Revenues from our ophthalmic products constituted 60.3 percent and 56.0 percent of our total revenues for the three months ended October 29, 2008, and for the fiscal year ended July 31, 2008, respectively. Revenues from our neurosurgical products represented 24.1 percent and 25.8 percent for the three months ended October 29, 2008, and for the fiscal year ended July 31, 2008, respectively. Revenues from our Original Equipment Manufacturer ("OEM") relationships represented 14.6 percent and 16.7 percent of our total revenues for the three months ended October 29, 2008, and the fiscal year ended July 31, 2008, respectively. In addition, other revenue was 1.0 percent of our total revenues for the three months ended October 29, 2008, and 1.5 percent of our total revenues for the fiscal year ended July 31, 2008.
International revenues of $3.5 million constituted 28.6 percent of our total revenues for the three months ended October 29, 2008, as compared to 28.4 percent as of the fiscal year ended July 31, 2008. We expect that the relative revenue contribution of our international sales will continue to rise for the remainder of fiscal 2009 and fiscal 2010 as a result of our continued efforts to expand our international distribution and direct sales force. The Company initially engineered and produced prototype instruments designed to assist retinal surgeons in treating acute subretinal pathologies such as histoplasmosis and age-related macular degeneration. The Company developed a number of specialized lines of finely engineered microsurgical instruments, which today have grown to comprise a product catalogue of over 1,400 retinal surgical items including scissors, fiberoptics, cannulas, forceps and other reusable and disposable surgical instruments.
The Company has an integrated neurosurgical product line which includes the Omni®ultrasonic aspirator, a Malis® electrosurgical generator and precision neurosurgical instruments. Our neurosurgery product catalogue consists of over 300 neurosurgical items including energy source devices, disposable and reusable instruments and other disposable accessories.
The primary use of the Company's Omni® ultrasonic aspirator in neurosurgery is tumor removal. The Company distributes the Omni® control module, handpieces and accessory tips in the United States, Canada, Australia, New Zealand, a portion of Latin and South Americas and all but two countries in Europe, Spain and Portugal. The control module and handpieces are manufactured by Miwatec Co., Ltd., a wholly-owned subsidiary of Mutoh Co. Ltd. of Japan. The accessory tips are manufactured by the Company. The Omni® system uses ultrasonic waves to cause vibration of a tip that emulsifies bone and tissue for removal and then may utilize suction to aspirate these bone and tissue fragments. The Omni® system is unique in its ability to cause the tip to oscillate torsionally allowing the surgeon to remove bone, a feature that is a safer alternative to a rotating drill in removing bone in or near critical anatomical structures in intracranial and spine surgery. The tips and disposable packs are manufactured at the Company's facility in O'Fallon, Missouri.
In intracranial neurosurgery, a bipolar electrosurgical system is the modality of choice for tissue coagulation as compared to monopolar products. The popularity of the bipolar system is largely due to the efforts of the late Dr. Leonard I. Malis, who designed and developed the first commercial bipolar coagulator in 1955 and pioneered the use of bipolar electrosurgery for use in the brain.
The Company's sales of its core neurosurgical products grew 15.3 percent during the three months ended October 29, 2008, compared to the prior year period. We anticipate that the Company is strategically positioned for future growth of our neurosurgical product line.

