Good day ladies and gentlemen and welcome to the third quarter welcome to the third quarter 2010 Stratasys earnings conference call. My name is Chris and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Shane Glenn, Director of Investor Relations. Please proceed.

Thanks Chris. Good morning and welcome to the Stratasys conference call to discuss our third quarter financial results. Representing Stratasys’ executive management on the conference call today is the Chairman and CEO 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 the Investor section of our website at www.stratasys.com or directly by accessing the link provided in our press release. We will begin with the Safe Harbor statement. All statements herein that are not historical facts or that includes such words as expects, anticipates, projects, estimates, vision, planning, could, plan, believes, desires, intends or similar words, constitute forward-looking statements covered by the Safe Harbor protection of the Private Securities Litigation Reform Act of 1995. Except for the historical information herein, the matters discussed in this news release are forward-looking statements that involve risks and uncertainties. These include statements regarding projected revenue and income in future quarters, the size of the 3D printing market; our objectives for the marketing and sale of our Dimension and uPrint 3D printers, and our Fortus 3D Production Systems, particularly for the use in direct digital manufacturing; our agreement with HP to expand the distribution and sales of our 3D printers, our WaveWash support removal system, the demand for our proprietary consumables; the expansion of our paid parts service and our beliefs with respect to the growth and demand for our products. Other risks and uncertainties that may affect our business include our ability to penetrate the 3D printing market; our ability to maintain the growth rates experienced in this and preceding quarters; our ability to introduce, produce and market new materials such as ULTEM and the market acceptance of these and other materials; the impact of competitive products and…

Good morning and thank you for joining us to discuss our third quarter financial results. The third quarter results of $30 million and $0.15 per share in GAAP EPS reflects the improvement in business conditions, we continue to observe within our core markets. Considering the seasonal weakness that is typical during the summer months, the strong third quarter also indicates a continued building of positive momentum. Sales growth of our system area was very, very impressive with 3D printer systems revenue increasing by 26% and Fortus system revenue growing by 39% during the third quarter over last year. Our game changing collaboration with HP continued to generate positive results during the period. Orders for their new Designjet 3D printer were strong and end-customer demand continued to build. Unit sales of our Designjet in markets served by HP were more than double than comparative uPrint sales generated within those markets last year, an impressive achievement. We remain pleased with the progress of our distribution agreement with HP and are optimistic about expanding the collaboration in the future. Our consumable revenue grew by 34% during the third quarter, the fastest quarterly growth rate within the past three years. We believe this positive momentum can be sustained given the usage trends that we are observing within the channel. In addition, strong unit system growth which grew by 39% during the third quarter bodes well for future growth and consumable sales. We generated nearly $12 million in cash from operations during the third quarter alone and now maintain approximately $84 million in cash and investments. Our financial help is the strongest in our company's history. We are optimistic about the fourth quarter and enter the period with positive sales momentum at a strong pipeline of our opportunities. Okay, I will return later to update you on some of our initiatives, but first I’d like to turn call over to our CFO, Bob Gallagher, who will further highlight our third quarter results. Here’s Bob.

Thank you, Scott. Total revenue was $30.3 million for the third quarter, a 24% increases over the $24.3 million reported for the same period last year. The company shipped 631 units during the third quarter, a 39% increase over the last year. This represented a record third quarter for unit shipments. The strong unit expansion was driven by growth in both our 3D printer and 3D production system sales. Domestic sales grew by 31% during the third quarter and represented $16.8 million or 56% of total revenue. International sales grew by 17% to $13.4 million. Slower international growth was due to a more modest 6% growth in the Far East. Third quarter product revenue was $24 million, a 33% increase over the $18 million reported for the same period last year. Several factors impacted our product revenue growth during the quarter. First, Fortus system sales increase by 39% when compared to the third quarter of last year. As you may recall from our comments last quarter, we entered the third quarter with a strong backlog of Fortus system sales. In addition, we observed strong orders for Fortus systems during the quarter which when combined with our strong Fortus backlog contributed to an impressive growth over the last year. The second item impacting our product revenue during the third quarter was a 34% increase in our consumable revenue compared to last year. This represents an acceleration from the growth rate we experienced during the second quarter and as a continuation of the positive trend that we began late last year. We continue to believe that our strong consumable growth represents a positive leading indicator for our business going forward. Lastly, our 3D printer system revenue increased by 26% when compared to the third quarter last year, driven by strong sales of…

Thank you, Bob. We appreciate the need to provide financial guidance to our shareholders and investment community. And we continue to observe an improvement in market conditions during the third quarter and we are optimistic about the balance of 2010. We are currently evaluating various scenarios for our collaboration with HP in 2011 and beyond, all of which could have varied effects on our financial performance. It is our ultimate goal to provide long term target operating model which is supported by our expectations of a broader HP relationship. We hope you can appreciate if there are many moving parts in our relationship with HP that currently include uncertainties on the location and new market expansion, the timing of that expansion as well as the inclusion of new products. Now, I’d like to turn the call back over to Scott Crump.

