Good day, everyone, and welcometo the SonoSite Third Quarter Financial Results Conference Call. Today's callis being recorded. At this time for opening remarks and introductions, I wouldlike to turn the conference over to Anne Bugge. Please go ahead Anne.

Thank you, Operator, and goodafternoon. This is Anne Bugge, Vice President of Corporate Affairs forSonoSite. Before we begin, SonoSite issued its news release after the marketclosed today, October 29, 2007, regarding financial results for the thirdquarter and nine months ended September 30, 2007. If you have not received a copyof the release please contact SonoSite Investor Relations at 425-951-1333 and acopy will be sent to you immediately. You can also access the release on ourwebsite at www.sonosite.com under the investor section. A replay of the call will beavailable beginning at 4:30 PM Pacific Time today, and available throughmidnight, Pacific Time, November 12, 2007. The replay number for U.S.participants is 719-457-0820 or toll-free 888-203-1112. The access code is482-6129. Additionally, this call is being broadcast over the Internet and canbe accessed via the company's website at sonosite.com. I would like to remind you thatthis conference call contains certain projections or forward-looking statementsregarding future events or the future financial performance of the company.Except for historical information discussed in this conference call, thestatements made today contain forward-looking statements that involvesubstantial risks and uncertainties. Actual results could differ materiallybecause of factors listed in the management discussion and analysis section ofthe company's 2006 Form 10-K and in other filings and reports with the SEC. Wedo not undertake any duty to publicly update any forward-looking statements. Now, I would like to turn thecall over to Mr. Kevin Goodwin, President and Chief Executive Officer ofSonoSite.

Thanks, Anne. Welcome everyone.I’ve got Mike Schuh, our CFO with me today. First of all, the third quartershowed improving execution on all of our major segments of the business, U.S. hospitaland office channels as well as International. There is still a lot of work tobe done, but we are very pleased by the evident progress that was made. For thesecond quarter in a row, revenue growth exceeded our own forecast. Thisparticular quarter was also uniformly strong in each of the three seven months. Revenue in the third quarter grew24% to a total of $50 million. In total of the U.S. grew 21% over prior year.Direct hospital sales grew significantly over the prior year. While results inthe office channel were down modestly on a year-over-year basis, our partnerMarketBridge is improving with sequential growth of 25%. They are definitelymaking progress. International put togetheranother solid performance, and grew 28% over the prior year. The performancewas broad-based across most of our markets, and we also announced the openingof a subsidiary in India,our 10th international subsidiary. Gross margin was 69.4% comparedto 71% a year ago. The decline reflected lower margin sales to distributors, aswe expand our sales mix in emerging markets, and MicroMaxx was 71% of worldwiderevenue in the quarter. Improved operating margin was actually masked by higherlegal costs, as we move through the discovery process with our two patentlitigation cases, Zonare and GE. Due to the higher legal expenses, G&Aexpense grew 58% on a year-over-year basis and 57% sequentially. Excluding these patent litigationcosts, G&A expenses, as a percent of revenue would have declined in thequarter. R&D expenses hit a peak in terms of dollars for the year and grew30% as planned over the prior year’s third quarter and increased to 14% ofrevenue from last year’s 13%. Now despite the increased productdevelopment and G&A expenses,…

(Operator Instructions). We'llhear first from Alan Robinson with RBC

Hi, very good afternooneverybody. Congratulations on the revenue number there. Anne Bugge Thank you.

Hello, Alan.

Just on the guidance first of all,Kevin. So, you are looking at the top end of your previous range now for theyear for revenue increase, 18%. I guess. That kind of implies to me sub-14%growth for the fourth quarter of the year, which would be the lowest growthover the last seven quarters. Is there anything really going on there or is itmore just a case of conservatism there?

That's what we’re estimating.Last year, we had a robust quarter in the fourth quarter coming out of a coupleof less robust quarters. And I’d say that's where the estimate stands at now.We certainly have momentum but by no means would we over-forecast from here.

I guess the question is, are youscaling down your expectations for the fourth quarter to reflect just cautionwith regard to the new product launches?

Well certainly, Alan, when youlaunch five new products let alone one, and they are all really good, you havea process of having the market and the channels digest them. So, that is theconcern, sure.

Alan, if I could add, if you lookat last year, you also have a difficult comp with the International side, whichhad 41% growth in the fourth quarter last year. So, just keep that in mind.

Okay, fair enough. And then justfinally with the new S series range that you've announced, it looks like youare moving away from the Swiss Army knife approach to develop more of anapplication-specific product lineup. So how does this design approachimpact the number of transducers you expect to sell with a typical unit? Will therebe fewer per unit or more or the same, or how will that workout?

