Sarah Norton - IR Lonnie M. Smith - Chairman and CEO Marshall L. Mohr - Sr. VP and CFO Aleks Cukic - VP of Business Development and Strategic Planning Benjamin B. Gong - VP, Finance and Treasurer Gary Guthart - President and COO

Tao Levy - Deutsche Bank Eli Kammerman - Cowen and Company Ed Shenkan - Needham & Company Miroslava Minkova - Bear Stearns David Lewis - Morgan Stanley

Welcome to the Intuitive Surgical Incorporated Fourth Quarter 2007 Earnings Conference Call. All lines will be in a listen-only mode until the question-and-answer session. Today's call is being recorded. If anyone has any objection, you may disconnect at this time. I would now like to turn the call over to Sarah Norton, Investor Relations. Sarah Norton - Investor Relations: Good afternoon and welcome to Intuitive Surgical's fourth quarter conference call. With me today we have Lonnie Smith, our Chairman and CEO; Marshall Mohr, our Chief Financial Officer; Aleks Cukic, our Vice President of Business Development and Strategic Planning; Ben Gong, our VP of Finance; and Gary Guthart, our President and Chief Operating Officer. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied, as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company's Securities and Exchange Commission filings. Prospective investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website, at intuitivesurgical.com on the Audio Archives section under our Investor Relations page. In addition, today's press release has been posted to our website. Today's format will consist of providing you with highlights of the fourth quarter as described in our press release announced earlier today, followed by a question-and-answer session. First Lonnie will present the quarter's business highlights. Marshall will follow with a review of our fourth quarter's financial results. Next, Aleks will discuss sales and marketing highlights. Then Ben will provide our financial forecast for 2008, and finally, we will host a question-and-answer session. With that, I would like to introduce Lonnie Smith, our Chairman and CEO. Lonnie M. Smith - Chairman and Chief Executive Officer: Thank you for joining us today. 2007 was our third consecutive year of over 60% top line growth. We grew total revenue to 601 million for the year and 189 million for the fourth -- in the fourth quarter. Operating highlights for the fourth quarter are as follows. We sold 78 da Vinci Surgical Systems, up from 50 during the fourth quarter of last year. 20 of those systems were sold to existing customers. Our international team had an excellent quarter, contributing 26 of the 78 systems sold. We're at the fourth quarter with 795 da Vinci Systems installed worldwide. Total revenue for the quarter was up 68% from last year. Instrument and Accessory revenue increased to $56 million, also up 68%. Total recurring revenue including service grew to $81 million, up 63% from the prior year, comprising 43% of total revenue. We generated an operating profit of $83 million, 44% of revenue before non-cash 123R stock option expense, up 98% from the fourth quarter of last year. GAAP net income grew to 49 million, 26% of revenue, up 108% from last year. Through the full year of 2007, we sold 241 da Vinci Surgical Systems, up 42% from prior year. Total revenue grew to $601 million, up 61%; recurring revenue to $276 million, up 66%, comprising 46% of total revenue. We generated $243 million in operating profit, 40.5% of revenue before non-cash 123R stock option expense, up 83%. GAAP net income grew to $145 million, 24% of revenue, up 101%. We ended the year with $635 million in cash and investments, up 102 million from last quarter and 305 million from last year, which after excluding 56 million in cash received from the exercise of stock options and adding back 22 million invested in working capital and plant, property and equipment during the year, accounts were 188% of our reported GAAP net income for the year. This is a reflection of the significant non-cash stock option and statutory tax expenses reflected in our GAAP net income and is the reason that we continue to believe that operating income before non-cash 123R stock option expense remains the best measure of our actual financial performance. Adoption for surgical robotics is procedure-specific and patient-driven. We continue to drive the adoption curve for robotically assisted surgery procedure-by-procedure. Some of our high growth procedures, high growth defined as over 50% for the year, included gastrectomy, pulmonary lobectomy, prostatectomy, radical cystectomy, mamectomy, nephrectomy, hysterectomy and sacrocolpopexy. Some of these, the measured of relatively small prior year basis, but we have learned from past experience that that is how now new adoption curves begin. The da Vinci S continued to dominate our systems mix, a 93% of systems sold. High definition vision systems accounted for 74% of the systems in the quarter and 66% of the systems for the ear. We continue to make significant progress in terms of innovation and efficiency in every area of our business. Some 2007 data points, you might find of interesting clue. We added 201 employees during the year, ending the year with 764 employees. Revenue per employee grew to 905,000 in 2007 compared to 756,000 in 2006. Instrument and accessory revenue per system was up 21.8% to 302,000 from 248,000 in 2006. Cash generated before cash received from stock option exercise and cash invested in working capital, property, plant and equipment was $6.96 per share. With that, I will pass the time over to Marshall Mohr, our Chief Financial Officer Marshall L. Mohr - Senior Vice President and Chief Financial Officer: Thank you, Lonnie. Total fourth quarter revenue increased to $189.4 million, up 68% from $112.6 million for the fourth quarter of 2006, and up 21% from $156.9 million for the third quarter of 2007. Fourth quarter revenue by products category were as follows: Instrument and accessory revenue increased to 56.1 million, up 68% compared with 33.3 million last year, and 13% compared with 49.5 million last quarter. The growth rate in instruments and accessories is comparable to and a direct result of our procedure growth rate. The amount of instrument and accessory revenue we earned per procedure remained relatively unchanged at between $1,500 and $2,000 per procedure for established da Vinci accounts. Including the impact of initial orders completed with new system purchases, instrument and accessory revenue continues to be between 2,000 and $2,500 per procedure. Systems revenue increased to 108.6 million, up 73% compared with 63 million last year, and up 27% compared with 85.5 million last quarter. The increase in systems revenue reflects increased unit sales as well as an increase in the average revenue per system. Fourth quarter da Vinci Surgical System revenue reflects the sale of 78 systems compared with 50 systems sold during the fourth quarter of last year and 63 systems sold in the third quarter. Two of the system sales in the quarter involved trade-ins where a customer upgraded two of his four systems from da Vinci standard systems to da Vinci S Systems with HD. 58 of the systems sold during the quarter were our latest S model incorporating HD vision capabilities. 12 were four arm S models incorporating standard vision capabilities, 2 were three arm S models and 6 were standard systems. 26 of the system sales were outside of the U.S. compared with 17 in the third quarter. Fourth quarter average revenue per system including all da Vinci models but excluding upgrades was 1.38 million, which is 50,000 more than the average revenue per system in the third quarter of 2007. The higher average revenue per system primarily reflects a favorable geographic and product mix, including a higher proportion of our sales comprising HD systems and a higher proportion of our sales being direct sales to European customers, which are denominated in euros, which strengthened relative to the dollar this quarter. Upgrades including fourth arms and HD accounted for 1 million of the current quarter systems revenue, compared with 1.6 million last quarter. Service revenue increased to 24.7 million, up 52% compared with 16.3 million last year and up 13% compared with 21.9 million last quarter. The growth in service revenue is primarily driven by our largest system installed base as well as higher annual contract prices associated with da Vinci S and HD models. Total fourth quarter recurring revenue comprised of instrument, accessory and service revenue increased to 80.8 million, up 63% compared with the fourth quarter of 2006, and up 13% compared with the third quarter of 2007. Recurring revenue represented 43% of total fourth quarter revenue, compared with 45% in the third quarter, reflecting the significant increase in system sales. Revenue outside the United States represented 26% of total fourth quarter revenue compared to 22% in the third quarter. The growth in international revenue reflects 26 system sales compared with 17 in the third quarter. Our fourth quarter 2007 gross margin of 71.4% increased compared with 69.1% realized in the third quarter. The increase in gross margin reflects higher average system ASPs, material cost reduction and productivity gains. During the fourth quarter, we established a legal entity in Mexico and entered into a three-year building lease for 34,000 square feet in Mexicali, Mexico. We expect to begin producing certain instruments in Mexico by the end of 2008. Costs associated with these activities were not significant in the fourth quarter of 2007. Total operating expenses for the fourth quarter of 2007 were 61.8 million compared with 54.5 million in the third quarter of 2007. The sequential operating expense increase of 7.3 million reflects increased costs associated with the growth in our top line particularly commissions, costs associated with patents acquired or licensed, increased spending on R&D, increased non-cash 123R stock compensation expense and increased headcount. We added 67 employees during the fourth quarter ending the period with 764 regular employees. The majority of these additions were to our worldwide sales and support and manufacturing organizations. Fourth quarter 2007 operating income was 73.4 million or 38.7% of sales, compared with 54 million or 34.4% of sales for the third quarter of 2007. Fourth quarter 2007 other income of 8.4 million decreased compared with $12.2 million in the third quarter of 2007. Third quarter 2007 other income included a $4.1 million gain on the sale of Hansen stock. In addition, we realized 900,000 