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Article by DailyStocks_admin    (08-10-08 04:55 AM)

Stratasys Inc. CEO James III Monroe bought 20000 shares on 8-05-2008 at $15.79

BUSINESS OVERVIEW

General Development of Business

We are a leader in the market for office rapid prototyping (“RP”) systems, which includes three dimensional (“3D”) printing systems. We develop, manufacture and sell a family of systems, including a line of 3D printers, all of which create physical models from computerized designs. We were incorporated in Delaware in 1989 and our executive offices are located in Eden Prairie, Minnesota. Our systems are based on our core patented fused deposition modeling (“FDM ® ”) technology and on our patented Genisys ® technology, which we purchased from IBM in 1994. We sold our first product, the 3D Modeler ® , commercially in April 1992 and introduced our second product, the Benchtop, in June 1993. In February 2002, we introduced Dimension ® , our first 3D printer. Dimension offers modeling capabilities in ABS plastic on a desktop 3D printer platform. We believe that Dimension, when introduced at $29,900, was the lowest priced system in the RP and 3D printing markets. We believe that the Dimension 768BST, when introduced at $18,900, was the lowest priced commercial system in the RP and 3DP printing markets. In May 2007, we introduced the FDM 200mc, our first system specifically designed for direct digital manufacturing (“DDM”) which is the production of end use parts rather than prototypes. Other recent significant developments in our business are set forth below:

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In August 2006, we announced that effective January 1, 2007 we were discontinuing our North American Distributor Agreement with Objet Geometries Ltd. (“Objet”). The Eden systems that we distributed (the “Eden Systems”) use inkjet technology to jet ultra-fine layers of UV-cured resin to build RP models. While the distribution agreement contributed approximately $16.2 million in 2006 sales, these sales were at an average gross margin of 27%. After allocation of associated costs, our internal financial statements indicated that distribution of the Eden Systems made a negligible contribution to our earnings. In order to provide a smooth transition for our customers, we serviced the Eden Systems we sold through August 1, 2007. We recognized approximately $2.4 million of Objet system, consumable and maintenance revenue in 2007.
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In January 2007, we introduced the new Dimension Elite with soluble supports, offering the customer a new ABSplus material that on average is 40% stronger than our other ABS material offering. Priced at $32,900, the Elite builds in thinner layers offering better fine feature model detail and surface finish.
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In May 2007, we introduced the FDM 200mc, our first system specifically directed at the DDM market offering the stronger ABSplus material and our high-end productivity system software.
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In July 2007, we introduced our high-end productivity system, the FDM 400mc, our most accurate and repeatable system ever. The FDM 400mc has a build chamber similar to our Vantage line, but builds in the new ABS M-30 material as well as other materials previously available only on the Vantage product line. This was our second product introduction in 2007 directed at the DDM market.
*

In December 2007, we introduced the FDM 900mc, which represents our largest system ever. It is capable of building parts up to 4.5 feet measured on the diagonal, nine times larger than parts built by the FDM 400mc. The FDM 900mc uses ball-screw technology and improves part accuracy and repeatability and can hold tighter tolerances. This new product is the direct result of a $3.6 million order from a Fortune 100 global manufacturing company received in September 2005 to advance our proprietary FDM ® technology for DDM applications.
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Effective December 2007, we discontinued our distribution agreement with Arcam AB to exclusively distribute its metal-based direct digital manufacturing and prototyping systems in North America. In Arcam’s patented electron-beam melting (“EBM”) process, called CAD to Metal ® , titanium powder is transformed into solid metal parts for either functional prototyping or end-use. We believe that the EDM technology is attractive primarily to early adopters and the distribution agreement did not result in significant sales or margins to us.
*

In January 2008, we introduced two new 3D printers, the Dimension 1200es SST ™ and BST ™ . The BST builds with break away supports while the SST builds with automated soluble support removal. Both offer the customer the ABSplus material previously available only on the Elite. Priced at $34,900 and $26,000 depending on the type of supports, the 1200es builds in thinner layers, offering better fine feature model detail.

Description of Business

We are a leader in the RP and 3D printing markets. We develop, manufacture, market, and service a family of 3D printers and high-performance RP systems that enable engineers and designers to create physical models, tooling and prototypes out of plastic and other materials directly from a computer-aided design (“CAD”) workstation. Our high-performance systems are used both to create prototype models as well as to produce parts for end user applications, which is referred to as direct digital manufacturing (“DDM”). Our 3D printers and high-performance systems can be used in office environments without expensive facility modification. In many industries, the models and prototypes required in product development are produced laboriously by hand-sculpting or machining, a traditional process that can take days or weeks. Our computerized modeling systems use our proprietary technology to make models and prototypes and end-use-parts directly from a designer’s three-dimensional CAD in a matter of hours. In addition to selling RP systems and 3D printers, through our Paid Parts service, we make and sell parts for RP and DDM applications based on our customers’ CAD files. We estimate approximately 15% to 20% of our Paid Parts revenue is from DDM parts.

We believe that the 3D printers and high-performance systems using our FDM technology are the only systems commercially available that can produce prototypes and parts from production grade plastic without relying on lasers. This affords our products a number of significant advantages over other commercially available three-dimensional rapid prototyping technologies that rely primarily on lasers to create models. Such benefits include:

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the ability to use the device in an office environment due to the absence of hazardous emissions
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little or no post-processing
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ease of use
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the need for relatively little set up of the system for a particular project
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the availability of a variety of modeling materials
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modeling in production-grade plastics for functional testing
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no need for costly replacement lasers and laser parts

Our systems can also run virtually unattended, producing models while designers perform other tasks.

The process involved in the development of a three-dimensional model using our FDM systems begins with the creation of a 3D geometric model on a CAD workstation. The model is then imported into our proprietary software program, which mathematically slices the CAD model into horizontal layers that are downloaded into the system. A spool of thin thermoplastic modeling material feeds into a moving FDM extruding head, which heats the material to a semi-liquid state. This semi-liquid material is extruded and deposited, one ultra-thin layer at a time, on a base (the “X-Y Stage”) in a thermally-controlled modeling chamber. As the material is directed into place by the computer-controlled head, layer upon layer, the material solidifies, creating a precise and strong laminated model.

Based upon data and estimates furnished in the 2007 Wohlers Report, through 2006 we shipped approximately 32% of all RP systems since the industry’s inception in 1987, an improvement over the 24% we realized through 2002. The 2006 Wohlers Report also states that we shipped 41% of all RP systems globally in 2006.

Applications for High-performance Systems and 3D Printers

Both high-performance systems and 3D printers allow for the physical modeling of a design using a special class of machine technology. These systems take data created from CAD data, CT and MRI scan data or 3D digitized data to quickly produce models, using an additive approach. Traditionally, RP and 3D printing have been used by organizations to accelerate product development. Many companies use RP and 3D printing models to test form, fit and function to help improve the time to market.

