Throughout this discussion, references are made to the following financial measures: "constant currency" and "adjusted diluted net earnings per share." These financial measures are an alternative representation of Stryker Corporation's (the Company or Stryker) past and potential future operational performance and do not replace the presentation of the Company's reported financial results under U.S. generally accepted accounting principles (GAAP). The Company has provided these supplemental non-GAAP financial measures because they provide meaningful information regarding the Company's results on a consistent and comparable basis for the periods presented. Management uses these non-GAAP financial measures for reviewing the operating results of its business segments, for analyzing potential future business trends in connection with its budget process and bases certain annual bonus plans on these non-GAAP financial measures. In order to measure the Company's sales performance on a constant currency basis, it is necessary to remove the impact of changes in foreign currency exchange rates which affects the comparability and trend of sales. Constant currency results are calculated by translating current year results at prior year average foreign currency exchange rates. In order to measure earnings performance on a consistent and comparable basis, the Company excludes the restructuring charges recorded in 2008 which affects the comparability of operating results and the trend of earnings. In addition, the Company believes investors will utilize this information to evaluate period-to-period results on a comparable basis and to better understand potential future operating results. The Company encourages investors and other users of these financial statements to review its Condensed Consolidated Financial Statements and other publicly filed reports in their entirety and not to rely solely on any single financial measure.

Stryker is one of the world's leading medical technology companies with the most broadly based range of products in orthopaedics and a significant presence in other medical specialties. Stryker works with respected medical professionals to help people lead more active and more satisfying lives. The Company's products include implants used in joint replacement, trauma, spinal and craniomaxillofacial surgeries; biologics; surgical, neurologic, ear, nose & throat and interventional pain equipment; endoscopic, surgical navigation, communications and digital imaging systems; as well as patient handling and emergency medical equipment.

Domestic sales accounted for 65% of total revenues in the first quarter of 2009 and 63% in the first quarter of 2008. Most of the Company's products are marketed directly to doctors, hospitals and other health-care facilities. Stryker primarily maintains separate and dedicated sales forces for each of its principal product lines to provide focus and a high level of expertise to each medical specialty served.

International sales accounted for 35% of total revenues in the first quarter of 2009 and 37% in the first quarter of 2008. The Company's products are sold in more than 100 countries through both Company-owned sales subsidiaries and branches as well as third-party dealers and distributors.

The Company's business is generally not seasonal in nature; however, the number of orthopaedic implant surgeries is lower during the summer months.

In March 2009 the U.S. Food and Drug Administration (FDA) Orthopaedic and Rehabilitation Devices Advisory Panel voted not to recommend that the Company receive marketing approval for its OP-1 Putty. The Company is disappointed by the FDA advisory panel's vote and believes the clinical evidence that it submitted and the long history of OP-1's use demonstrate OP-1's proven safety record. The Company plans to maintain close discussions with the FDA to determine potential paths forward for approval and is reviewing its strategic plan for OP-1.

Outlook

As a result of the continued weaker demand for certain MedSurg Equipment products as well as consideration of slowing elective procedures for certain Orthopaedic Implant products, the Company is reducing its guidance for 2009. The Company now projects that diluted net earnings per share for 2009 will be in the range of $2.90 to $3.10, an increase of 2% to 10% over adjusted diluted net earnings per share of $2.83 in 2008. The financial forecast for 2009 anticipates a constant currency net sales increase in the range of 2% to 5%. If currency exchange rates hold near March 31, 2009 levels, the Company anticipates an unfavorable impact on net sales of approximately 5.5% to 6% in the second quarter of 2009 and an unfavorable impact on net sales of approximately 3.5% to 4.5% for the full year of 2009.

The reconciliation of reported diluted net earnings per share to adjusted diluted net earnings per share for the year ended December 31, 2008 is as follows:

Reported diluted net earnings per share                   $2.78
Restructuring charges                                     $0.05
Adjusted diluted net earnings per share                   $2.83

The weighted-average diluted shares outstanding used in the calculation of this non-GAAP financial measure are the same as the weighted-average diluted shares outstanding used in the calculation of the reported per share amounts.