more of foreign exchange gains in the third quarter compared to the fourth quarter. The impact of these gains was partially offset by increased interest income of 1.2 million resulting from interest earned on greater cash and investment balances. Our effective tax rate for the fourth quarter was 39.9%, which brings the annual tax rate to 39%, which is consistent with our overall guidance. We continue to utilize net loss carry forwards and employees' stock related tax benefits in 2007. The amount of employees' stock related tax benefits increased in the fourth quarter such that we now expect our cash outlay, as a percentage of pre-tax income, will be less than 6% for 2007. Our net income increased to 49.2 million or $1.24 per share, up 108% compared with 23.6 million or $0.62 per share for the fourth quarter of 2006, and up 20% compared with 40.9 million or $1.04 per share for the third quarter of 2007. Let me quickly summarize our results for 2007. Total revenue for 2007 was 601 million, up 61% compared with 373 million last year. Revenue growth was driven by procedure adoption and total procedures grew 74% in 2007 to approximately 85,000. Da Vinci prostatectomy, our largest procedure, grew to approximately 55,000 procedures in 2007, exceeding our target growth of 65%. And da Vinci Hysterectomy, our fastest growing procedure grew to over 13,000 procedures in 2007, exceeding our target growth of approximately 175%. Instrument and accessory revenue for 2007 was 191.7 million, up 72% compared with 111.7 million last year. Systems revenue for 2007 was 324.4 million, up 58% compared with 205.9 million last year. Operating income for 2007 was 206.7 million, up 93% compared with 107.4 million last year. Operating income included 36.3 million of stock-based compensation charges in 2007, compared with 25.3 million in 2006. Net income for 2007 was 144.5 million, or $3.70 per share, up 101% compared with 72 million or $1.89 per share last year. Now turning our attention to the balance sheet; we ended the fourth quarter of 2007 with cash, cash equivalents, and investments of 635 million, up 102 million from the previous quarter-end and up 305 million from December 31st, 2006. 14 million of the cash generated in the quarter and 56 million of the cash generated during the year was associated with stock purchase activities. The remaining cash generated is primarily related to operating activities. Our accounts receivable balance increased to 130.4 million at December 31st from 120.5 million at September 30, 2007. The increase in accounts receivable is attributed to increased sales. Our net inventory increased to 32.4 million at December 31st, from 26.8 million at September 30, 2007. Our inventory turns at December 31st of 6.5 times per year was slightly lower than the seven turns at the end of the previous quarter. And with that, I'd like to turn it over to Aleks, who will go over our sales, marketing and clinical highlights. Aleks Cukic - Vice President of Business Development and Strategic Planning: Thank you, Marshall. During the fourth quarter, we shipped 78 da Vinci systems, which as Marshall mentioned, included a two system trade-in. Geographically, 52 systems were sold in the United States, 17 in Europe and 9 into rest of world markets. 72 of the 78 system shipments were da Vinci S systems and the remaining six were standard da Vinci systems. Of the 72 S systems sold, 58 were high-definition or HD systems. We finished 2007 with 795 cumulative da Vinci systems worldwide; 595 in the U.S., 136 in Europe and 64 in rest of world markets. Independent of the trade-ins, 18 of the 76 systems sold during the quarter represented repeat system sales to existing customers. International system sales were strong and included four da Vinci systems into France, three into Belgium, three into Germany and three more into Korea. Clinically, we had an excellent quarter, a quarter in which we experienced strong sequential procedure growth in all four targeted surgical specialties, both U.S. and internationally. A particular note was the strength of the international procedure growth, most notably within dVP. Our gynecologic procedure business placed by da Vinci Hysterectomy and da Vinci Sacrocolpopexy, registered the largest sequential percentage growth for the quarter, whereas urology registered the largest absolute procedure growth. We also experienced significant growth within our kidney business, specifically da Vinci Nephrectomy and Partial Nephrectomy and with the addition of several key cardiac centers during 2007, we saw strong growth in our da Vinci Mitral Valve Repair business. Ben will provide you with updated procedure guidance during his review. in Q4 we had 110 da Vinci related clinical papers published within various peer-reviewed journals across multiple surgical specialties. We also launched 2 new instruments; a new Atrial retractor and the dual-blade retractor, which is targeted for kidney procedures. Neither of these products will significantly boost our top line, but each will offer our surgeon customers added utility, leading to a more optimized surgical procedure. Optimizing each of our target procedures through the development of new products and product enchantments remains an important priority. We participated in multiple conferences within urology, gynecology, general surgery and cardiothoracic surgery during the quarter. However, I'll limit my review to only a few. The First Annual International Gynecologic Oncology Robotics Symposium was held at the University of North Carolina, Chapel Hill, with professional attendance estimated at 175. The program covered several da Vinci procedures and included live surgery transmissions. During one of the live cases a type 3 radical hysterectomy performed by Dr. John Boggess demonstrated how the most complex and demanding open cancer operations can be performed through minimally invasive techniques. This very demanding procedure to the audience's surprise was completed in less than 3 hours. During the Ask the Experts panel, Dr. Boggess reported that of his 300 plus da Vinci cases, he has aborted only 3 radical hysterectomies due to metastatic disease, converted one oncologic patient due to severe fibroids and converted only one patient due to an unforeseen excessively large ovary. He concluded by saying and I quote, contraindications are disappearing as are complications. But it takes time to ramp up. We came away from this symposium with an even stronger positive impression of Intuitive's market position within the field of GYN oncology. As the 36th Global Congress of the AAGL held in Washington DC, da Vinci procedures were featured prominently on several fronts. The AAGL put on 2 post graduate robotics courses as well as a robotics breakfast symposium. All of these programs were very well attended. In addition, the general AAGL program features several abstracts, posters, presentations, summarizing clinical experiences with da Vinci Hysterectomy, both benign and malignant Myomectomy and Sacrocolpopexy. Dr. Ricardo Estape from the University of Miami presented a retrospective review of his first 26 da Vinci Radical Hysterectomies compared to his last 10 laparoscopic radicals and his last 20 performed through an open technique. He compared blood loss, operating time, lymph node yields, length of hospitalization and pain management regiments within each cohort. Regarding blood loss, for da Vinci patients, it was 90 milliliters, laparoscopic 320 milliliters, open procedures 840 milliliters. Operating time was 142 minutes for da Vinci patients, 212 for laparoscopy and 122 for open. Lymph node yields in the da Vinci procedure was 34 compared to 21 in the lap case and 32 in his open procedures. Length of stay was similar for both da Vinci and laparoscopic patients; 1.3 and 1.4 days, however, for patients undergoing open radical hysterectomy, 3.7 days. And finally pain medication; patients undergoing a da Vinci Hysterectomy or a lap procedure were on pain meds for an average of 8 days compared to 22 days for pains subjected -- for patients subjected to an open radical hysterectomy. Again, these were his first 26 patients. He went on to say that his da Vinci operating times are now consistent with its open times. When you overlay all the data he presented, it's pretty clear to see why he and others have chosen the da Vinci approach for their oncologic procedures. Dr. Maria Bell from Stanford Medical Center, Sioux Falls, South Dakota presented cost data from one facility that measured both the direct and indirect cost associated with open hysterectomy, da Vinci Hysterectomy and laparoscopic hysterectomy. Her data showed that the total hospital cost for an open hysterectomy was $8,763, which compared to $6,388 for the da Vinci Hysterectomies and $5,873 for her lap test. The average length of stay for an open hysterectomy was 3.69 days, compared to 1.19 days for a da Vinci Hysterectomy and 1.37 days for a lap hyst. I think its important note that it's estimated at almost two-thirds of the 600,000 or so hysterectomies performed annually in the U.S. are still being performed with conventional open surgical technique. And when evaluating this data on a cost and performance basis, it becomes pretty clear why she and her group have converted the overwhelming majority of their hysterectomies both benign and oncologic to da Vinci. One of the emerging da Vinci procedures in 2007 was da Vinci Sacrocolpopexy, which had a similar growth rate to da Vinci Hysterectomy. Though the opportunity is smaller than our da Vinci Hysterectomy opportunity, perhaps 50 to 60,000 U.S. cases, the patient value is tremendous, which we believe sets up well for patient consolidation. The gold standard therapy for advanced vaginal vault prolapse has always been sacrocolpopexy performed through an open laparotomy incision. However, the procedure is highly invasive and carries with it a long recovery period. These patients are typically hospitalized for three days and experience post surgical morbidity lasting 4 to 8 weeks. At the AAGL Pre-Congress Robotics Course, Dr. Patrick Culligan from Atlantic Health System in Morristown, New Jersey, a surgeon who has performed over 50 da Vinci Sacrocolpopexy procedures reported that his patients are experiencing significantly less blood loss, approximately 50 milliliters versus 265 milliliters for this open technique, and are being released from the hospital in 23 hours. Postoperative morbidity within his patient base is ranged from one to two weeks. He has also reported a decrease in complication, which is a da Vinci theme that