Thank you, Shane. We are very pleased with the rebound in our financial performance over the past nine months. We are optimistic that our positive momentum will be sustained. We remain excited about the potential of our game changing agreement with HP as the collaboration continues to generate positive results. As we outlined earlier, HP's entrance into the market six months ago is having a positive impact on 3D printer sales within HP's market. These trends suggest that HP's distribution capabilities, brand power and marketing mussel can expand 3D printing awareness and can greatly accelerate the sales of our 3D printers. HP's near to midterm goals remain the refinement of their go-to-market strategy and to better understand the 3D printing market. To achieve that goal, HP has assembled a dedicated 3D printing team managed out at Barcelona, Spain and have begun to engage their reseller network. They have produced marketing materials to promote their design jet series of 3D printers and have attended multiple trade shows within the five countries that they currently serve. They are monitoring customer feedback on product performance and customer uses and are observing the expansion of the 3D printing opportunities. Despite their need to better understand the 3D printer market over the near term, we believe HP's dominance within the 2D [platter] market give in an extensive appreciation of the end customer as well as the 3D printer market in terms of the market potential. Following their recent successes HP has communicated their desire to expand into additional markets and we are currently involved in discussions surrounding this expansion. As we have communicated previously, the near term financial impact of the current phase of our agreement with HP is expected to be relatively immaterial and that our expansion with HP will likely remain a gradual…

(Operator Instructions). Our first question comes from the line of Troy Jensen. Please proceed.

So quick one on the HP expansion, is it logical to think that they would roll out the remaining countries in Europe before they move into other continents first?

It's difficult to say where they would expand next. I think they have a strong presence within those five European countries and that doesn't necessarily mean that the next expansion would be within Europe. It has to do with their strongest partners and demand.

And then shifting gears on the delta example that you guys gave for the direct digital manufacturing, was that a system order or is that a paid parts customer?

Actually Troy that order was serviced by a service bureau that is qualified to do that for aerospace customers. So, it was done by a third-party, but obviously using our equipment.

Our next question comes from the line of Brian Drab, please proceed.

I know the year-over-year growth rates are just looking outstanding, but I was hoping that maybe you could give us a little color on how things went sequentially from second quarter to third quarter, particularly within Fortus and the consumables market. Clearly, the growth rate looks better from second quarter to third quarter, but could you talk about the direction in absolute sales of those products that went and maybe what we could expect going forward?

I think what you really saw in terms of our overall revenue, you saw that it was very similar to what we had in the third quarter, remembering that the third quarter is usually our seasonally weakest quarter. We had strong sales within our Fortus systems as we ended the quarter with a strong backlog and sequentially consumables were predominantly flat on a quarter-to-quarter basis, as well as RedEye maintenance. So, it was a very comparable quarter in terms of overall product mix and color to the second quarter, remembering then again that we have that seasonal weakest quarter.

And then going forward into the fourth quarter, it sounds from your commentary like you would expect sequential improvement in most of those businesses?

Again, if you take Q3 as a seasonal weakest quarter, traditionally what you’ve seen for us, is Q4 as being one of our stronger quarters.

And then just one more quick one, regarding gross margin, I mean sales aren’t clearly much improved from last year and you made some comments in gross margin so I may have missed this, but could you say that the main reason that gross margin is up only about 60 basis points even on such strong sales improvement, is the HP agreement in having to give up some value at HP now that they are in the picture?

Well, certainly HP is a part of that but if you look at our products that we have introduced and one of the comments that we made during the call is that since last year our products are more focused on uPrint Plus which are lower average selling price within the products, though we have moved down some of our price points in there. Offsetting part of that was improvements then in the Fortus product mix as well as consumable products themselves.

