with our more recently developed technologies. These technology platforms represent the majority of our revenue, provide the opportunity to expand into new markets and we believe will drive our future growth.
Our business is to alleviate pain, promote healing and restore function by developing innovative biologic solutions for regenerative medicine. Our goal is to utilize our current and future technology platforms to develop tissue forms and products (collectively referred to herein as "Products") to create procedure specific solutions to repair, replace or heal bone and tissue loss caused by trauma, disease or surgical intervention, augment prosthetic implant procedures, facilitate spinal fusion and replace and/or repair damaged ligaments, tendons and other tissues within the human body. We expect to achieve this objective by executing on three main initiatives: development of innovative technologies, utilization of these technologies to create efficacious products for specific surgical procedural applications and medical education. We provide our biologic solutions to orthopedic, spinal, trauma, neurosurgical and oral/maxillofacial surgeons for use in the various surgical procedures.
During 2008, we accomplished certain milestones as we continued to transform the Company to one that provides to the medical profession procedure specific biological solutions as follows:
• In December 2008, we initiated a pivotal clinical trial for our DuraTech™ BioRegeneration Matrix. DuraTech™ is the first of several products under development based upon our proprietary human collagen technology platform. We expect to file a 510(k) with the FDA to secure marketing clearance for DuraTech in the third quarter of 2009.

• In October 2008, we received FDA clearance for our next generation grafting material, MagniFuse™ Bone Graft. MagniFuse™ will provide a range of market opportunities with products specifically designed for use in posterolateral spine, deformity and minimally invasive procedures.

• In May 2008, we announced our Plexur® Technology was to be used in the Craniofacial Reconstruction Program Funded by the Armed Forces Institute of Regenerative Medicine.

• In April 2008, we received FDA clearance to market our Plexur P® Biocomposite in spinal applications. Plexur P® is a porous, resilient scaffold that allows for the rapid absorption and retention of cells to facilitate bone growth.

• In March and July of 2008, we received FDA clearances for our Plexur M™ Biocomposite for application in the pelvis, extremities and spine. Plexur M™ is a uniquely moldable, settable biomaterial, which, when heated, gives surgeons the ability to contour the product into almost any shape.

During 2008, we invested $7.3 million to solidify our tissue supply position and expanded certain of our tissue supply arrangements. This investment, and our investment in plant and equipment, including a new enterprise software system, resulted in our cash declining to $18.8 million at December 31, 2008. Results of Operations
The following table sets forth our consolidated results of operations for 2008, 2007 and 2006:

                                                                               Percent Change
                                                                               2008       2007
                                          Year Ended December 31,              vs.        vs.
    (in thousands)                      2008          2007         2006        2007       2006

    Revenue                        $ 103,814     $ 104,277     $ 99,241           -          5 %

    Cost of revenue                   48,770        50,555       51,439          -4 %       -2 %


    Gross profit                      55,044        53,722       47,802           2 %       12 %

    Operating expenses                52,467        50,459       45,455           4 %       11 %


    Operating income                   2,577         3,263        2,347          -2 %       39 %

    Other (expense)                     (111 )        (589 )       (498 )        81 %      -18 %


    Income before income taxes         2,466         2,674        1,849          -8 %       45 %

    Income tax expense (benefit)         263            57          (58 )       361 %     -198 %

    Net income                     $   2,203     $   2,617     $  1,907         -16 %       37 %


    Earnings per share:
    Basic                          $     .12     $     .15     $    .11
    Diluted                        $     .12     $     .15     $    .11

Net Income
Net income for the year ended December 31, 2008 was $2.2 million or $.12 diluted earnings per share. Net income included $1.0 million related to a gain from a litigation settlement and $0.5 million related to the receipt of license fees. Compared to 2007, net income in 2008 declined primarily from increased operating expenses to support distribution initiatives and research and development and was partially offset by improved gross margins.
Net income for the year ended December 31, 2007 was $2.6 million, or $.15 diluted earnings per share, and resulted from increased revenue and improved gross margins, which were partially offset by higher operating expenses as compared to 2006. Our investment in distribution effectiveness initiatives, the costs associated with the settlement of certain litigation, and the non-cash compensation costs related to grants of equity awards contributed to the increase in operating expenses.