repeats from procedure-to-procedure surgical specialty to surgical specialty. Capping off the congress was a live transmission of a da Vinci Sacrocolpopexy performed by Dr. Anthony Visco from Duke University Medical Center. The interest from GYNs and urogynaecologists performing sacrocolpopexy is strong. This matched with the patients' desire for a gold standard operation performed minimally invasively, sets up well for hospital seeking to expand the women's health initiative. The 25th World Congress of Endourology was held in Cancun and was attended by nearly 1300 urologists. There are multiple dVP presentations made at this meeting by both U.S. and non-U.S. surgeons. But to me, perhaps the key takeaway from this year's congress was the sheer volume of da Vinci-based moderated presentations and abstracts, 145 in total. In addition to dVP, many of these presentations were focused on da Vinci Nephrectomy and Partial Nephrectomy for kidney cancers, cystectomy and urinary diversions for bladder cancers, pyeloplasty and other urologic disorders. The patient value that da Vinci brings to the treatment of all of these corresponding diseases is substantial and as da Vinci Prostatectomy grows towards the standard of care for prostate surgery in the U.S. and other countries, it is clearly pulling with it several da Vinci opportunities within the vertical of urologic surgery. This year's world congress was further validation of this cumulative pull-through. And within our procedure business, we experienced it more in Q4 than in quarters past, and we would expect it to continue. In closing, I'd like to bring your attention an important paper that was featured in the November edition of the American Cancer Society's publication, Cancer. As many of you know, the last remaining criticism for performing dVP was the absence of longer term published results. It certainly hasn't slowed acceptance of the procedure, but it was outdone than the West. The cancer journal published five-year dVP outcomes emanating out of the Vattikuti Urology Institute at Henry Ford Hospital in Detroit. The series compared the results of Henry Ford's first 200 patients to the result of their last 200 patients, between the years of 2000 and 2006. The total population of their dVP series was 2,766 patients. The patients were operated on by three different surgeons. This comprehensive review compared cancer controlled functional outcomes such as sexual health and urinary incontinence, length of hospital stay and several other key variables. The authors stratified the metrics by age, cancer grade, PSA and Gleason score, body mass index and other criteria. There is far too much data that go into on this call. But by almost any measure, the 5-year data was viewed as very positive. The authors' conclusion is as follows and I quote, the results of this large series of 2,766 patients confirms the promising outcomes reported in earlier robotic-assisted prostatectomy series. Perioperative complications remain low and long-term outcomes are favorable. Continued experience and technical refinements of the procedure demonstrate improvements in operative parameters and functional results. Robotic-assisted prostatectomy remains a safe and reproducible treatment for men with clinically localized prostrate cancer. This concludes my overview and I will now turn the time over to Ben. Benjamin B. Gong - Vice President, Finance and Treasurer: Thank you, Aleks. I will be providing our 2008 financial forecast on a GAAP reporting basis, including stock compensation expenses and I will also provide an estimate of our stock compensation expenses separately, so you can calculate meaningful comparisons and exclude these non-cash expenses. Starting with procedures, we continue to expect dVP and dVH adoption to drive the growth in our 2008 recurring revenues. For 2008, we expect dVP procedures to grow approximately 40% from a base of approximately 55,000 procedures performed in 2007. And we expect dVH procedures to grow approximately 150% from a base of approximately 13,000 procedures performed in 2007. In addition, as Aleks mentioned, we expect to have continued growth in other procedures, particularly in the GYN specialty. Overall, we expect total procedures to grow at least 55% in 2008 from a base of approximately 85,000 procedures performed in 2007. With regard to revenue, we expect our total 2008 revenues to grow approximately 40% over 2007. Instrument and accessory revenues, which are specifically driven by procedures performed, are expected to grow approximately 55% over 2007. We expect this growth to result from procedures performed on new system placements as well as increased utilization of existing installed systems. System utilization has steadily increased and currently averages about three procedures per system per week across the installed base. System revenues have continued to grow strongly and we expect to see continued growth in system placements throughout 2008. We are forecasting system revenue to grow approximately 30% over 2007. We expect this growth to come from an increase in unit shipments. Our system ASP reached a high of $1.38 million in Q4 2007 and averaged approximately 1.33 million for all of 2007. As a reminder, our system ASP can fluctuate quarter-to-quarter as a result of geographic mix and product mix. For 2008, we expect our average system ASP to be approximately the same as last year, which was $1.33 million. We expect service revenues to grow approximately 44% above 2007 levels with an average annual service revenue per installed system of $135,000 per year. With regard to our first quarter 2008 revenue, please note that the fourth quarter is seasonally our strongest quarter for system sales. And we typically place more systems in the fourth quarter than the following first quarter. As a result, we expect Q1 2008 revenues to be sequential last year lower than the fourth quarter of 2007. Then we expect to grow revenue sequentially each quarter throughout 2008. With regards to gross profit margin, we expect to have modest year-over-year improvement in gross margin, driven primarily by improvements in manufacturing efficiency. Much of the improvement we experienced in Q4 2007 came from favorable product mix, geographic mix and exchange rate changes. These factors are difficult to predict and can fluctuate quarter-to-quarter. Therefore, we are forecasting gross margins to be between 69 and 70% for the year. Before moving to operating expense, I will provide a forecast on stock compensation expenses to explain clearly how these non-cash charges will likely change in 2008. As you know, our stock prices appreciated significantly since this time last year, and as a result, we expect charges to income for stock compensation expense to be significantly higher in the coming year. To review, in 2007 we recorded approximately $36 million in stock compensation expense distributed as follows: 6 million in cost of goods sold, 8 million in R&D and 22 million in SG&A. For 2008, assuming our present day stock price, we expect to record approximately $60 million in stock compensation expense distributed as follows: 10 million in cost of goods sold, 13 million in R&D and 37 million in SG&A. this will represent approximately a 67% increase in stock compensation expense for the year. Now on a GAAP basis, I will describe our forecast for operating expense growth in 2008. In the R&D expense category, we are continuing to invest in the development of new products internally as well as co-development with third parties. We expect our R&D expenses to grow approximately 52% in 2008. Many of our R&D program expenses are planned in the first half of the year. As a result, we expect R&D expense to grow sequential from Q4 2007 to Q1 2008, then remain relatively flat for the remainder of the year. In the SG&A expense category, we are continuing to expand our field sales organizations to drive the growth of procedures as well as system placements. As Aleks mentioned, the several new procedures emerging this presents opportunities for us to increase the number of procedures performed per installed system. To drive this growth in procedures, we are planning to increase our ratio of coverage of clinical sales people per account. We believe this will be instrumental in driving the continued adoption of existing and new procedures. We are also continuing to add system sales people to drive the 30% growth in system revenues for 2008. For the year, we expect our SG&A expenses to grow approximately 40%. Since a significant portion of our field sales headcount is being added in the first half of the year, we expect SG&A expense, as a percent of sales, to increase sequentially in Q1. For the year, we expect SG&A expense, as a percent of sales; to be about same as it was in the full year 2007. We expect total operating expense including FAS 123R stock compensation expense to grow approximately 43% for the year. We expect operating income to grow approximately 40% for the year. For Q1 2008, we expect operating expense to grow approximately 10% sequentially from Q4 2007. Other income expense for 2008 is expected to come in between 36 and $40 million, driven primarily from interest income on cash and investments. With regard to income tax, as mentioned in the past, we expect to report a GAAP tax rate of approximately 39% for the year. However, we expect our effective cash tax expense to be less than 25% for 2008. We expect to start reporting the benefits of our international tax strategy in the form of a lower GAAP tax rate in 2009. Regarding shares outstanding, we currently have 38.5 million common shares outstanding, we also have approximately 3.1 million option shares outstanding. Depending upon our average stock price during the year, a portion of the 3.1 million option shares will be added to the fully diluted shares calculation. For calculating EPS in 2008, we expect the share count to be approximately 40 million shares in Q1 and going to approximately 40.8 million shares by the end of the year. Finally with regard to capital investments, we have acquired property next to our corporate headquarters. We plan to construct a 154, 000 square foot manufacturing, engineering building on this property over the next two years. This will translate into higher capital expenditures than we've had in recent years. For 2008, we expect to spend approximately $60 million in capital expense, which is up from approximately $20 million spend in 2007. That concludes our prepared remarks. We will now open the call to your questions. Question And Answer

