products for men's incontinence and erectile restoration, to include products and therapies targeted at benign prostatic hyperplasia (BPH) in men, as well as urinary incontinence, pelvic organ prolapse and menorrhagia in women. We estimate there are as many as 1.8 billion incidences of these conditions in the global markets we serve, with many people suffering from multiple conditions. Treatment options for these conditions vary considerably depending on the severity of the condition. Approximately 450 million of these men and women have conditions sufficiently severe so as to profoundly diminish their quality of life and significantly impact their relationships. Our addressable market is contained within this group of patients. Our product development and acquisition strategies have focused on expanding our product offering for surgical solutions, including less-invasive solutions for surgeons and their patients. Our primary physician customers include urologists, gynecologists, urogynecologists and colorectal surgeons.
We completed our 36th year of operations in 2008, with a continued focus on technological innovation, market expansion and financial strength. Our net sales grew from $463.9 million in 2007 to $501.6 million in 2008. In 2008, men's health contributed $219.2 million, or 44 percent of total net sales, BPH therapy contributed $116.3 million, or 23 percent of total net sales, and women's health contributed $166.1 million, or 33 percent of total net sales. Our products for treating incontinence in both the men's and women's health businesses drove revenue growth in 2008, particularly through the success of the AdVance® male sling and the MiniArc® Single Incision Sling for treating female stress urinary incontinence. Our erectile restoration product revenues grew through notable expansion in a number of international markets. We provide a full line of medical laser systems to deliver minimally invasive procedures for the treatment of obstructive BPH and urinary stones. BPH therapy revenues declined in 2008, as a result of a slower than anticipated market penetration rate, but we have made considerable improvements to product performance in 2008 and are now selling throughout our global markets GreenLight HPS® (High Performance System), and we continue to market our TherMatrx® solution for in-office treatment of BPH. Revenue from our prolapse repair products, notably Apogee® and Perigee®, also grew more significantly through expansion in international markets and exited 2008 strong in all regions with the recent launch of our new Elevate® posterior transvaginal prolapse repair system in the back half of 2008. Our Her Option® product for the treatment of menorrhagia, or excessive uterine bleeding, experienced a decline in revenues during the year, with lower than expected adoption rates for office-based procedures. In 2008, we implemented a number of company-wide initiatives to reduce working capital, manage expenses and drive operating leverage throughout our business. As a result, we generated income from operations of approximately $69 million in 2008, compared to $29.5 million in 2007, and cash from operations of approximately $116 million in 2008, which more than doubled the 2007 amount of $48 million. We also retired approximately $120 million of debt in 2008 compared to approximately $50 million in 2007.
In January of 2007, we sold the Laserscope aesthetics business. All of the information in this report, unless specifically stated otherwise, excludes the Laserscope aesthetics business, which we reported as discontinued operations during the six month period, July 2006 to January 2007, during which we held this business.

Results of Operations
Sales trends
The following table compares net sales of our product lines and geographies between 2008 and 2007, and between 2007 and 2006.

(in thousands)              2008             2007           $ Increase       % Increase          2007             2006          $ Increase       % Increase

Net Sales
Product Line
Men's health             $ 219,211        $ 188,519        $   30,692             16.3 %      $ 188,519        $ 160,436        $  28,083             17.5 %
BPH therapy                116,346          125,497            (9,151 )           -7.3 %        125,497           70,436           55,061             78.2 %
Women's health             166,084          149,912            16,172             10.8 %        149,912          127,446           22,466             17.6 %

Total                    $ 501,641        $ 463,928        $   37,713              8.1 %      $ 463,928        $ 358,318        $ 105,610             29.5 %


Geography
United States            $ 355,678        $ 334,258        $   21,420              6.4 %      $ 334,258        $ 272,679        $  61,579             22.6 %
International              145,963          129,670            16,293             12.6 %        129,670           85,639           44,031             51.4 %

Total                    $ 501,641        $ 463,928        $   37,713              8.1 %      $ 463,928        $ 358,318        $ 105,610             29.5 %


