Good day ladies and gentlemen, and welcome to the Third Quarter 2008 Stryker Earnings Conference Call. My name is Amity and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate question-and-answer session towards the end of this conference. [Operator Instructions]. Certain statements made in today's conference call may constitute forward-looking statements. They will be based upon management's current expectations and will be subject to various risks and uncertainties that could cause the company's actual results to differ materially from those expressed or implied in such statements. In addition to factors that may be discussed in this call, such factors include, but are not limited to: pricing pressures generally including cost-containment measures that could adversely affect the price of or demand for the company's products, regulatory actions, unanticipated issues arising in connection with the clinical studies and otherwise that affect United States Food and Drug Administration approval of new products, changes in reimbursement levels from third-party payers, a significant increase in product liability claims, changes in economic conditions that adversely affect the level of demand for the company's products, changes in foreign exchange markets, changes in financial markets, and changes in the competitive environment. Additional information concerning these and other factors are contained in the company's filings with the United States Securities and Exchange Commission, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. Today's conference call will also include a discussion of adjusted net earnings from continuing operations for the comparative nine months ended September 30th, 2007. Further discussion of this non-GAAP financial measure including a GAAP reconciliation appears in the company's Form 8-K filed today with the United States Securities & Exchange Commission, which maybe accessed from the For Investors page on the company's website at www.stryker.com. I'd now like to turn the presentation over to your host of today's call, Mr. Stephen MacMillan, President and CEO of Stryker. Please proceed, sir.

Thank you Amity, and good afternoon everyone and welcome to Stryker's third quarter 2008earnings report. With me today are Dean Bergy, our Vice President and Chief Financial Officer; and Katherine Owen Vice President of Strategy and Investor Relations. As many of your call from the Q2 call, I had not planned to participate on this call knowing that it would be in very good hands with Katherine and Dean. However in light of the current market environment, we thought it made sense for me to join today's call as well. Like most quarters, we had our share of successes and challenges and through it all, we are pleased to deliver our 31st consecutive quarter of double digit sales growth. Although held somewhat by a favorable calendar and currency, overall reported sales growth was 14% and 12% on a constant currency basis. Net earnings increased to strong 20% in the quarter to $0.66 per share in line with our internal budget goals and leaves us on track to deliver our commitment of $2.88 per share for the full year. On a geographic basis, growth was reasonably balanced with the U.S. posting a 13% increase while international was up 15% reported and 10% operationally. Our unique footprint of businesses again delivered solid growth overall as our four largest implant businesses showed sequentially faster growth this quarter than last. MedSurg continues to deliver though this time led by an extraordinary quarter at medical while endoscopy and instruments slowed a bit. By group, our orthopedic implant businesses were up 12% as reported and 10% operationally with our U.S. spine, trauma, CMF, and knee franchises posting particularly outstanding results in the quarter, all up at least 18%. Specifically, despite the challenge of a very difficult comparison of 31% growth in last year's third quarter, our…

Thanks Steve. As many of you are aware, we tend to discuss new products only after they have launched rather than provide details regarding our pipeline. We know this can be frustrating to investors particularly given the acceleration in R&D spending from 2005 through '07. The rationale behind this strategy is aimed at preserving our competitive advantage and frankly review the sales growth we deliver as the best indication as to how successful our R&D investments have been. With the company targeting eight straight years of double digit sales growth, despite a slowdown in the med tech industry, we believe our R&D investments have largely been a success. Year-to-date in '08 roughly 30% of our total company sales of some products launched in the past three years. Like many companies, we had delays or projects that haven't worked out as we had initially hoped. But overall, our sales growth suggests we are making solid investments. We would also note that our pipeline is comprised primarily of singles and doubles that represent evolutionary product improvements and our launches versus blockbusters, but it's the consistency in volume of these incremental launches across all our divisions that in their entirety have an impact on sales. We also thought, it would be worth highlighting some of the recent product launches. As Steve mentioned in early October, orthopedics launched the tritanium primary, which we view as an important new product addition to our hip portfolio. This primary after tabular shell offers enhanced fixation through its tritanium advanced fixation technology, a biologically compatible material, combined with the ongoing recovery of our Trident franchise as well as the continued update for the Cormet hip resurfacing product, the tritanium primary is an important addition to the sales forces product offerings. Shifting to medical over the past 18 months,…