Recent Developments
On October 9, 2008, Alcon Research, Ltd. filed a lawsuit against the Company and Synergetics in the Northern District of Texas, Case No. 4-08CV-609-Y, alleging infringement of United States Patent No. 5,603,710; as such patent is amended by the Reexamination Certificate issued July 19, 2005. Alcon Research, Ltd. has requested enhanced damages based on an allegation of willful infringement, and has requested an injunction to stop the alleged acts of infringement. Because the complaint fails to identify a single product as infringing, at this stage the Company is left to guess at the basis for the suit. Aggregate sales revenue of products which may have any similarity with the referenced patent was approximately $400,000 for the last six fiscal years. The Company expects to raise meritorious defenses to the infringement suit.
On December 1, 2008, the Company amended its Revolving Credit Facility to extend the termination date through November 30, 2009. In addition, the bank removed the Company's option to borrow at the bank's prime lending rate. The Company's borrowings are now priced at an interest rate of the LIBOR plus 2.00 percent and adjusting each quarter based upon our leverage ratio. New Product Sales
The Company's business strategy has been, and is expected to continue to be, the development, manufacture and marketing of new technologies for micro-surgery applications including the ophthalmic and neurosurgical markets. New products, which management defines as products first available for sale within the prior 24-month period, accounted for approximately 21 percent of total sales for the Company for the three months ended October 29, 2008, or approximately $2.5 million. This continued growth was primarily in our capital equipment products both in the ophthalmic and neurosurgery markets. Synergetics' past revenue growth has been closely aligned with the adoption by surgeons of new technologies introduced by Synergetics. In the last 24-month period, Synergetics has introduced 73 new items to the ophthalmic and neurosurgery markets. We expect adoption rates for the Company's new products in the future to have a similar effect on its operating performance. Growth in Minimally Invasive Surgery Procedures Minimally invasive surgery is surgery performed without making a major incision or opening. Minimally invasive surgery generally results in less patient trauma, decreased likelihood of complications related to the incision and a shorter recovery time. A growing number of surgical procedures are performed using minimally invasive techniques, creating a multi-billion dollar market for the specialized devices used in the procedures. Based on our micro-instrumentation capability, we believe we are ideally positioned to take advantage of this growing market. The Company has developed scissors having a single activating shaft as small as 30 gauge (0.012 inch, 0.3 millimeter in diameter). We also believe that we are the world leader in microfiber illumination technology as our PhotonTM, PhotonTM II and LumenTMlight sources can transmit more light through a fiber of 300 micron diameter or smaller than any other light source in the world. These products were developed for ophthalmology and neurosurgery but have wide ranging minimally invasive surgical applications. The Company's Malis®line of electrosurgical bipolar generators is the market share leader in neurosurgical generators worldwide. These generators produce a unique and patented waveform that has been developed and refined over many decades and has proven to cause less collateral tissue damage as compared to other competing generators. The Omni® power ultrasound system technology provides a new method for the minimally invasive removal of soft and fibrotic tissue, as well as bone removal. This technology is in its infancy, and we anticipate that, once fully developed, it will become a standard of care in multiple minimally invasive surgical applications. The Company has benefited from the overall growth in this market and expects to continue to benefit as it continues to introduce new and improved technologies targeting this market.

Demand Trends
Increased volume, product mix improvements and price contributed to the majority of sales growth for the Company during the three months ended October 29, 2008. Ophthalmic and neurosurgical procedures volume on a global basis continues to rise at an estimated 5.0 percent growth rate driven by an aging global population, new technologies, advances in surgical techniques and a growing global market resulting from ongoing improvements in healthcare delivery in third world countries, among other factors. In addition, the demand for high quality products and new technologies, such as the Company's innovative instruments and disposables, to support growth in procedures volume continues to positively impact growth. The Company believes innovative surgical approaches will continue to significantly impact the ophthalmic and neurosurgery market. Further, economic conditions may negatively impact capital expenditures at both the hospital and doctor level.
Pricing Trends
Through its strategy of delivering new and higher quality technologies, the Company has generally been able to maintain the average selling prices for its products in the face of downward pressure in the healthcare industry. However, increased competition in the market for the AdvantageTM electrosurgical generator has negatively impacted the Company's selling prices on these devices. Further, economic conditions may be negatively impacting the Company's selling prices for the Omni® ultrasonic aspirator. Results Overview
During the fiscal quarter ended October 29, 2008, we had net sales of $12.2 million, which generated $7.1 million in gross profit, operating income of $1.2 million and net income of approximately $661,000, or $0.03 earnings per share. The Company had approximately $446,000 in cash and $14.2 million in interest-bearing debt and revenue bonds as of October 29, 2008. Management anticipates that cash flows from operations, together with available borrowings under our existing credit facilities, will be sufficient to meet working capital, capital expenditure and debt service needs for the next twelve months. Our Business Strategy
Our mission is to design, manufacture and market innovative microsurgical instruments and consumables of the highest quality in order to assist and enable microsurgeons around the world to provide a better quality of life for their patients. Our goal is to become a global leader through:
• continuous improvement and development of our people,

• continuous improvement and development of our manufacturing facilities,

• continuous improvement of our systems; and

• continuous improvement of our research and development initiatives.

During July 2008, the Company realigned its field sales operations. The realignment was designed to position the Company to attain increased revenues and market share. A comprehensive study of the Company's sales and marketing structure was undertaken, and as a result, a new and improved sales training system is being developed, higher recruitment standards are being implemented, individual and corporate objectives were linked with changes to the compensation structures and a defined sales process has been initiated.
During August 2008, the Company has begun to introduce lean manufacturing philosophies into the production environment. These philosophies were applied to our largest volume disposable product family where we were able to cut manufacturing times approximately in half. We plan to continue to apply the lean philosophy to one value stream at a time according to the financial importance to the Company. We will also be applying this philosophy to other departments in our organization, including purchasing, accounting and administration. In addition, the Company's most recent acquisition, Medimold, is producing components which were previously supplied by outside vendors. Over the next fiscal year, select high volume plastic components will be introduced to this lower cost process. Our annual savings from this process is now projected to be over $300,000.

