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 our products are marketed directly to doctors, hospitals and other healthcare facilities. For the most part, we maintain separate and dedicated sales forces for each of our principal product lines to provide focus and a high level of expertise to each medical specialty served. Internationally, our products are sold in over 100 countries through company-owned sales subsidiaries and branches as well as third-party dealers and distributors. Our business is generally not seasonal in nature; however, the number of reconstructive surgeries is generally lower during the summer months.

In the first nine months, revenues in the United States accounted for 65.3% and 63.4% of total revenues in 2012 and 2011, respectively, and international revenues accounted for 34.7% and 36.6% of total revenues in 2012 and 2011, respectively.

RESULTS OF OPERATIONS

Our consolidated results of operations for the three and nine months ended
September 30, 2012 and 2011 were:
                                                     Three Months                 Nine Months
                                                2012    2011   % Change     2012    2011   % Change
Net Sales                                      $2,052   $2,031     1.0     $6,319   $6,092     3.7
Gross Profit                                    1,397    1,362     2.6      4,283    4,021     6.5
Research, development & engineering expenses      114      122    (6.6 )      342      347    (1.4 )
Selling, general & administrative expenses        791      765     3.4      2,433    2,316     5.1
Intangible amortization                            30       31    (3.2 )       92       90     2.2
Restructuring charges                              12      -         -         45      -         -
Other income (expense)                            (6)     (13)   (53.8 )     (24)     (15)    60.0
Income taxes                                       91      104   (12.5 )      319      309     3.2
Net Earnings                                     $353     $327     8.0     $1,028     $944     8.9
Diluted Net Earnings per share                  $0.92    $0.84     9.5      $2.68    $2.41    11.2

Dollar amounts in millions except per share
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Our geographic and segment net sales for the three and nine months ended September 30, 2012 and 2011 were:

                                                               Percentage Change                                       Percentage Change
                                                                   2012/2011                                               2012/2011
                                 Three Months Ended                       Constant         Nine Months Ended                       Constant
                                  2012            2011       Reported     Currency         2012           2011       Reported      Currency
Geographic sales:
United States               $    1,360         $  1,298         4.7           4.7     $    4,128        $ 3,862         6.9            6.9
International                      692              733        (5.6 )        (0.4 )        2,191          2,230        (1.8 )          2.0
Total net sales             $    2,052         $  2,031         1.0           2.9     $    6,319        $ 6,092         3.7            5.1
Segment sales:
Reconstructive              $      891         $    901        (1.1 )         1.1     $    2,776        $ 2,729         1.8            3.3
MedSurg                            781              767         1.7           3.1          2,388          2,303         3.6            4.8
Neurotechnology and Spine          380              363         4.7           6.9          1,155          1,060         9.0           10.5
Total net sales             $    2,052         $  2,031         1.0           2.9     $    6,319        $ 6,092         3.7            5.1

Net sales increased 1.0% and 3.7% for the three and nine months ended September 30, 2012, respectively, from 2011. For the three-month period, net sales grew 3.4% as a result of increased unit volume and changes in product mix, and 0.4% due to acquisitions, partially offset by an unfavorable impact of 0.9% due to changes in price and 1.9% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency net sales increased in the three-month period by 2.9%. For the nine-month period, net sales grew 4.9% as a result of increased unit volume and changes in product mix and 1.6% due to acquisitions, partially offset by an unfavorable impact of 1.4% due to changes in price and 1.4% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency net sales increased in the nine-month period by 5.1%.

The increase in consolidated net sales for the three-month period was primarily due to higher shipments of Instruments, Neurotechnology and reprocessed and remanufactured medical devices; these gains were partially offset by slowness in the European and Japanese markets. The increase in the nine-month period was also primarily due to higher shipments of Instruments, reprocessed and remanufactured medical devices and Neurotechnology.

Net sales in the United States increased 4.7% and 6.9% for the three- and nine-month periods, respectively. International sales decreased 5.6% and 1.8% for the three- and nine-month periods, respectively. In constant currency, international sales decreased 0.4% and increased 2.0% for the three- and nine-month periods, respectively.