Thanks Katherine. I will begin with the impact of foreign currency on our sales in the third quarter. Foreign currency again had a favorable impact on sales this quarter. The weakening of the U.S. dollar added $26 million to international sales and increased the company's overall sales growth by 1.7%. However, the dollar was stronger than we anticipated during the quarter and the positive impact on sales was much less than we projected during our last call. Consequently the 1.7% FX benefits compares unfavorably to the 2.5% to 3% FX benefit for the third quarter that we estimated at the time of our previous call. In the third quarter, the dollar weakened approximately 9% against the euro and about 8% against the yen when compared to prior year rates. And the currency rates holding their current levels, we expect the impact of foreign currency will decrease fourth quarter 2008 sales by about 2.5% to 3.5% versus the prior year. Now, I'll spend a moment on the impact of price and volume mix on the top line. Selling prices were flat on a worldwide basis in the quarter with domestic prices up about 0.5% and the international prices declining slightly as a result of the April 1st, 2008 government reimbursement cuts in Japan. Japanese pricing declined 5% in the quarter. FX was up 2% as I've already stated; and volume and mix growth was 12% in the third quarter inline with the second quarter. To be fair, both quarters included one additional selling day compared to the prior year. In contrast to our upcoming fourth quarter, we'll have one last selling day than we had last year. Domestic volume mix growth was 12% in the quarter and the international volume mix growth came in at 10%. Now I will turn to…

Thanks Dean. As we head into the final quarter, we continue to feel good about achieving the goals we articulated at the start of the year. And eight straight years of double digit revenue growth and 20% EPS growth to $2.88 a share. Given the overall external environment combined with our own unforeseen challenges, which popped out during the year, we feel good about this performance. We'll now open it up for Q&A. Question And Answer

[Operator Instructions]. Your first question comes from the line of Gerard Howe with Pharmacy Sales Partner [ph].

Great, thanks a lot; good afternoon. Could you discuss just the visibility that you have in the MedSurg business? I'm not really sure in terms of the timing when you know you're going to get certain orders, but especially in the digital OR business. How many month ahead you can see revenue coming in?

Sure, Gerard. I don't know if you heard it, we have a crack going on the line with your questions. So, I apologize that we didn't hear it exactly correct. But I think your question was regarding capital spending. As many of you know, about 60% of our MedSurg sales are capital as a result there is significant interest in the potential of sales slow down tied to the current economic environment. Couple of things we'd like to point out there; first: although we have a hefty capital exposure, the vast majority of our sales are relatively low ticket items. And we simply don't have any single product within ASP 100s of 1000s not alone millions. As a result, probably insulate to somewhat from the higher level of scrutiny from hospital capital committees. Second, quarter-to-quarter the impact of swings that occur whether the MedSurg divisions are generally a function of capital spending budgets. And third, if you recall back in our Analyst Day in May, we took a look at hospital capital spending versus U.S. MedSurg sales. And we did see some correlation between the two over this. There is generally a hefty gap in those growth rates. And when we publish during that... or showed during that period was that there was a range from a low of 15% U.S. MedSurg to a high of roughly 22% to 23% compared to a hospital CapEx range of down 3%, up roughly 10%. So against that all those facts and circumstances, we're cautiously optimistic regarding potential for our MedSurg franchises particularly when you layer in overall relatively low market shares across the world and considerably U.S. opportunity that we are now leveraging. We are also cognizant of how much economic uncertainty there is and the potential impact it might have on capital budgets and hospital's financial flexibility going forward probably can't be overstated. All of which will be considerations as we prepare our budgets for 2009.

Okay, great. On SG&A spending, hopefully you can hear me better now. On SG&A spending, do you still see a significant amount of leverage there? I know in the past you've talked about the opportunity to gain leverage from now line items. Do you still feel comfortable going forward that there is a lot left in there?

I think we still have reasonable opportunities for leverage within our SG&A line. We've got certain franchises, particularly our trauma and spine franchises, where we've invested significantly in the sales force in the U.S. and conversely in our MedSurg businesses we've invested pretty significantly outside the U.S. And recent years we believe those are leverage opportunities as well as some broader leverage opportunities just overall in terms of how we run the business and think about the way that we might be able to leverage opportunities for sourcing the products and where we manufacture them as well. Particularly as we go through some of these quality initiatives, I think it gives us an opportunity to evaluate kind of our planned structures well.

I expect the SG&A to come in small pieces overtime, more than anything dramatic.

All right, great. Thanks so much.

Your next question comes from the line of Mike Weinstein with JPMorgan. Please proceed.

Good evening.

Hi, Mike.

Steve,glad you could join us here; thanks for doing that. Let me ask first, I am going to ask an income statement question first. And I think probably be helpful for everybody in the line to get a better understanding of what we look at the release here and what we playing out was obviously your gross margins going down, because you're spending and you're offsetting that with your cost controls and your OpEx line. Help us understand both pieces of that if you would. Help us understand where the incremental spending... why the incremental spending, first of all is showing up in your cost of goods sold line. And then if we think about to stick R&D, which was down 4% the quarter, is that fewer people, is that fewer projects, is that projects that on hold? How are you getting the tightening of the belt that we are seeing here; it's helping continue to get to the 20%?