Frequently, users report rapid pay-back times by using RP and 3D printing, as they accelerate their product development cycle and reduce post-design flaws through more extensive design verification and testing.

There are also opportunities for DDM. DDM involves the manufacture of parts fabricated directly from systems that are subsequently incorporated into the user’s end product or process. DDM is particularly attractive in applications that require short-run or low volume parts that require rapid turn-around, and for which tooling would not be appropriate due to small volumes. Our FDM 200mc, 400mc, and 900mc, Titan, Vantage and Maxum systems are well suited for these types of applications.

An emerging portion of the DDM market segment is the production of fabrication and assembly tools that aid in the customer’s production and assembly process. In addition, we have seen a growing number of applications for end-use parts.

During the past five years, the largest growth segment of the RP market has been 3D printers. 3D printers are low-cost RP systems (typically under $40,000) that reside in the design/engineering office environment, allowing product development organizations quick access to a modeling system.

Products

3D Printers and High-Performance Systems

We have been developing and improving our line of products since our inception in 1989. Since our first commercial product was introduced in 1992, we have enhanced and expanded our product line. We have improved both the speed and the accuracy of our FDM systems, expanded their build envelopes, introduced a number of new modeling materials and developed and introduced a low-cost 3D printer. We have also enhanced and upgraded the software that our systems use to read CAD files and build parts.

Each of our products is based upon our patented FDM process, and our 3D printers also employ technology acquired from IBM. Our products are sold as integrated systems, which consist of an RP machine, the software to convert the CAD designs into a machine compatible format, and modeling materials. Each of our products is compatible with an office environment and does not require an operator to be present while it is running.

Our family of 3D printers and high-performance systems affords a customer’s product development team, including engineers, designers and managers, the ability to create prototypes through all stages of the development cycle. Our products meet the needs of a very demanding and diverse industrial base by offering a wide range of capability and price from which to choose. The domestic list prices of our systems range from $18,900 for Dimension 768 BST to $400,000 for our high productivity FDM 900mc. We also offer special pricing for trade-in systems and upgrades.

The Dimension is a 3D printer that allows a user to create parts in ABS plastic. ABS usually offers the part strength required for true form, fit and function testing. Dimension operates in the office, offering speed, ease of use and networking capabilities at a competitive price. It features our Catalyst ® software, which offers a single pushbutton operation by automating all of the required build procedures. We introduced the Dimension BST in February 2002, although commercial shipments to selected resellers commenced in December 2001. We believe that Dimension 768 BST, at a list price of $18,900, is among the lowest-priced whole product systems in the 3D printing market. Dimension SST, introduced in February 2004, offers users the benefits of our WaterWorks or automated soluble support removal technology (SST) on the Dimension platform. It is priced at $24,900. The Dimension 1200es SST, introduced in January 2008 and priced at $34,900 offers the ability to build larger parts and creates parts from our new ABSplus material, which on average are 40% stronger than our standard ABS.

The FDM 200mc is our lowest priced high performance FDM System that incorporates our WaterWorks soluble support system and InSight Software. The patented WaterWorks process allows for the easy removal of supports from a completed prototype by simple immersion into a water-based solution. Since support material is dissolved, resulting in a cleaned prototype, most post-processing steps required in our competitors’ systems are eliminated. The FDM 200mc is further enhanced by the addition of our InSight software. InSight offers the customer a more flexible array of features allowing for a range of fully automatic operation to individual and customized functions for each step of the build process. With the combination of ABS, WaterWorks and InSight software, the FDM 200mc offers the customer “hands free” operation of the entire prototype building process. The FDM 200mc was introduced in May 2007, and represents our first system specifically designed to target the DDM market.

The FDM Titan was introduced in 2001 and provides a unique set of features that addresses demanding customer requirements. Titan offers users the capability to model with a wide range of engineering thermoplastic materials, including polycarbonate (“PC”), ABS, ABSi, PC/ABS, PC-ISO and polyphenylsulfone (“PPSF”). These modeling materials provide superior strength coupled with heat and chemical resistance. This combination of properties affords engineers and designers a variety of options to meet demanding industrial prototyping and design requirements. Titan has a large build envelope and uses new technology based on “look ahead” motion profiles that provide faster build speeds. The Titan also incorporates enhanced ease of use features, such as WaterWorks, the InSight software, automatic material loading and supply changeover.

The FDM Maxum™ was released in late 2000. It incorporates MagnaDrive technology, which allows the extrusion head to float on a bed of air while being controlled through electromagnet devices. Its build envelope is among the largest in the industry, allowing users to build large parts. The Maxum also delivers a fine feature detail capability allowing customers to make prototypes of very small parts. This feature was developed in conjunction with Fuji Film Corp. of Japan. Features as small as .005” x .010” may be built, allowing for increased prototyping capabilities for the telecommunications, electrical connector and camera and photography industries.

The FDM 400mc was introduced in July 2007 and represents an increase in repeatability, part accuracy and material strength over the Vantage and Titan systems, which are being discontinued. In addition, in January 2008, we introduced the FDM 360mc, which offers similar part quality to the FDM 400mc, but fewer material choices and slower build speeds. Both of these systems can be configured to meet specific customer needs. Prices for these systems range from $75,000 to $225,000 depending on the configuration and needs of the customer.

In December 2007, we introduced the FDM 900mc, which represents our largest system ever. It is capable of building parts up to 4.5 feet measured on the diagonal, nine times larger than parts built by the FDM 400mc. The FDM 900mc uses ball screw technology and improves part accuracy, repeatability and tolerances. This new product is the direct result of a $3.6 million order from a Fortune 100 global manufacturing company entered into in September 2005 to advance our proprietary FDM ® technology for direct digital manufacturing applications.

We periodically discontinue manufacturing older products. We discontinued sales of the GenisysXs, FDM 8000 and Prodigy systems at various times in 2002. We discontinued sales of the FDM 2000 in 2003 and the FDM 3000 in 2004. We discontinued the Prodigy Plus in 2007 and will discontinue the Vantage and Titan product line during 2008. However, we continue to support these products in the field.

Modeling Material

FDM technology allows the use of a greater variety of production grade plastic modeling materials than other RP technologies. We continue to develop filament modeling materials that meet our customers’ needs for increased speed, strength, accuracy, surface resolution, chemical and heat resistance, and color. These materials are processed into our patented filament form, which is then fed into the FDM systems. Our spool-based system has proven to be a significant advantage for our products over ultraviolet (“UV”) polymer systems or powder based systems, because our system allows the user to quickly change material by simply mounting the spool and feeding the desired filament into the FDM devices. Spools weigh from one pound to ten pounds, and the creation of a model may require from 0.1 pound to more than one pound of filament. The spool-based system also compares favorably with stereo lithography (“SLA”) UV polymer systems, because the spool-based system allows the customer to use it in an office environment and to purchase a single spool, as compared to an entire vat of SLA UV polymer, thereby reducing the customer’s up-front costs.