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

                                                  Three Months Ended September 30                                                        Nine Months Ended September 30
                                                                      % Change                                                                               % Change
                                                                        U.S.            International                                                          U.S.            International
                                                         Constant                                Constant                                       Constant                                Constant
                          2012    2011    As Reported    Currency    As Reported  As Reported    Currency       2012     2011    As Reported    Currency    As Reported  As Reported    Currency
Reconstructive
Hips                    $  288   $ 300        (3.9 )      (2.1 )          1.6          (9.6 )     (5.9 )      $  908   $  914        (0.7 )       0.6            4.5          (5.9 )     (3.3 )
Knees                      315     311         1.4         3.0            4.5          (4.3 )      0.4           996      975         2.2         3.4            4.9          (2.7 )      0.7
Trauma and Extremities     235     236        (0.7 )       2.7           10.5         (10.6 )     (4.2 )         711      678         4.8         7.1           14.9          (3.6 )      0.7
TOTAL RECONSTRUCTIVE       891     901        (1.1 )       1.1            5.3          (8.9 )     (4.1 )       2,776    2,729         1.8         3.3            7.5          (5.1 )     (1.7 )
MedSurg
Instruments                303     294         3.0         4.6            6.2          (5.3 )      0.3           931      868         7.2         8.5           10.5          (0.6 )      3.7
Endoscopy                  259     257         1.1         2.7            1.1           1.2        6.5           802      788         1.8         3.0            1.0           3.6        7.9
Medical                    169     171        (1.3 )      (0.1 )         (6.7 )        24.7       31.9           506      522        (3.2 )      (2.2 )         (7.4 )        16.1       21.3
TOTAL MEDSURG              781     767         1.7         3.1            1.7           1.9        7.6         2,388    2,303         3.6         4.8            3.6           3.8        8.2
Neurotechnology and
Spine
Spine                      175     179        (1.6 )       0.1            1.8          (9.0 )     (3.7 )         537      509         5.6         6.7            8.9          (1.8 )      1.9
Neurotechnology            205     184        10.8        13.5           23.1          (3.7 )      2.1           618      551        12.1        13.9           20.6           1.9        5.9
TOTAL NEUROTECHNOLOGY
AND SPINE                  380     363         4.7         6.9           11.3          (5.8 )     (0.2 )       1,155    1,060         9.0        10.5           14.3           0.5        4.3

Reconstructive net sales in the three-month period decreased 1.1%, primarily due to an unfavorable impact of 1.4% due to changes in price and 2.2% due to the unfavorable impact of foreign currency exchange rates on net sales. Net sales were positively impacted by a 2.4% increase in unit volume and changes in product mix and 0.1% due to the favorable impact of acquisitions on net sales. Reconstructive net sales in the nine-month period increased 1.8%, primarily due to a 4.1% increase in unit volume and changes in product mix and 1.3% due to acquisitions. Net sales were negatively impacted by an unfavorable impact of 2.1% due to changes in

Dollar amounts in millions except per share
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price and 1.5% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency Reconstructive net sales in the three- and nine-month periods increased 1.1% and 3.3%, respectively, primarily due to increases in Trauma and Extremities, with sales of Knees also contributing to the increases.

MedSurg net sales in the three-month period increased 1.7%, primarily due to a 3.3% increase in unit volume and changes in product mix. These increases were partially offset by an unfavorable impact of 0.2% due to changes in price and 1.4% due to the unfavorable impact of foreign currency exchange rates on net sales. MedSurg net sales in the nine-month period increased 3.6%, primarily due to a 4.8% increase in unit volume and changes in product mix and 0.2% due to acquisitions. These increases were partially offset by an unfavorable impact of 0.3% due to changes in price and 1.1% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency MedSurg net sales in the three- and nine-month periods increased 3.1% and 4.8%, respectively, led by higher shipments of Instruments and reprocessed and remanufactured medical devices; these higher shipments were partially offset by challenging global market conditions for capital equipment.

Neurotechnology and Spine net sales in the three-month period increased 4.7%, primarily due to an 6.0% increase in unit volume and changes in product mix and 2.1% due to acquisitions, partially offset by an unfavorable impact of 1.3% due to changes in price and 2.2% due to the unfavorable impact of foreign currency exchange rates on net sales. Neurotechnology and Spine net sales in the nine-month period increased 9.0%, primarily due to a 6.7% increase in unit volume and changes in product mix and 5.7% due to acquisitions, partially offset by an unfavorable impact of 2.0% due to changes in price and 1.5% due to the unfavorable impact of foreign currency exchange rates on net sales. In constant currency Neurotechnology and Spine net sales in the three- and nine-month periods increased 6.9% and 10.5%, respectively.

