We supplement the reporting of our financial information determined under GAAP with certain non-GAAP financial measures, including percentage sales growth in constant currency, adjusted net earnings and adjusted diluted net earnings per share. We believe that these non-GAAP measures provide meaningful information to assist shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency, adjusted net earnings and adjusted net earnings per diluted share are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management uses these non-GAAP financial measures for reviewing the operating results of reportable business segments, and analyzing potential future business trends in connection with our budget process and bases certain annual bonus plans on these non-GAAP financial measures. To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Percentage sales growth in constant currency is calculated by translating current year results at prior year average foreign currency exchange rates. To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect the comparability of operating results and the trend of earnings. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported sales growth, net earnings and diluted net earnings per share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures at the end of the discussion of Results of Operations below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

ABOUT STRYKER

Stryker is one of the world's leading medical technology companies, with 2011 revenues of $8,307 and net earnings of $1,345. We are dedicated to helping healthcare professionals perform their jobs more efficiently while enhancing patient care. We offer a diverse array of innovative medical technologies, including reconstructive, medical and surgical, and neurotechnology and spine products, to help people lead more active and more satisfying lives.

In the United States, most of the Company's products are marketed directly to doctors, hospitals and other health-care facilities. For the most part, Stryker 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. Internationally, the Company's products are sold in over 100 countries through 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 reconstructive surgeries is lower during the summer months.

In the first three months, revenues in the United States accounted for 64.0% and 63.5% of total revenues in 2012 and 2011, respectively, and international revenues accounted for 36.0% and 36.5% of total revenues in 2012 and 2011, respectively.

RESULTS OF OPERATIONS

Our consolidated results of operations for the three months ended March 31, 2012
and 2011 were:
                                                      First Quarter
                                                2012     2011     % Change
Net Sales                                      $2,161    $2,015       7.2
Gross Profit                                    1,452     1,326       9.5
Research, development & engineering expenses      112       111       0.9
Selling, general & administrative expenses        819       765       7.1
Intangible amortization                            31        27      14.8
Restructuring charges                              14        -          -
Other income (expense)                            (8)      (12)     (33.3 )
Income taxes                                      118       104      13.5
Net Earnings                                     $350      $307      14.0
Diluted Net Earnings per share                  $0.91     $0.78      16.7

Our geographic and segment net sales for the three months ended March 31, 2012 and 2011 were:

                                      Dollar amounts in millions except per share
10                                              amounts or as otherwise specified


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                                                                                    Percentage Change
                                                                                        2012/2011
                                                Three Months Ended March 31                     Constant
                                                     2012             2011       Reported       Currency
Geographic sales:
United States                                  $         1,384     $  1,279             8.2         8.2
International                                              777          736             5.6         6.1
Total net sales                                $         2,161     $  2,015             7.2         7.4
Segment sales:
Reconstructive                                 $           958     $    911             5.2         5.2
MedSurg                                                    821          764             7.5         7.9
Neurotechnology and Spine                                  382          340            12.4        12.3
Total net sales                                $         2,161     $  2,015             7.2         7.4

Net sales in the quarter increased 7.2% from 2011. In the quarter, net sales grew 6.9% as a result of increased unit volume and changes in product mix, and 2.3% due to acquisitions, which were partially offset by an unfavorable impact of 1.7% due to changes in price and 0.2% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency net sales increased in the quarter by 7.4% from 2011.

In the United States net sales in the quarter were $1,384, an increase of 8.2% from 2011 as a result of higher shipments of Reconstructive implants and Neurotechnology and Spine products and sales growth through acquisitions. International net sales in the quarter were $777, an increase of 5.6% from 2011. In constant currency, international net sales increased 6.1% in the quarter from 2011, primarily due to higher shipments of MedSurg and Neurotechnology and Spine products as well as sales growth through acquisitions.

The following geographical sales growth information by segment is provided to supplement the net sales information presented above:

                                                             Three Months Ended March 31
                                                                               % Change
                                                                               U.S.            International
                                                                 Constant                               Constant
                                     2012    2011   As Reported  Currency   As Reported  As Reported    Currency
Reconstructive
Hips                                  312     302           3.3      3.1         6.3         0.2         (0.1 )
Knees                                 352     335           5.1      5.0         4.9         4.8          5.2
Trauma and Extremities                243     223           9.0      9.7        12.6         6.5          7.3
Total Reconstructive                  958     911           5.2      5.2         7.4         2.4          2.6
MedSurg
Instruments                           314     285          10.2     10.5        12.2         5.1          6.3
Endoscopy                             279     268           4.1      4.4         2.1         9.1         10.4
Medical                               179     171           4.7      5.2        (1.8 )      29.3         31.9
Total Medsurg                         821     764           7.5      7.9         6.3        11.2         12.6
Neurotechnology and Spine
Spine                                 181     161          12.4     12.2        14.7         6.4          6.8
Neurotechnology                       201     179          12.3     12.3        15.8         7.8          8.0
Total Neurotechnology and Spine       382     340          12.4     12.3        15.2         7.3          7.5

