimension a year ago. Now we're flat; a dramatic drawdown. I know there's a couple of reasons for that, but I'm wondering about market maturity. What percentage of the Dimensions are going to new customers?

Because we're going through an indirect channel through the reseller channel, we don't have statistics of what's new customers versus existing customers. We only have anecdotal evidence from the channel out there, where we're finding that people are adapting to a second system much more readily than people are going for new technology in this economic environment.

We continue to believe - and our observations support it - that the opportunity is based on a price elastic business model and is still in the early stages of the early majority being very underpenetrated, still with a huge opportunity.

Your next question comes from Ryan Thibodeaux - Maple Leaf Partners.

Bob, just one housekeeping item first. Can you say what the operating cash flow was, either for the first nine months or for the quarter?

For the nine months it was approximately $5.8 million and I think through the first six months of the year I think we were actually negative operating cash flow about $5.2, so it was a very positive quarter, close to $11 million in operating cash flow for the quarter.

And then back on the gross margin question, could you kind of, if possible, just give a little bit more granularity into how we should look at the gross margin bands within Dimension and within the high-end systems? Because it seems like if you're having a lot of growth from the initial shipments of the 900 that your gross margins may be better within the high-end systems. Is that not correct?

That's a reasonable assumption. There's a couple of factors that are influencing the year-over-year comparative analysis, so let me try to highlight a little bit of that. Previously our software amortization previously had been included in G&A and we've now moved that up to cost of sales, product cost of sales. And it was approximately $350,000 in Q3 of 2008. In addition, we've reallocated some of our costs of our refurbishment department between products and services between the two years and that has a $280,000 impact between the two groups in Q3 of this year. So there's certain factors there that are influencing the year-over-year comparative analysis. We don't think those reclassifications were material so that we had to go back and restate the previous year, but they're significant when doing the type of analysis that you are, so let me just repeat that - the software amortization was approximately $350,000, which came out of G&A, and the cost of the refurbishment, which is a switch between products and services, was approximately $280,000.

Where was the refurb before?

In services, cost of sales services. So it doesn't affect the overall gross margin but it does affect the comparison between products and services.

And then along the same line of thinking, is there any tendency on the Dimension towards the lower-priced offerings now that we're kind of - given the comments that you said earlier on the economy and how it's affecting Dimensions sales?

No, we've not seen that. Obviously we did, as Bob mentioned, see a great Q3 to education, which tends to buy on the low price range, but that's not really your question. So no, we have not seen that.

About 70% of the market is still going for our three highest-priced printers currently.

And then as it relates to OPEX, given some of the cost reductions is the run rate that we were at in Q3, is that a reasonable run rate for Q4?

We don't comment on specific line items as it relates - we give our overall guidance and we try to stay outside the box in between that other than to say, you know, some of our new product initiatives, both on - continuing to move down the price elasticity curve as well as new direct digital manufacturing operation opportunities, both of those will require continued investment. So you'll see us continuing to invest in our R&D area as we move forward.

Your next question comes from Graham [Rain] – Bares Capital.

Scott, you stated that you believe the 3D printers will see some expansion in 2009 based on some of the initiatives you have in place. Can you provide some more detail on what those might be? Is that new products, is it a pricing strategy, or something else?

Well, we don't comment on new products other than we continue to have them. We are investing about $10 million overall in this activity for new products on an annual basis, but as far as specific new products, we're really not, for competitive reasons, commenting.

And have you seen any change in the competitive environment in that 3D printer market from Z Corp. or 3D Systems?

Not with Z Corp. In terms of V-Flash, no, that potential product is pretty much invisible worldwide; however, we do continue to competitively monitor it. So I'd say no, there's no real, on a competitive basis, on the 3D printing side; we've not seen any competitive changes.

Bob, the $1.9 million broken out and available for sale securities on the balance sheet, what does that relate to? Is that the auction rate securities or is that something different?

No, that's - auction rate securities is exactly what it is. We recognized approximately - we had a third party outside analysis of our Jefferson County auction rate security again this quarter and we took an additional impairment of approximately $50,000, so we have a total impairment that we recognized on a long-term basis on that security of $440,000 year-to-date.

So there's no other - in that long-term investments line, there's no other auction rate securities?

It's only that one. We do have one other auction rate security with Lorraine County and that continues to be AA rated with an AA-rated insurance company behind it, too, with really strong financial statements from the issuing entity.

Your next question comes from [Unidentified Analyst] - Dougherty & Company LLC.

I wonder if you could talk about that 3D printer revenue accelerating next year. You made the comment there. Just to go back to that, I wonder if that is having to do with the fact that you're selling more of the expensive products there, so you're going to get an ASP lift or if you're actually going to be thinking about growing units next year.