Consolidated Cost of Sales
Cost of sales decreased 2.1% and 1.7% for the three and nine months ended September 30, 2012, respectively, to 31.9% and 32.2% of sales, respectively, compared to 32.9% and 34.0% of sales, respectively, in 2011. For the nine-month period, cost of sales includes an additional cost of $15 related to inventory that was "stepped-up" to fair value following acquisitions compared to $127 in 2011. The three- and nine-month periods also include $2 and $4, respectively, in other restructuring-related costs. Excluding the impact of these amounts, cost of sales in the three- and nine-month periods were 31.8% and 31.9% of sales, respectively, compared to 32.0% and 31.9% of sales, respectively in 2011.

Research, Development and Engineering Expenses

Research, development and engineering expenses decreased 1.4% to $342, representing 5.4% of sales in the nine-month period compared to 5.7% in 2011. These costs decreased 6.6% to $114 representing 5.6% of sales in the three-month period compared to 6.0% in 2011. The spending level decreased as a percent of sales in the three- and nine-month periods primarily due to the termination of all development of the OP-1 molecule in late 2011. The timing of projects in general also causes the spending level to vary from quarter to quarter as a percentage of sales.

Selling, General and Administrative Expenses Selling, general and administrative expenses increased from 2011 by 3.4% and 5.1% for the three- and nine-month periods, respectively, to $791 (38.5% of sales) and $2,433 (38.5% of sales), respectively. The three- and nine-month periods include $8 and $25, respectively, in acquisition and integration-related charges compared to $20 and $42, respectively, in 2011. In addition, general and administrative costs in the nine-month period include the $33 offered to the DOJ to settle the subpoena received in 2010 related to the sales and marketing of the OtisKnee device; the nine-month period also includes $8 in separation costs associated with our former Chief Executive Officer. The three- and nine-month periods in 2011 were favorably impacted by the resolution of a value added tax issue. Excluding the impact of the acquisition and integration-related charges and the OtisKnee matter, expenses in the three- and nine-month periods were 38.2% and 37.6% of sales, respectively, compared to 36.7% and 37.3% of sales, respectively, in 2011.

Restructuring Charges

In the three- and nine-month periods we recorded $12 and $45, respectively, 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 2013 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.

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

Other Income (Expense)

Other expense in the three- and nine-month periods decreased $7 and increased $9, respectively, from 2011. The decrease for the three-month period from 2011 was primarily a result of a favorable impact of $6 on interest expense related to tax audit settlements. The increase for the nine-month period from 2011 was mainly the result of a favorable impact of $20 on our interest expense for the three months ended June 30, 2011, also due to tax audit settlements.

Income Taxes

Our effective income tax rate on earnings in the three- and nine-month periods was 20.5% and 23.7%, respectively, compared to 24.1% and 24.7%, respectively, in 2011. In September 2012 we effectively settled all tax matters through 2004 relating to two German subsidiaries, and also adjusted the estimate of foreign tax credits to the amount shown on the tax return as filed; the net tax impact of these favorable events is reflected in the effective income tax rate for the three-month period. The rate for the three-month period also includes acquisition, integration, restructuring and other charges of $17 (net of $4 income tax benefit). The rate for the nine-month period includes the amortization of inventory step-up charges of $11 (net of $4 income tax benefit) and acquisition, integration, restructuring and other charges of $85 (net of $21 income tax benefit).

Net Earnings
Net earnings for the three- and nine-month periods were $353 or $0.92 per diluted share and $1,028 or $2.68 per diluted share compared to $327 or $0.84 per diluted share and $944 or $2.41 per diluted share in 2011.

Reported net earnings includes restructuring and related charges and acquisition and integration related charges related to acquisitions completed in 2011, including additional cost of sales for inventory sold in the year that was "stepped-up" to fair value. We also offered $33 to the United States Department of Justice to resolve the matter related to sales and marketing of our OtisKnee device and recorded a corresponding non-tax deductible charge. Excluding the impact of these items, adjusted net earnings in the three- and nine-month periods increased 5.1% and 6.2%, respectively, from 2011, to $370 or $0.97 per diluted share and $1,124 or $2.93 per diluted share, respectively.