During August 2008, the Company has begun to utilize its Material Requirements Planning ("MRP") within its information system to more efficiently schedule production work flow and priorities in its vertically integrated manufacturing processes. The Company is beginning to utilize this capability to manage its inventory more efficiently and gain benefits from its master production plan. In addition, the Company is continuing to work on establishing a standard cost system during fiscal year 2009. These improvements to the information system will give the Company the tools to measure its manufacturing performance against standards, provide enhanced budgeting capabilities and build more effective monitoring controls over inventory.
In October 2008, the Company initiated a thorough review and reprioritization of its research and development projects, leading to a decision to focus available resources on high priority projects with a concurrent reduction in the total number of projects from approximately 63 projects at the end of fiscal year 2008 to 38 projects as of October 29, 2008, a reduction of approximately 40 percent. In addition, it has begun to develop a uniform policies and procedures manual for its research and development initiatives. Results of Operations
Three Month Period Ended October 29, 2008 Compared to Three Month Period Ended October 29, 2007
Net Sales
The following table presents net sales by category (dollars in thousands):

                                                                         Quarter Ended
                                                                                                   % Increase
                                                   October 29, 2008        October 29, 2007        (Decrease)

Ophthalmic                                        $            7,384      $            6,365              16.0 %
Neurosurgery                                                   2,953                   2,561              15.3 %
OEM (Codman, Stryker and Iridex)                               1,782                   1,364              30.6 %
Other                                                            127                     179             (29.1 %)

Total                                             $           12,246      $           10,469              17.0 %

Ophthalmic sales grew 16.0 percent in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. Domestic ophthalmic sales increased 7.1 percent, while international sales increased 34.8 percent. Domestic ophthalmic sales management was recently reorganized. The Company continues to train its new, recently added territory managers and is beginning to see a return on its investment in a direct sales force in certain countries. Additionally, the Company expects that the VitraTM laser and the initial shipments of the SupraTMlaser, which are expected to commence in the second quarter of fiscal 2009, will have positive impacts on net sales for the remainder of fiscal 2009.
Neurosurgery sales growth for the three months ended October 29, 2008 increased 15.3 percent as compared to the three months ended October 29, 2007. Domestic neurosurgery sales increased 20.1 percent and international sales increased 2.6 percent. The Company expects that sales of the Malis® AdvantageTM electrosurgical generator and the Omni®ultrasonic aspirator and their related disposables will continue to have a positive impact on net sales for the remainder of fiscal 2009.
OEM sales during the first fiscal quarter of 2009 increased 30.6 percent compared to the first fiscal quarter of 2008. Sales to Codman decreased 31.3 percent compared to the first fiscal quarter of 2008. This decrease was impacted by the decision to defer the consolidation of the Philadelphia operations into the O'Fallon operations, as this changed the timing of requested inventory deliveries. In addition, sales to Stryker increased considerably during the first quarter of fiscal 2009 compared to the first fiscal quarter of 2008, as the new generator we now produce for Stryker had not been released in the first quarter of 2008 and was not available until April of 2008. Sales to Stryker of the new generator are expected to positively impact revenue for the remainder of fiscal 2009 and fiscal 2010. Sales to Iridex Corporation ("Iridex") of $77,000 added to the OEM sales growth.

The following table presents domestic and international net sales (dollars in thousands):

                                                   Quarter Ended October 29,
                                               2008          2007       % Increase
      United States (including OEM sales)   $    8,746     $  7,719            13.3 %
      International (including Canada)           3,500        2,750            27.3 %