Sure, Mike. Let's start with the gross margin line. As you recall, we had five straight years of steady gross margins improvement, and as we've been investing this year in the quality piece. That's clearly going to take a step back probably this year and next year. But I'd say then probably beyond that, we will hope to start to get back on that curve of other improvement again. Now, why a lot of parts you showing up in there? A lot of it really is within the plans. So, it's affecting the cost of goods line as opposed to other parts. Now, on the R&D piece, I would tell you we've not cut back people. It's been more some of the external stuff. I'd also tell you some of the clinical work. We were quietly continuing to spend on OP-1 to get it there. And we've beefed up some of the other projects over the last few years that are coming through on project basis. But our people and projects, we still feel very good about. And as a remainder, we kind of back to historical norms on the R&D line after a few years being well above that.

When you say it's external step on the R&D spend, are you talking about clinical work or are you talking about payments to physicians? Help us understand that.

No, more... it's more I'd tell you its consultants helping with extra projects kind of to say that call it surge projects more than anything.

And remember, Mike, we did have a couple of larger trials like on these spine side with disc, and Steve mentioned, on OP-1 that just during the normal course of their progression have moved out some... the more expensive pivotal trials base. I think it's also in terms of you some of your comments on gross margin, it may be helpful to get people a sense of some of the specifics areas that kind of fall under that umbrella of the quality initiative, And this certainly isn't now encompassing set of examples. But just to give some sense of how broad we are going here and why you are seeing such impact to the gross margin line. We are introducing a more formal corporate quality system, which sets minimum consistent standards across all of our locations. And that's an area like compliant investigation, design controls for new product development and production processes. We are also adding resources to both our Stryker Incorporate quality organization to implement these improved processes. And also to monitor the key quality data like compliance and NDRs. And then lastly, we have been working across the divisions to improve the control and the efficiency of our supplier base and that's by sharing vendor audits and performance metrics. Traditionally each cited this [ph] on their own even when a supplied did business more than one Stryker division or side. Again that's not meant to be an all encompassing list, but it does give you sense of how broad and deep we are going and that and where that falls on the gross margin line.

Katherine, let me ask you... that was very helpful. Let me ask you just one OP-1 question for Katherine or Steve. What we saw in the abstract of math and what you are talking about representing at the upcoming advisory panel is... with the incremental value that that's really getting you there is at the 36 months CT scans, is that really what you felt like you needed in order to be approached the FDA?

We think that was... yes, that was the probably the key additional data Mike along with other dialoging with them.

Okay, great. Thank you Steve, thank you again.

Thanks, Mike.

[Operator Instructions]. Your next question comes from the line of Bob Hopkins with Banc of America. Please proceed.

Thank you. Just a couple of quick questions. You guys are talking about this spending going out three years in terms of the least $50 million. And I was wondering if you could be clear on exactly what you mean there. Is that $55 million, is it $70 million, is it a $100 million, just any rough sense as to what at least $50 million means?

It means at least $50 million, and I am not trying to charge the question. But if you think about where we started the year, we were looking at spending $20 million to $30 million. That number has gone up throughout the year, and again as we decided really to go very broad and very deep. That was a decision we made; we think it's the right thing to do. But we were going to be spending more. And so we will get into more specifics on the January call, which is when we'll give guidance for next year, but you should think about at least $50 million is us underscoring the at least and beyond that we're just going to have to wait until January, Bob.

Okay. And then a sort of a follow up to that. I mean I think to certain degree on one level, it gives people comfort that you are spending all this money on quality. But on the other hand every time we've spoken, you're spending more money and it's got a longer duration. And so you wonder, why so much money over such a long period of time, and it makes the investors nervous that there's a deeper seated problem at Stryker from a manufacturing perspective. So, I guess my question really is to Steve. Given all that's going on, how comfortable are you that... you've got quality systems that are in place at a level that means the risk of recalls or the risk of things that can have a meaningful detriment to your ongoing business are quite low, and that this spending program is really just added security?

Sure, Bob. I mean as you know, we get three warning letters in place. We've underscored the magnitude of the investment. I think as we dug in deeper of what we realize is we've got a lot of good quality product. But we haven't had the compliance systems all the way through the company as rigorous as we would like. And therefore we're looking not just at the facilities, I got warning letters, but going obviously much broader across the entire company. We are dialoging deeply with the FDAs relates both to those warning letters as well as getting better across the board. I would call it it's the evolution of the company from a highly decentralized smaller company to one that's clearly a much bigger company now with more rigorous controls and that natural evolution, but yes, it's part of growing up. Katherine, do you want to add something?

Yes, I would just... Bob, a couple of things: one of the things even though we don't give ongoing updates about facilities that's been re-inspected, we did think it was an important or have had an inspection. We did think it was important to call out that since the last time we gave an update, which was in April when we got the biotech warning letter. We have had subsequent inspections of other facilities globally. And those have gone very well. Again that's just one data point, we still have a lot of work to do. But we did think it was important to convey that, so people could get conviction that the investments we've been making now for the better part of the year are paying off and are being appropriately geared in the right directions as it relates to the quality initiatives.