Results of Operations



       The table below outlines the components of net earnings from the
Condensed Consolidated Statements of Earnings as a percentage of net sales and
the period-to-period percentage change in dollar amounts:



                                                 Percentage of Net Sales
                                                   Three Months Ended      Percentage
                                                        March 31               Change
                                                    2009         2008       2009/2008
Net sales                                             100.0        100.0          (2)
Cost of sales                                          32.2         30.6           3
Gross profit                                           67.8         69.4          (4)
Research, development and engineering expenses          5.0          5.2          (6)
Selling, general and administrative expenses           38.5         40.0          (6)
Intangibles amortization                                0.6          0.6          (9)
Operating income                                       23.7         23.5          (1)
Other income (expense)                                  0.4          1.2         (65)
Earnings before income taxes                           24.1         24.7          (4)
Income taxes                                            6.6          6.9          (7)
Net earnings                                           17.6         17.8          (3)

The table below sets forth domestic/international and product line sales information (in millions):

                                                     Percentage Change
                               Three Months Ended        2009/2008
                                    March 31                   Constant
Domestic/international sales:   2009       2008     Reported   Currency

Domestic                       $1,042.0   $1,032.9      1          1
International                     559.3      601.5     (7)         7

Total net sales                $1,601.3   $1,634.4     (2)         3

Product line sales:
Orthopaedic Implants             $973.2     $971.1      0          6
MedSurg Equipment                 628.1      663.3     (5)       (1)

Total net sales                $1,601.3   $1,634.4     (2)         3

The table below sets forth additional geographical sales growth information for significant products within the Company's Orthopaedic Implants and MedSurg Equipment segments on both a reported basis and a constant currency basis:

                                                      Three Months Ended March 31, 2009
                                                              Percentage Change
                                             Domestic      International             Total
                                                                   Constant              Constant
                                             Reported   Reported   Currency   Reported   Currency

Orthopaedic Implants sales:
Hips                                               3         (7)         9         (2)         6
Knees                                              8        (12)         4          1          6
Trauma                                            10         (3)         6          2          8
Spine                                             13         (2)         9          8         11
Craniomaxillofacial                               12        (14)         0          3          8
Total Orthopaedic Implants                         6         (7)         7          0          6

MedSurg Equipment sales:
Surgical equipment and surgical navigation
systems                                           11        (12)         3          4          8
Endoscopic, communications and digital
imaging systems                                   (7)        (1)        16         (5)        (1)
Patient handling and emergency medical
equipment                                        (27)        (1)        18        (22)       (18)
Total MedSurg Equipment                           (5)        (7)        10         (5)        (1)

The Company's net sales decreased 2% in the first three months of 2009 to $1,601.3 from $1,634.4 million in 2008. Net sales grew by 4% as result of increased unit volume and changes in product mix and decreased by 5% due to the unfavorable impact changes in foreign currency exchange rates had on net sales.

The Company's domestic sales were $1,042.0 million for the first quarter of 2009, representing an increase of 1% as a result of higher shipments of Orthopaedic Implants partially offset by lower shipments of Medsurg Equipment. International sales were $559.3 million for the first quarter of 2009, representing a decrease of 7%. The impact of foreign currency comparisons to the dollar value of international sales was unfavorable by $87.0 million in the first quarter of 2009. On a constant currency basis, international sales increased 7% in the first quarter of 2009, as a result of higher shipments of Orthopaedic Implants and MedSurg Equipment.

Worldwide sales of Orthopaedic Implants were $973.2 million for the first quarter of 2009, consistent with the prior year period. On a constant currency basis, sales of Orthopaedic Implants increased 6% in the first quarter of 2009, as a result of higher shipments of reconstructive, trauma, spinal and craniomaxillofacial implant systems.

Hip Implant Systems: Sales of hip implant systems decreased 2% during the first quarter (6% increase on a constant currency basis). Solid worldwide sales growth in Trident hip related products drove the Company's constant currency sales growth. Sales growth in X3 Polyethylene and Restoration Modular hip systems in the United States, Europe, Canada and the Pacific region; Accolade cementless hip products in the United States, Europe and Canada; and hip resurfacing products in the United States also led to the Company's constant currency sales growth.