Revenue
   For the year ended December 31, 2008, revenue of $103.8 million was
relatively flat when compared to revenue of $104.3 million for the prior year.
We plan to focus our strategic efforts on expanding the domestic and
international markets for our current and future primary product lines.
   The following table details the components of our revenues for the years
presented:

                                                                              Percent Change
                                                                              2008       2007
                                         Year Ended December 31,              vs.         vs.
     (in thousands)                  2008          2007          2006         2007       2006

     DBM Segment                  $  61,961     $  65,794     $ 57,493          -6 %       14 %
     Hybrid/Synthetic Segment         3,087         1,760        1,270          75 %       39 %
     Traditional Tissue Segment      20,258        17,623       16,955          15 %        4 %
     Spinal Allograft Segment         8,499        10,739       13,795         -21 %      -22 %
     Client Services Segment          8,201         7,621        9,128           8 %      -17 %
     Other                            1,808           740          600         144 %       23 %

                                  $ 103,814     $ 104,277     $ 99,241           -          5 %

2008 Compared to 2007
DBM Segment revenue, which consists of revenue from the sale of Grafton® DBM and Xpanse® Bone Inserts and revenue from the processing of two private label DBMs, declined 4% in 2008 as compared to 2007, primarily as a result of the decline in private label revenue. Revenue from Grafton® DBM, private label DBM and Xpanse® Bone Inserts changed 2%, (62)% and 22%, respectively, in 2008 compared to 2007. Revenue from Grafton® DBM was negatively impacted in 2008 as a result of a decline in average selling prices. The decline in private label revenue was primarily due to one of our private label DBM customers formally notifying us of their decision not to renew its current agreement with us upon the agreement's expiration in March 2009. We recognized $0.5 million of revenue from this customer in the first quarter of 2008 and the customer has not made any purchases since.
Revenue in our Hybrid/Synthetic Segment, which reflects sales of our Plexur P® Biocomposite and GraftCage® Spacers, increased 75% for the year ended December 31, 2008, compared to the prior year, primarily as a result of a 139% increase in Plexur P® revenue due to increased unit volume. We do not anticipate revenue from the distribution of the GraftCage® Spacers to be a significant contributor to our future revenue stream.
Revenue in our Traditional Tissue Segment, which represents the worldwide distribution of allograft bone tissue grafts, increased 15% in 2008 as compared to 2007. The increase in 2008 traditional tissue revenue resulted from increased unit sales volume, especially in the international market.
Revenue in the Spinal Allograft Segment declined 21% in 2008 as compared to 2007, primarily due to a decrease in unit sales volume that we anticipate will continue in 2009.
Client Services Segment revenue, which is generated by the processing of allograft bone tissue for our clients, mainly the Musculoskeletal Transplant Foundation ("MTF"), increased 8% in 2008 as compared to 2007. Our contractual agreements with MTF expired at the end of 2008.