Thank you. [Operator Instructions]. Our first question comes from Tao Levy with Deutsche Bank. Tao Levy - Deutsche Bank: Good afternoon everyone. Lonnie M. Smith - Chairman and Chief Executive Officer: Hi Tao. Tao Levy - Deutsche Bank: Hi and congratulations on a very strong quarter and year. There are a couple of questions on my end. In terms of gynecology, given the strength and given Aleks, all the comments that you've made regarding the clinical benefits, is there any way that your guys are now comfortable sort of comparing it to the progress that we saw in the past with urology? Lonnie M. Smith - Chairman and Chief Executive Officer: You know Tao I think, the place we comfortable comparing it, it really is not in the metrics as much as it is in the patient value. We are continuing to see more and more patients that are again looking for facilities that are performing these operations, we continue to see physicians and professional societies, they are making it a bigger part of their agendas at their meetings, it becomes difficult to compare when you look at the number of systems we had installed at the time versus the number of systems we have today and the general acceptance of robotic surgery today. So I don't think we are ready to tell you, it's going to look -- the growth curve is going to resemble dVP. Ironically, it is fairly similar today, in fact dVH is probably a little bit bigger, but I don't think we can say that going forward -- and faster I should say, and bigger in overall procedures. Tao Levy - Deutsche Bank: Okay. And also on the manufacturing side, with this -- you're doing in Mexico, the gross margins guidance that you're giving, should we expect that to hit initially, is it also the more of a S systems, is it the euro, any better sense there? Benjamin B. Gong - Vice President, Finance and Treasurer: Yeah Tao, this is Ben. We incorporated all of those factors and coming up with our estimate of 69 to 70% gross margin for the year. There's some start-up cost with the Mexico operation, however, we're containing to bring down some cost just in our normal manufacturing efficiencies and that's going to sort of balance that out the -- and as we said in the past, we really don't try to forecast what's going to happen with exchange rates. Tao Levy - Deutsche Bank: Okay. And you look the new system sales that are taking place today. Obviously in the past urology was still the drive, it's probably still one of the big drivers. How does gynecology fall into that selling process today? Lonnie M. Smith - Chairman and Chief Executive Officer: Well each day becomes a bigger and bigger part of that process. I would say that we're still focused on -- our sales people are still focused on developing robotics initiatives within the hospitals which includes multiple specialties. Gynecology plays a bigger and bigger role each day. I would also say that the uptake of gynecology has in many instances put stress on hospitals that only have one system and I think you've seen again this quarter probably being the strongest side of that and a total of 20 systems that went to repeat customers. So, gynecology is a big player in that and I think will continue to be and continue to expand. Tao Levy - Deutsche Bank: And just lastly, I couldn't -- obviously the guidance that you're providing on the sales line are 40%, it's the highest level that you've ever started the year off. Any -- what's the thinking behind the big number that you're putting out there. Is this early in the year, what's giving you the confidence that 2008 looks like it's going to be a potentially even better than 2000 -- from last year, this early? Lonnie M. Smith - Chairman and Chief Executive Officer: To tell you if I take you back to last year if you remember hysterectomy was even earlier on in the adoption process and with the history that we have had this year with hysterectomy and how its about that as well as continued progress in some of the other procedures, and some of the pull-through procedures that we were identifying earlier, we feel more confident right now. Tao Levy - Deutsche Bank: Okay. Great, thanks a lot. Lonnie M. Smith - Chairman and Chief Executive Officer: Thank you Tao.

