Our objective is to continue to build a customer-focused and profitable medical device company by developing or acquiring innovative medical devices and other products to sell through our sales channels. Our strategy therefore entails substantial growth in revenues through both internal means - through launching new and innovative products and selling existing products more intensively - and by acquiring existing businesses or already successful product lines. We aim to achieve this growth in revenues while maintaining strong financial results. While we pay attention to any meaningful trend in our financial results, we pay particular attention to measurements that are indicative of long-term profitable growth. These measurements include revenue growth (derived through acquisitions and products developed internally), gross margins on total revenues, operating margins (which we aim to continually expand on as we leverage our existing infrastructure), and earnings per diluted share of common stock.
ACQUISITIONS
Our strategy for growing our business includes the acquisition of complementary product lines and companies. Our recent acquisitions of businesses, assets and product lines may make our financial results for the nine months ended September 30, 2008 not directly comparable to those of the corresponding prior-year period. See Note 2 to the unaudited condensed consolidated financial statements for a further discussion.
RESULTS OF OPERATIONS
Net loss for the three months ended September 30, 2008 was $(15.3) million, or $(0.54) per diluted share, as compared with net income of $9.7 million, or $0.33 per diluted share, for the three months ended September 30, 2007. Net income for the nine months ended September 30, 2008 was $10.1 million, or $0.35 per diluted share, as compared with net income of $28.1 million, or $0.94 per diluted share, for the nine months ended September 30, 2007. Executive Summary
The decrease in net income for the three and nine month periods ended September 30, 2008 over the prior year periods resulted primarily from two significant charges recorded in the third quarter of 2008 in the pre-tax amounts of $25.2 million for in-process research and development related to the Theken acquisition, and a non-cash charge of $18.0 million in connection with the chief executive officer's stock-based compensation. The impact of these charges was favorably offset by increases in revenues of 24% and 22% during the three and nine-month periods ended September 30, 2008, respectively. Our costs and expenses include the following charges (in thousands):

                                                 Three Months Ended September 30,                Nine Months Ended September 30,
                                                   2008                     2007                  2008                     2007
Acquisition-related charges                  $          26,584         $         1,239      $          30,245         $         2,870
Facility consolidation, manufacturing and
distribution transfer and system
integration charges                                        238                      93                    802                     778
Employee termination and related costs                       -                     130                      -                     (29 )
Litigation settlements                                       -                     138                      -                     138
Charges associated with discontinued or
withdrawn product lines                                  1,207                       -                  1,207                   1,456
Intangible asset impairments                                 -                       -                      -                   1,014
Charges related to restructuring European
subsidiaries                                                 -                       -                      -                     335
Incremental professional and bank fees
related to the delayed 10-K filing                           -                       -                  1,041                       -
Stock-based compensation and other
related charges                                         18,356                       -                 18,356                       -

Total                                        $          46,385         $         1,600      $          51,651         $         6,562

Of these amounts, $6.5 million and $4.7 million were charged to cost of product revenues in the nine-month periods ended September 30, 2008 and 2007, respectively, and the in-process research and development charge of $25.2 million was included in research and development expense in the nine-month period ended September 30, 2008. The remaining amounts, except for intangible asset amortization, were charged to selling, general and administrative expenses.

Acquisition-related charges include the in-process research and development charge and inventory fair value purchase accounting adjustments. Employee termination and related costs for the nine months ended September 30, 2007 reflect the reversal of previously recorded accruals for anticipated terminations as a result of changes in estimates during the second quarter 2007. Charges associated with discontinued or withdrawn product lines in 2008 reflect the discontinuation of products distributed for third parties and in 2007 reflect the discontinuation of certain dural repair products. Intangible asset impairments include termination of various trademarks for various products, which will now be re-branded as part of Integra Pain Management, and the impairment of certain other technology and trademarks based on business and operating decisions during the third quarter.
We believe that, given our strategy of seeking new acquisitions and integrating recent acquisitions, our current focus on rationalizing our existing manufacturing and distribution infrastructure, our recent review of various product lines in relation to our current business strategy, and a renewed focus on enterprise business systems integrations, charges similar to those discussed above could recur with similar materiality in the future. We believe that the delineation of these costs provides useful information to measure the comparative performance of our business operations across reporting periods. Revenues and Gross Margin on Product Revenues Our revenues and gross margin on product revenues were as follows (in thousands):