Reconstructive net sales in the quarter increased 5.2% from 2011, primarily due to a 6.1% increase in unit volume and changes in product mix. The increase in units sold was due to higher industry demand. In addition, net sales were negatively impacted by an unfavorable impact of 2.6% due to a change in price, partially offset by the favorable impact of 1.8% due to acquisitions. In constant currency Reconstructive net sales in the quarter increased 5.2% from 2011, primarily due to increases in Trauma and Extremities and with Knees and Hips also contributing to the increases.

MedSurg net sales in the quarter increased 7.5% from 2011, primarily due to a 8.2% increase in unit volume and changes in product mix and 0.3% due to acquisitions. These increases were partially offset by an unfavorable impact of 0.5% due to changes in price and 0.4% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency MedSurg net sales in the quarter increased 7.9% from 2011, led by higher shipments of Instruments, Endoscopy and reprocessed and remanufactured medical devices.

Neurotechnology and Spine net sales in the quarter increased 12.4% from 2011, primarily due to a 6.2% increase in unit volume and changes in product mix and 8.0% due to acquisitions, partially offset by an unfavorable impact of 2.0% due to changes in price. In

Dollar amounts in millions except per share
11 amounts or as otherwise specified

constant currency Neurotechnology and Spine net sales in the quarter increased 12.3% from 2011.

Consolidated Cost of Sales

Cost of sales in the quarter increased 2.9% from 2011 to 32.8% of sales compared to 34.2% in 2011. Cost of sales in 2012 includes an additional cost of $12 related to inventory that was stepped up to fair value following acquisitions compared to $54 in 2011. Cost of sales in 2012 also included $2 in other restructuring-related costs. Excluding the impact of these amounts, cost of sales in the first quarter of 2012 were 32.2% of sales compared to 31.5% in 2011. This increase was primarily due to the impact of lower pricing on sales resulting in an increase in cost of sales as a percentage of sales and increased charges for excess and obsolete inventory.

Research, Development and Engineering Expenses

Research, development and engineering expenses represented 5.2% of sales in the quarter compared to 5.5% in 2011. The change in spending level is due primarily to the termination of all development of the OP-1 molecule in late 2011, the timing of new product development for anticipated future product launches and continued investment in new technologies.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in the quarter increased 7.1% and represented 37.9% of sales compared to 38.0% in 2011. Included in 2012 were $8 in separation costs associated with our former Chief Executive Officer; in addition, 2012 included $9 related to acquisition and integration-related charges compared to $13 in 2011. Excluding the impact of these amounts expenses in the first quarter of 2012 were 37.1% of sales compared to 37.3% in 2011.

Restructuring Charges

In the quarter we recorded $14 in restructuring charges related to the continuation of focused reductions of our global workforce and other restructuring activities that are expected to reduce our global workforce by approximately 5% and be substantially complete by the end of 2012 at a total cost of approximately $150 to $175. The actions were initiated in 2011 to provide efficiencies and realign resources in advance of the new Medical Device Excise Tax scheduled to begin in 2013, as well as to allow for continued investment in strategic areas and drive growth.

Other Income (Expense)

Other expense in the quarter decreased $4 from 2011 as a result of higher average yields on investments and higher average balances of marketable securities, partially offset by higher interest expense associated with the senior unsecured notes issued in September 2011.

Income Taxes

Our effective income tax rate on earnings in the quarter was 25.2% compared to 25.3% in 2011. The rate for the quarter includes the amortization of inventory step-up charges of $10 (net of $2 income benefit) and acquisition, integration, restructuring and other charges of $18 (net of $7 income benefit).

Net Earnings

Net earnings in the quarter increased 14.0% from 2011 to $350. Basic net earnings per share in the quarter increased 16.5% from 2011 to $0.92, and diluted net earnings per share in the quarter increased 16.7% from 2011 to $0.91.

Reported net earnings includes restructuring and related charges and acquisition and integration related charges related to the Neurovascular, Orthovita, Memometal and Concentric acquisitions, including integration related costs and additional cost of sales for inventory sold in the year that was "stepped up" to fair value. Excluding the impact of these items, adjusted net earnings in the quarter increased 7.4% to $379 and adjusted diluted net earnings per share increased 10.0% to $0.99.