Percent of net sales

Product Line
Men's health                  43.7 %           40.6 %                                              40.6 %           44.8 %
BPH therapy                   23.2 %           27.1 %                                              27.1 %           19.7 %
Women's health                33.1 %           32.3 %                                              32.3 %           35.5 %

Total                        100.0 %          100.0 %                                             100.0 %          100.0 %


Geography
United States                 70.9 %           72.0 %                                              72.0 %           76.1 %
International                 29.1 %           28.0 %                                              28.0 %           23.9 %

Total                        100.0 %          100.0 %                                             100.0 %          100.0 %

Net Sales. In 2008, net sales increased by 8.1 percent or $37.7 million over 2007. Growth in our business continues to be driven by the success of recent product launches, particularly the AdVance® male sling for treating mild male incontinence, the MiniArc®Single-Incision Sling, and the InhibiZone®-coated AMS 800® Artificial Urinary Sphincter, along with continuing launches of products outside the United States, specifically the AMS 700® MS™ for erectile restoration. We believe the current worldwide economic crisis has resulted and may continue to result in some reduction in the procedures using our products. Although a majority of our products are subject to reimbursement from third party government and non-government entities, some procedures that use our products can be deferred by patients. In light of the current economic conditions, patients may not have employer-provided healthcare, be as willing to take time off from work or spend their money on deductibles and co-payments often required in connection with the procedures that use our products. While we believe current economic conditions may have contributed to a softening in our recent revenue growth rates, the specific impact is difficult to measure. Furthermore, we cannot predict how these economic conditions will impact our future sales.
In 2007, net sales grew by 29.5 percent or $105.6 million from 2006. The increase was driven by a full year of sales of the GreenLight HPS® system, which we acquired in July 2006, and the continued growth of the existing product lines in both the male and female product portfolios. The existing product lines were enhanced in 2007 by new product launches, particularly the MiniArc® Single-Incision Sling and the InhibiZone®-coated AMS 800®Artificial Urinary Sphincter along with continuing launches outside the United States, specifically the AdVance® male sling and the AMS 700® MS™ for erectile restoration. Men's health products. Net sales from men's health products grew 16.3 percent in 2008, following an increase of 17.5 percent in 2007.

The largest portion of the increase in 2008 is in the male continence product line, driven by the continued success of the AdVance® male sling and the AMS 800® with InhibiZone®. Growth in sales of our erectile restoration products are consistent with market growth rates.
In 2007, erectile restoration product sales experienced double digit growth, driven by the continued worldwide rollout of the AMS 700® MS™, which features a one-touch button design for easier deflation and was originally launched in the United States in the fourth quarter of 2006. Male continence sales increased in 2007 as a result of strong growth in both the AMS 800® Artificial Urinary Sphincter and the newly launched AdVance® male sling, which treats mild to moderate incontinence.
BPH therapy products. Net sales from BPH therapy products declined 7.3 percent in 2008, following an increase of 78.2 percent in 2007.
The decline in 2008 was driven by lower sales of our laser therapy products, where we did not achieve the utilization rates anticipated as we have seen a slowing in the surgical markets due to the increased use of drugs to treat BPH as well as increased competition. We also experienced a decline in sales of our TherMatrx® product, which is used for treatment of non-obstructive BPH, due to a shift away from microwave therapies for in-office procedures.
Growth in BPH therapy net sales in 2007 over the same period in 2006 was driven by laser therapy sales growth due to the first full year of revenue following the Laserscope acquisition in July 2006. Partially offsetting this increase was a decline in sales of our TherMatrx®product.
Women's health products. Net sales from women's health products grew 10.8 percent in 2008, following an increase of 17.6 percent in 2007. The decline in net sales growth in 2008 compared to the prior year is primarily volume driven.
The female continence product line, driven by the new MiniArc® sling, contributed strong growth in dollars and units over 2007. The MiniArc® Single-Incision Sling is our latest generation of slings, offering a less invasive treatment for female incontinence. The MiniArc® requires just one incision to surgically place a small strip of mesh material to support the urethra. In the latter part of 2008, we launched our new Elevate®posterior transvaginal prolapse repair system, which had a minimal impact on our results for 2008. Our Her Option® products for the treatment of menorrhagia, or excessive uterine bleeding, experienced a decline in revenues and units compared to the prior year. Revenue growth in this area has been impacted as the industry continues to experience lower than expected adoption rates for office-based procedures.
In 2007, we saw balanced net sales growth in dollars from all three therapies. Growth in sales and units of our female continence products was driven mainly by continued growth of our Monarc® self-fixating slings and the 2007 launch of the MiniArc® product. Our prolapse repair solutions, Apogee® and Perigee®, saw worldwide growth in 2007, primarily driven by our continued commitment to and emphasis on physician training. The Her Option® product grew significantly in 2007 as commercial payers continued to implement reimbursement for this therapy. International sales and foreign exchange effects. Our consolidated net sales grew $37.7 million, or 8.1 percent in 2008 from 2007. Of this growth, $4.9 million, or 1.0 percentage point, was due to favorable currency exchange rates in the markets in which we conduct business in a foreign currency. Because a portion of the expenses associated with international sales are foreign currency denominated costs, changes in these currency rates do not affect net income and cash flows from operations by the same dollar amount as they affect sales revenues.
In 2007, $7.6 million, or 2.1 percentage points, of the net sales growth from 2006 was due to favorable currency exchange rates.