Currently, we have seven modeling materials commercially available for use with our FDM technology:

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ABS is an engineering thermoplastic material (named for its three initial monomers, acrylonitrile, butadiene, and styrene), which offers a balance of strength, toughness and thermal resistance and is used commercially to make products such as cell phones, computer cases and toys.
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ABSplus and M-30 are our newest materials and, like ABS, are thermoplastic materials with all the associated benefits. ABSplus has the added benefit of creating additional part strength. Parts built with these materials are on average 40% stronger than our standard ABS parts.
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Polycarbonate (“PC”) is an engineering thermoplastic material, which is used commercially for demanding applications in a number of industries. PC offers superior impact strength coupled with resistance to heat and corrosive agents.
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PC-ISO, a derivative of PC that is translucent, expands the usage of polycarbonate models and prototypes in various medical applications.
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Polyphenylsufone (“PPSF”) is a specialty thermoplastic material, which offers excellent mechanical properties while being subjected to demanding thermal and chemical environments. PPSF is used to make prototype parts for numerous industries, including automotive, fluid and chemical handling, aerospace, and medical sterilization.
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ABSi is a higher grade translucent ABS, which features greater impact strength than our standard ABS. It can also be used in medical applications, including gamma-ray sterilization.
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PC-ABS is a blend of polycarbonate and ABS plastic. The blend combines the strength of PC with the flexibility of ABS.

In addition to the modeling materials, we offer a proprietary water-soluble material used for support during the build process, which is later automatically dissolved from the finished part in systems that employ WaterWorks. Other proprietary release materials are used for support and are removed from the final model by hand.

Each material has specific characteristics that make it appropriate for various applications. The ability to use different materials allows the user to match the material to the end use application of the prototype, whether it is a pattern for tooling, a concept model, or a functional part. ABS and ABSplus are also offered in numerous colors, including white, black, red, blue, yellow and green. We offer a program to create custom colors for unique customer needs.

The modeling and support filament used in the RP and DDM systems and 3D printers that we sell are consumable products that provide us additional recurring revenue.

Operating Software

Our high-performance systems and 3D printers use one of two software products that convert the three-dimensional CAD databases into the appropriate two-dimensional data formats. The software products also provide a wide range of features, including automatic support generation, part scaling, positioning and nesting, as well as geometric editing capabilities. The software is not sold as a stand-alone product.

Catalyst EX, our entry-level software product, enables users to build prototype parts at the push of a button. It was introduced in 2000 and is used on Dimension 1200es SST and BST, Dimension Elite, and Dimension 768 BST and SST.

Our InSight preprocessing software is used on the remainder of our FDM products – FDM 200mc, 360mc, 400mc, and 900mc, Vantage, Titan and Maxum. It increases build speed and improves the design engineer’s control and efficiency over the entire build process. It has a broad set of features that facilitate the demanding applications ranging from a single “push button” for automatic pre-processing to individual editing and manipulation tools for each process step.

We continuously improve both software products to meet the demands of our sophisticated customers. Throughput enhancements, advanced build algorithms and features are intended to keep pace with complex industrial geometric designs while saving valuable operator time.

Services

Maintenance, Leasing, Training and Contract Engineering

We also provide a number of services in relation to our rapid prototyping business. We provide maintenance to our customers under our standard warranties and separate maintenance contracts. In the United States, we lease or rent RP systems and 3D printers under operating agreements to customers that do not desire to purchase them or enter into sales-type leases. We offer training to our customers, particularly on our high-performance systems. Finally, from time to time we offer contract engineering services to third parties in connection with the development of systems and services incorporating our proprietary technology.

CEO BACKGROUND

S. Scott Crump , age 54, has served as our Chief Executive Officer, President, Treasurer and a director since our inception in 1988 and as Chief Financial Officer from February 1990 to May 1997. Mr. Crump is, with Lisa H. Crump, his wife, a co-founder of Stratasys, and he is the inventor of Stratasys’ FDM ® technology. During the period from 1982 to 1988, Mr. Crump was a co-founder and Vice President of Sales of IDEA, Inc., which later changed its name to SI Technologies, Inc., a leading manufacturer of force, load and pressure transducers. Mr. Crump continued to be a director and shareholder of that company until its sale to Vishay Intertechnologies, Inc. (NYSE: VSH) in April 2005. Mr. Crump, a registered professional engineer, is the son of Ralph E. Crump, a director of Stratasys.

Ralph E. Crump , age 84, has been a director of Stratasys since 1990. Mr. Crump is President of Crump Industrial Group, an investment firm located in Trumbull, Connecticut. He was a founder and director of Osmonics, Inc., now GE Osmonics, a manufacturer of reverse osmosis water filtration devices, until it was acquired by General Electric Company (NYSE:GE) in February 2003. Mr. Crump was chairman of SI Technologies, Inc. until April 1, 2005, when it was sold to Vishay Intertechnologies, Inc. (NYSE: VSH). In 1962, Mr. Crump founded Frigitronics, Inc., a manufacturer of ophthalmic goods and medical instruments, and was its President and Chairman of the Board until it was acquired by Revlon in 1986. Mr. Crump was also a director of Mity Enterprises, Inc. (Nasdaq: NITY), a manufacturer of institutional furniture, until July 17, 2007, when it was acquired by a wholly owned subsidiary of MITY Holdings, Inc., an affiliate of Sorenson Capital Partners, L.P., and Peterson Partners LP. He is a Trustee of the Alumni Foundation of UCLA and a member of the Board of Overseers for the Thayer Engineering School at Dartmouth College. Mr. Crump is the father of S. Scott Crump.

John McEleney , age 45, has been a director of Stratasys since 2007. He has been a director of SolidWorks Corporation, a wholly owned subsidiary of Dassault Systemes S.A., (Nasdaq: DASTY) since June 2000, and also served as its Chief Executive Officer from 2001 until June 2007. Mr. McEleney joined SolidWorks in 1996, serving in several capacities, including Chief Operating Officer and Vice President, Americas Sales. Prior to joining SolidWorks, Mr. McEleney held several key management positions at CAD software pioneer Computervision and at defense contractor Raytheon. Mr. McEleney also serves as a director of Newforma, a privately held software company.

Edward J. Fierko , age 67, has been a director of Stratasys since February 2002. Since May 2003, Mr. Fierko has been President of EJF Associates, a consulting firm. From March 2003 to May 2003, Mr. Fierko was Vice President of GE Osmonics, Inc., a manufacturer of reverse osmosis water filtration devices. From November 1999 through February 2003, he served as President and Chief Operating Officer of Osmonics, and from November 1998 to September 1999 he served as Executive Vice President of Osmonics. From September 1987 to August 1998, Mr. Fierko was President and CEO of Ecowater International, a holding company with operating companies in the water, waste and special process treatment industry. Prior to that, Mr. Fierko held several management positions over a 23-year career at General Electric Company.