The following reconciles the non-GAAP financial measures adjusted net earnings and adjusted diluted net earnings per share with the most directly comparable GAAP financial measures, reported net earnings and diluted net earnings per share:

                                      Dollar amounts in millions except per share
12                                              amounts or as otherwise specified


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                                                          Three Months Ended March 31
                                                            2012                2011
Reported net earnings                                $            350     $          307
Acquisition and integration-related charges, net
of tax:
Inventory "step up" to fair value                                  10                 36
Acquisition and integration related charges                         7                 10
Restructuring and related charges                                  12                  -
Adjusted net earnings                                $            379     $          353

Diluted net earnings per share of common stock:
Reported diluted net earnings per share                          0.91               0.78
Acquisition and integration-related charges, net
of tax:
Inventory "step up" to fair value                                0.03               0.09
Acquisition and integration related charges                      0.02               0.03
Restructuring and related charges                                0.03                  -
Adjusted diluted net earnings per share              $           0.99     $         0.90
Weighted-average diluted shares outstanding                     383.8              394.2

The weighted-average basic and diluted shares outstanding used in the calculation of these non-GAAP financial measures are the same as the weighted-average shares outstanding used in the calculation of the reported per share amounts.

HEALTHCARE REFORM IN THE UNITED STATES
In 2010 federal legislation to reform the United States healthcare system was enacted into law. The legislation is far-reaching and is intended to expand access to health insurance coverage, improve quality and reduce costs over time. We expect the new law will have a significant impact upon various aspects of our business operations. However, it is unclear how the new law will impact patient access to new technologies or reimbursement rates under the Medicare program. In addition, the new law imposes a 2.3 percent excise tax on medical devices, scheduled to be implemented in 2013, that will apply to United States sales of a majority of our medical device products. We continue to assess the impact that federal healthcare reform will have on our business.
LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Operating cash flow was $35 in the quarter, a decrease of 82.8% from 2011. Operating cash flow resulted primarily from net earnings adjusted for non-cash items (depreciation and amortization, stock-based compensation, sale of inventory stepped-up to fair value at acquisition and deferred income taxes), partially offset by an increase in working capital. Cash payments of tax consumed $153 in the quarter. The net of accounts receivable, inventory, loaner instrumentation and accounts payable consumed $166 of operating cash flow in the quarter, including $54 for loaner instrumentation and $35 for accounts payable. Inventory consumed $29 of operating cash flow primarily due to the building of inventory related to acquisitions and other business growth, increased stock levels in advance of new product introductions and higher inventory levels in support of sales growth. Inventory days on hand increased by 8 days due to the impact of the above. Accounts receivable used $48, primarily due to the building of accounts receivable related to acquisitions and other business growth. Accounts receivable days sales outstanding increased by 2 days due to timing of sales. In addition, the payment of certain legal settlements consumed $33 of operating cash flow in the quarter.

Investing Activities

Net investing activities consumed $123 of cash in the quarter compared to $878 in the comparable 2011 period. Cash used was primarily due to capital spending in both periods as well as acquisition activity in 2011.

Financing Activities

Net financing activities consumed $128 of cash in the quarter compared to $389 in the 2011 period, primarily due to the payment of dividends and repurchases of common stock. Dividends paid per common share increased 18.1% from $0.18 in the 2011 quarter to $0.2125 in 2012 period.

Liquidity

Our cash and marketable securities were $3,297 at March 31, 2012 and $3,418 at December 31, 2011 and our current assets exceeded current liabilities by $5,680 at March 31, 2012 and $5,383 at December 31, 2011. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We have funded, and may continue from time to time to fund, ourselves in the capital markets. We have strong short- and long-term debt ratings that we believe should enable us to refinance

Dollar amounts in millions except per share
13 amounts or as otherwise specified

our debt as it becomes due. In addition, we have a $1,000 credit facility with a diverse group of financial institutions that, if needed, should provide sufficient funding to meet short-term financing requirements. We had approximately $1,106 of borrowing capacity available under all of our existing credit facilities at March 31, 2012.

At March 31, 2012, approximately 66% of our consolidated cash and cash equivalents and marketable securities were held in locations outside of the United States. These funds are considered indefinitely reinvested to be used to expand operations either organically or through acquisitions outside the United States. We do not intend to repatriate any significant amounts of cash in the foreseeable future.

We continuously monitor our investment portfolio positions for exposures to the European debt crisis. We currently do not have any investments in the sovereign debt instruments of Spain, Portugal, Ireland, Italy or Greece. Any non-sovereign exposure in these countries in our investment portfolios is considered immaterial.