Yeah, Brian if you look at [the] during the quarter, what you call a higher margin 3D printers, and the higher margin 3D printers includes the Stratasys Dimension line as well as the uPrint Plus. So, what's excluded from that is the basic uPrint as well as the Deskjet systems that we sell to HP. But if you just look at the Dimension line plus the uPrint, you add the uPrint Plus, that was about 58% of our total 3D printer volume during the quarter, that’s versus around 55%, you could do a similar analysis for last year. So, we still sold a lot of higher margin printers, but certainly the HP systems as well as the basic uPrint are definitely lower margin systems.

Our next question comes from the line of Jim Ricchiuti of Needham & Company. Please proceed. Jim Ricchiuti - Needham & Company: Just a question regarding the strength you are seeing in consumables, I know it’s still very early but is there anything you can point to in the European business with HP now in the market that perhaps is having some impact on consumables?

I think you said it right when you said its very early in relationship, it’s only been six months now that HP has really been selling products into marketplace and we don’t really have anything on the dynamics to point any difference in that market relative to the rest of the world. Jim Ricchiuti - Needham & Company: Can you talk a little bit about whether you were seeing more strength in growth in consumables with Fortus versus the 3D printers?

We've actually seen a rebound in use of both systems. What we are trying to do is focus our Fortus product line on direct digital manufacturing applications, and a good example was the one that we talk about with Delta Airlines, that’s a customer of ours that’s going to generate a tremendous number of consumable sales in order to make all those parts. So we are continuing to try to drive higher volume with the DDM applications, but we have also seen a rebound compared to the 2009 levels on our 3D printers.

Our next question comes from the line of Ryan Thibodeaux of Maple Leaf Partners. Please proceed.

Could you expand a little bit on a comment that HP is now refining their go-to-market strategy? I guess they are refining it from what is the question.

They started off selling on a very similar basis and looking at some of the techniques that we use. Now they are in the process of going back for the systems that they sold as well as systems where they haven’t been as successful. They are doing customer surveys and follow-up within the marketplace and talking to additional resellers to find out the reaction within the marketplace. They are very good at going back and double checking things within the marketplace and surveying the market much better than Stratasys has ever been at that.

Would that indicate that the roll out to date is going better or worse than expected?

For HP it’s definitely gone better than their initial plans.

But they are still have to refine their strategy…

Right. And remember, this is only two products in five European countries, so it’s what they are doing in the short term.

And maybe I can add to that. HP, as a company, are experts in 2-dimensional printing. This group is expanding the company into a 3-dimensional goal. It’s more than just the go-to-market. It’s also an interesting education and expansion process for the company with obviously some huge upside for both Stratasys and HP.

Okay. And then, Bob you usually breakout the uPrint as a percentage of the total dimension shipments. I think Shane may have said it offhandedly. Can you just clarify that again?

Yes, the Dimension line and the uPrint Plus was 58% of the total volume. The Deskjet and the basic uPrint is the balance.

Our next question comes from the line of Chad Bennett of Northland Capital Market. Please proceed.

Yes, just a couple of questions. Fortus for the quarter, was there anything unusual in terms of ASP larger systems going out or can you give us some type of comparison either sequentially year-over-year kind of what the ASP was overall for that business?

Yes, the ASP on that business is really because of the products ranged from our 360mc that has the ASP out at the retail level of the $80,000 to $100,000 and then you move all the way up to a 900mc that will retail out at about $400,000. You will see a huge mix of the ASP isn’t necessarily meaningful within that market. But to give you a little bit of color of that we saw an increasing demand for our 900mc products which is the large build-on globe and the one that has an average end-customer selling price for around $400,000.

And you talked about kind of the backlog coming into the quarter and strong orders throughout the quarter. Do we have any way of, what's backlog going into the fourth quarter here or is it similar up down versus what you had coming into third quarter?

Unfortunately we don’t give you the exact backlog. We try to give a little bit of qualitative flavor around the numbers. It’s a strong backlog relative to typically what we see but we're not going to give out the specific number.

Okay. And then I think a couple of callers have tried asking this. So the HP kind of units in the quarter, I guess you gave one metric that the business basically doubled year-over-year in those five countries versus uPrint last year. Was uPrint last year in those five countries even a meaningful number to base that off of?

Yes, because if you look at the color around last year's numbers, last year was down substantially from the 2008 level but business was down much more dramatically in the US markets last year and Europe actually held up relatively strong. So we think it's important. It’s a small measure because it’s only the two products in the five, but we think it’s a significant measure.

Chad if you look at uPrint last year, it was by far the best-seller; I'm talking system-wise here, I don’t actually have the Europe numbers in front of me, but if you look at, system-wise, but it was by far the best-seller last year in the third quarter.