                                            Three Months Ended September 30,              Nine Months Ended September 30,
                                               2008                   2007                  2008                   2007
Integra NeuroSciences                    $         68,014       $         56,678      $        192,146       $        176,610
Integra Orthopedics                                53,848                 33,035               155,996                 99,483
Integra Medical Instruments                        45,166                 45,302               132,092                116,721

Total revenue                                     167,028                135,015               480,234                392,814
Cost of product revenues                           64,317                 50,863               184,688                152,248

Gross margin on total revenues           $        102,711       $         84,152      $        295,546       $        240,566

Gross margin as a percentage of total
revenues                                               61 %                   62 %                  62 %                   61 %

THREE MONTHS ENDED SEPTEMBER 30, 2008 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2007
Revenues and Gross Margin
For the three months ended September 30, 2008, total revenues increased by $32.0 million, or 24%, to $167.0 million from $135.0 million for the same period during 2007. Domestic revenues increased by $22.6 million to $128.2 million, or 77% of total revenues, for the three months ended September 30, 2008 from $105.6 million, or 78% of total revenues, for the three months ended September 30, 2007. International revenues increased to $38.8 million from $29.4 million in the prior-year period, an increase of 32%. In the neurosciences category, sales of our ultrasonic aspirator, neuromonitoring, cranial stabilization and dural repair products led revenue growth. In the orthopedics category, lower extremity metal implants, engineered collagen products for dermal and nerve repair, and our Integra Mozaik bone void filler led revenue growth. Upper extremity products declined compared to the prior-year quarter. Theken spine products, acquired in August, contributed $6.8 million to revenue in the quarter. Finally, in the medical instruments category, Jarit instruments (sold primarily to hospitals) led growth, offset by declines in Miltex instruments (sold primarily to offices) and surgical lighting and distributed products.
Included in revenues are royalties of $2.9 million and $8.7 million, respectively, for the three and nine months ended September 30, 2008, and $2.5 million and $7.6 million for the three and nine months ended September 30, 2007.
We have generated our product revenue growth through acquisitions, new product launches and increased direct sales and marketing efforts both domestically and in Europe. We expect that our expanded domestic sales force, the continued implementation of our direct sales strategy in Europe and sales of internally developed and acquired products will drive our future revenue growth. We also intend to continue to acquire businesses that complement our existing businesses and products. Many of our recent acquisitions involve businesses or product lines that overlap in some way with our existing products. Our sales and marketing departments are integrating these acquisitions, and, as a result, there has been, and we expect there will continue to be, some negative effect on sales of our existing products that will affect our internal growth.

Gross margin increased by $18.5 million to $102.7 million for the three months ended September 30, 2008, from $84.2 million for the same period last year. Gross margin as a percentage of total revenue is 61% for the third quarter 2008, compared to 62% for third quarter 2007.
Other Operating Expenses
The following is a summary of other operating expenses as a percent of total revenues (in thousands):

                                             Three Months Ended September 30,
                                               2008                    2007
     Research and development                         21 %                     5 %
     Selling, general and administrative              52 %                    42 %
     Intangible asset amortization                     2 %                     2 %