We actually expect rather thesame number of transducers to be sold per system, but you did the nail on thehead. The application-specific ultrasound, first of its kind in the world ofultrasound and medicine, a category that's now being, if you will, derive fromthe hand-carry ultrasound category, and we are very excited about at the probe it.The probe per unit estimate is really going to be a constant, in our view.

Okay, fair enough. I'd be amissnot to ask the question about acquisitions. Can you give us an update on thestate of play there? Perhaps how many people you have working on your workingon seeking out possible acquisitions and what’s going on there?

Well, we have Marcus Smith, whois our Vice President of Corporate Development, spearheading an effort tocontinue to look at a variety of opportunities and that’s about all I can sayright now.

All right. I'll someone else takea turn. Thanks.

And next we'll hear from CharlesChon with Goldman Sachs.

Thank you. Can you guys hear me?

Yeah.

How are you Charles?

Awesome, great. Thanks.

So I would like to start out withjust a couple of house keeping items. First of all, you told us how much the revenuemix was from MicroMaxx. Can you tell us what was for the sale of the TITANsystem?

Let’s see here.

Yeah, the combination of the twois probably about 85%, Charles.

85%. Excellent. And just ingeneral, this is obviously a substantial uptick in terms of the mix for bothMicroMaxx and TITAN. Can you tell us what might be going on there? Was there asignificant - was there some promotional activities around the two products?

No. I mean, MicroMaxx candidlyhas been doing very well all year and getting better as the year goes on. TheMB upgrade, the SonoMB upgrade has been a real solid move for us. So, I wouldhave to tell you, Charlie, that we are in better position vis-à-vis the SonoMBupgrade and MicroMaxx than we thought we would be the three quarters in. So,it’s all good news.

Great. And can you help usdissect the 21% growth in the U.S.?How strong exactly was the growth in the U.S. hospital channel? And then onthe flip side, you spoke to modest year-over-year declines in the officechannel. Can you kind of give us some more numbers to work with here?

Yeah, hospital was up north of30% for the quarter, and office channel was down, Mike?

Just slightly less than 10.

Just under 10%. But important toknow on the office channel side, as they move to a really independent processof generating demand and converting it to revenue, they did much better thanlast year’s third quarter, when you compare just what they did as anindependent. So, there's two ways to look at that. Total office sectorrevenues, which, of course, were down just under 10%, and then justMarketBridge channel revenues, which were very impressively up.

Right. And as we….

Charlie almost a 100%.

Okay.

On independent basis.

I see. So, as we go into thefourth quarter, we should see a year-over-year increase on the office channelside of the business then? Would that be fair?

Yeah. We are hoping to see anincrease in the fourth quarter, if not just level.

Okay, great. And finally, and apologizefor if I missed this on the call, but did you speak to stock option expensepicking up?

No, we didn’t mention that.

Okay. I just wanted to make sure. Okay, thank you very much. I'llhop off.

Thank you.

(Operator Instructions). We willhear next from David Khtikian with JP Morgan.

Hi, guys.

Hi, David.

Hi.

Great quarter.

Thank you.

I guess if we could maybe, howshould we think about, when these new products rolling out, where MicroMaxx andTITAN and the other products are going to fit in, either as a percentage ofsales or just more broadly 2008, 2009?

Well, that’s a great question.MicroMaxx is intended to go long in part of really a three-tiered productladder with the M-Turbo at the top, multifunctional Swiss Army knife-likedevice. Down in the middle, your broad range of application-specific S productsand down below that from a price-positioning standpoint. MicroMaxx, however, we are notplanning on lowering our price in the MicroMaxx, so the ladder if you will,from a pricing dimension is structured around above the MicroMaxx and then theTITAN and 180 are really heading towards the end of their lifecycle in the next12 months. And so what we envision is havingquite a strong line-up. If you consider that MicroMaxx or SonoMB has got usthis far, up 24% for this year, and in general building momentum, and then wecarry forward here from Q4, we transition cut the new ones in, and that processwill one fold, of course, beginning next years. So that’s the way we are thinkingabout it, next 24 months, next eight quarters, we'll have that three-tieredproduct line-up of M-Turbo, S line and then MicroMaxx.

And then can you, are you able totalk about pricing at all? I mean, you say MicroMaxx is going to be the, youare saying that’s kind of the base price? Is that correct?

What we are not doing is we arenot dropping the price on MicroMaxx.

Okay. And any S products are, youare saying incrementally more expensive?