Knee Implant Systems: Sales of knee implant systems increased 1% during the first quarter (6% on a constant currency basis) due to strong growth in the Triathlon knee system in the United States, Europe, Japan, Canada and Pacific region. Sales growth in Global Modular Replacement System (GMRS) knee products in the United States, Europe and Canada as well as sales growth of Scorpio knee systems in Latin America and Japan led to the Company's constant currency sales growth.

Trauma Implant Systems: Sales of trauma implant systems increased 2% during the first quarter (8% on a constant currency basis) as a result of sales growth in the Gamma 3 Hip Fracture System and the SPS Calcaneal foot plating system in the United States, Europe, Canada and the Pacific region as well as sales growth in the Company's T2 Nailing System in the United States and Europe. Sales growth in Variax distal radius products in the United States and Europe also led to the Company's constant currency sales growth.

Spinal Implant Systems: Sales of spinal implant systems increased 8% during the first quarter (11% on a constant currency basis) primarily due to strong sales growth of thoracolumbar implant systems in the United States, Canada and Japan as well as solid sales growth in interbody devices products in the United States, Europe, Canada and the Pacific region. Sales growth of bone substitutes products in the United States, Europe, Japan, Canada and the Latin America region also contributed to the Company's constant currency sales growth.

Craniomaxillofacial Implant Systems: Sales of craniomaxillofacial implant systems increased 3% during the first quarter (8% on a constant currency basis) primarily due to strong sales growth of products for neurological indications in the United States, Japan and the Latin America region.

Worldwide sales of MedSurg Equipment were $628.1 million for the first quarter of 2009, representing a decrease of 5%. On a constant currency basis, sales of MedSurg Equipment decreased 1% in the first quarter of 2009 as a result of higher shipments of surgical equipment and surgical navigation systems offset by lower sales of endoscopic, communications and digital imaging systems and patient handling and emergency medical equipment.

Surgical Equipment and Surgical Navigation Systems: Sales of surgical equipment and surgical navigation systems increased 4% during the first quarter (8% on a constant currency basis) due to solid sales growth of powered surgical, operating room equipment and interventional pain products in the United States. Solid sales growth in powered surgical products in Japan and the Latin America and the Pacific regions also led to the Company's constant currency sales growth.

Endoscopic, Communications and Digital Imaging Systems: Sales of endoscopic, communications and digital imaging systems decreased 5% during the first quarter (1% on a constant currency basis) due to lower sales of medical video imaging equipment products and image portal products in the United States partially offset by solid sales growth in general surgery products in the United States, Europe and the Latin America and Pacific regions as well as sales growth in communications products in the United States, Canada and the Latin America and Pacific regions and medical video imaging equipment in Europe.

Patient Handling and Emergency Medical Equipment: Sales of patient handling and emergency medical equipment decreased 22% during the first quarter (18% on a constant currency basis), due to lower sales of hospital bed products in the United States, Canada and the Latin America region and stretchers in the United States, Europe and Canada, partially offset by sales growth in hospital bed products in Europe and stretchers in the Latin America region.

Cost of sales in the first quarter of 2009 represented 32.2% of sales compared to 30.6% in the same period of 2008. The increase in the cost of sales percentage in the quarter is primarily due to reduced absorption due to lower production levels as well as increased compliance initiative costs and higher freight costs.

Research, development and engineering expenses represented 5.0% of sales in the first quarter of 2009 compared to 5.2% in the same period of 2008 and decreased 6% to $80.4 million. The spending level in the first quarter of 2009 decreased due to tight control on discretionary spending as well as the Company's continued focus of research and development resources on compliance initiatives. The timing of projects also causes the spending level to vary from quarter to quarter as a percent of sales.

Selling, general and administrative expenses decreased 6% in the first quarter of 2009 and represented 38.5% of sales compared to 40.0% in the same period of 2008. The decrease in selling, general and administrative expenses as a percent of sales in the first quarter of 2009 is primarily due to tight control on discretionary spending, which more than offset increased legal settlement costs recorded for certain product liability claims partially offset by insurance recoveries.