Our next question comes from Eli Kammerman with Cowen. Eli Kammerman - Cowen and Company: Yes, thank you and good afternoon. Lonnie M. Smith - Chairman and Chief Executive Officer: Hi Eli. Eli Kammerman - Cowen and Company: First question is, as you look at the growth for prostatectomy, can you tease apart what fraction of the growth is related to additional market penetration for radical prostatectomy as a strategy and what growth -- what is the component of growth from replacing open surgery. Lonnie M. Smith - Chairman and Chief Executive Officer: Eli I don't know that we will ever be able to tell you that exactly. It's just not a metric that has reliable data behind it and they track by agencies, et cetera. I can tell you anecdotally when we speak to our physicians, more and more we are hearing that patients who would have been candidates and would have seeked out radical -- breaky therapy specifically are now seeking out da Vinci Prostatectomy, we know that's taking place. On top of that we know that on a geographic expansion basis we are seeing tremendous outside of the United States. So when you put all of those factors together it brings us a level of confidence when we look at 2008 growing by at least 40%. So it's hard for us to tell exactly what it's going to look like and from what bucket we are going to take. But we do measure it both in terms of our estimates of prostatectomy in the market as well as new cancer -- new prostate cancer patients. Eli Kammerman - Cowen and Company: Okay, thanks for that answer. One more question please. For your guidance you said you expect to see revenues grow by 40% and operating income grow by 40%. So it seems strange that you are not expecting to see any gains in operating leverage despite higher utilization of the systems for more procedures. How do you explain that? Benjamin B. Gong - Vice President, Finance and Treasurer: Eli, this is Ben. So, keep in mind that that's on GAAP basis and even though the operating expenses are going 40%, it's handicapped by this growth in the non cash FAS 123R expenses. And so if we were to take that out then the operating income that Lonnie has talked about it's certainly is going to go more than 40% as a year-over-year. So, you have that. And we did mention that there is little of improvement in the gross margin which is I think what are you points on in terms of better utilization. Eli Kammerman - Cowen and Company: Okay, thanks very much.