The M-Turbo is incrementally moreexpensive and then the S product line is targeted to a particular segment andits price point varies from higher to lower depending on the situation than theMicroMaxx. But the margins are, the margin plan is neutral. So, we expect to beable to trade revenue and unit growth with margins hitting the target of 70%.

Okay. And then I guess here, onelast question on the S products. How do we think about that with the physicianoffice? Are these products going to be more geared toward those customers, are thosecustomers going to be more apt to take on those products or are these going tobe spread across hospitals and physician office market?

We believe once we get thestrategy fully implemented, and that’s not going to happen in one quarter. Butthere is a broad range of clinical segments that should be right for thisapplication-specific approach which I might add is the industry's first zero-footprintultrasound. You basically you can wall mount this, desk mounted it like a PCmonitor. It’s got a very similar design concept to the iMac G5, where theimaging engine is right behind the glass. So, there is a lot of ways youcan install this in the clinical practice segment by segment. So, we think it'sgot a wide angle potential, a range of price points, but it’s not going to beimplemented in one quarter. And I would also say that the heavy R&D, ourproduct development investment you've seen is slated to continue the deliveryof more of these innovations such as the S line.

Okay. Thanks for taking thequestion. Yeah it's great. Thank you.

(Operator Instructions). We willhear next from Robert Toomey with E.K. RileyInvestments.

Hi, good afternoon.

Hello, Bob. Anne Bugge, Hi.

Hi. A couple of follow-ups. Therewas very, very good information there. I just wanted to follow-up on that lastquestion, Kevin, with respect to the Cart-based market and your ability topenetrate some of those applications. Is anything changing therematerially with this new three-tiered product lineup? In other words, can youjust give us a little update on Cart-based and are you having more success inpenetrating that market?

Well, I'd say our penetrations'constant, Bob and has we remain so.

Okay.

Hasn’t been hurt, hasn’t reallygone up that much as far as we can tell. Where we have increased ourpenetration in market share in our own point of view is in these new emergingmarkets, and this new product line is only going to help that, because it'sbeen custom-designed based on nine years doing business with these people, forexactly what they need. The greatest evidence Bob is 37%increase in sales leads. We had our single best trade show ever this fall inthe nine years I've been around, and in general it's been a great October, verybusy and very successful.

Great. And then I had aclarification, Kevin, on MarketBridge. I think you said that there, I wasn’tclear, was their revenue up 25% sequentially or was the independent market and yousaid, you also mentioned independent market was up 100%. So, I’m not clear whatthe status is there with MarketBridge?

Yeah, on a sequential basis they areup 25% just apples-to-apples.

Okay.

And then on a year-over-yearbasis if you look at the business they are originated and booked and compared ityear-to-year, they doubled the business. Now going back to the previousstatement of why the office sector was down just under 10%, we have to add inoffice business that may have been transitioned from our hospital channel toour office channel last year. So on an apples-to-apples basis,MarketBridge was up 25% Q2 to Q3. And dollar originated book from them only asan independent channel were basically 100% up year-over-year.

Great, so its sound like it'sworking well.

It’s improving. Nothing in thecompany’s work perfectly, but we are making progress.

Good. And one last question I hadon - you mentioned patent litigation. Can you just give us an update at all,Kevin, on for status where you are with those two litigations, and I know youcan’t really talk about particulars, but if you just talk a little bit aboutthe status of where those stand right now.

Yeah. We envision probablyheading to trial next year on both cases. The trials are scheduled next year.And we are actively involved in discovery and all it goes with that. And thereis no other opportunity to report anything just yet. There are always otheroutcomes that could happen, but at this stage the plan and the expense guidanceincludes go into two trials.

Okay. And can you breakout whatthat expense was in the third quarter for litigation?

No, but it was expensive.

Okay.

It's part of the G&A line.Mike, you want to comment on that?

Yeah, modestly, in terms of whenyou look at increases, you can assume that, just the majority of the increasewould be attributed to the legal costs.

So, the actual increased dollars. And the way to think about thatis that we don’t see it as a long-term cost in our business. It’s a short-termcost. And we also believe that we can through the execution of our businessplan on the offensive side, hopefully, potentially, outrun that unnecessary risein cost by growing revenues aggressively with this new product line. So, I wouldn’t factor one case oranother going forward. Some highly negative case or some highly positive casein terms of our P&L. I can tell you the company is building revenuemomentum with the new product line; we are going to have even more, and we arejust going to bite the bullet on the spending, and go from there.

Great, thank you.

And we have no further questionsin the queue at this time. I would like to turn the conference back to ourspeakers’ for. I do apologize, we had some late arrivals. Our next questioncomes from Charles Chon, a follow-up from Charles Chon with Goldman Sachs.