Interest and marketable securities income, which is included in other income (expense), decreased to $15.6 million in the first quarter of 2009 from $27.9 million in 2008 as a result of lower average yields on the Company's investments.

The Company's effective income tax rate for the first quarter of 2009 was 27.3% as compared to effective income tax rates for the first quarter of 2008 and year ended December 31, 2008 of 28.1% and 27.4%, respectively. The effective income tax rates are lower than the U.S. statutory income tax rate primarily as a result of manufacturing in lower income tax international jurisdictions.

Net earnings for the first quarter of 2009 were $281.1 million, a decrease of 3% compared to net earnings of $290.5 million in the first quarter of 2008. Basic net earnings per share were $0.71 in both the first quarter of 2009 and 2008, and diluted net earnings per share increased 1% in the first quarter of 2009 to $0.71 from $0.70 in 2008.

Liquidity and Capital Resources

The Company's working capital at March 31, 2009 increased $300.9 million to $3,818.1 million from $3,517.2 million at December 31, 2008. The increase in working capital resulted from cash earnings partially offset by dividend payments as well as payments of certain current liabilities and accrued expenses. Accounts receivable days sales outstanding remained unchanged at 59 days at March 31, 2009 compared to December 31, 2008 and days sales in inventory increased 19 days to 174 days at March 31, 2009 from 155 days at December 31, 2008. Days sales outstanding decreased one day and days sales in inventory increased 12 days compared to the March 31, 2008 levels. Days sales in inventory at March 31, 2009 is higher than the prior year periods primarily due to higher levels of inventory resulting from the slowdown in sales levels and in support of the Company's ongoing compliance initiatives.

The Company generated cash of $272.4 million from operations in the first quarter of 2009 compared to $190.8 million in 2008. The increase in cash provided by operating activities in the first quarter of 2009 compared to 2008 is primarily due to the reduction in accounts receivable and increases in certain current liabilities including income taxes.

In the first quarter of 2009, the Company used cash of $158.6 million for the payment of dividends, $30.6 million for capital expenditures and $2.6 million for acquisitions. The Company also purchases and sells marketable securities, which are classified as available-for-sale investments in accordance with the provisions of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.

The Company had $685.8 million in cash and cash equivalents and $1,559.3 million in current marketable securities at March 31, 2009. The Company had outstanding borrowings totaling $20.5 million at March 31, 2009. The Company believes its cash on hand and marketable securities, as well as anticipated future cash flows from operations, will be sufficient to fund future operating capital requirements, future manufacturing facility construction and other capital expenditures, future business and product line acquisitions to supplement its current product offerings and loaner instrumentation for surgical implants in support of new product launches. Should additional funds be required, the Company had $1,077.6 million of additional borrowing capacity available under all of its existing credit facilities, including the Company's $1,000.0 million 5-year nonamortizing, revolving Unsecured Credit Facility that expires in November 2010.

In addition, the Company had the entire $100.0 million of eligible accounts receivable that could be sold through its accounts receivable securitization facility available at March 31, 2009. The Company did not extend its accounts receivable securitization facility agreement upon its expiration on April 24, 2009.

Other Matters

The Company has certain investments in net assets in international locations that are not hedged. These investments are subject to translation gains and losses due to changes in foreign currencies. For the quarter ended March 31, 2009, the weakening of foreign currencies relative to the U.S. dollar decreased the value of these investments in net assets, and the related deferred gain in shareholders' equity, by $98.7 million.

The Company operates in multiple income tax jurisdictions both inside and outside the United States. Income tax authorities in these jurisdictions regularly perform audits of the Company's income tax filings. Accordingly, management must determine the appropriate allocation of income to each of these jurisdictions based on current interpretations of complex income tax regulations. Income tax audits associated with the allocation of this income and other complex issues, including inventory transfer pricing and cost sharing and product royalty arrangements, may require

an extended period of time to resolve and may result in significant income tax adjustments if changes to the income allocation are required between jurisdictions with different income tax rates.