Clifford H. Schwieter , age 60, has been a director of Stratasys since 1994. In 2002, Mr. Schwieter became the President and Chief Executive Officer of Concise Logic, Inc., a software development company focused on semiconductor design tools. From 1994 to 2002, Mr. Schwieter was the President and a Managing Director of C.H. Schwieter and Associates, a management and financial consulting firm. From July 1992 to March 1994, he served as President, Chief Executive Officer and a director of Centric Engineering Systems, Inc., which was engaged in the development of mechanical design and analysis software for computing systems ranging from workstations to mainframes and massively parallel networked computing environments. Mr. Schwieter was Vice President and General Manager of the Electronic Imaging Systems Division of the DuPont Company from 1986 to 1991. From 1971 to 1986, Mr. Schwieter was with the General Electric Company, where he served as Vice President of GE’s Calma Company from 1985 to 1986 and was responsible for that subsidiary’s worldwide business in the mechanical design and factory automation arena. He was President and Representative Director of GE Industrial Automation, Ltd., a joint venture between GE and C. Itoh & Company located in Tokyo, from 1982 to 1985.

Arnold J. Wasserman , age 70, has been a director of Stratasys since 1994. Mr. Wasserman has been a principal of Panda Financial Associates, a leasing/consulting firm, for more than 35 years. Prior to that, he held positions with IBM and Litton Industries. Mr. Wasserman has consulted with major corporations in the areas of marketing, advertising and sales. He is the lead independent director and chairman of the audit committee of MTM Technologies, Inc. (Nasdaq: MTMC).

Gregory L. Wilson , age 60, has been a director of Stratasys since 1994. Mr. Wilson has been Chairman of the Board of SimTek Fence, a manufacturer of synthetic fences, since 2007. He was, with his wife Kathy R. Wilson, a co-founder of Mity Enterprises, Inc., a manufacturer of institutional furniture, and served as Chairman of the Board of that company from its inception in 1987 to July 17, 2007 when it was acquired by a subsidiary of MITY Holdings, LLC, an affiliate of Sorenson Capital partners, L.P. and Peterson partners L.P. From its inception until May 2002, he also served as President of Mity. From 1982 until 1987, Mr. Wilson was President of Church Furnishings, Inc., in Provo, Utah. Mr. Wilson served as a Financial Analyst at the Ford Motor Company and as General Manager of the Stereo Optical Company in Chicago, Illinois. Mr. Wilson also serves on the board of directors of Design Imaging, Inc., Salt Lake City, Utah, and The Central Utah Advisory Board for Wells Fargo Bank.

MANAGEMENT DISCUSSION FROM LATEST 10K

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to facilitate an understanding of our business and results of operations. It should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. All amounts in the following discussions are stated in thousands, except employees, share and per share data, prices for systems, or unless otherwise indicated.

General

We develop, manufacture, and market a family of 3D printing, rapid prototyping (“RP”) and direct digital manufacturing (“DDM”) systems, which enable engineers and designers to create physical models, tooling, jigs, fixtures, prototypes, and end use parts out of plastic and other materials directly from a computer aided design (“CAD”) workstation.

Our strategy in 2007 was three-fold:

* Continue expanding our market position in the 3D printing market through increased sales of the Dimension BST, our low-cost 3D printer, and the four other Dimension products including the Dimension Elite introduced in January 2007. The Dimension Elite has automated soluble support removal and offers the customer a new ABSplus material that on average is 40% stronger than our other ABS material offering. The Elite builds in thinner layers offering better fine feature model detail. At the end of 2007, the Dimension product line consisted of five systems ranging in price from $18,900 to $32,900. In 2007, the unit growth rate of Dimension was 25%, which contributed to a 35% increase in revenues from this product line as compared with 2006. According to the 2007 Wohlers Report (“Wohlers”), we shipped more 3D printers than other company in the world in 2006, and based on our results in 2007, we believe that we have continued that trend in 2007.

* Expand our position in the RP and DDM markets through new proprietary product introductions including the FDM 200mc, FDM 400mc and FDM 900mc, all of which are directed at the DDM market. In 2007, revenue from our high-performance proprietary systems grew by 31% over 2006. The system revenue growth is attributable to our renewed focus on proprietary products, customer acceptance of new product introductions, and further penetration of DDM applications. We remain fully committed to our historic core RP business. We expect growth rates for our high-performance systems will continue to be strong. We believe that new opportunities in direct digital manufacturing and rapid tooling and expansion of traditional rapid prototyping applications will continue to be the impetus for this growth.

In December 2007, we introduced the FDM 900mc, which is capable of building parts nine times larger than the FDM 400mc and represents our largest system ever. It can build a part as large as 4.5 feet measured along the diagonal. The FDM 900mc uses ball-screw technology and improves part accuracy, repeatability and tolerances. This new product is the direct result of a $3.6 million order from a Fortune 100 global manufacturing company entered into in September 2005 to advance our proprietary FDM ® technology for direct digital manufacturing applications.

* Continue to invest in establishing our Paid Parts service of producing parts for customers. We believe this is a fragmented global market dominated by numerous small companies generating less than $1 million each in annual sales. Sales from our Paid Parts service have been volatile quarter-to-quarter as we work to identify the most effective ways of reaching customers. In the fall of 2005, we launched RedEye RPM™ as an Internet site allowing customers to obtain instant quotes and then order their parts over the Internet via the submission of a standard 3D CAD STL file. Year-over-year sales of our Paid Parts service increased by 30%. As customers continue to increase their volume of parts ordered, we are often successful in selling them systems to produce their own parts.

In August 2006, we announced that effective January 1, 2007 we were discontinuing our North American Distributor Agreement with Objet Geometries Ltd. (“Objet”). The Eden systems that we distributed for Objet (the “Eden Systems”) use inkjet technology to jet ultra-fine layers of UV-cured resin to build RP models. In order to provide a smooth transition for our customers, we continued to service the Eden Systems we sold through August 1, 2007.

We also announced that effective December 2007 we discontinued our distribution agreement with Arcam AB to exclusively distribute their metal-based direct digital manufacturing and prototyping systems in North America. In Arcam’s patented electron-beam melting (“EBM”) process, called CAD to Metal ® , titanium powder is transformed into solid metal parts for either functional prototyping or end-use. We believe that the EBM technology is attractive primarily to early adopters and our distribution agreement with Arcam did not result in significant sales or margins.

The discontinuation of the Objet and Arcam agreements impacts the year-over-year revenue and gross margin analysis. We sold approximately $4.0 million and $17.5 million of distributed products in 2007 and 2006, respectively. These sales were at gross margins of approximately minus 4% in 2007 and positive 26% in 2006. In discussing the year-over-year revenue and gross margin comparisons we refer to these two relationships as “distributed” products and services. “Proprietary” refers primarily to products that we design and manufacture including third party peripheral items such as stands and tanks, and services we provide.

