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), operating cash flows (which we aim to increase through improved working capital management), and earnings per diluted share of common stock.
We believe that we are particularly effective in the following aspects of our business:
Developing metal implants for bone and joint repair, fixation and fusion. Through acquisitions, particularly those of Theken in 2008 and Newdeal Technologies SAS in 2005, we have acquired significant expertise in developing metal implants for use in bone and joint repair, fixation and fusion and in successfully bringing those products to market.
Developing, manufacturing and selling specialty regenerative technology products. We have a broad technology platform for developing products that regenerate or repair soft tissue and bone. We believe that we have a particular advantage in developing, manufacturing and selling tissue repair products derived from bovine collagen. These products comprised 23% and 22% of revenues for the nine months ended September 30, 2009 and 2008, respectively. Products that contain materials derived from animal sources, including food, pharmaceuticals and medical devices, have been subject to scrutiny from the media and regulatory authorities. Accordingly, widespread public controversy concerning collagen products, new regulations, or a ban of our products containing material derived from bovine tissue, could have a material adverse effect on our current business and our ability to expand.
Acquiring and integrating new product lines and complementary businesses. Since 1999, we have acquired and integrated more than 30 product lines or businesses through an acquisition program that focuses on acquiring companies or product lines at reasonable valuations which complement our existing product lines or can be used to leverage our broad technology platform in tissue regeneration and metal implants. We also employ a team of seasoned managers and executives who have demonstrated their ability to successfully integrate the acquired product lines and businesses.
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, 2009 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. Since the beginning of 2008, we have acquired the following businesses:
In August 2008, we acquired Theken Spine, LLC, Theken Disc, LLC and Therics, LLC (collectively, "Theken") for $75.0 million in cash, acquisition expenses of $2.4 million and working capital adjustments of $4.0 million. In addition, the Company may pay up to an additional $121.0 million in future payments based on the revenue performance of the business in each of the two years after closing, including the $52.0 million that has been accrued at September 30, 2009. Theken, based in Akron, Ohio, designs, develops and manufactures spinal fixation products, synthetic bone substitute products and spinal arthroplasty products. With Theken, we acquired a unique and comprehensive portfolio of spinal implant products and a robust technology pipeline and demonstrated product development capacity, an established network of spinal hardware distributors with established access to the orthopedic spine market, and a strong management team with extensive experience in the orthopedic spine market. Theken does not currently sell its products outside of the U.S. Accordingly, we expect that the business will benefit from Integra's large international presence. The Theken products are now being marketed under the name Integra Spine™.
In October 2008, we acquired Integra Neurosciences Pty Ltd. in Australia and Integra Neurosciences Pty Ltd. in New Zealand for $4.0 million (6.0 million Australian Dollars) in cash at closing, $0.3 million in acquisition expenses and working capital adjustments, and up to $2.1 million (3.1 million Australian Dollars) in future payments based on the performance of business in the three years after closing. With this acquisition of the Company's long-standing distributor, we now have a direct selling presence in Australia and New Zealand.