Hi guys, thanks for the secondquestion here. I was just curious, to the extent that you might be able to, canyou speak to some of the competitive dynamics during the quarter? Was there anyaggressive position by competitors ahead of SonoSite’s new product launcheshere?

None that we saw. There were acouple of efforts on the part of one competitor to announce a few things new.No real impact by that. So, no, I can’t say there were Charlie.

Great. Thank you very much.

Okay.

And we do have another questionfrom Jason Wittes with Leerink Swann.

Thank you. (inaudible). So, firstoff , just a follow-up on the legal expenses. It's obviously, as you are saying,not going to be a long-term expense. But it sounds like you can assume for 2008that expense should there? Is that a fair assumption looking into next year?

Yes, if we. If you look at thestructure of our guidance for next year, it’s in there.

Okay. And also that I hear yousay that gross margin for 2008 would be somewhere in the 70% range, because Ithought you got a [percent] bump from a loss of royalty expense?

That’s right. And we’ve seen adecline in the last two quarters as a result of a rise in our emerging marketmix, which is sold through distribution. So, we’re just trying to take a sortof steady position on that, and I’d suggest that you just accept the guidance atface value and leave it at that.

Okay. So, in other words you areexpecting somewhat of an increase in emerging markets next year to offset anyincrease you get in, say the domestic market on pricing?

Yeah. It could happen that way.This is simplest way to say. Remember that those emerging markets come withvery nice operating margins or net contribution margins, but you have a lowergross margins.

Okay. And in terms of I think, itwas pointed out that next quarter, it looks like you are guiding to a prettylow number relative to the last several quarters. That is the 14% revenuegrowth number. It sounds awfully conservative given all these product launches,or is it because of these product launches they are just going to make it alittle bit longer sale this quarter? And I guess wrapped in with that,how should we be thinking about the launch of these new products in terms oftheir dimensional impact on the quarters? Is it going to take several quartersor is this a fourth quarter event?

Well remember that we alwaysreally guide you folks to think about annual numbers, and the ups and downs ofquarterly growth rates sometimes could be skewed by factors, which we could gointo ad nauseum. But the fact is that the quarter, we are launching fiveproducts in, you have to be careful. It does stretch out some buying, thingscould go wrong, so we’re just trying to be careful here. It’s very good newsfor the long-term. Our outlook for next year isagain an annual outlook, and I wouldn’t get too highly focused on everyquarter’s growth rate. I’m certainly happy that we’ve had three quarters in arow with increasing growth rates. Those were nice pleasant surprises againstthe way we had forecasted. But at this stage I'd just accept it at face value,we'll move through it and see what happens, but we are certainly looking at thingspositively.

Are all the new products out andavailable at this point, and your sales force fully plugged away at selling them?

They have been launched. Thedemos are in the process of shipping or have already shipped depending on whichone, and they will all ship for revenue this quarter. The process you follow inthis business is you ship demo, field demo units globally first, and have tomake their way out into the various distribution channels and shop in front ofcustomers. We have, of course, shown thesedevices in approximately six or seven tradeshows already. Three in October andsome others that took place late in Q3, on a very quite basis, and we've gottenvery good responses. But the physical display of the products is still works inprocess, a long from done. And then we'll ship for revenuein the quarter, which means we'll have our final revenue release during thecourse of the quarter and then as the orders come in we'll convert that torevenue and go from there, get some installations and build on that nextquarter.

Okay. And I guess okay. Okay, sothat -- I know that I completely understand why you don’t want to guide towardsquarter especially since there's such variability and it doesn't make sense foryour business model. But it sounds like it would be optimist to assume you gota huge bump from all these new products. It sounds like its more 2008 event?

Yeah, I wouldn’t do that for thisquarter probably. I would just let it run as it is. If we deliver that, that willbe a surprise to us and you, but next year for sure we feel good about ourprospects of delivering because of these products.

Okay. Thank you very much.

And we have no further questionsin the queue. I would like to turn the conference back to our speakers foradditional or closing remarks.

Okay. Well, in closing things aretracking well. The U.S.sales performance is steadily improving. International notched anotherexcellent quarter. The U.S.office channel's improving, and we've just introduced the largest launch of newproducts in the ultrasound industry, and there is a lot of excitement aboutwhat these products offer. Still though, we do ask that you don’t get ahead ofus. We are making steady solid progress. We will be in full swing -- we are infull swing for the most important quarter of our year, and we also think that2008 is shaping up to be a very good year. So, thanks a lot everyone. And we’llbe in touch.

That does conclude today’sconference. We do thank you for your participation. Have a great day.