We expect to generate some revenue from our relationship with MTF in the first quarter as the contractual relationship winds down.
Other revenue consists mainly of $0.5 million related to license fees, the international distribution of xenograft products, sales commissions for the distribution of traditional tissue processed by others and revenue from the distribution of the Kinesis™ BMAC™ system. During the year ended December 31, 2008, other revenue increased 144% compared to 2007.
2007 Compared to 2006
DBM Segment revenue increased 14% in 2007 as compared to 2006 primarily as a result of increased unit volumes. Revenue from Grafton® DBM, private label DBM and Xpanse™ Bone Inserts increased 6%, 89% and 47%, respectively, in 2007 compared to 2006.
Revenue from our Hybrid/Synthetic Segment represented sales of our PLEXUR P® Biocomposite and GraftCage® Spacers. The PLEXUR P® Biocomposite contributed $1.0 million to revenue growth for the year ended December 31, 2007.
Traditional Tissue Segment revenue from the worldwide distribution of allograft bone tissue grafts increased 4% in the year ended December 31, 2007 from the prior year. The increase in 2007 traditional tissue revenues resulted from increases in domestic and international unit sales, partially offset by declines in domestic pricing.
Revenue in our Spinal Allograft Segment declined 22% in the year ended December 31, 2007 compared to the same period in 2006 primarily due to a decrease in unit sales volume.
Client Service Segment revenue declined 17% for the year ended December 31, 2007 compared to the prior year.
Major Customers
In 2008, 2007, and 2006, MTF accounted for $14.2 million, $16.2 million, and $19.4 million of revenue, or 14%, 16%, and 20%, respectively, of consolidated revenue. Our agreements with MTF expired at December 31, 2008. Gross Margin

                                          Year Ended December 31,
                   (in thousands)       2008         2007         2006

                   Gross Profit     $ 55,044     $ 53,722     $ 47,802
                   Gross Margin         53.0 %       51.5 %       48.2 %

In both 2008 and 2007 gross margin increased over gross margin levels in the respective prior year, primarily due to increased unit processing volumes, processing efficiencies and better management of inventory risk exposures, such as obsolescence.

Operating Expenses

                                                                                                 Percent Change
                                                                                               2008           2007
                                                  Year Ended December 31,                      vs.            vs.
(in thousands)                            2008              2007              2006             2007           2006

Marketing, selling and general
and administrative                     $ 45,032          $ 44,801          $ 40,627               -            10 %
Research & development                    7,435             5,658             4,828              31 %          17 %

Total                                  $ 52,467          $ 50,459          $ 45,455               4 %          11 %

Marketing, selling and general and administrative expenses in 2008 were relatively flat compared to 2007. In 2008, we had higher non-cash compensation costs for equity awards and increased marketing and selling expenses, compared to the prior year, offset by lower performance based compensation expense. Compensation expense related to our equity award program was $1.7 million in 2008 compared to $0.9 million in 2007. Also in 2007, we incurred $1.0 million in costs associated with the settlement of and legal fees incurred in connection with certain litigation.
For 2008, research and development expenses increased 31% as compared to 2007, primarily due to the costs incurred for basic research, product development and process development activities to support the technologies and products we are developing for future commercialization.
In 2007, marketing, selling and general and administrative expenses increased 10% when compared to 2006, principally due to our investment in improving worldwide distribution effectiveness, the costs associated with the settlement of certain litigation, the non-cash compensation costs associated with our equity award programs and professional fees. Compensation expense related to our equity awards program was $0.9 million and $0.3 million in 2007 and 2006, respectively. Research and development expenses in 2007 increased 17% when compared to 2006, primarily due to our focus on the development of new technologies and products.

Operating Income

                                                                              Percent Change
                                                                              2008       2007
                                         Year Ended December 31,              vs.         vs.
    (in thousands)                  2008          2007          2006          2007       2006

    DBM Segment                  $  18,902     $  20,105     $  16,305          -6 %       23 %
    Hybrid/Synthetic Segment             5           277          (717 )       -98 %      139 %
    Traditional Tissue Segment       3,666         2,470         5,888          48 %      -58 %
    Spinal Allograft Segment           286         1,941         1,819         -85 %        7 %
    Client Services Segment          4,454         5,744         4,240         -22 %       35 %
    Other                            1,265           334            45         279 %      642 %

                                    28,578        30,871        27,580          -7 %       12 %
    Corporate                      (26,001 )     (27,608 )     (25,233 )        -6 %        9 %

    Operating Income             $   2,577     $   3,263     $   2,347         -21 %       39 %