So, Steve are you comfortable saying that now you think the probabilities of recalls or more substantial issues as a result of the current state of your quality is quite low. Is that something you are comfortable saying?

I think we are getting a lot better. I always want to be careful when we... just as Deane referenced, we just referenced, the System 6 recall. I will tell you part of as you get better, and as you apply more rigorous criteria. We are probably seeing ourselves having more quality shipment holds or things like that during the course of the year that we haven't called out. That all of which to me are the signs of actually having a more rigorous and healthy quality systems. We are almost saying internally. If you don't have any shipment holds maybe it means we are not being as rigorous. So, it's all part of just getting a lot stronger. The way I'd look at this again is when we put our time and energy onto something. I believe our team executes as well as anybody in the industry and since earlier this year, this has become a much bigger focus of our management team. And I am very proud of the progress we are making. But again I'm telling you this was years of running a business very decentralized with different standards from plant to plant. The FDA clearly expects in today's day and age, they want big companies to have one system across everything. They don't like to decentralize the operations that had different ways of doing things. It's all about harmonizing, standardizing, and getting them all to the same place. And it is going to us few years. And I think as we dug deeper in from very early in the year, we realized, you know what? There is probably more work to be done than we fully imagined. And we've taken it now with the full vigor. And that's why we are trying to particularly emphasis the at least, because we didn't want people to assume that this was the peak year. Deep down, I would say '09, I think some people were assuming, okay. And we might have bought very early in the year: okay, we spend a lot this year and it starts to taper back down. I'd say '09 is probably going to be higher than '08.

Okay. Thanks very much. I'll let someone else ask the 20% question.

Thanks Bob.

Your next question comes from the line of Rick Wise of Leerink Swann. Please proceed.

Good afternoon, Steve.

Hey, Rick.

I'd love to ask the 20% questions, but knowing you are not going to answer anyway, I'll skip ahead to a couple others here. If I could touch on the economy again, I guess my question is basically will it be different this time? In the past I think we'd all agree that the economy hasn't had a big ups and ups, haven't had a big impact on hip knee volumes. Is it going to be different this time and maybe just in broadly where are you concerned as you look for proper portfolio given that kind of global economies.

Rick, it's obviously such interesting times. You talk to anybody right now from people selling bottled water to anything else and seeing slowdown. I think the way we still look at the global reconstructive market is probably still seeing dollar growth in 7% to 9% range. I think we still feel pretty good about spine and trauma and most of the brand. And we have not really seen any signs of a slowdown in our MedSurg business other than our typical product cycle things. Having said that, we are always paranoid. And I think any CEO in today's environment would be nuts to sound overly bullish and feeling that we've got it. I personally think we are going to be in for a very difficult global economy through '09, and maybe into '010. I think it's going to be worst than a lot of people imagine. And we've been trying to brace for that in terms of our own planning. But having said that, I think the fundamentals of our businesses every division right now, we still feel pretty good about that.

Turning to the stock buy back with the buyback complete one that you are considering a new program, and two maybe reflect on for us, but it might mean for acquisitions. Do we take this as a sign that acquisitions are less likely given how speedily you did the share buyback or the values aren't right, right now so you felt you had time? I'd appreciate your perspective.

Sure, first off, we're not going to buy a bank; don't worry about. So, I think we're in a digestion, kind of a little bit of a wait and see mode. I think the one hand certainly could do another buyback. We also are obviously sitting on the cash and case, the right opportunity might come along. And we probably want to sit tight for a little bit just understanding and seeing how things shake out. I think it's good time to have a good cash position. And I think we will be clearly wanting to deploy that cash still primarily via acquisition, but also wanting to see where it place out.

And, Rick, if I can just add relative to the buyback we just did, I mean I think we still feel very good about the economic value that will get out of the execution of that buyback over time.

I appreciate that.

Great. Thanks, Rick.

Your next question comes from the line of Larry Keusch with Goldman Sachs. Please proceed.

Hi. Good afternoon.

Hey, Larry.

So, let's say I guess Steve, I know again you're... we are obviously not getting into guidance for next year on this call. But I am wondering if you wouldn't mind, certainly as Katherine at some of these recent conferences and certainly open to the door to the possibility that perhaps that growth objective might adjust down for a period of time. Could you just walk us through sort of what are the things that are changing at the margin that may have you start thinking that way obviously, the cost going up associated with the FDA and taking care of those processes as one. But sort of what else is sort of moving around that makes you start thinking that maybe that is a possibility.