     Total other operating expenses                   75 %                    49 %

Total other operating expenses, which consist of research and development expenses, selling, general and administrative expenses, and amortization expenses, increased $59.8 million, or 91%, to $125.6 million in the third quarter of 2008, compared to $65.8 million in the third quarter of 2007. Research and development expenses in the third quarter of 2008 increased by $28.2 million to $34.7 million, compared to $6.5 million in the same period last year. Most of the increase was related to the $25.2 million in-process research and development charge related to the acquisition of Theken and increased spending on biomaterials programs, including our multi-center clinical trial in connection with a proposed application to the FDA for approval of our DuraGen Plus® Adhesion Barrier Matrix product in the United States. In the remainder of 2008 and for 2009, we expect to increase our research and development expenses on activities directed toward further expanding the indications for use of our absorbable implant technology products, including the DuraGen Plus® Adhesion Barrier Matrix clinical trial.
Selling, general and administrative expenses in the third quarter of 2008 increased by $31.5 million to $87.7 million, or 52% of revenue, compared to $56.2 million, or 42% of revenue, in the same period last year. The increase in selling, general and administrative expenses over the prior year was due primarily to an $18.0 million stock-based compensation charge in connection with the renewal of the chief executive officer's employment agreement, increases in finance department personnel, and expenses attributable to businesses acquired in the last year. As we gain more leverage from our larger selling organizations, we expect selling, general and administrative expenses to decrease to between 38% and 40% of revenue over the remainder of 2008 and into 2009.
We intend to continue to expand our direct sales and marketing organizations in our selling platforms and to increase corporate staff to support the recent growth in our business, integrate acquired businesses, and improve the internal controls over financial reporting. Additionally, we have incurred higher operating costs in connection with our recent investments in our infrastructure, including the continued implementation of an enterprise business system and the expansion of our finance and accounting staff. We expect to incur costs related to these activities for the remainder of 2008 and in 2009 as we complete these activities.
Non-Operating Income and Expenses
The following is a summary of non-operating income and expenses (in thousands):

                                       Three Months Ended September 30,
                                          2008                  2007
            Interest income          $           399       $         1,518
            Interest expense                  (4,249 )              (3,863 )
            Other income (expense)              (409 )                (325 )

Interest Income
Interest income decreased in the three months ended September 30, 2008 compared to the same period last year, primarily as a result of significantly lower cash and investment balances and lower interest rates as compared to the prior year. Interest Expense
Interest expense increased in the three months ended September 30, 2008 compared to the same period last year, primarily due to increased borrowings under our bank credit agreement, offset by the repayment at maturity of our convertible notes due in March 2008.
Our reported interest expense for the three-month period ended September 30, 2008 and 2007, includes $3.6 million and $2.2 million, respectively, of cash interest expense on convertible notes and the senior credit facility. We incurred approximately $9.8 million of costs in connection with the issuance of our 2010 Notes and 2012 Notes, each as defined below, of which $7.6 million was capitalized and which is being amortized over the term of the notes. Interest expense for the three months ended September 30, 2008 includes $0.6 million of non-cash amortization of debt issuance costs as compared to $0.7 million in the same period last year.
On March 15, 2008, our 2008 Notes, as defined below, matured and, in accordance with the terms of the 2008 Notes, we paid approximately $119.6 million and issued 768,221 shares of our common stock in March and April 2008. We borrowed $120.0 million under our credit facility in March 2008 in order to repay the 2008 Notes, which were entirely repaid by April 15, 2008. In July 2008, we borrowed $80 million to fund the acquisition of Theken and for other general corporate purposes.
Other Income
Other income (expense) for both periods represents losses resulting from changes in foreign currency exchange rates.

Income Taxes

                                            Three Months Ended September 30,
     (in thousands)                            2008                    2007
     Income (loss) before income taxes   $        (27,150 )       $       15,666
     Income tax expense (benefit)                 (11,859 )                5,993