In December 2008, we acquired Minnesota Scientific, Inc., doing business as Omni-Tract Surgical ("Omni-Tract"), for $6.4 million in cash paid at closing, 310,000 unregistered shares of our common stock valued at $10.7 million (of which 135,000 shares were issued at closing, with the remainder issued in January 2009), working capital adjustments of $0.1 million and $0.3 million in transaction related costs, subject to certain adjustments. Omni-Tract is a global leader in the development and manufacture of table mounted retractors and is based in St. Paul, Minnesota. Omni-Tract markets and sells these retractor systems for use in vascular, bariatric, general, urologic, orthopedic, spine, pediatric, and laparoscopic surgery. We have integrated Omni-Tract's product lines into our combined offering of JARIT®, Padgett™, Redmond™, and Luxtec® lines of surgical instruments and illumination systems sold by the Integra Medical Instruments sales organization.
In August 2009, we acquired certain assets and liabilities of Innovative Spinal Technologies, Inc. ("IST") for approximately $9.3 million in cash and $0.2 million in acquisition expenses. IST had filed for Chapter 7 bankruptcy protection in May 2009 and the acquisition was the result of an auction process conducted by the bankruptcy trustee and approved by the U.S. Bankruptcy Judge for the District of Massachusetts. IST's focus was on spinal implant products related to minimally invasive surgery and motion preservation techniques. We acquired three product lines, various product development assets for posterior dynamic stabilization, various patents and trademarks, inventory, and assumed certain of IST's patent license agreements and related obligations. These assets and liabilities acquired did not meet the definition of a business under the authoritative guidance for business combinations. Accordingly, the assets and liabilities have been recognized at fair value with no related goodwill.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2009 was $14.4 million, or $0.49 per diluted share, as compared with net loss of $(16.9) million, or $(0.60) per diluted share, for the three months ended September 30, 2008. Net income for the nine months ended September 30, 2009 was $35.2 million, or $1.20 per diluted share, as compared with net income of $4.5 million, or $0.16 per diluted share, for the nine months ended September 30, 2008. Executive Summary
The increase in net income for the three months ended September 30, 2009 over the prior-year period resulted primarily from decreases in operating expenses stemming 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. In addition, net income improved as our revenues increased by 3% in the period and our gross margin percentage increased from 61% in the 2008 period to 63% in 2009. Offsetting this somewhat was the impact of income taxes in the third quarter of 2009.
The increase in net income for the nine months ended September 30, 2009 over the prior-year period resulted primarily from decreases in operating expenses related to the significant third quarter 2008 charges described above and from a 4% increase in revenue, and an improvement in gross margin percentage from 62% in the 2008 period to 64% in 2009.

Our costs and expenses include the following charges (in thousands):

                                           Three Months Ended              Nine Months Ended
                                             September 30,                   September 30,
                                          2009            2008            2009           2008
Acquisition-related charges            $    1,035       $  26,131      $    4,966      $  26,584
Employee termination and related
costs                                           -               -             646              -
Inventory fair market value
purchase accounting adjustments                 -             453               -          3,661
Facility consolidation, acquisition
integration, manufacturing and
distribution transfer, and system
integration charges                            96             238             488            802
Discontinued product lines                      -           1,207             246          1,207
Incremental professional and bank
fees related to (a) the delayed
filing of financial statements and
(b) waivers or possibility of
obtaining waivers under our
revolving credit facility                       -               -             350          1,041
(Gain)/loss related to early
extinguishment of convertible note            207               -            (916 )            -
Non-cash interest expense related
to the application of FSP APB 14-1          2,335               -           7,862              -
Stock-based compensation and other
related charges                                 -          18,356               -         18,356
Impairment of long-lived assets             1,519               -           1,519              -
Litigation settlement                        (253 )             -            (253 )            -
Foreign exchange loss on
intercompany loan (1)                           -               -           1,876              -


Total                                  $    4,939       $  46,385      $   16,784      $  51,651

(1) This foreign exchange loss is associated with our intercompany loan set up in connection with the restructuring of a German subsidiary in the fourth quarter of 2008. Net income for the nine months ended September 30, 2009 and prior periods include foreign exchange gains and losses associated with intercompany loans not related to any restructuring.

Of these amounts, $6.1 million and $6.5 million were charged to cost of product revenues in the nine-month periods ended September 30, 2009 and 2008, respectively. The remaining amounts, except for intangible asset amortization and interest expense, were charged to selling, general and administrative expenses.
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            Nine Months Ended
                                            September 30,                 September 30,
                                         2009           2008           2009           2008
Orthopedics                            $  64,135      $  53,848      $ 193,665      $ 155,996
NeuroSciences                             67,228         68,014        188,407        192,146
Medical Instruments                       40,923         45,166        116,889        132,092