Our next question comes from Amit Hazan with Oppenheimer.

Hi, good evening gentlemen. This actually Michael Tieu [ph] in place of Amit Hazan. Lonnie M. Smith - Chairman and Chief Executive Officer: Hi Michael.

Hi, just have a couple of questions for you guys. The first one is it appears that you are at least about 33% penetrated into the tier 1 hospitals mostly in major metropolitan areas. So, on a go-forward basis how should we think about system placement growth? Lonnie M. Smith - Chairman and Chief Executive Officer: A couple of things. Again I think it's important to know when you look at however you want to stratify hospitals and large hospitals or tier 1 or tier 2 or tier 3 that when you are talking about the largest hospitals our view is that those and we see it more and more every quarter that those become very strong candidates for multiple systems, so I would probably push on that math [ph] there a little bit. Secondly when you look at what we did this quarter, specifically of the 52 US hospitals that I shifted the 52 systems sold in the US, 8 of those systems went to hospitals less than 200 beds which un-stratified in any of those measures. So what we begin to see more and more each quarter as the procedures become proliferated the number of hospitals or I should say the number of beds in those hospitals is probably less important than it was in the past. So we look at the US market and we think that evidence of raising that guidance throughout the year and giving, I think, strong guidance in '08 that we are very, very bullish on it.

Okay and my next question is related to that in terms of purchasing. This has been the topic that's been discussed for a lot of capital equipment manufactures and wanted to find out if you are seeing any sort of slowdown or pressure in terms of the overall credit crunch market and anything that's affecting financing and what are the percentage of your customers who are financing and are they financing through you or third party that you are arranging? Lonnie M. Smith - Chairman and Chief Executive Officer: The answer to that is, no. We -- as we talked to -- we have about half of our sales force right now meeting to -- going through their pipeline and I had -- McNamara asked them if they had seen any delay because of the credit crunch and the answer: no one responded with any kind of positive experience. So now one has seen any deals delay because of it. We have third party financing in about 15% of our sales. We believe that hospitals will prioritize their investments where they believe that brings the greatest value to them in terms of incremental patients and revenue and we think we place very well in that.

Okay. And two last questions. One is the impetus behind the CalTech IP settlement. So you think that opens the Door for competitor to come in. And my last question how do you view the U.S. -- all U.S. units in terms of utilization. Do you think they will be able to reach the same levels as in the U.S.? Lonnie M. Smith - Chairman and Chief Executive Officer: On the CalTech question we don't see any door opening from the point of view of the settlement with CalTech; it was just a few patterns. The resolution doesn't leave us weakened in anyway in terms of our defensive position on patents.

Okay. Lonnie M. Smith - Chairman and Chief Executive Officer: The Utilization of Systems, OUS, it actually varies region by region. We certainly have some regions that are even higher utilization in the Untied states and -- but we would expect that overall as the adoption of dVP and dVH in other procedure gets greater internationally that we are going to see growth in utilization OUS as well as United States. Marshall L. Mohr - Senior Vice President and Chief Financial Officer: Just a closing comment on that, we have and we talked about this in the past, dVP OUS lagged the US and we've talked about 07 words come up very rapidly and it grew tremendously in '07. dVH is the same way. It's early in the United States and it's even earlier outside the United States. So there's a nice step function there that I think when all procedures caught up there is really no reason to suggest that that it should be any difference. But there is going to be a lag effect.

So when do you think you will be able to start to quantify in the growth for dVP and DVH internationally or can you give us some sort of range as far as where do you use see international procedures going for 2008. Lonnie M. Smith - Chairman and Chief Executive Officer: I don't think we have given that guidance. It's hard for us to tell you what -- in project with accuracy what that's going to look like in '08. We can just say that in '07 it was a -- I mean you can look at the system placements in that -- what that tells you is that procedures are in demand outside of United States because procedures drive system sales. So it was very, very strong in '07. Marshall L. Mohr - Senior Vice President and Chief Financial Officer: And yes, just to repeat, we think procedures would grow approximately 55% or more worldwide and it's going to strong both domestically and internationally.

Okay, Thank you very much.