Customer location               2008                2007              $ Increase          % Increase            2007                2006             $ Increase          % Increase

Within U.S.                  $ 355,678           $ 334,258           $   21,420                6.4 %         $ 334,258           $ 272,679           $  61,579                22.6 %

International
Before currency impact         141,109             129,670               11,439                8.8 %           122,083              85,639              36,444                42.6 %

Subtotal                       496,787             463,928               32,859                7.1 %           456,341             358,318              98,023                27.4 %

Currency impact                  4,854                   -                4,854                  -               7,587                   -               7,587                   -

Total                        $ 501,641           $ 463,928           $   37,713                8.1 %         $ 463,928           $ 358,318           $ 105,610                29.5 %

Operating Expenses
The following table compares the dollar and percentage change in the Statement
of Operations between 2008 and 2007, and between 2007 and 2006.

                                                                              $ Increase              %                                                     $ Increase              %
(in thousands)                           2008                2007             (Decrease)           Change              2007                2006             (Decrease)           Change

Net sales                             $ 501,641           $ 463,928           $  37,713               8.1 %         $ 463,928           $ 358,318           $ 105,610              29.5 %
Cost of sales                           111,097             105,592               5,505               5.2 %           105,592              68,872              36,720              53.3 %

Gross profit                            390,544             358,336              32,208               9.0 %           358,336             289,446              68,890              23.8 %

Operating expenses
Marketing and selling                   175,670             169,495               6,175               3.6 %           169,495             123,204              46,291              37.6 %
Research and development                 46,247              43,315               2,932               6.8 %            43,315              33,877               9,438              27.9 %
In-process research &
development                               7,500               7,500                   -               0.0 %             7,500              94,035             (86,535 )           -92.0 %
General and administrative               39,281              43,070              (3,789 )            -8.8 %            43,070              34,417               8,653              25.1 %
Integration costs                             -               1,103              (1,103 )             n/a               1,103               1,712                (609 )           -35.6 %
Litigation settlement                         -              14,303             (14,303 )             n/a              14,303                   -              14,303               n/a
Amortization of intangibles              34,465              18,264              16,201              88.7 %            18,264              12,393               5,871              47.4 %


Total operating expenses                303,163             297,050               6,113               2.1 %           297,050             299,638              (2,588 )            -0.9 %