Well, that's a good question. Again, we're not commenting in terms of new product releases. One thing I can say as an overall - we do believe that the 3D printing opportunity is in its early stages still. The more we are in it, the more we look at it, the more we talk to some of the other CADoriented companies in the business that are now focusing more on 3D. Like, for instance, Autodesk, there's more focus and there's certainly significantly more installed base of the threedimensional mechanical CAD. But bottom line, it's not just about price. You need to consider other full-product offerings. We need to look at other, for instance, the other key three criteria - that of the product offering, the distribution and the service. But our mid-term and long-term strategy is to continue to expand the price range of the 3D printers.

And then a question just on international sales. I noticed that the revenue growth rate was pretty much the same as Q2 and a lot of the companies who are selling equipment right now are seeing a big deceleration there in Q3. How was it able to hold up for you guys and do you expect it to hold up?

Was that related to capital equipment?

Yes.

Yes, obviously - and you mentioned the third quarter. We saw strong growth because of some of the new product offerings, and we're going into some additional markets that we haven't been in in the past in the high-end systems with the direct digital manufacturing, so that's given us some good strong growth. What we're trying to do is reduce development costs, shorten our product release cycles, and have some alternatives through additional manufacturing applications. So it's an uncertain environment out there but, you know, we have some positive momentum going for us currently.

Maybe I can tag onto that, Bob. The economy is impacting, for instance, on the high end, our traditional rapid prototyping business, which remains as a slower grower. We're making up the difference and getting the significant growth from these new applications of DDM, which are huge.

Can you guys say with specificity that that backlog in those high-end systems is up quartertoquarter or flat or down?

We don't comment on backlog quarter-to-quarter. We only give our backlog number yeartoyear. We just wanted to highlight that there was continued positive momentum in the 900mcs at the beginning of Q4 here.

Your next question comes from Clinton Morrison - Feltl & Company.

Consumable consumption, any comment with regards to the tough economy, consumables aren't cheap. Have you seen any change in the rate at which that's bought or anticipate any?

Quarter-over-quarter we saw 20% growth in our consumables, Clint.

I'm thinking more kind of on the per user basis or people tending to buy less because the economy is tough and do you think that's happening?

Well, you know, time will tell, but we're not anticipating that. What we've seen and studied over the years, with a decline in the economy is that if it's a soft decline in the economy - and again, this is business-to-business type transactions - that companies actually invest more in this new product or product extension, product line extension business, which actually may increase the actual usage. Now, you know, if it's a serious economic downturn, then you probably would see less consumable usage. But, you know, from what I've been reading, the issues that are affecting the tightening of the credit may or may not affect business. I mean, the actual business - loans to business they're still flowing. Where they're not flowing is into the real estate and in that area. And we're in the B2B business. We don't do transactions with B2C or anything to do with the financial industry or the real estate industry. So we're kind of a B2B company.

And with the introduction in the quarter of the 900mc, is there a margin pickup as that product matures or do you pretty much hit stride the second you start making and shipping?

We're always looking for ways to cost reduce our products. That's something that's a normal part of our - so we'll continue to look at it as we move forward, but it's a good margin product for us now.

Bob, do have sort of an actual share count at the end of the quarter?

I don't have it in front of me, but if you look at the face of the financial statements on the balance sheet, encapsulated on the far left-hand side would be the share count. In fact, they just put it in front of me. It's 25 million 906.

Your next question comes from Steve Denault - Northland Securities.

You make reference to new markets - and this is in regards to the high end - and I think you're suggesting new applications as opposed to geographies. Is there anything in terms of product attributes and the 900mc that, whether it be speed or envelope size or anything of that nature, that makes it more friendly or conducive to a direct digital manufacturer?

Yes. Hold up for just a moment. We wanted to clarify the previous question for a minute.

Yes. Clint had asked a question, share count, and I said 25 million 906, and that excluded our treasury shares, which is 5 million 687. So I wanted to make sure people didn't go out with the wrong share count number. So it's 25.9 million less 5.7, essentially. Sorry. Now if you could repeat the question so people keep on track? Sorry about that.

You talked about new markets for the high-end systems, and I'm assuming you're referencing new applications. Is that correct?

Yes.

Is there anything specifically related to the FDM 900mc that makes it more conducive to these new markets or direct digital manufacturing or anything of that nature? What's driving it?

Yes, definitely. The 900mc was designed specifically for DDM, so like, for instance, in this area of fixtures and assembly tools where you need higher accuracy, higher speed, a little bit stronger materials, that product does that. It's a much higher accuracy system. It has a higher speed. And also it's large. Some of these fixtures have to be large to hold, let's say, a large part of a large assembly while it's being produced. So we can do parts now, for instance, on the diagonal up to over a foot in size, and prior to that in the industry you really didn't see parts that large. So yes, it's very targeted towards the DDM area. And as we make improvements, we'll further expand not just sort of the low-hanging fruit but other opportunities globally.