      Total                                 $   12,246     $ 10,469            17.0 %

Domestic sales for the first quarter of fiscal 2009 compared to the same period of fiscal 2008 increased 13.3 percent as sales of domestic ophthalmology have increased due to higher vitreoretinal instrument sales and disposables, and sales of domestic neurosurgery have increased due to higher electrosurgical generator sales and their related disposables. The ophthalmology product line primarily contributed to the international sales growth of 27.3 percent for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. Gross Profit
Gross profit as a percentage of net sales was 57.8 percent in the first quarter of fiscal 2009, compared to 62.3 percent for the same period in fiscal 2008. Gross profit as a percentage of net sales for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 decreased approximately five percentage points, primarily due to the change in mix toward higher international sales, pricing pressure on both ophthalmic and neurosurgical capital equipment and additional scrap costs experienced in manufacturing some of the Company's products. The Company has implemented a scrap reduction initiative during the second quarter of fiscal 2009. Operating Expenses
Research and development ("R&D") as a percentage of net sales was 5.3 percent and 4.3 percent for the first quarter of fiscal 2009 and 2008, respectively. R&D costs increased to $652,000 in the first quarter of fiscal 2009 from $449,000 in the same period in fiscal 2008, reflecting an increase in spending on active, new product development projects focused on areas of strategic significance, partially offset by a decrease in costs associated with new products. The Company's pipeline included approximately 38 active, major projects in various stages of completion as of October 29, 2008. The Company's R&D headcount increased by 40.0 percent from October 29, 2007 to October 29, 2008. The Company has strategically targeted R&D spending as a percentage of net sales to be approximately 5.0 to 7.0 percent.
Sales and marketing expenses increased by approximately $193,000 to $3.2 million, or 26.5 percent of net sales, for the first fiscal quarter of 2009, compared to $3.1 million, or 29.1 percent for the first fiscal quarter of 2008. The decrease in sales and marketing expenses as a percentage of net sales, was primarily due to the 17.0 percent increase in sales, partially offset by an increase in sales and marketing headcount by 17.5 percent from October 29, 2007 to October 29, 2008.
General and administrative ("G&A") expenses decreased by $219,000 during the first fiscal quarter of 2009 and as a percentage of net sales were 16.5 percent for the first fiscal quarter of 2009 as compared to 21.4 percent for the first fiscal quarter ended October 29, 2007. The Company's legal expenses decreased by $118,000, as the costs associated with the Iridex lawsuit and subsequent settlement are no longer a significant factor. The Company also experienced a decrease of approximately $105,000 in outside consulting costs on the Company's Sarbanes-Oxley compliance efforts, primarily due to efforts that further internalize the documentation processes and procedures.

Other Expenses
Other expenses for the first quarter of fiscal 2009 decreased 26.4 percent to $176,000 from $239,000 for the first quarter of fiscal 2008. The decrease was due primarily to a lower interest rate, as well as a reduced average balance on the Company's working capital line of credit borrowings. Operating Income, Income Taxes and Net Income Operating income for the first quarter of fiscal 2009 was $1.2 million, as compared to operating income of $785,000 in the comparable 2008 fiscal period. The increase in operating income was primarily the result of 17.0 percent more net sales and $219,000 in decreased G&A expenses, partially offset by an approximate five percentage point decrease in gross profit margin, a $193,000 increase in sales and marketing expenses and a $203,000 increase in R&D expenditures.
The Company recorded a $326,000 provision on pre-tax income of $987,000, a 33.0 percent tax provision, in the quarter ended October 29, 2008. In the quarter ended October 29, 2007, the Company recorded an $189,000 tax provision on pre-tax income of $546,000, a 34.6 percent tax provision. In addition, the Company recorded a $40,000 increase in the research and experimentation credit during the quarter ended October 29, 2008.
Net income increased by $264,000 to $661,000 for the first quarter of fiscal 2009, from $397,000 for the same period in fiscal 2008. Basic and diluted earnings per share for the first quarter of fiscal 2009 increased to $0.03 from $0.02 for the first quarter of fiscal 2008. Basic weighted-average shares outstanding increased from 24,296,309 at October 29, 2007 to 24,440,861 at October 29, 2008.
Liquidity and Capital Resources
The Company had $446,000 in cash and total interest-bearing debt and revenue bonds payable of $14.2 million as of October 29, 2008.
Working capital, including the management of inventory and accounts receivable, is a key management focus. At October 29, 2008, the Company had an average of 61 days of sales outstanding ("DSO") for the three month period ending October 29, 2008, unfavorable to July 31, 2008 by seven days. However, the 61 days of sales outstanding is one day favorable to October 29, 2007. The Company utilized the three month period to calculate DSO as it included the current growth in sales. The collection time for non-U.S. receivables is generally longer than comparable U.S. receivables, and as such, the increase in non-U.S. sales of 27.3 percent is unfavorably impacting the DSO calculation. At October 29, 2008, the Company had 281 days of cost of sales in inventory on hand, unfavorable to July 31, 2008 by 63 days. However, the 281 days of sales in . . .