Total revenue                            172,286        167,028        498,961        480,234
Cost of product revenues                  63,021         64,317        180,974        184,688


Gross margin on total revenues         $ 109,265      $ 102,711      $ 317,987      $ 295,546


Gross margin as a percentage of
total revenues                                63 %           61 %           64 %           62 %

THREE MONTHS ENDED SEPTEMBER 30, 2009 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2008
Revenues and Gross Margin
For the three months ended September 30, 2009, total revenues increased by $5.3 million, or 3.2%, to $172.3 million from $167.0 million for the same period during 2008. Domestic revenues increased by $3.9 million to $132.1 million, or 77% of total revenues, for the three months ended September 30, 2009 from $128.2 million, or 77% of total revenues, for the three months ended September 30, 2008. International revenues increased to $40.1 million from $38.8 million in the prior-year period, an increase of 3.4%. Orthopedics revenues were $64.1 million, an increase of 19.1% over the prior-year period. Most of the increase came from sales of metal spine implants because we owned the Theken spine business for only two months during the 2008 period. Sales of metal implants for the mid- and hindfoot, engineered collagen products for skin and wound repair, and Integra Mozaik™ collagen/ceramic bone void filler also grew significantly.
NeuroSciences revenues were $67.2 million, down 1.2% from the prior-year period. Sales of implants, including the DuraGen® family of products, grew year-over-year, but were offset by declines in sales of hospital capital equipment, particularly in our critical care monitoring systems, Radionics® image guided surgery, and stereotactic radio surgery systems. We are uncertain when hospitals will begin to increase spending on capital equipment relative to the prior year; however, we expect that revenues from implants, particularly our DuraGen® family of products, will continue to grow.
Revenues in the Medical Instruments category were $40.9 million, down 9.4% from the prior year but up sequentially for the second quarter in a row. Sales decreased due to eliminated distributed product lines, the discontinuation of our Original Equipment Manufacturing ("OEM") surgical lighting line of products, and declines in hospital-based instruments and pain management sales. Foreign exchange fluctuations, primarily due to the weakening of the euro, British pound and Canadian dollar versus the U.S. dollar, accounted for a $1.7 million decrease in third quarter of 2009 revenues as compared to the same period last year.
We expect that the following factors will continue to temper sales growth in the short term: reduced spending by hospitals on capital equipment, the occurrence of fewer elective surgical procedures in the current global recessionary economic environment, our recent elimination of many of the product lines we distributed for third parties, and the discontinuation of our OEM surgical lighting line of products. However, we do expect these factors to produce a benefit in our gross margin as a percentage of revenue, as most of our capital equipment products and products distributed for third parties tend to generate lower gross margins as compared to our other products.

While most of our products are not used in elective surgical procedures, approximately 10% of our revenues in the three-month period ended September 30, 2009 consisted of sales of capital equipment. Given the current economic conditions, lower hospital spending on capital equipment could continue for the rest of 2009 and potentially beyond then. We expect to drive future revenue growth by continuing to launch new products and acquire businesses and products that can be sold through our existing sales organizations, and by gaining additional market share through the expansion of our Integra Extremity Reconstruction and Integra Spine sales organizations in the U.S. and leveraging the distribution channels in our Integra Spine, Integra NeuroSciences, and Integra OrthoBiologics sales organizations to broaden each organization's access to spine surgeons. We believe that the biggest opportunities for revenue growth exist in the extremity reconstruction and spine markets.
Gross margin increased by $6.6 million to $109.3 million for the three-month period ended September 30, 2009, from $102.7 million for the same period last year. Gross margin as a percentage of total revenue was 63% for the third quarter 2009 compared to 61% for the same period last year. This increase results from a higher portion of product sales coming from higher margin implants, particularly spine and extremity reconstruction, in combination with reduced sales of lower margin instrument, distributed and capital products, partially offset by an impairment of technology assets of $0.9 million and increased reserves. In addition, the 2009 period contains less inventory purchase accounting adjustments, where charges of $0.6 million related to Theken in the third quarter of 2009 compared to $1.3 million related to this acquisition in the third quarter of 2008. The 2008 period also contained charges related to discontinued product lines totaling $1.2 million.
We expect our consolidated gross margin to improve for the rest of 2009 as sales of our higher gross margin implant products, particularly those from the spine business, are expected to continue to increase as a proportion of total revenues. Although we continuously identify and implement programs to reduce costs at our manufacturing plants and to manage our inventory more efficiently, gross margin improvements in our business are expected to continue to result primarily from changes in sales mix to a larger proportion of sales of our higher gross margin implant products.
Other Operating Expenses
The following is a summary of other operating expenses as a percent of total revenues:

                                             Three Months Ended September 30,
                                               2009                    2008
     Research and development                          7 %                    21 %
     Selling, general and administrative              41 %                    52 %
     Intangible asset amortization                     2 %                     2 %

     Total other operating expenses                   50 %                    75 %

Total other operating expenses, which consist of research and development expenses, selling, general and administrative expenses, and amortization expenses, decreased $40.2 million, or 32%, to $85.4 million in the third quarter of 2009 compared to $125.6 million in the third quarter of 2008. Research and development expenses in the third quarter of 2009 decreased by $23.2 million to $11.5 million, compared to $34.7 million in the same period last year. This decrease is due to a $25.2 million charge for In Process Research and Development ("IPRD") associated with the Theken acquisition in 2008, partially offset by a $0.3 million IPRD charge in the third quarter of 2009. Excluding the IPRD charges, spending increased $1.7 million to $11.5 million, and most of the increase in spending is attributable to our spine business and our clinical trial to support FDA approval of expanded claims for our INTEGRA® Dermal Regeneration Template product.
We target 2009 spending on research and development to be between 6% and 7% of total revenues. Most of this planned spending for 2009 is concentrated on product development efforts for our spine, neurosurgery and extremity reconstruction product lines.

Selling, general and administrative expenses in the third quarter of 2009 decreased by $17.8 million to $69.9 million, compared to $87.7 million in the same period last year, largely due to the 2008 non-cash charge of $18.0 million in connection with the chief executive officer's stock-based compensation. Selling expenses increased by $1.5 million primarily due to the increase in revenues and the corresponding commission costs, particularly in connection with our spine product revenues, which generate relatively higher distributor commission costs. In addition to spine, selling expenses also increased in the third quarter of 2009 compared to the same period last year in connection with the acquisitions of the Integra Neurosciences Pty Ltd. in Australia and New Zealand and Omni-Tract businesses. Excluding the stock-based compensation charge in 2008, general and administrative costs decreased $1.2 million primarily due to lower legal fees driven by the settlement of our Codman litigation, lower consulting and professional fees related to our financial operations, which offset increases related to the acquisitions of the Theken, Integra Neurosciences Pty Ltd. in Australia and New Zealand, and Omni-Tract businesses. We will continue to expand our direct sales organizations in our direct selling platforms where business opportunities are most attractive, including extremity reconstruction, and increase corporate staff to support our information systems infrastructure to facilitate future growth.
Amortization expense in the third quarter of 2009 was $4.0 million, compared to $3.2 million in the same period last year. Increases related to the acquisitions of the Theken, Integra Neurosciences Pty Ltd. in Australia and New Zealand, and Omni-Tract businesses, and $0.6 million due to the impairment of a trade name, which were partially offset by reductions from fully amortized intangible assets.
Non-Operating Income and Expenses
The following is a summary of non-operating income and expenses (in thousands):

                                              Three Months Ended
                                                 September 30
                                               2009          2008
                   Interest income          $      197     $    399
                   Interest expense         $   (5,493 )   $ (6,955 )
                   Other income (expense)   $     (380 )   $   (409 )

Interest Income
Interest income decreased in the three months ended September 30, 2009 compared . . .