Right, now I understand. I didn’t know kind of the relative geographical breakouts specifically when you kind of get down to five countries in Europe, if that’s a meaningful metric, debates it off of. Okay. I guess just lastly…

I need to see how I already did it to one other person; I'll need to do it you so I ask you to get back in the queue.

Our next question comes from the line of Andy Schopick of Nutmeg Securities. Please proceed.

Thank you and good morning. I will try to keep this quick. Bob, I wonder if you can give us any color at all such as you did last quarter on the sell-through in the HP channel, whether there was really anything here that would provide a little additional color on to what’s happening.

Yes. Most all of the systems that we shifted to HP, just like last quarter most of all the systems sold through to end customers.

Okay and secondly Bob, R&D tax credit. Do you have any greater visibility or can you give us any color on what might happen if Congress does renew that R&D tax credit, how that will affect your tax rate given the adjustments you've already made here in the third quarter to lower the overall effective rate?

I’ve taken no R&D tax credit into consideration in my effective rate. If it does happen legislation in the fourth quarter, typically its had about a 2% impact in the overall effective tax rate which we then apply for the effective rate and reduced that in the Q4.

That’s the upside of the year.

Our next question comes from the line of Chuck Murphy of Sidoti & Company. Please proceed. Chuck Murphy - Sidoti & Company: Just kind of coming back to the comment about the HP markets having 3D printer volume up 88% year-over-year, could you say what the year-over-year improvement was in like the first and second quarter?

You know what, I think we did, Chuck, just go back and look at the comments in the script. I think the year-over-year improvement in the third quarter is better than the one we reported in the second quarter. I don’t believe we provided you in the first quarter.

And of course the launch was mid to second quarter. So, Q3 and definitely Q4 are better measurements. Chuck Murphy - Sidoti & Company: And the other question was, just any change in the Designjet’s price?

No.

No.

Our next question comes from the line of Jeff Evanson of Dougherty. Please proceed. Jeff Evanson - Dougherty & Company: Bob, could you tell us if there was any FX impact to the gross margins in the quarter?

Well, relative to the rates in effect at the end of the Q2, it would probably be a negative impact of $115,000. If you looked at it on a year-over-year basis, from the third quarter last year it was probably a negative impact of about $578,000. Jeff Evanson - Dougherty & Company: And then Scott, I guess what I’d like to know is what would you put on as the probability that you guys expand this HP distribution relationship into North America in 2011?

Well, I’m definitely optimistic about not only the relationship on the expansion, but the potential for 500,000 systems to go serve the existing 6 million [cavities] what the probability is, is pretty difficult that it determines, so I think I’m not going to give an exact probability. Jeff Evanson - Dougherty & Company: Why would they not expand in Europe at this point and said potentially go into a new geography, I don’t quite understand that.

It really has to do where demand comes from within their existing reseller base, but I don’t think Stratasys should get in the business in trying to predict HP’s marketing strategy. I think they are much better at marketing than we are. Jeff Evanson - Dougherty & Company: I respect the latter part of that, I guess I’m confused why they wouldn’t be seeing continued demand in Europe. That seems not to comport with what you are telling us about strong growth through HP.

Yes, there is a difference between, like I said, they’re refining their go-to-market strategy and it’s really a question probably a better voice to HP than it would be to Stratasys. Jeff Evanson - Dougherty & Company: And Bob, last question, sorry. So, in simple terms, what should I model for a Q4 tax rate at this point?

Right now if you look at the effective rate that we have on a nine month basis is the best estimate that we have for the year. If you see pass of the R&D tax credit in Q4 then the rate would reduce to a rate of 1 to 2 points below that effective rate. The one thing that comes into play, there is stock options and exercise the likes of stock options which are a discrete item in the quarter, and can have a significant impact on the quarterly effective rate, and there is no way to predict that.

Our next question comes from the line of Graeme Rein of Bares Capital. Please proceed.

I’m interested in the RedEye business. You mentioned that the pricing is firmed up a little bit. Could you discuss, is that just due to strengthening in the economy in general or have you seen competitors exit the RedEye paid parts market?

Well, I think the market’s dynamic, we certainly have seen a year-over-year improvement. RedEye has also done a very good job of analyzing our value proposition. And as we’ve done that along with the improvement in the economy and in the sector, short up prices, and I think that there will be next year some consolidation and effective pricing from that consolidation, but I don’t believe that we are seeing that this year. I think it’s more our actions and then an improvement of overall design prototyping, as well as some pre-orders in DDM and great opportunities in the DDM area for RedEye.