Operating income (expense)               87,381              61,286              26,095              42.6 %            61,286             (10,192 )            71,478               n/a
Royalty income                            4,474               5,028                (554 )           -11.0 %             5,028               1,701               3,327             195.6 %
Interest income                             747               1,153                (406 )           -35.2 %             1,153               2,754              (1,601 )           -58.1 %
Interest expense                        (27,398 )           (37,760 )           (10,362 )           -27.4 %           (37,760 )           (18,395 )            19,365             105.3 %
Amortization of financing costs          (4,099 )            (3,273 )               826              25.2 %            (3,273 )            (8,302 )            (5,029 )           -60.6 %
Gain on extinguishment of debt           10,055                   -              10,055               n/a                   -                   -                   -               n/a
Other income (expense)                   (2,195 )             3,071              (5,266 )             n/a               3,071                 283               2,788             985.2 %


Income (loss) from continuing
operations before income taxes           68,965              29,505              39,460             133.7 %            29,505             (32,151 )            61,656               n/a
Provision for income taxes               26,413              15,914              10,499              66.0 %            15,914              11,731               4,183              35.7 %


Net income (loss) from
continuing operations                    42,552              13,591              28,961             213.1 %            13,591             (43,882 )            57,473               n/a


Loss from discontinued
operations, net of tax benefit
of $0.4 million and
$2.7 million for 2007 and 2006,
respectively                                  -                (691 )               691               n/a                (691 )            (5,435 )            (4,744 )           -87.3 %

Net income (loss)                     $  42,552           $  12,900           $  29,652             229.9 %         $  12,900           $ (49,317 )         $  62,217               n/a

The following table shows the Statement of Operations as a percentage of net sales for 2008, 2007 and 2006.

                                                            2008             2007             2006

Net sales                                                   100.0 %          100.0 %          100.0 %
Cost of sales                                                22.1 %           22.8 %           19.2 %

Gross profit                                                 77.9 %           77.2 %           80.8 %

Operating expenses
Marketing and selling                                        35.0 %           36.5 %           34.4 %
Research and development                                      9.2 %            9.3 %            9.5 %
In-process research and development                           1.5 %            1.6 %           26.2 %
General and administrative                                    7.8 %            9.3 %            9.6 %
Integration costs                                             0.0 %            0.2 %            0.5 %
Litigation settlement                                         0.0 %            3.1 %            0.0 %
Amortization of intangibles                                   6.9 %            3.9 %            3.5 %

Total operating expenses                                     60.4 %           64.0 %           83.6 %


Operating income (expense)                                   17.4 %           13.2 %           -2.8 %

Royalty income                                                0.9 %            1.1 %            0.5 %
Interest income                                               0.1 %            0.2 %            0.8 %
Interest expense                                             -5.5 %           -8.1 %           -5.1 %
Amortization of financing costs                              -0.8 %           -0.7 %           -2.3 %
Gain on extinguishment of debt                                2.0 %            0.0 %            0.0 %
Other income (expense)                                       -0.4 %            0.7 %            0.1 %


Income (loss) from continuing operations before
income taxes                                                 13.7 %            6.4 %           -9.0 %
Provision for income taxes                                    5.3 %            3.4 %            3.3 %


Net income (loss) from continuing operations                  8.5 %            2.9 %          -12.2 %

Net income (loss)                                             8.5 %            2.8 %          -13.8 %