Our next question is from Ed Shenkan with Needham. Ed Shenkan - Needham & Company: Congratulation on a great year. Lonnie M. Smith - Chairman and Chief Executive Officer: Thank you Ed. Ed Shenkan - Needham & Company: Our question comes from a survey that did out of 157 physicians and we found that over 50% of the current da Vinci users are interested in buying additional systems in the next three years. Additionally we found 80% of the systems are being used by multiple groups within a hospital. And we are just wondering are you expecting in the future that groups are going to have dedicated machines for their specialty or they are going to doing more sharing across the departments then they are already doing. Lonnie M. Smith - Chairman and Chief Executive Officer: If you look at some of the larger da Vinci customers are across the da Vinci customer base you will find both. You will find that in some instances you will have dedicated cardiac system, you will have dedicated urologic systems and you will have dedicated Gynecologic systems. Now when you if you look at your data and just overlay it to the actual numbers that we just reported we had roughly 24% or 25%, a quarter of the systems placed in the fourth quarter were second systems and I don't think that's the second, third or forth systems, repeat systems. So I don't think its far off of the entire year. So I would just say that we believe that fully developed robotics initiatives will require multiple systems and at what rate that happens within an individual hospital will be difficult to tell and vary from place to place. Ed Shenkan - Needham & Company: A couple of questions on cardiac surgery. We are hearing feedback from cardiologist that there is a system lag time with regards to beating heart surgery. Will you be able to address this with new technology integrations in the future or is this going to require significant system improvements just a great area wondering how soon we are going to be able to get there? Marshall L. Mohr - Senior Vice President and Chief Financial Officer: Let me comment on that. We just came from STS and there may be some other comments but we have currently some products for review with the FDA but I talked with our hospital that does a lot of beating hearts in Belgium and they just bought an AS last year and the Chief of Surgery -- Chief of Cardiac Surgery there told me that the AS has made a huge difference in terms of these that he can -- on beating heart he can certainly do a double and -- single and double vessels, very easily with that and our stabilizer and on arrested heart with a stabilizer being hit [ph] to all vessels of the heart and was just -- and just said it had made a huge difference in terms of the -- and so we did off the couple of products we have a fourth arm, a stabilizer that is not cleared yet in the United States and we have the atrial retractor that is a -- this is for mitral valve repair but the atrial retractor for -- that is approved and also our fourth arm instrument. Both have made the control and the ease of doing these procedures, taking a long way including the capabilities that we brought with AS system. Ed Shenkan - Needham & Company: So, Lonnie with those improvements, how far are we becoming more of a standard of care in cardiac surgery and just sort of put it in perspective is this two, three years and what kind of development must occur for that to really happen. Lonnie M. Smith - Chairman and Chief Executive Officer: I don't know that it's -- I can't predict that. I will say that we have a cleared adoption mitral valve. That curve is real and you got to get some place and other thing that we're seeing a lot of growth, we saw a good growth in TCAP and the Scopica [ph] bypass issue a bit, but lobotomy for lung cancer or the thoracic surgeons are... I've run into several SDS that were just enormously enthusiastic about it. So, really you build credibility, we'll build credibility with mitral valve and we will see the recent general medical article comparing stents and bypass that was favorable. But there's a lot of these cardiac surgeons are very, very conservative. They will come -- they will not come early, they will come -- the mitral valve there's a big event -- was a big move, there's not only that we have multiple centers doing it but when the Clinton Clinic takes a major role in it and we will see. But I don't like to put a time frame on it. We have got enough procedures. We have got not only what we are seeing with prostatectomy and now cystectomies, Nephrectomies, but you are seeing on hysterectomies, sacrocolpopexies and myomectomies and we are seeing all these procedures. So we got a good pipeline of procedures building growth. So our growth will come from both penetrating the procedure, adding additional procedures and geographic growth and those are the drivers of the growth for the foreseeable future. Marshall L. Mohr - Senior Vice President and Chief Financial Officer: And for cardiac there is not one specific tool that you need to make it you know massively more easier to do? Lonnie M. Smith - Chairman and Chief Executive Officer: You know Ed it's not about in a revasc procedure specifically; it isn't about one thing. It started with stabilization. I mean in the old days when we had a three-arm system with good stabilization, there were still that were able to get through that operation and we continue to address those things organically where we can and partner with other people where we need to. And so we have done that in the past with Medtronic, there's a lot of adoption of the U-Clips that they have and the procedure is evolving -- it's evolving pretty well, but we are not going to paint the picture that it's just one thing missing and you are going to throw a switch and all of a sudden everybody's going do revasc. It is growing, it will continue to grow, but that's about as far out I think as we can say. Ed Shenkan - Needham & Company: Thanks very much. Lonnie M. Smith - Chairman and Chief Executive Officer: We have our time for two more question and -- I think that's 1 or 2.

Our next question is from Rick Wise with Bear Stearns. Miroslava Minkova - Bear Stearns: Hi, Lonnie, hi Ben. Lonnie M. Smith - Chairman and Chief Executive Officer: Hi. Miroslava Minkova - Bear Stearns: It's actually Miroslava for Rick. Lonnie M. Smith - Chairman and Chief Executive Officer: Yes. Miroslava Minkova - Bear Stearns: I will be speaking for Rick today and I guess my first question is of the 20 systems that you sold to repeat customers in the US this quarter, can you just give us some more insight as to -- did these additional place -- getting an additional system, does it have to do with growth in the current procedures or is it more related to new procedures that they may be experimenting with or adopting. Marshall L. Mohr - Senior Vice President and Chief Financial Officer: I would say that it goes across the entire spectrum but the big driver is that they are expanding the capacity they had on their single system or their second system and required a third or fourth system now. The mail clinic in Las Chester, Minnesota which is a very busy centre in urology and other areas purchased a third and a fourth system. But at the same time we have a small hospital in -- outside of Orlando, Celebration Hospital, which is 122 bed hospital that bought first and their second. So I think you are going see that it's going go for a number of different reasons at the -- the core of that message is that people need extra capacity to do all the procedures that they are stacking up. Miroslava Minkova - Bear Stearns: Okay, great, thanks for the color. And also in your 55% procedure growth guidance for the year, you mentioned -- Ben mentioned that there are several new procedures emerging. Maybe so if you could us a little bit more color which are -- exactly are these procedures, I know you kind of talked about a lot of procedures. But the top ones among them would actually be very helpful. Lonnie M. Smith - Chairman and Chief Executive Officer: So if you look within the verticals and while just keeping in verticals of let's say gynecology, sacrocolpopexy for vaginal vault collapse is on that list. It's something that is continuing to grow rapidly at the same pace really as hysterectomy. Below that you have myomectomy, removal of the fibroid but preservation of the uterus also has nice growth. In the urology side of it, you are looking at the kidney operations, removal of the kidney or removal of part of kidney, partial nephrectomies. Both of those are showing very nice promise, a very nice growth as is the work around bladder cancers, prostatectomies and urinary diversions. So when we look out through those verticals, those are definitely on that list. And I would say within cardiac we continue to talk about mitral valve repair and it's becoming more and more of a mini part of that cardiac story. I think we have time for -- Marshall L. Mohr - Senior Vice President and Chief Financial Officer: One more caller. Lonnie M. Smith - Chairman and Chief Executive Officer: One more caller. Miroslava Minkova - Bear Stearns: Thank you. Marshall L. Mohr - Senior Vice President and Chief Financial Officer: Thank you.