Sure, let me just reiterate what I've been saying since I joined the company, which now five and a half years, believe it or not. It seems like just yesterday, but it's been that long. We described to deliver the 20% for as long as possible. But I wasn't going to commit to it indefinitely. And what we did never want to do is drive the company off a cliff. So to me, one of the things that I think our senior leadership job. We are thinking about this company for the long haul. We want us to continue to be a premier... it's not the premier growth company in the in the med tech space. Something we feel like we've been for quite a while. And that's going to mean continuing to invest for the long haul and not driving it off the cliff. Clearly as you look at next year, currency if it stays where it is right now is going to be a much bigger headwind. We've obviously got our additional spend in the quality and compliance areas. And it's such an uncertain time right now. And I think again certainly premature. But what we don't want to do is drive the company off the cliff. And we've reminded everybody 20% is tough to do in the best of times. It's... I don't think it's going to be easy to call 2009, the best of times, and it's why we are certainly not going to reconfirm that specific number at this point in time.

Okay. And I appreciate that. We've all seen way too companies that get stuck on a specific growth objective and run themselves into the ground, because the management team start making mistakes, so...

And that's what we want to avoid.

Right. And I think everybody agrees with that, so I think that's fine. Switching gears just two other questions on the FX since you brought it up. Again obviously a lot of moving pieces there, Latin American currencies have just absolutely been smoked in the last several weeks. And so that poses now issues for folks. But again could you remind us how you are again setup effects? And if you could... if you'd be willing to sort of say, for x percent move in currency how much is that kind of fall to your at bottom line when you think about your natural hedges. And then the other question is if you'll be willing to see just sort of comment on why the company decided to go and sue the government, because that's something that obviously people get very nervous about. And so if you'd be willing to share again really what you guys are seeing and what gave you the confidence to really bring a suit to them.

Why don't you start with?

Yes, let me start with the FX question. Obviously, not for an easy question, I think for any company they answer, Larry. But as we have stated many times we certainly believe that we have natural hedges by virtue of where we manufacture product with the reasonable percentage of our product manufactured in Europe including primarily our spinal trauma products. So, again as I pointed out on this call, one of the things you do see is a little bit of timing differential. So, the natural hedge when the dollar strengthens as much as it has doesn't help us as much to offset some of the bad guys that fall to the bottom line more immediately from the translation of our foreign businesses until the inventory turns, because the lower cost of the products that are manufactured in those European locations get stuck in an inventory turn. We certainly still continue to believe that overtime our natural hedges will generally work although I would also tell you that. And it is very difficult to quantify in a percentage basis particularly for any finite period of time, exactly what it is, but I would tell you that in general terms, when the dollar weakens we get some marginal benefit to the bottom line when the dollar strengthens. It hits us a little bit, but overtime we've seen the natural hedges work to basically offset enough of that than we've been able to manage all way through it. And we don't have any reason to believe that that's changed.

And, Dean, are you LIFO or FIFO, I forget?

Our inventories are both, but primarily FIFO.

Okay.

And Larry, just to answer this second one that HHS thing. I'd call your attention to the fact that it's probably getting a lot more attention from the investment community than I think we would think it fully wants. At the end of the day, if you look closely, it's basically a discovery dispute. It's about the level of information provided as opposed to, okay, you guys have been doing something horrible and all that. So, we are arguing over the amount of stuff to provide the government. It's really what it's down to.

Okay.

I think it has been probably slightly over blown. I think we've had a pretty good legal team, same legal team that has led us through all the last few years, I think very skillfully is leading us through this as well.

Okay. Excellent. Thanks, Steve.

Thanks, Larry.

Your next question comes from the line of Michael Jungling with Merrill Lynch. Please proceed.

Hi, it's Paul Choi filling in from Michael. Hi guys.

Hi, Paul.

Maybe first, if we could touch on surgeon training programs, we've seen some changes in the way your competitors are responding to the DoJ settlements; for instance reinstating physician training programs. Is there anything that you guys are doing different going forward now? And how is physician training on Cormet going at this point?

We are obviously working it through the monitors and being very disciplined to clearly shut a lot of stuff down; I would say it's less than what we had. And you we are trying to be very diligent about it. In terms of Cormet training, it's ongoing; and as you know, we don't routinely give out the numbers as people trained.

Remember, Paul, we went to the need of assessment like everybody else in the first quarter, and had our training programs for the year embedded in that all was finished by the end of the first quarter. The Cormet training resumed in April, and that's continuing throughout the year.

So, at least at this point you don't feel any need to make any material changes with respect to physician training?

We continue to work with the monitor, which is the guidelines that they've put in place, and went through that needs assessment. So there... have there been any changes? Yes. But I think we feel pretty comfortable about the training program that we have in place.

Okay. Then as a follow up on the on the DoJ settlement: how is it affecting your view with respect to non-settlement areas such as trauma, spine and MedSurg? Do you guys feel there is a need for a step-up there as we've seen with one of your competitors, Zimmer, and perhaps Smith & Nephew as well?

We're trying to be disciplined across the whole company.