In April 2009 the U.S. Internal Revenue Service (IRS) proposed adjustments to the Company's previously filed 2003, 2004 and 2005 income tax returns related to income tax positions the Company has taken for its cost sharing arrangements with two wholly owned entities operating in Ireland. The Company believes it followed the applicable tax law and Treasury regulations and will vigorously defend these income tax positions. If the IRS were ultimately to prevail with respect to their proposed adjustments, such adjustments could have a material unfavorable impact on the Company's income tax expense and net earnings in future periods.

In 2009 the Company received a letter from the United States Attorney's Office for the District of Massachusetts indicating that its subsidiary, Stryker Biotech, is a target of a federal grand jury investigation relating to (i) the illegal promotion of OP-1 products and Calstrux, (ii) the sale of misbranded medical devices and (iii) the submission of false reports to the U.S. Food and Drug Administration regarding the number of patients treated with OP-1 under one of the Company's Humanitarian Device Exemptions. As previously reported, the Company and certain current and former employees have also received subpoenas from the United States Attorney's Office for the District of Massachusetts requesting documents related to false Institutional Review Board approvals as well as the issues identified above. The Company understands that certain former Stryker Biotech employees have pled guilty to charges related to the on-going investigation. The Company is in the process of responding to the United States Attorney's Office regarding these matters.

In 2008 the Company received a warning letter from the U.S. Food and Drug Administration (FDA) related to quality systems and compliance issues at its OP-1 implant manufacturing facility in Hopkinton, Massachusetts. In 2007 the Company received two warning letters from the FDA regarding compliance with certain quality system specifications at its reconstructive implant manufacturing facilities: one letter for its facility in Cork, Ireland and another for its facility in Mahwah, New Jersey. The Company takes these matters very seriously and has been fully cooperating with the FDA to address its observations.

In 2007 the Company announced that it reached a resolution with the U.S. Attorney's office for the District of New Jersey in connection with a previously announced investigation relating to "any and all consulting contracts, professional service agreements, or remuneration agreements between Stryker Corporation and any orthopedic surgeon, orthopedic surgeon in training, or medical school graduate using or considering the surgical use of hip or knee joint replacement/reconstruction products manufactured or sold by Stryker Corporation." The resolution was in the form of a non-prosecution agreement for an 18-month period that ended on March 27, 2009. During the term of the agreement, the Company's Orthopaedics subsidiary was subject to oversight by a federal monitor, as appointed by the U.S. Attorney, regarding compliance with certain standards and procedures in connection with the retention and payment of orthopaedic surgeon consultants related to reconstructive products and the provision of certain benefits to such surgeons. Subsequent to entering into the non-prosecution agreement, the U.S. Department of Health and Human Services, Office of Inspector General (HHS) issued a civil subpoena to the Company in seeking to determine whether the Company violated various laws by paying consulting fees and providing other things of value to orthopedic surgeons and healthcare and educational institutions as inducements to use Stryker's orthopedic medical devices in procedures paid for in whole or in part by Medicare. The Company produced numerous documents and other materials to HHS in response to the subpoena and had been working with HHS to attempt to narrow the scope of the requested production. In 2008 the U.S. Department of Justice and HHS sought judicial enforcement of the subpoena and a court agreed to enforce it in January 2009. At the same time, the U.S. District Court for the District of New Jersey dismissed the Company's complaint which had asked the court to quash the subpoena and sought other appropriate relief on the grounds that the subpoena was overbroad and oppressive.

In 2007 the Company disclosed that the U.S. Securities and Exchange Commission made an informal inquiry of the Company regarding possible violations of the Foreign Corrupt Practices Act in connection with the sale of medical devices in certain foreign countries. Subsequently, in 2008, the Company received a subpoena from the U.S. Department of Justice, Criminal Division, requesting certain documents for the period since January 1, 2000 in connection with the U.S. Securities and Exchange Commission inquiry. The Company is fully cooperating with the U.S. Department of Justice and the U.S. Securities and Exchange Commission regarding these matters.

Forward-Looking Statements

This report contains information that includes or is based on forward-looking statements within the meaning of the federal securities law that are subject to various risks and uncertainties that could cause the Company's actual results to differ materially from those expressed or implied in such statements. Such factors include, but are not limited to: further weakening of economic conditions that could adversely affect the level of demand for the . . .