We continually evaluate our government receivables, particularly in Spain, Italy, Portugal and Greece. We believe that our current reserves related to receivables are adequate and any additional concentration of credit risk associated with the European debt crisis is not expected to have a material adverse impact on our financial position or liquidity.

Guarantees and Other Off-Balance Sheet Arrangements

We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, of a magnitude that we believe could have a material impact on our financial condition or liquidity.

OTHER MATTERS

Hedging
We have 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. In the quarter, the strengthening of foreign currencies relative to the United States dollar increased the value of these investments in net assets and the related foreign currency translation adjustment gain in shareholders' equity by $85. Legal and Regulatory Matters
We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor and intellectual property and other matters. The outcomes of certain of these matters will not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages, as well as other compensatory and equitable relief, that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management has sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable cost, or the minimum of the range of probable losses when a best estimate within the range is not known, for the resolution of these legal matters is recorded. Estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. For each of the following legal matters the final outcome is dependent on many variables and cannot be predicted. Accordingly, it is not possible at this time for us to estimate any material loss or range of loss. As a result, we have not accrued for any liability related to these matters. However, the ultimate cost to resolve these matters could have a material adverse effect on our financial position, results of operations and cash flows.
In April 2011 lawsuits brought by Hill-Rom Company, Inc. and affiliated entities against us were filed in the United States District Court for the Western District of Wisconsin and the United States District Court for the Southern District of Indiana. The suits allege infringement under United States patent laws with respect to certain patient handling equipment manufactured and sold by us and seek damages and permanent injunctions. The Wisconsin lawsuit has subsequently been transferred to the U.S. District Court in Indiana. We intend to vigorously defend ourselves in these matters.
In 2010 we received a subpoena from the United States Department of Justice related to sales, marketing and regulatory matters related to the Stryker PainPump. The investigation is ongoing.
In 2010 we received a subpoena from the United States Department of Justice (DOJ) related to the sales and marketing of the OtisKnee device. We continue to cooperate with the ongoing government investigation and to take other actions to minimize our potential exposure.
In 2010 a shareholder's derivative action complaint against certain of our current and former Directors and Officers was filed in the United States District Court for the Western District of Michigan Southern Division. This lawsuit was brought by the Westchester Putnam Counties Heavy and Highway Laborers Local 60 Benefit Funds and Laborers Local 235 Benefit Funds. The complaint alleges

Dollar amounts in millions except per share
14 amounts or as otherwise specified

claims for breach of fiduciary duties and gross mismanagement in connection with certain product recalls, United States Food and Drug Administration (FDA) warning letters, government investigations relating to physician compensation and the criminal proceeding brought against our Biotech division. The case has been stayed while a Special Committee of the Board of Directors evaluates the claims.
In 2007 we disclosed that the United States Securities and Exchange Commission (SEC) made an inquiry of us regarding possible violations of the Foreign Corrupt Practices Act (FCPA) in connection with the sale of medical devices in certain foreign countries. Subsequently, in 2008, we received a subpoena from the United States Department of Justice, Criminal Division, requesting certain documents for the period since January 1, 2000 in connection with the SEC inquiry. We are fully cooperating with the U.S. Department of Justice and the SEC regarding these matters.
In 2007, the United States Department of Health and Human Services, Office of Inspector General (HHS) issued a civil subpoena to us seeking to determine whether we 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. We have produced numerous documents and other materials to HHS in response to the subpoena. The following provides an update to the status of two previously disclosed matters:
In 2010 a purported class action lawsuit against us was filed in the United States District Court for the Southern District of New York on behalf of those who purchased our common stock between January 25, 2007 and November 13, 2008, inclusive. The lawsuit seeks remedies under the Securities Exchange Act of 1934. In May 2010 the lawsuit was transferred to the United States District Court for the Western District of Michigan Southern Division. On March 30, 2012, the case was dismissed. Should plaintiffs appeal this ruling, we will continue to vigorously defend this matter.
In 2009 a federal grand jury in the District of Massachusetts returned an indictment charging Stryker Biotech LLC and certain then-current employees and a former employee of Stryker Biotech with wire fraud, conspiracy to defraud the FDA, distribution of a misbranded device and false statements to the FDA. In January 2012 Stryker Biotech reached a settlement with the United States Attorney's Office for the District of Massachusetts, under which Stryker pled to one misdemeanor charge and paid a non-tax deductible fine of $15. As a result of this resolution, the Department of Justice dismissed all thirteen felony charges against Stryker Biotech contained in the 2009 federal grand jury indictment. All of the charges against the then-current and former employees of Stryker Biotech have also been dismissed.
FORWARD LOOKING STATEMENTS

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