And a follow-up on that, the new applications you are seeing in DDM and other paid parts customers, are these translating into system sales or are they more one-off projects?

There has always been a very good correlation between doing thousands of parts and then selling tens of units, we call that prospecting and then that could be both up and down. We do a good job of supporting systems, our system users where they go through a normal design cycle, prototyping peak in valley. When they hit their peak, we are there, sometimes one day turnaround, they are back up. So, it’s not only selling systems up which also leads to the consumables, but then when customers get either machine or multiple machines, they typically can’t, I guess in no case can they get all of the offerings that RedEye has, and so RedEye is a natural resource for them.

(Operator Instructions). Our next question comes from the line of Neil Chatterji of Craig-Hallum. Please proceed.

Just a quick question on, in light of your cash generation, if you could just comment on any plans for using that going forward?

We’ve been asked about our cash for a long period of time and we continue to say that we have a cash opportunity as opposed to our cash problem. We’ve looked at it, over the years we’ve looked at various opportunities and acquisitions on that and investments within technologies, but those are the type of things you would announce when they come. Until then we’re focused on generating cash which we think is positive for our business and our shareholders.

Our next question comes from the line of Troy Jensen of Piper Jaffray. Please proceed.

So, a couple for Bob here. R&D spending was down sequentially, is it sustainable at these levels and then should we expect any commission accelerators in the SG&A line in Q4?

In terms of R&D, what I said at the end of the second quarter is that we expected R&D spending to be at a similar level in the second half than we would in the first half. Q3 was about 2.2. Q2 was about 2.7 and R&D spending probably will come in somewhere between those two numbers in Q3. The second half will come close to the first half in terms of R&D spending. In terms of commissions, the accelerators were definitely going to see some accelerators on commissions in some of our variable compensation in Q4. We’ve taken some of that into effect in Q3 but you are also going to see it as an impact in Q4 definitely.

And DSO’s, great job this quarter. It’s always been an issue for you guys, it was kind of higher than what investors like to see for the DSO line. Was it collections there or linearity? What improved dramatically here on the DSO line?

One of the things that gives a positive impact is the timing on some of our sales within HP itself. I need to say that my staff is doing a great job of collections. They’ve got a good system down there, definitely. But at HP we've got our systems down also as it relates to HP, they've don a great job of collections as it relates to our largest customer too.

Our next question comes from the line of Ryan Thibodeaux of Maple Leaf Partners. Please proceed.

Hey, Scott. A question, just curious on your thoughts and the growth on the emerging open source market, I know that it's for buying, this company was recently acquired by one of your competitors and I think they shipped a thousand units in '09 and they're up 100% year-to-date at a 2,500 yard price point. So I'm just curious what are your thoughts on that business model line?

Well, I think you actually have maybe three business models there in the open source area. I think by definition it's not really a business, it’s more of a sharing. And in terms of Bits from Bytes, they're primarily targeting home [caveats], as well as the area of educators, not necessarily education but educators, as well as the do-it-yourself [areas]. And within the do-it-yourself [areas] that's not in the commercial area. So Stratasys is focused on, in professional rather prototype being worldwide as a tool is really focused on the commercial use of 3D printers, and there's certainly long-term both applications and markets in that area, but none of the products out there are what are called full product solutions for those that want to use them as tools to solve problems at least at this time.

Okay, and then last question for Rob, just a follow-up from an early question, someone asked about gross margin. I believe in the second question you had commented that one of the reasons that you said the sequential decline in gross margins was because of the weaker Euro. I am just curious if you had a reversal of that effect in Q3.

Yes, surprisingly we didn’t. It was actually, we continued to have an adverse effect relative to where we were at the beginning of the year, and last year on the Euro, what we may remember is that the Euro was going down in Q2 but it really started off in April and May that the rates with the Euro were relative high to where we're at in the August-September timeframe. So, relative to the beginning of the year we still had an adverse effect and actually Q3 had an adverse effect relative to Q2.

So, it was till negative from Q2 to Q3?

Yes, it was about $115,000 negative quarter-over-quarter impact.

There are no further questions at this time. I would now like to hand the call back over to Mr. Scott Crump, CEO.

Okay. In closing, I’d like to thank you for your interest in Stratasys, Inc. and we look forward to speaking with you again next quarter. Goodbye.

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