Our next question comes from David Lewis with Morgan Stanley. David Lewis - Morgan Stanley: Thanks guys, so let me bring it here the rear here. Just one quick question -- a couple of quick questions here. On new accounts is it a safe assumption as you look at the U.S. businesses replacements, on a go forward basis, the opportunity in the U.S. is really for existing customers. And we think we have peaked out in terms of new account generation in the U.S.? Lonnie M. Smith - Chairman and Chief Executive Officer: No. Actually the there are lot of new systems placements David this past quarter as there are every quarter. As Alex mentioned before we had aided those new system placement were in hospitals that have less then 200 beds and really the opportunity here to place systems at hospitals that don't have any is still very, very large. David Lewis - Morgan Stanley: Okay, so the opportunity growth in your mind [ph] is still pretty balanced between new U.S. systems, suggesting U.S. systems and then your OUS expansion? Lonnie M. Smith - Chairman and Chief Executive Officer: That's correct. David Lewis - Morgan Stanley: Okay, very helpful. I think gross margin and I know your margins have been an area of conservatism here throughout 2007, but Marshall could you just tell us of the 250 point inter-year gross margin improvement, how much of that do you think was currency? Marshall L. Mohr - Senior Vice President and Chief Financial Officer: It was less than half -- less than half of that was currency. David Lewis - Morgan Stanley: Okay. And then the -- so the other 150 or so bips is there any reason to not assume that we see another 150 bips in 2008? Marshall L. Mohr - Senior Vice President and Chief Financial Officer: No, because there was part -- part of that of also a system mix and we think we have been riding some favorable system mix between geographically, we sell through distributors at lower prices and we don't believe the debt mix will continue at the same level we are predicting a slightly different mix. And then we have build into the model some level of increase but again as Ben mentioned earlier, there are some costs to sort of balance that out in terms of investments in Mexico and so forth. David Lewis - Morgan Stanley: Okay. And then just last quick question. The Mexican investment towards the back half of '08, is that going to be instruments or system and what percent of manufacturing capacity you think you would have online by the end of the year. Gary Guthart - President and Chief Operating Officer: This is Gary. It's primarily instruments and it will be a small percentage coming online at the end of the year. David Lewis - Morgan Stanley: Less than 10%: Gary Guthart - President and Chief Operating Officer: Yes in 10% Marshall L. Mohr - Senior Vice President and Chief Financial Officer: I want to comment on this on the margin expansion and then -- we -- it's always a balance fro us to try to mange make sure we are investing enough in the future to sustain growth as well as tread margins -- our margins are excellent. We are going to invest and now sometimes quite frankly grow with our paces our ability to higher the quality of people we want and so we will get some of that. But we're trying to manage here pretty closely. The [indiscernible] not going to over invest in people but we are going to invest and are investing heavily in future products and we will continue to do that and if that needs flat margins or even a decrease in margins, we will take that. David Lewis - Morgan Stanley: Thank you for the color. Lonnie M. Smith - Chairman and Chief Executive Officer: I think we are -- do you have time for one more or so? Okay. Let me close then. As I said previously we focused on financial metrics such as revenues, profits and cash flow during these conference calls. And our organizational focus remains on increasing patient value by improving surgical outcomes and reducing surgical trauma and I'd like to -- I would like to probe the pretty human face what this means in the lives of three different patients. First the letterhead [ph] by one of Dr. William Schwab's patients at the University of Pennsylvania and this is dated January 23, 2008. This patient says I've been blind for one year and I am scheduled to get a guide dog in early February. Last Tuesday I was diagnosed with a cancerous tumor on my left kidney. The doctors of the University of Pennsylvania health system pulled out all the stops for me. Today eight days later, I am cured of cancer and still able to go to boot camp in 2 weeks to get my new guide dog. My primary care position Robert -- Dr. Robert Keidel [ph] called me Tuesday afternoon with the news about the cancerous tumor on my left kidney. It wasn't an emergency but I had to come out very soon. Recovering from the surgically curable cancer normally takes at least six weeks and involve a partial removal of the rib in the lower back just to reach the kidney. My problem was that in less than three weeks I was growing to the Guiding Eyes School in Yorktown Heights, New York to know my new service dog and learn how to navigate without my cane. Dr. Keidel contacted Dr. William Schwab at the part of urology who specializes in minimal invasive robotic surgery. Dr. Keidel thought that Dr. Schwab technique might be best for my situation. The email started flying. Last Thursday I saw Dr. Schwab with my wife Joanna. He explained that my tumor is small enough and that the place is fairly accessible for his robotic surgical method. He showed my wife a short video so that she could see how it worked. The most important thing was that if he performed the surgery the next day I would be ready and able to go to guide dog school as scheduled. Even though Dr. Schwab didn't normally perform surgery on Fridays he said he would arrange it all for me, and get to guide dog school on time. Dr. Schwab performed surgery last Friday, the procedure called a Microscopic Robotic Partial Nephrectomy. He removed the tumor and some joining tissue from my left kidney. I spent that weekend recovering in a Presbyterian Hospital. I came home Monday morning. Today is Wednesday, I walked for 45 minutes on a treadmill this morning and another 45 minutes this afternoon around the city, I feel very good and I am now cured of cancer. Wow, I'm still scheduled to go to Guiding Eyes on February 4th, to get my companion and start my new life, hurray. I was lucky to have a benefit of this robotic procedure. The physicians at PAN went the extra mile for me. Thank you everyone at UPHS who helped make this possible for me. And earlier this week at STS I talked to Dr. Michael Smith, a cardiac surgeon in Cincinnati and he described his experience with a 40-year old woman who had recently -- who had already undergone six sternotomies for recurring tumor in the left atrium of her heart, referred to in for a 7th procedure. The women broke down in tears when he told her that he can remove the tumor with a da Vinci system without performing a sternotomy. And finally Dr. James Potter [ph], Urologist at Swedish hospital in Seattle who has had a da Vinci prostatectomy himself performed da Vinci prostatectomy on a very fit 50-yuear old -- 55-year old man and CEO of a company in the Seattle area. The patient said, less than two week post-op, one week after the catheter was removed, he ran a six mile loop around Lake Union. He felt so good that he ran another 6.5 mile loop the next day. A week later he ran a 10-K race at Bitaltrails [ph] Park in Belgium [ph]. The next week he triathlon in Billingham with his son consisting of a 0.5-mile swim, a 22-mile bike ride, and a 5-mile run. In the following week he ran the 26.2-mile Seafair marathon. Persons like these are the strongest advocates for surgery with a da Vinci system and are the very foundation of our operating performance. In closing I assure you that we remain committed to focusing on the vital few things that truly make a difference as we strive to take surgery beyond the limits of the human hand. That concludes today's call. We thank you for your participation and support in this extraordinary journey. We look forward to talking with you again in three months.

This concludes today's conference, you make at this time. Thank you.