As our installed base of systems has increased, we have derived an increasing amount of revenue from sales of consumables, maintenance contracts, and other services. Revenue relating to our installed base of systems generates recurring revenue for us. In 2007, excluding revenue from distributed Objet and Arcam systems, total non-system revenue increased by 17% due principally to a 23% growth in proprietary consumable revenue and 30% growth in Paid Parts revenue, partially offset by a slower growth in rental and maintenance revenues.

Total net unit shipments increased 21% in 2007 amounting to 2,169 systems compared with the 1,796 net units shipped in 2006. Wohlers shows we shipped 41% of all systems within the RP industry in 2006. Based on data derived from Wohlers, we believe we shipped more total systems than any other company in our industry in the world in 2006 and that this will also be the case for 2007. Our growth was derived from a number of industries, including automotive, consumer products, electronics, general manufacturing, educational, government, and aerospace.

In 2008, we plan to continue to make significant investments in fixed assets, process improvements, information technology (“IT”), head count additions, and human resource development activities that will be required for growth. We anticipate that our operating expenses will increase in 2008 over the amounts reported in 2007, but that our gross profit growth will exceed that of our expenses. This should allow for increased operating profits as a percentage of sales in 2008 as compared with 2007. Our expense levels are based in part on our expectations of future sales . While we have adjusted, and will continue to adjust, our expense levels based on both actual and anticipated sales, fluctuations in sales in a particular period could adversely impact our operating results. Whereas our backlog as of December 31, 2007, was $5.7 million, it would not be sufficient to meet our budgeted sales targets should new system orders in 2008 decline.

We expect growth to be largely dependent upon our ability to penetrate new markets and develop and market new RP, DDM and 3D printing systems, materials, applications, and services that meet the needs of our current and prospective customers. Our ability to implement our strategy for 2008 is subject to numerous uncertainties, many of which are described under “Risk Factors,” above, in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the section below captioned “Forward Looking Statements and Factors That May Affect Future Results of Operations.” We cannot ensure that our efforts will be successful.

Results of Operations

Twelve months ended December 31, 2007 compared with twelve months ended December 31, 2006

The following table sets forth certain statement of operations data as a percentage of net sales for the periods indicated. All items are included in or derived from our consolidated statement of operations.

The primary drivers of the year-over-year growth in product sales were:

* 35% increase from Dimension system sales

* 31% increase in high productivity system sales

* 23% increase in consumable sales

The increase in sales of our proprietary products was partially offset by a 73% decrease in distributed system sales.

Adjusting for the impact of the terminated distributed agreements with Objet and Arcam, net sales of our products and services for 2007 and 2006 and changes in net sales were as follows:

Our Dimension systems sales continue to grow as we introduced a new, higher-priced system in January 2007 and as awareness of the technology increases. Sales of high-performance systems grew with new product introductions, the refocus of the domestic sales team on proprietary products and new applications within the DDM market. As we increase our installed base of systems in the field, we continue to see solid growth in consumables. Overall, proprietary systems and consumables grew by 31% in 2007 compared to 2006.

Service revenues predominately consisted of the following components: maintenance, Paid Parts, and rentals. We saw a 30% increase in our Paid Parts service as we continued to invest in reaching customers through trade shows, direct mailings and our RedEye RPM™ website, which allows customers to order their parts over the Internet. Revenues from maintenance services on our proprietary systems saw year-over-year revenue growth of 6%. We attribute this slower growth to the one-year warranty for all international systems and domestic education systems as well as the high quality and reliability experienced by our 3D printer customers who now acquire multiple systems.

North American sales declined because of the discontinuation of the Objet distribution agreement. Results for 2007 include $2.4 and $1.6 million of Objet and Arcam related revenue, respectively, compared with $16.2 and $1.3 million of Objet and Arcam related revenue, respectively, in 2006.

North American sales benefited from:

* New high-productivity system introductions and a renewed focus of the domestic sales team in selling proprietary products.

* Our strong Dimension reseller network and the new Dimension Elite.

* Growth in our Paid Parts service which focused in 2007 almost exclusively on North America.

We saw a strong European market during 2007 for our high-end productivity systems. We believe a portion of this recovery was due to the weakness of the dollar relative to the euro, but a portion also related to new product introductions. In addition, we saw strong growth in sales of our Dimension products as we continued to grow our reseller network and their effectiveness. We also saw strong growth in Asia Pacific due to new product introductions, expansion in our Dimension reseller network as well as the effectiveness of existing resellers.

We believe Europe will remain a strong market throughout 2008 with new product introductions and assuming continued weakness in the US dollar. We expect the Asia Pacific region will be strong due to new product introductions and continued expansions we have made in our reseller network. North America will be negatively impacted by the discontinuation of the Arcam agreement. Declining economic conditions in any of these regions could adversely impact our future sales and profitability.

Product gross profit increased, as a percentage of product sales, due to an increase in sales of proprietary products and a significant decline in sales of Eden Systems and related consumables in the overall mix. The products that we distributed carried a significantly lower margin than our proprietary systems and consumables, which we manufacture. Service gross profit was relatively consistent between the years. Our Paid Parts service business carries a higher gross margin, but this was offset by lower margins on our overall maintenance business.

Operating Expenses

Selling, general and administrative expenses for 2007 increased significantly over the prior year as a percentage of sales for the following primary reasons:

* We significantly expanded our sales and marketing efforts in our Paid Parts business in an effort to capture market share in a segment of the RP market that is very fragmented today.

* With the discontinuation of the Objet distribution agreement and no new high productivity systems at the beginning of 2007, we were concerned with retaining our highly trained domestic sales team and set individual quotas at levels to insure their retention. With the renewed focus on proprietary high productivity systems and the new product introductions throughout 2007, many sales persons exceeded quotas and were paid commissions at an accelerated commission rate as a percentage of sales.

* We opened an office in Japan to support our growing sales both within Japan and elsewhere in the Asia Pacific region.

* We incurred a bad debt expense of $564,000 that resulted from the bankruptcy of an Italian distributor we originally engaged in early 2005 to sell 3D printers. At that time, it was a subsidiary of a large Italian company, but was subsequently sold to management without our knowledge.