Cost of sales. Gross margin improved 0.7 percentage points from 2007 to 2008. Margins improved in 2008 as a result of changes in the mix of products sold, improved inventory planning, lower warranty and service costs on our laser therapy products and higher average selling prices. These improvements were partially offset by a decline in margins on our laser therapy products from about 54 percent in 2007 to 50 percent in 2008, primarily as a result of lower production volume with the conclusion of the aesthetics product supply agreement. Historically, margins have generally benefited from stable overhead costs, which account for more than a quarter of our cost of sales. Future margins will continue to depend upon product mix, production levels, labor costs, raw material costs and our ability to manage overhead costs over time. We expect margins for our laser therapy products to improve over time, through cost reductions, favorable product mix and optimization of console and fiber reliability.
Margins decreased 3.6 percentage points from 2006 to 2007 primarily driven by the continued change in the mix of products sold, as equipment consoles for laser therapy and Her Option®became a larger share of total revenue. We also experienced increased warranty costs, which were 1.3 percent of sales in 2007, compared to 0.2 percent in 2006, as a result of the continued enhancements made to improve the reliability of the GreenLight HPS® console and fibers. As service becomes a larger part of our business, we also saw a 0.5 percent increase in the cost of service in 2007 compared to the prior year. These increased costs were partially offset by favorable exchange impacts on gross margin for international operations, the impact of increased volume and our ability to control overhead spending.
Marketing and selling. Marketing and selling expenses as a percentage of sales decreased by 1.5 percentage points in 2008. The decrease in the current period relates to leveraging of investments made in 2007 primarily for the transition from independent distributors to our direct sales force for international laser therapy sales. As these investments were better leveraged in 2008, the result is lower expense as a percentage of revenue. We will continue to invest in marketing and selling in support of increasing sales levels, but we expect marketing and selling expense will continue to decrease as a percentage of sales over time.

Marketing and selling expenses increased by 2.1 percentage points in 2007 due to the full year effect of the laser therapy sales force and marketing personnel of Laserscope which was acquired in July of 2006, continued growth of the Her Option® product line, the exchange rate impact for foreign operations and the launches of several new products.
Research and development. Research and development includes costs to develop and improve current and possible future products plus the costs for regulatory and clinical activities for these products. Research and development expenses as a percentage of revenue decreased to 9.2 percent in 2008 compared to 9.3 percent in 2007. These ratios are in line with our long-term goal for spending in research and development of approximately ten percent of sales.
The $9.4 million increase in research and development expense from 2006 to 2007 is related to a full year of costs associated with the Laserscope acquisition, continuing development of GreenLight® fiber applications, increased personnel and project work in the areas of applied research, product development, clinical studies, regulatory filings and intellectual property support including those related to our acquisitions of BioControl Medical, Ltd. (BioControl), Solarant Medical, Inc. (Solarant), and Ovion Inc. (Ovion).
In-process research and development. The 2008 in-process research and development (IPR&D) expense represents a $7.5 million milestone payment related to our acquisition of BioControl for the in-process development of an implantable electrical stimulation device to treat urge incontinence and interstitial cystitis (IC). There was a similar milestone payment of $7.5 million in 2007, also related to BioControl. The following paragraphs describe the status of previously acquired IPR&D projects that remain in progress at January 3, 2009.
During 2006, we recognized IPR&D charges of $94.0 million, of which $25.6 million related to the acquisition of BioControl. As noted above, we recognized additional IPR&D charges for BioControl of $7.5 million during 2007 and $7.5 million during 2008. Since the technology purchased had not yet reached technological feasibility and lacked an alternative future use, the full purchase price of $40.6 million was charged to in-process research and development. The development efforts were less than 50 percent complete at the time of the acquisition. During 2008, based on findings from earlier feasibility studies, we incorporated the results of these studies into product enhancements. We anticipate we will begin a new feasibility study for urge incontinence in women late in 2009 or early in 2010.
Also during 2006, we recognized in-process research and development charges of $62.1 million related to our acquisition of Laserscope, primarily associated with in-process fiber development which had not yet reached technological feasibility and lacked an alternative future use. This included the development of fibers to treat bladder tumors, strictures and renal cancer, as well as other laser indications. Development for these therapies was estimated to be less than 50 percent complete at the time of acquisition. In 2008, we launched the extended application fiber for strictures and bladder tumors. We expect to develop further enhancements for BPH therapy treatments in addition to developing new laser therapy treatments. We are still in the development stages for the remaining therapies and expect products to be developed from this in-process development to reach marketability over the next several years. We recognized additional IPR&D charges in 2006 of $4.3 million related to our July 2005 acquisition of Ovion for the in-process development of a minimally invasive permanent birth control device for women which had not yet reached technological feasibility and lacked an alternative future use. The development efforts were less than 20 percent complete at the time of the acquisition. As of . . .