Paul,I mean I don't think we've done... when we only look at our training, our education, all our consulting programs that we had in place and I'll remind you it's the market share basis. We had fewer consultants than any of our competitors and that data is readily available. That's the same approach that we took throughout organizations, so it wasn't like there is a different set of standards as to what was appropriate activity between the different divisions.

Okay, great. And then if I could get quick one on cross-linked poly; we are hearing some more surgeons just reporting some increases in cross-linked polyware sort of out [ph] years, maybe the seven to eight year timeframe with not too much difference to standard poly. Can you comment on what you think... what's occurring there?

Hey, Paul, maybe we can follow up offline. I don't think we are seeing that right now.

Sure, sounds good. Okay, thanks a lot guys.

Thanks.

Your next question comes from the line of Bruce Nudell with UBS. Please proceed.

Good evening. Thanks for taking the call. For Steve, I will pose some hypotheticals to you, and maybe you could kind of help give us a better ballpark on your intuitive feel about how much impact the economy might have. So MedSurg is kind of a 15% trend line business. I know you've been doing a little better than that recently. But if it is 15%. How much is at risk given your sense of the CapEx sensitivity of the business. And then on the hips and knee side of the trend line and units it has been six and a half, but we're amounted like let's say 5%, assume 5%, how much sensitivity might there be on next year and then I have a follow-up?

Sure. I'd say Bruce, there might be a couple of points in the market of downside to those businesses, because I would also tell you... I think we feel really good about the trajectory of our new products flow and our opportunities to continue expand in other markets. If you think about it as we figured that business today MedSurg still has tremendous opportunity outside the United States. So, even if the global market slows, I think our ability to take market share is very strong there. The same frankly with all of our orthopedic implant businesses. We have tremendous momentum as you see certainly in spine, trauma, CMF, and knees. Even if those markets slow a little bit, I think our ability to grow faster than the markets in the U.S. and globally is good. And if any thing... someday our hip business is going to actually start growing again and stop being the big drag that that's been. So even if the markets slow down a couple of points, I think we feel pretty good about how we are positioned right now.

Your next question comes from the line of Matt Miksic with Piper Jaffray. Please proceed.

Hi, every body. Can you hear me okay?

Yes.

Go ahead.

So, couple of questions and mostly follow-ups at this point. Just one on FX; Dean, you were talking about the impact there in the quarter, obviously in the top line and the way it flows through ineffectively and natural hedges in the bottom line. Is it fair to say normally we wouldn't think about much of the bottom line impact in the given quarter because of the way described your hedging strategy in the past with the sort of rapid move of these rates in August and September. In this quarter, did you see more of an impact on the bottom line than you normally would have?

Probably, again I think more rapid currency moves exacerbates the issue of the timing of the inventory.

Okay.

Matt, one just follow-up on that: remember, with a revenue based last year $6 billion in sales, there is a lot of moving pieces in any quarter. And I would call it whether it's fluctuations in currency or legal costs tied at CPA or HSS or whatever it is. In any given quarter, there's some stuff going for... some stuff going against us. So although the incremental hit maybe greater in any given quarter, there's usually some offset. I wouldn't focus too much on one single line item for a company of our size.

Great; that's helpful. Second, just there was a question earlier about the DoJ, but just sort of more broadly, where I guess about half way through this NPA cycle that you have. I just wanted to... just get an update on things like... and maybe you've talked about this before. But, are you for the surgeons that you feel you've been able to certify their contracts or are you paying those surgeons again? Are you still on track to sort of wrap this up in the first quarter of '09? Any other changes or tweaks to the status of the DoJ?

I think obviously as you go through something like this, there is a little bit of sorting out and obviously we experienced some of that in the first quarter when we had some training stuff that didn't go off quite as we had planned. But the bottom line, I think the process is working pretty well right now. And we are on track to move forward with approaches that we've put in place really frankly in terms of how we run the business, even beyond the March 2000 expiration.

Okay, but still on track for that March completion looks like?

Yes.

Okay. And then one on again there has been some questions on the economy and the impact. In the past, even when sort of capital budgets have gone under pressure, I think EMS has sort of held in there being municipal side of that business and medical. And obviously you haven't seen any pressure there this quarter given the numbers. But if you could help us understand how significant that is to you and as you look out the next couple of quarters, that's something you are starting to see or think about or worry about more or something we should be aware of, is municipal budgets and their impact on EMS?

Yes,I guess I think of answer just a little bit more broadly than that. I think if you think about our MedSurg business as we try to relate the people about 60% capital. So there is going to be quarterly volatility around what we view is baseline 15% growth. But there's a lot of moving factors than anyone on those business; product cycles have a big impact. If you look at the facts getting in into the last year, year and a half into the critical care segment of the patient handling market. That's $150 million domestic business that we didn't participate in. So, something like that is probably going to have a lot more impact than the vagaries of the municipal budgets in any given period. So, I think if you think about that business overall, there is going to be a periods when MedSurg overall is either above or below 15%. It's probably going to be tied more to product cycles. We gave some insights to that at our analyst meeting. And you can look at the historical trends, you get a sense where product, where we are probably eye in product cycles for each of those. And then there on top of that what Steve touched on the international expansion. You take those in total; that's where we get to that teens type of growth. And then there will be fluctuation around that given the capital component and maybe some impact from the economy as well. Operator, can we go to next question please.