Research and development increased by 11.4% over the previous year as we remain committed to designing new products and materials, reducing costs on existing products, and improving the quality and reliability of all of our platforms. Increases were primarily the result of increases in engineering headcounts partially offset by an increase in internally capitalized software. During the quarter ended September 30, 2005, we announced that we received a $3.6 million order from a Fortune 100 global manufacturing company to advance our proprietary FDM technology for direct digital manufacturing applications. This effort resulted in the FDM 900mc. The agreement includes payments to us over four years as R&D milestones are achieved, as well as payments that are dependent upon future deliverables. R&D payments received offset accelerated R&D efforts aimed at direct digital manufacturing advances and are not recognized as revenue. During 2007 and 2006, we offset approximately $980,000 and $1.1 million, respectively, of R&D expenses with monies received from this customer, respectively. As we continue our commitment to R&D and certain quality initiatives into 2008, we expect to report accelerated R&D and quality improvement spending in 2008 as a percentage of sales. This spending is focused on accelerating our development efforts to address both the 3D printer and DDM market opportunities we believe exists.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three Month Period Ended March 31,

For the three months ended March 31, 2008 compared to the same year-ago period, the growth in unit volume was low relative to historical growth rates. The unit growth in the first quarter of 2007 was a 36% increase over the first quarter of 2006 making it a difficult quarter to compare against in 2008.

Sales of our high productivity proprietary systems increased 29% driven by new product introductions over the past twelve months and an expansion in marketing to DDM applications. The increase in high productivity proprietary systems revenue was partially offset by lower sales of discontinued distributed products. Distributed system sales were $83,000 in the first quarter of 2008 compared with $670,000 in the prior year’s first quarter. Dimension system revenue increased 20% as the majority of system sales favored the higher priced systems, including the new Dimension 1200es BST and SST. Revenues from our proprietary consumables increased 14% due to our expanding installed base of systems.

Overall service revenue declined 1% in the first quarter of 2008 compared to the same year-ago period. We recognized no distributed-product-relat ed service revenue during the first quarter of 2008 compared to $323,000 in the first quarter of 2007. Excluding distributed-product-relat ed service revenue, total service revenue increased by 5% over the same prior-year period. Paid parts revenue declined by 12% in the first quarter of 2008 compared with the first quarter of 2007. The comparative first quarter of 2007 was an exceptionally strong quarter for Paid Parts as the business grew 70% over the first quarter of 2006 and included several large dollar orders. Paid Parts continues to be predominantly a domestic business and weaknesses in the Unites States economy may be adversely affecting sales.

North American sales, which include Canada and Mexico, accounted for approximately 50% and 55% of total revenue in the three months ended March 31, 2008 and 2007, respectively. This decline in sales percentage is primarily due to the discontinuation of the North American product distribution agreements with Arcam and Objet. Distributed system, consumable and maintenance sales were approximately $83,000 in the first quarter of 2008 compared to $1.1 million in the first quarter of 2007. International sales grew 23% for the three months ended March 31, 2008 compared to the same period in the prior year. The international increase was led by strong sales for all our products in both Europe and the Asia Pacific region.

Whereas we expect to report higher revenues and profits in 2008 over the results achieved in 2007, declining economic conditions could adversely impact our future sales and profitability.

The gross profit percentage benefited from improved mix within our high performance system business as the increase in our sales of proprietary high performance systems more than offset the decline in the sales of distributed products. In addition, the gross margin benefited from increased sales of our proprietary consumable products. As we have indicated in the past, our distributed products had relatively low gross margins as compared to our proprietary products.

The gross profit margin also benefited from better average prices for our Dimension products with more customers preferring the features of our higher priced systems introduced since the beginning of 2007. Our most recent product introduction was the Dimension 1200es SST and BST priced at $34,900 and $26,900, respectively, in February 2008. The additional features of these two systems have resulted in higher average selling prices and margins as compared to the previous 1200 models.

Operating Expenses

Operating expenses and operating expense as a percentage of sales, as well as the percentage change in operating expenses were as follows:

Research and development expense increased by 20% for the three months ended March 31, 2008, compared to the same period in the prior year, as we remain committed to designing new products and materials, reducing costs on existing products, and improving the quality and reliability of all of our platforms. Increases were primarily the result of increases in engineering headcounts and material spending partially offset by the capitalization of internally developed software during the three months ended March 31, 2008. Capitalized research and development expenditures for the quarter related to internally developed software increased to $427,000 from $389,000 for the same period in the prior year. During the quarter ended September 30, 2005, we announced that we received a $3.6 million order from a Fortune 100 global manufacturing company to advance our proprietary FDM technology for rapid manufacturing applications. This effort is based around our high-performance systems. The agreement includes payments to us over four years as R&D milestones are achieved, as well as payments that are dependent upon future deliverables. R&D payments received offset accelerated R&D efforts aimed at rapid manufacturing advances and are not recognized as revenue. During the three months ended March 31, 2008 and 2007, we offset approximately $280,000 and $256,000, respectively, of R&D expenses with payments received from this customer. As we continue our commitment to R&D throughout 2008, we expect to report higher R&D expenses than we incurred in 2007.

Selling, general and administrative expenses increased 14% for the first quarter of 2008 compared to the same period in the prior year. The increase is additional spending to support our growth including spending for process improvements. We expect the growth in selling, general and administrative expenses to continue over the remainder of 2008.

Operating Income

Primarily due to the increase in net sales, changes in the product mix, along with the other reasons cited above, for the three months ended March 31, 2008 compared with the same year-ago period, operating income increased by 24%.

Other Income (Expense)

Interest income increased in the three months ended March 31, 2008 compared to the same year-ago period due to a an increase in our cash and investments. Foreign currency transaction gains and losses are principally due to currency fluctuations between the US dollar and the Euro. We enter into 30-day forward contracts to hedge our foreign currency exposure. In 2008 we hedged only a portion of our foreign currency exposure and the resulting loss was due to the weakening of the US dollar relative to the Euro. Our strategy is to continue to hedge our estimated Euro denominated accounts receivable position throughout the remainder of 2008. At March 31, 2008, we had approximately €5.0 million in Euro-denominated receivables and a €3.8 million 30-day forward contract.

Other income (expense) includes a $390,000 charge related to our investment in auction rate securities. Given the current environment, we have been proactive in evaluating our cash and investments. As we reported in our Annual Report on Form 10-K, we finished 2007 with approximately $18.8 million in auction rate securities, but we have reduced our position to $6.8 million as of March 31, 2008.

Approximately two-thirds, or $4.8 million, of our auction rate securities held at March 31, 2008, are triple A rated and insured by a highly rated insurance company. The remaining $2.0 million in auction rate securities is an investment in a Jefferson County, Alabama municipal bond that has seen its rating reduced to triple C from triple A. In order to help us determine the carrying value of these investments, we hired outside consultants to qualitatively and quantitatively evaluate our auction rate securities portfolio.

CONF CALL

Shane Glenn

Welcome to the Stratasys conference call to discuss second quarter financial results. Representing Stratasys’ Executive Management on the conference call today is the Chairman and CEO of Stratasys, Scott Crump and CFO, Bob Gallagher.

A quick reminder that today’s conference call is being transmitted over the web and can be accessed through the investor section of our website at www.stratasys.com. We will begin with the Safe Harbor statements. All statements herein that are not historical facts or that include such words as expects, anticipates, projects, estimates, vision, planning, believes or similar words that are forward-looking statements that we deem to be covered by and to qualify for the Safe Harbor protection covered by the Private Securities Litigation Reform Act of 1995.