And is it safe to assume that the strength within the high end and the strength with international are interrelated in the quarter itself?

You know, our strength internationally comes from both sides of our business, both from our high end as well as our 3D. We saw some strength there in the 3D printers relative to the U.S. market.

Have there been any programs put in place, either domestically and/or international, that, as a result of maybe recent bailout packages that have called for the accelerated depreciation of capital goods in any way?

Yes, we haven't really seen anything that we would put to the effects of that to date. That has a possibility for some late Q4 activity, but we haven't seen any of that yet.

Oh, so there are programs in place internationally?

Not so much internationally, but I guess I was speaking more to the domestic market.

But that's been around for the better part of six months, right?

Right. But there are some questions of whether that would carry over into the next year or not, which may actually put some acceleration there for certain people making decisions who are on the fence.

And the final question is, the strength within paid parts, you make reference to changes you've made within sales and marketing activities. Can you provide additional color on that?

Well, just basically being more efficient, more targeted towards the telesales activities with strong sales management. And we now have a full-time leader for paid parts whereas in prior quarters we were operating without that.

Steve, the other thing is, you know, as Scott mentioned in his comments, this architectural application. I mean, don't get me wrong, it's still a very, very small part of the paid parts business, but we're seeing a lot of interest or some increased interest in using the service for architectural models, so we're excited about that. And, as Scott mentioned, that's a really big market that we could eventually go after not only with the paid parts business but with our system business as well.

And we're seeing more and more what looks like DDM type of business. We don't currently have a metric to measure the difference between RP and the DDM, but we're working on that. But there's a very large upside opportunity for RedEye within this DDM market as well.

The reference to architectural models, what would your service or your [additive] fabrication tend to ultimately end up replacing in terms of how those models were manufactured in the past?

Well, the worldwide application, worldwide industry today actually takes a three-dimensional need and provides through a two-dimensional CAD, you know, a two-dimensional computer-aided design blueprint, and then the architect painstakingly takes each one of the pieces - usually with foam core - and then builds a model. This is all manual. So you've got sort of automation in the CAD, but you're got manual as an output. And what we're able to do with one button pushed is basically build that whole model or build a model where you can take, let's say, on a house, you can take the roof off. You can take the second floor to look at the first floor if you're going through a house or in the case of a building. So it's really about automation compared to the manual processes that are out there. The coloring, the jury's out on the finishing and the coloring, and we do not provide colors.

(Operator Instructions) Your next question comes from Andy Schopick - Nutmeg Securities.

Bob, I think you mentioned that amortization of previously deferred software was $350,000 that had been reclassed. What was the capitalization?

It was 576, Andy, this - or 577 this quarter and the amortization was 355.

And also on the R&D tax credit, you'll be a small beneficiary, I assume, of the implementation of that and it'll accrue all in the fourth quarter. Can you give us any sense of what that catch up will be, what the overall effective rate in the fourth quarter might be and for the full year?

Yes. I would expect the overall effective tax rate in Q4 will probably be between 31.5% and 33.5% for the fourth quarter effective tax rate.

So it's going to be a relatively small impact in terms of the accrual.

Yes.

Also, just in terms of new applications, Scott, I'm wondering, as you look at the development of this market and look at the approach, in particular, that Z Corp. has taken, being strictly kind of a color printing type company, are there new avenues here that you would like to pursue, new applications or verticals that you think will significantly enhance the market opportunity that you'd like to position yourself for over the next year?

Well, there are quite a few sub markets, which isn't your question, where you, on a salebysale basis, see expansion through those new applications. But essentially we're leading and continue to pioneer lead in the 3D printing applications on mechanical three-dimensional CAD and Z Corp. has launched, as you know, systems initially into the architectural area and we're a follower there. We're an observant follower or possible follower. And we're also looking at the gaming application, which are collectible outputs for [inaudible]. You know, per game you can see up to 10 million -

Yes, the figurines, the avatars?

Yes. Yes, although it is a totally different application and totally different market, obviously, than the mechanical. That's another upside long-term for Stratasys.

At this time we have no further questions in queue. I would now like to turn the call back over to Shane Glenn for closing remarks.

Okay, in closing we were very pleased with our third quarter results. While the impact of the current economic crisis is difficult to predict, our current expectation and outlook remains for a strong finish in 2008. We believe our innovative products and services are helping our customers to reduce development costs, shorten their product release schedules--which get their products to market faster--and provide alternatives to traditional manufacturing processes. We believe these characteristics should help sustain strong demand for our products moving forward. Our vision remains to move down the price elasticity curve with our 3D printers and we are positioned for improved growth in our 3D printing business next year. In addition, we expect other new opportunities within direct digital manufacturing and architecture will [be] incremental growth drivers in the future. Thank you for your interest in Stratasys and we look forward to speaking with you again in February. Good bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.