[Operator Instructions]. Your next question comes from the line of Joanne Wuensch with BMO Capital Markets. Please proceed.

Thank you very much for taking my questions. Can we go back to gross margins please? Of the 140 basis points year-over-year decline, can you give us a little bit more color and parse out how much of that comes from FX commodities and increased spending. And I am going to make my second question attached to my first. Should we think of the low 67% level as sort of an ongoing rate at least over the next several quarters?

Joanne, I am not going parse it down that deep. But the majority is probably related to the quality spending, the other things are the commodity and freight costs or things that started impacting us earlier this year. So those are carryovers probably next order of magnitude than FX, globally [ph] last. I think the bottom line is, I think the gross margin probably will be a little bit strong as. Probably... in our last call, we gave guidance and said that I think gross margins could be down up to 40 basis points for the year. I think, it's probably going to be a little more impacted than that when we get to year end. I remember I think our gross margin for last year was 68.9%. So, I wouldn't view this lower gross margin as a trend line. I think it will be a little bit higher, but for the years it's going to be little bit lower than 40 basis point decline. But I think we have other offsets and we will be able to manage through that way.

And I think as just follow-up, Joanne, if you look over the next few years, it's clearly an opportunity for us to have gross margin improvement beyond just the expected decline in the magnitude of quality investments we are making. Have a look at that 20 manufacturing facilities worldwide. We believe this opportunity for a greater consolidation of certain processes rather than duplicating these efforts across multiple divisions and that's one of the things that we're focused on as we think about over the next few years what our margin profile will look like.

Okay. So, we need to think as higher cost associated with quality controls, but also at the same time, you are still working on increasing the output and increasing consolidated all those, other kind of good things.

We will Joanne. I'd say in the short-term, there's a greater focus on getting the quality stuff up to where we really want it to be. And so the cost savings stuff will probably still be a few years out. I would say if you can... we want to be careful. We can't take on too many things at once. But I think it's what gives us hope still for the long run. And frankly a lot of the quality stuff that we are putting in place will make us more efficient in our operations that I think will start to see probably in 2010 and beyond.

Very helpful, thank you very much.

Thanks Joanne.

Your next question comes from the line of Bruce Nudell with UBS. Please proceed.

Hi, thank you. I knocked in [ph]. Follow up to Larry's original question; and just given the inventory turns you have to look out kind of towards '09 and you say okay, $100 million of FX hit on the top line, $25 million roughly at the operations line. Is it like a $5 million exposure you have or just bigger than bread box? Any help would be greatly appreciated.

I think I would... I'd be remiss to comment with too much granularity, Bruce, just because at this point in time it's a little bit hard to tell what the currencies are going to do. But again, I frame this all within the context of we do believe this is manageable overtime. And we certainly... certainly our past history would reflect that fact. A lot of companies have entered into some pretty esoteric hedging strategies, and those are very, very costly. Today we found our natural hedges worked well for us overtime and we're comfortable being able to manage our way through that.

Your next question comes for the line of Tao Levy with Deutsche Bank. Please proceed.

Yes, hi. This is Cez, [ph] thanks for taking the questions. First just your prior EPS guidance include your R&D tax credit and also actually on the gross margin line with commodity prices decreasing. Are we going to see maybe any benefit over the near term in COGS?

Sure. The R&D tax credit if you look at our rate reconciliation from our financial statements over the years, we have not gained any real significant benefit from the R&D tax credit. So, although I recognize it. As we have stated in this... in those last bill, there's not any real significant impact on our guidance that would come from that. Relative to the commodity price changes, we are certainly hopeful that that will be a benefit as we go forward, since it's hard to say. But I think time will have to determine kind of how those prices come back over time. But certainly as they've heard as, as they have come back, they will help us.

Okay. And then just on the I guess more on the FDA side, you said there was recall on the instrument business. Can you give may be a little more color around that just something that was caught by your new quality initiative? And also just with the FDA maybe can you comment on the last correspondence with them?

Let me take those second part first, because that will be shorter now. We are not going to get into the miniature of the conversations going back and forth with the FDA. I think it makes sense to really focus on when we've got something tangible report back to you like the results of re-inspections and we are trying to get color about the magnitude of the investments we are making there and some successes that we've had. And in terms of the system sticks late in the third quarter, we did put shipment hold and initiated a voluntary recall of the power tool. It was due to an issue that had reason we're by the trigger can stick after a certain number of uses. Although, the incidence level was very low and they've thus far but no patient safety issues, given our heightened to commitment to quality, we decided to have a voluntary recall for the product. And as Dean stated in his comment, the issue has been resolved and the product is now in a early stages of shipping again.