Our belief is that we have the largest part-building service based on the number of dedicated machines. Except for the historical information herein, the matters discussed in this news release our forward-looking statements that involve risks and uncertainties. These include the continued market acceptance and growth of our Dimension product line, FDM 200mc, 360mc, 400mc, 900mc, Maxum, Titan and Vantage product lines, the size of the 3D printing market, our ability to penetrate the 3D printing market, our ability to maintain the growth rate experienced in this and preceding quarters, our ability to introduce in the market new materials such as ABS-Plus and ABS-M30 and the market acceptance of these and other materials, the impact of competitive products and pricing, the timely development and acceptance of new products and materials, the success of our recent R&D initiative to expand the direct digital manufacturing capabilities of our core FDM technology, the success of the our RedEye RPM and other paid parts services and the other risks detailed from time-to-time in our SEC reports, including our quarterly reports filed on Form 10-Q, to be filed throughout 2008 and our annual report on 10-K filed for the year ended December 31, 2007.

The information discussed within this conference call includes financial results and forward-looking financial guidance in accordance with the US Generally Accepted Accounting Principles or GAAP. In addition non-GAAP financial guidance’s include and exclude certain expenses. The non-GAAP financial measures are provided in an effort to give information that investors may deem relevant to the company's operations and compared to the performance. Primarily the identification and exclusion of expenses associated with stock-based compensation required under SFAS 123R.

We'd like to confirm the date of our third quarter earnings release and conference call. Stratasys' third quarter results will be released on or before the morning of November 4 2008, followed by a conference call on the same day of the release. We will release the conference call time and details about two weeks prior to that date. Now I would like to turn the call over to our CEO, Scott Crump.

Scott Crump

We are pleased to announce our record second quarter financial results. Revenue grew 13% for our proprietary products and services in the second quarter and net income was also up 13% over last year. Our high-end FDM system business grew by 33% over the same period last year driven by new products and positive impact of our direct digital manufacturing opportunities.

We announce the large order for multiple 900mc systems during the quarter, which was a direct result of our efforts to strategically expand into direct digital manufacturing. Our proprietary consumable revenue increased by 17% driven by our rolling installed base of systems as we announced the installation of our 10,000 system during the second quarter. Paid parts demonstrated improve performance as revenue increased 25% sequentially over the first quarter.

Okay I’ll return later to discuss some of our strategic initiatives but first I would like to turn the call over to our CFO, Bob Gallagher who will further highlight our second quarter results; here’s Bob.

Bob Gallagher

Prior to discussing the details of our financial results, we would like to outline the relative impact of discontinuing our product distribution agreements. As we have previously outlined, we have discontinued the distribution of Eden and Arcam products which created certain issue when conducting year-over-year comparative analysis of our revenue growth and margins.

In the second of 2008 we recognized approximately 105,000 of sales related to these discontinued distribution agreements compared to approximately 537,000 in the same period last year. Total revenue increased by 11% to $31.2 million for the second quarter of 2008, compared to $28.2 million for the same period last year. Revenue from proprietary products and services, which excludes all distributed product-related revenue increased by 13% in the second quarter over the same period last year.

The company shipped 540 systems during the second quarter versus 564 last year. The decline in unit resulted from lower 3D printer unit volume. The decline more than offset strong unit growth in our high-end system business. Scott will provide additional commentary later in the call which will address the reason impact of promoting our higher priced printers as well as the impact of the weakening domestic manufacturing environment.

The 1200 SST, Elite and 768 SST, are three highest priced 3D printers, representing approximately 72% of our 3D printer unit volume during the second quarter. Second quarter product revenue as reported increased by 12% to $24.8 million when compared to $22.2 million for the same period last year.

Several factors influenced our proprietary product revenue during the second quarter. First, proprietary high-end system revenue increased by an impressive 33% when compared to last year, driven by the successful introduction of several new products. The performance of our high-end system business exceeded our expectations during the quarter.

Second our 3D printer system revenue declined by 4%, a function in the lower unit volumes for 3D printers, which more than offset higher average prices compared to last year.

Third, our proprietary consumables grew by 17% during the second quarter when compared to last year, driven by our ongoing expansion of our installed base of proprietary systems. The 17% growth in consumable revenue we reported for the second quarter excludes any consideration for the consumable cartridges included in the 1200es operate kit announced in February for customers who had a non-es version of the Dimension 1200. We sold approximately 260 operate kits during the quarter.

Second quarter’s service revenue as reported increased by 7% compared to the same period last year. We recognized no distributed product-related service revenue during the second quarter, compared to 376,000 in revenue for maintenance contracts we recognized during the same period last year. Excluding distributed product-related service revenue total proprietary service related revenue increased by 14%.

Maintenance revenue from contracts and proprietary systems increased by 17% during the second quarter when compared to last year. The increase in maintenance revenue over the prior years is due to the 2169 system we added to the installed base in 2007. Our paid-parts revenue increased by 5% during the second quarter versus last year, which was a significant improvement over the 12% decline in year-over-year revenue for paid-parts during the first quarter. We should note that the paid parts business was also up to 25% sequentially.

Gross profit increased by 11% to $17.3 million for the second quarter of 2008 when compared to $50.6 million for the same period last year. Gross profit as a percentage of sales remained at 55.3% compared to the same period last year. Operating profit increased by 16% or $5.8 million for the second quarter of 2008 compared to $5 million for the same period last year.

Stock-based compensation expense required under statement of Financial Accounting Standards or SFAS 123R amounted to approximately 320,000 in the second quarter compared to a 179,000 in the same period last year. Operating expenses increased by 9% during the second quarter compared to last year.

The increase in operating expenses was led by a 43% increase in R&D expense during the quarter. We expect more modest growth in R&D expenses in the second half of the year. Our vision remains to move down the price elasticity curve and target opportunities that are developing within the direct digital manufacturing market. Both of these initiatives will require continuous product development and investment.

While we remain committed to these plans we have recently initiated some cost reductions that should lessen the overall level of operating expenses we had previously expected. Total interest and other income for the second quarter decreased to 382,000 versus 525,000 last year. The decline was a result of lower interest rates and higher charges related to foreign currency exchange.

Pretax profit increased by 12% to $6.2 million for the second quarter of 2008 compared to $5.6 million from the same period last year. Excluding stock-based compensation expenses, pretax profit increased by 14% to $6.5 million for the second quarter of 2008 compared to $5.7 million for the same period last year.

Income tax, as reported amounted to $2.1 million, a rate of 34.1% compared to $1.9 million or 34.7% for the same period last year. Excluding the impact of stock-based compensation expenses, income tax expense amounted to $2.2 million or 33.2% for the second quarter versus $2 million or 34.4% for the same period last year.