Product segment operating income is comprised of segment revenue less material and production cost and selling and marketing expenses. Total product segment operating income of $28.6 million for the year ended December 31, 2008 declined 7% compared to 2007. Segment operating income was negatively impacted by higher selling and marketing expenses which were partially offset by a higher gross profit including the effect of $0.5 million in license fee revenue. In 2008 product segment operating income as a percentage of revenue was 28% compared to 30% in the prior year.
Costs and expenses associated with Corporate Segment declined 6% for 2008 compared to last year. In 2008, higher research and development expenses were offset by lower performance compensation expenses while in 2007, we also incurred a litigation settlement of $1.0 million.
Total product segment operating income for the year ended December 31, 2007 of $30.9 million increased 12% as compared to 2006 due to improved gross margin, which was partially offset by the cost of our distribution effectiveness initiatives. In 2007, product segment operating income as a percent of revenue increased to 30% compared to 28% in 2006.
Costs and expenses associated with Corporate increased 9% in 2007 from the prior year, mainly due to non-cash compensation costs for our equity award programs and higher professional fees.
Other Income (Expense)
For the year ended December 31, 2008, other expenses of $0.1 million primarily represents $1.5 million in interest expense associated with our capital lease obligation offset partially by interest income of $0.4 million and litigation settlement income of $1.0 million. For the year ended December 31, 2008, aggregate foreign exchange gains and losses were not significant.
For the year ended December 31, 2007, other expenses of $0.6 million represents $1.6 million of interest expense associated with our capital lease obligation, partially offset by interest income on invested cash balances of $1.0 million; a net foreign currency loss of $0.1 million, principally on intercompany debt, and a $0.1 million gain from a final contingent consideration payment related to the sale of a foreign subsidiary in 2002.
Other expenses in 2006 of $0.5 million is principally the result of $1.7 million in interest expense associated with our capital lease obligation, partially offset by interest income of $0.8 million on invested cash balances, a net foreign currency gain of $0.3 million, primarily related to intercompany debt, and a $0.1 million gain from a contingent consideration payment related to the sale of a foreign subsidiary in 2002.
Future foreign exchange gains and losses, including those related to intercompany debt, may have a material impact on our results of operations in the event of significant changes in the exchange rate between the U.S. dollar and the Euro, although the impact of such gains and losses should not have any impact on consolidated cash flows.

Income Tax Provision
In 2008 and 2007, after the application of available net operating loss carryforwards, we provided for Federal income taxes based on the alternative minimum tax method, as well as a provision for certain state taxes on alternative methods and foreign taxes. The carryforwards utilized for Federal, state and foreign purposes carried full valuation allowances. In 2008, we also recorded a charge for estimated penalties and interest related to our assessment of uncertain tax positions mainly as a result of an ongoing Federal tax audit. Our state income tax benefit in 2007 was primarily due to the reversal of certain domestic state tax reserves and the filing for a state tax refund related to a prior year, partially offset by a provision for minimum state taxes in certain jurisdictions. We have evaluated the continuing need for our valuation allowances for our domestic and foreign deferred tax assets in accordance with the provisions of the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable, and we have determined based on our assessment that there is not sufficient positive evidence to support the reversal of such valuation allowances.
We intend to maintain the valuation allowance until sufficient positive evidence exists to support the reversal of such valuation allowances. We evaluate our position with respect to the valuation allowances each quarter by taking into consideration numerous factors, including, but not limited to: past, present and forecasted results; the impact in each jurisdiction of operating activities; and the anticipated effects of our strategic plan.
In 2006, we provided an income tax benefit primarily due to the reversal of certain domestic state tax reserves, which were no longer required, partially offset by provisions for 2006 minimum state income taxes. No provision for federal or foreign taxes was recorded due to the availability of prior year net operating loss carryforwards, which carried a full valuation allowance, or due to recognizing a current year taxable loss for which any tax benefits or assets would be fully offset by the establishment of valuation allowances.
We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2003 through 2008 tax years generally remain subject to examination by Federal, foreign and most state authorities including, but not limited to, the United States, France, Bulgaria and the State of New Jersey. Our 2003 through 2005 Federal tax returns are currently under examination by the Internal Revenue Service ("IRS") and the State of New Jersey is examining certain of our 2003 to 2007 state tax filings. We have recently been advised of an audit of the 2006 and 2007 tax filings by our French subsidiary.
We are currently working with the IRS to complete and resolve their tax examination, which is subject to review and approval by the Joint Committee on Taxation. We anticipate we will owe no additional tax and the aggregate amount of our available Federal net operating loss carryforwards will not be materially impacted. Any remaining items disallowed would be deductible in future periods. Until such time as the Joint Committee on Taxation approval is received, the IRS examination will not be considered effectively settled for financial reporting purposes.
Upon our adoption of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109" ("FIN 48"), effective January 1, 2007, we had no material liability for unrecognized tax benefits ("UTBs"). The components of our UTBs are substantially comprised of deferred tax assets which are subject to a full valuation