And where is that product made in? Has that... they've been included in an inspection recently?

Yes, we're not going to again going to specifics about what sites have been inspected. We are trying to point out some successes we've had from a corporate standpoint. But beyond that we are not going into any detail. And so probably going to move on to the next call. Because we still have quite a few people in the queue.

Your next question comes from the line of Michael Matson with Wachovia Capital Markets. Please proceed.

Hi. I guess looking out at 2009, this sort of lays back with prior question about commodities. But while there is certainly some headwinds that you all are dealing with, I guess I'd see some things that some costs should start to roll off. I guess the monitoring costs, potentially after the first quarter, your commodities, and then your quality systems initiatives while it may not be a positive factor in your margins, the increase there probably won't be as great as this year. So, how do we sort of think about that in terms of offsetting some of these headwinds that you're dealing with?

I think really we are going to focus 2009 guidance on the January call. We did try to call out some of the bigger ticket items in terms of the magnitude of investment that we are making in quality. And as Steve referenced, not thinking about this year as a peak year, we did try to frame on thinking about making the investments necessary for the long-term. We think we've got a great footprint globally and across multiple segments of med tech. And that really gives our conviction and our ability to sustain double digit sales growth. But beyond getting into details about the components that are going to make up next year's guidance. We are going to really wait to the January fourth quarter call to go into that detail.

Okay. And then just on OP-1, is the potential for approval there or launch of that product can be affected at all by the warning letter at the biologic division?

Well, we need to get through the panel first, and that will be on February. And then after the panel, we need to get through an FDA decision. So, we've got a long way to go. And we probably have now the best track record in predicting the ultimate timeline for this product. So, no we could not... if we've got approval tomorrow, we could not launch it while the warning letter is in place. But I think on any timeframe basis, it's probably more work to do on the OP-1 side to actually get to the approval standpoint assuming that that's what comes out of the analysis the data before the panel and the FDA.

Okay. Thanks.

Thank you.

Your next question comes from the line Doug Schenkel with Cowen & Company. Please proceed. Doug Schenkel - Cowen & Company: Hi. Good after noon. And thanks for taking my questions. I guess one more question at least for me on the broader impact of the economy given that a lot of the bad news in the financial markets really became more pronounced over the past a month or so. If there were a slowdown in the pace of hip and knee procedures as a result of intensifying economic concerns. Would you necessarily have seen it already?

Yes, not necessarily. I think it will play out of the time. And there is going to be all kinds of swings and round about here. But I think first half select procedure, but you have different pockets. You have people, who may be in a job in a small company, and they don't want to schedule it, because they are worried about taking time off and potentially getting down sized while they are out recovering. The flip side is that people, who might be worried that they are going to lose their jobs and to want to go and have something done while they do have health insurance. So, I again I think there is going to be, as Katherine has said, there is going to be quarterly swings and... ups and downs here in different pieces. I think we still feel very good about the long-term trend. Doug Schenkel - Cowen & Company: Okay. Thank you for that. And then my second question is on the improved quality control spending, is it fair to assume that, the difference between your original guidance provided at the beginning of the year for $20 million to $30 million and spend versus the more recent guidance of at least $50 million and spend annually is having... did have an impact on margins in this quarter. And should we kind of think about those figures as a way that think about how you pace to spend this quarter and how spending will continue into Q4?

Absolutely, I'd say the third quarter was the first quarter we really start to feel the impact on it and we are going to feel it for a while. Doug Schenkel - Cowen & Company: Okay, thank you very much.

Your last question comes from the line of David Roman with Morgan Stanley. Please proceed.

Good evening, thank you for taking the questions. I'll leave my thoughts just to one given the time. Just on the share count, historically obviously buybacks have not been a big part of the mixture, can you just give us some sense as to where share count was exiting the quarter and without an authorization, should we expect to see that number tick back up?

Well, as we said we completed 9.1 million shares during the quarter, a lot of that because of the pacing of it didn't get into the shares outstanding count. I guess probably the easiest way to hopefully give you perspective is we think the share count... and obviously some of this is obviously dependent on where the share price itself is, but our best guess of a range of shared account for the fourth quarter would be in the $407 million to $408 million range.

Okay. And then for '09, will we see that number obviously depends on what happens with options, but that number should start to creep back up.

It should; and again, keep in mind of significant component of the share calculation is the share price itself. And a higher share price means a higher share count and obviously we are expecting and alluding for that overtime.

Okay, thank you.

Great. So with that, just again we're pleased to have delivered in the quarter. We'll remind you that our conference call for our fourth quarter and full year 2008 operating results will be held on January 27th, 2009. And that is the time when we will discuss our outlook for sales and earnings for 2009. So, thank you everyone; we appreciate it.

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