     Net income (loss)                   $        (15,291 )       $        9,673

     Effective tax rate                             (43.7 %)                38.3 %

Our effective income tax rate for the three months ended September 30, 2008 and 2007 was 43.7% (benefit) and 38.3%, respectively. The tax benefits related to the recorded charges for in-process research and development costs totaling $25.2 million and the stock-based compensation charge for the renewal of the chief executive officer's employment contract of $18.0 million. The remaining change in the effective income tax rate year-over-year was primarily the result of changes in the geographic mix of taxable income attributable to recently acquired businesses and changes in valuation allowances.
Our effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of taxable earnings and losses and changes in tax laws and statutory tax rates in applicable jurisdictions. We consider these factors and others, including our history of generating taxable earnings, in assessing our ability to realize deferred tax assets.
NINE MONTHS ENDED SEPTEMBER 30, 2008 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2007
Revenues and Gross Margin
For the nine-month period ended September 30, 2008, total revenues increased 22% to $480.2 million from $392.8 million during the prior-year period. Domestic revenues increased by $58.9 million to $357.3 million and were 74% of total revenues, as compared to 76% of revenues in the nine months ended September 30, 2007. International revenues increased $28.5 million to $122.9 million, an increase of 30% compared to the same period in 2007.

In the neurosciences category, sales of our ultrasonic aspirator, neuromonitoring, cranial stabilization and dural repair products led the revenue growth. In the orthopedics category, lower extremity metal implants, engineered collagen products for dermal and nerve repair, and our Integra Mozaik bone void filler led revenue growth. Upper extremity products declined compared to the prior year nine-month period. Theken spine products, acquired in August, contributed $6.8 million in the nine-month period. Finally, in the medical instruments category, Jarit instruments (sold primarily to hospitals) led growth, offset by declines in Miltex instruments (sold primarily to offices) and surgical lighting and distributed products.
Gross margin increased by $54.9 million to $295.5 million for the nine-month period ended September 30, 2008, from $240.6 million for the same period last year. Gross margin as a percentage of total revenue was 62% for the first three quarters of 2008, compared to 61% for this same period during 2007. Other Operating Expenses
The following is a summary of other operating expenses as a percent of total revenues (in thousands):

                                              Nine Months Ended September 30,
                                               2008                    2007
     Research and development                         10 %                     5 %
     Selling, general and administrative              44 %                    41 %
     Intangible asset amortization                     2 %                     2 %

     Total other operating expenses                   56 %                    48 %

Total other operating expenses, which consist of research and development expenses, selling, general and administrative expenses and amortization expenses, increased $84.3 million, or 45%, to $273.1 million in the first nine months of 2008, compared to $188.8 million in the same period last year. Research and development expenses in the first nine months of 2008 increased by $31.5 million to $50.3 million, compared to $18.8 million in the same period last year. The in-process research and development charge and routine research and development expenses related to Theken accounted for $26.4 million of the increase. The remaining increase relates to expanding the indications for use of our absorbable implant technology products, including a multi-center clinical trial in connection with a proposed application to the FDA for approval of our DuraGen Plus®Adhesion Barrier Matrix product in the United States. Selling, general and administrative expenses in the nine-month period ended September 30, 2008 increased by $53.3 million to $213.6 million, compared to $160.3 million in the same period last year. Selling expenses increased by $18.8 million primarily due to the accelerated ramp-up in our extremities reconstructive, intensive care unit, specialist and spine sales forces, and the impact of acquisitions. General and administrative expenses increased by $34.5 million in the first nine months of 2008 compared to the same period last year primarily because of the impact of acquisitions and increases in headcount, compensation, a non-cash charge of $18.0 million for stock-based compensation related to the chief executive officer's employment agreement, and increased spending on consulting services.
Amortization expense in the first nine months of 2008 decreased by $0.5 million to $9.2 million, compared to $9.7 million in the same period last year. Included in the 2007 amounts are $1.0 million of impairment charges. Non-Operating Income and Expenses
The following is a summary of non-operating income and expenses (in thousands):

                                        Nine Months Ended September 30,
                                           2008                  2007
            Interest income          $          1,530       $        2,378
            Interest expense                  (12,725 )             (9,896 )
            Other income (expense)                647                 (229 )

Interest Income
Interest income decreased in the nine-month period ended September 30, 2008, compared to the same period last year, primarily as a result of significantly lower interest rates period over period. Interest Expense
Interest expense increased in the nine months ended September 30, 2008 compared to the same period last year, primarily due to increased borrowings under our bank credit agreement, offset by the repayment at maturity of our convertible notes due in March 2008. In addition, in March 2008 we entered into a waiver . . .