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:

                                                  Three Months Ended           Nine Months Ended
                                                     September 30                September 30
                                                   2012          2011          2012          2011
Reported net earnings                          $      353     $    327     $    1,028     $    944
Acquisition and integration-related charges,
net of tax:
Inventory "step-up" to fair value                       -           12             11           85
Acquisition and integration related charges             6           13             17           29
Restructuring and related charges                      11            -             35            -
OtisKnee matter                                         -            -             33            -
Adjusted net earnings                          $      370     $    352     $    1,124     $  1,058

Diluted net earnings per share of common
stock:
Reported diluted net earnings per share        $     0.92     $   0.84     $     2.68     $   2.41
Acquisition and integration-related charges,
net of tax:
Inventory "step-up" to fair value                       -         0.03           0.03         0.22
Acquisition and integration related charges          0.02         0.03           0.04         0.07
Restructuring and related charges                    0.03            -           0.09            -
OtisKnee matter                                         -            -           0.09            -
Adjusted diluted net earnings per share        $     0.97     $   0.91     $     2.93     $   2.70
Weighted-average diluted shares outstanding         382.5        388.4          383.2        391.5

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

On June 28, 2012 the United States Supreme court upheld the federal legislation to reform the United States healthcare system that was enacted into law in 2010. 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

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

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

We generated $569 and $1,061 of cash from operations in the three- and nine-month periods ended September 30, 2012, respectively, compared to $446 and $807, respectively, in 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. The net of accounts receivable, inventory, loaner instrumentation and accounts payable consumed $218 of operating cash flow in the nine-month period, including $165 for loaner instrumentation and $65 for accounts payable. Inventory consumed $40 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 as compared to September 30, 2011 have increased by 7 days due to the impact of the above. Accounts receivable days sales outstanding increased by 1 day compared to the prior year due to timing of sales.

Investing Activities

Net investing activities consumed $167 of cash in the nine-month period compared to $1,755 in 2011. Cash used in 2012 was primarily for capital expenditures, while cash used in 2011 was due to acquisition activity as well as capital spending.

Financing Activities

Net financing activities consumed $386 of cash in the nine-month period compared to $22 in 2011, primarily due to the payment of dividends and repurchases of common stock. Cash proceeds from financing in 2011 also included $749 from the issuance of long-term debt. Dividends paid per common share in the nine-month period increased 18.1% to $0.6375 compared to $0.54 in 2011.

Liquidity

Cash and marketable securities were $3,863 at September 30, 2012 and $3,418 at December 31, 2011 and current assets exceeded current liabilities by $6,064 at September 30, 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 strong short- and long-term debt ratings that we believe should enable us to refinance our debt as it becomes due.

In August 2012 we refinanced our credit facility with a new $1,000 Senior Unsecured Revolving Credit Facility due August 2017 (2012 Facility). The 2012 Facility replaced the previously outstanding $1,000 Unsecured Credit Facility due in August 2013 (2010 Facility). The 2012 Facility includes an increase option permitting us to increase the size of the facility up to an additional $500, a $500 multicurrency sublimit (with no sublimit for euro borrowings), a $100 letter of credit sublimit and other terms, conditions and covenants substantially the same as the 2010 Facility. The 2012 Facility has an annual facility fee ranging from 5 to 22.5 basis points and bears interest at LIBOR, as defined in the 2012 Facility agreement, plus an applicable margin ranging from 57.5 to 127.5 basis points, both of which are dependent on our credit ratings.

Should additional funds be required we had approximately $1,056 of borrowing capacity available under all of our existing credit facilities at September 30, 2012, including the 2012 Facility.

At September 30, 2012, approximately 67% 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.

Several European countries, including Spain, Portugal, Italy and Greece (the Southern European Region), have been subject to credit deterioration due to weaknesses in their economic and fiscal situations. 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 the Southern European Region. Any non-sovereign exposure in these countries in our investment portfolios is considered immaterial.

We continually evaluate our receivables, particularly in the Southern European Region. The total net receivables from the Southern

Dollar amounts in millions except per share
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