Net income increased by 13% to $4.1 million for the second quarter of 2008 or $0.19 per share compared to $3.6 million or $0.17 per share for the same period last year. Excluding stock-based compensation expenses net income increased by 16% to $4.4 million or $0.20 per share for the second quarter of 2008, compared to $3.8 million or $0.18 per share for the same period last year.

Our diluted shares outstanding declined by 125,000 shares from the second quarter of last year, a result of our lower stock price and share repurchases. Our cash and investment position amounted to approximately $49 million at the end of the second quarter, compared to approximately $61 million at the end of fiscal 2007. The change in cash and investments from the end of fiscal 2007 is a result of cash used for stock repurchases combined with higher working capital requirements.

Year-to-date we bought back approximately 221,000 shares for approximately $4 million for an average purchase price of $17.88. We have approximately $26 million remaining under current repurchase authorization.

Inventory balances were $18.5 million at the end of the second quarter, which is up from the $12.8 million at the end of fiscal 2007 and up from the $17.6 million at the end of the first quarter. We attribute at the growth in our first quarter to four main reasons: A buildup of Dimension units in anticipation to additional demand, in order to provide for differences in our forecast mix versus actual demand; an increase in inventory to support our new product introductions, particularly 900mc’s in the second quarter as we commercially ship in Q3; a last time buy for legacy system inventory; and an increase in consumer volume until you to meet future customer demand.

In the second quarter we still have the effects from all the above. In addition we expanded our inventory for 900mc’s as we are now in non-commercial production in the third quarter. We also made additional strategic buys of consumable raw materials in anticipation of future lead and price increases. Accounts receivable at the end of the second quarter was $34.4 million compared to $26.3 million at the end of fiscal 2007.

Day sales outstanding or DSOs was approximately 100 days at the end of the second quarter compared to 89 days at the end of the first quarter. Our receivables at June 30 were at very high level. Obviously, it had to do with the timing of collection, but also the fact that many of our sales come towards the end of the quarter. While I’m disappointed in the number at June 30; I’m happy to report our DSOs have trended down in July and were under 90 days as of July 31. As I look forward to the end of Q3 I expect our DSO’s will continue to be under 90 days.

Total revenue increased by 12% to $62 million for the six month period end of June 30, compared to $85.6 million for the same period last year. Revenue from proprietary products and services which excludes all distributive product related revenue increased by 14% in the six month period, over the same period of last year.

Net income increased by 16% to $7.9 million for the six months of 2008 or $0.37 per share compared to $6.8 million or $0.32 per share for the same period last year. Excluding stock-based compensation expenses net income increased by 80% to $8.4 million or $0.39 per share for the six months period of 2008 compared to $7.1 million or $0.34 for the same period last year.

I’d like to summarize by going through the key financial highlights for the quarter. Strong growth in our high-end system sales and proprietary consumables driven by our new products in expanding basement solved systems, weaker 3D printer system revenue driven by lower 3D printer unit volume. Solid profit growth and a similar outline projected strong year-over-year profit growth in the second half of 2008.

Now I’d like to turn it over to our Director of Investor Relations, Shane Glenn to outline our financial guidance.

Shane Glenn

Stratasys provided the following information regarding its financial guidance for the fiscal year ending December 31, 2008. We adjusted revenue guidance to $125 million to $130 million, from our previous guidance of $130 million to $136 million. We adjusted non-GAAP earnings guidance, which excludes stock-based compensation expense required under SFAS 123R to $0.79 to $0.84 per share from our previous guidance of $.81 to $0.89 per share and we adjusted our GAAP earnings guidance to $0.75 to $0.80 per share from the previous guidance of $0.77 to $0.85 per share.

Stock-based compensation expenses required under SFAS 123R, estimated at $0.04 to $0.05 per share for the year. Our revenue adjustments reflect a reduction in 3D printer system revenue for fiscal 2008 compared to previous expectations. Net income per share adjustments reflect a lower revenue expectation offset partially by a reduction in operating expenses compared to previous expectations.

Our earnings growth projections remained very strong. Based on the low-end of our revised guidance we are projecting approximately 20% growth in pre-tax profit in the second half of the year. This is an acceleration from the growth rate we experienced in the first half.

We’re conducting a year-over-year comparative analysis and we would like to remind the callers of the approximate portion for share in tax credits we recognize in the second half for the fiscal 2007. Appropriate reconciliations between non-GAAP and GAAP financial measure are provided in a table at the end of the press release. We provide the non-GAAP financial estimates for those analyst and shareholders that want to use that information in evaluating our performance.

Now, I would like to turn the call back over to Scott Crump.

Scott Crump

Our second quarter results reflect our ongoing success with our new high-end precision systems, the FDM 200mc, 360mc, 400mc and 900mc. Customers are valuing this system for their improved functionality in making parts for prototypes and concept models, but more importantly have succeeded in targeting new direct digital manufacturing application with our high-end systems which is driving incremental system sales.

This success was highlighted by the large quarter we announce in July, we were at FDM 900mc systems. The 900mc, our largest added fabrication system is used expressly by customers for direct digital manufacturing. We estimate that approximately one third of all the high-end system sold during the second quarter will be utilized for direct digital manufacturing and sub-frequency.

I hope you can appreciate we remain excited about the emerging applications within the direct digital manufacturing as the second quarter results show we are generating significant incremental business from these new applications. Our direction within the 3D printing business over the past two years has been a departure from our longer-term vision of driving adoption through greater affordability.

Our recent strategy has included the introduction of higher-priced 3D printers that provide customers with improved functionality. This has produced some unanticipated results as our resellers have focused their efforts on these new systems, resulting in a disproportionately higher level of sales of our full-featured 3D printers compared to the lower-priced units.

While the strong sales of the higher-priced 3D printers have positively impacted our average printer prices and margins, total 3D printer unit volume lagged our expectations during the second quarter. We believe this trend reflects the difficulty in selling a relatively new technology to customers that are contending with a weakening domestic manufacturing environment and are less inclined to make innovative investments. We believe the new initiatives planned for 3D printing over the coming quarters will contribute to improve performance for this business.

We remain confident in our longer-term vision within 3D printing and believe a significant under penetrated market remains right for expansion. We continue to observe positive trends within our paid parts business as we’ve made organizational changes and implemented improvements in our sales and marketing efforts.

In addition to a 25% sequential increase in revenue over the first quarter, total registrations for our RedEye website increased by 43% and the number of new first-time customer orders increased by 53% compared to last year.

We are pleased to announce the installation of our 10,000th system in June to Peugeot Citroen, which purchased a high-precision FDM 400mc for the automaker’s engineering facility. We’ve now sold more systems in the past three years than in the company’s prior fifteen-year history. This expanding base of systems is contributing to the growth of our proprietary consumable, as well as maintenance revenue, which both increased by 17% during the second quarter versus last year.

I will return with some closing comments, but first I’d like to address any questions that you might have. Let’s open up the call for questions.

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