allowance. To the extent we prevail in matters for which either a receivable or a liability for a UTB has been established, or are required to pay an amount or utilize NOLs to settle a tax liability, or estimates regarding a specific UTB change, our effective tax rate in a given financial reporting period may be affected.
During the year ended December 31, 2008, the total amount of our UTBs declined $0.3 million to $4.0 million. At December 31, 2008, the reduction in net Federal, state and foreign deferred tax assets of $1.9 million as a result of UTBs was offset by a similar change in the related valuation allowance.
We expect that the amount will change in the next twelve months due to our filing of amended Federal and state tax returns, expiring statutes of limitation, and audit activity. However, we do not anticipate the change to be significant.
Liquidity and Capital Resources
Working Capital
At December 31, 2008, we had cash and cash equivalents of $18.8 million compared to $22.8 million at December 31, 2007. Working capital declined to $55.6 million at December 31, 2008 compared to $58.0 million at December 31, 2007, primarily due to the use of a portion of available cash to invest in additional tissue inventories of $7.3 million and for capital expenditures of $5.9 million.
Cash Flows From Operating Activities
Net cash provided by operating activities was $3.4 million in the year ended December 31, 2008 compared to $8.1 million provided by operating activities in the prior year. The decrease resulted primarily from an increased investment in tissue inventories of $12.4 million partially offset by an increase in accounts payable.
Cash Flows From Investing Activities
Net cash used in investing activities was $6.8 million and $4.0 million for the years ended December 31, 2008 and 2007, respectively. During the year ended December 31, 2008, net cash used in investing activity principally relates to the funding of capital expenditures, including the implementation of a new enterprise software system, and for production equipment and facilities for new products.
Cash Flows From Financing Activities
Net cash used in financing activities of $0.5 million in the year ended December 31, 2008 relates primarily to principal payments on our capital lease obligation of $0.8 million, our purchase of our own common stock under a repurchase program approved by our Board of Directors in December 2008, partially offset by the proceeds from the exercise of stock options and the sale of common stock pursuant to our employee stock purchase plan. In 2007, proceeds received from the exercise of stock options and the sale of common stock pursuant to our employee stock purchase plan were partially offset by payments on our capital lease obligation resulting in net cash provided by financing activities of $0.7 million.

Repurchase of Common Stock
In December 2008, our Board of Directors authorized a stock repurchase program under which up to $5.0 million of shares of our common stock may be acquired. Stock repurchases may be executed from time to time at current market prices through open-market and privately negotiated transactions in such amounts as management deems appropriate. The final number of shares repurchased will depend on a variety of factors, including the level of our cash and cash equivalents, price, corporate and regulatory requirements and other market conditions. The repurchase program may be terminated at any time without prior notice.
Further Liquidity and Financing Needs
As of December 31, 2008, we had cash and cash equivalents of $18.8 million. . . .