Back pain is the number one cause of healthcare expenditures in the U.S., with a direct cost of more than $25 billion annually for diagnosis, treatment and rehabilitation. The spine fusion market consists of products and devices used in the surgical treatment of spine disorders to stabilize the back and neck by fusing vertebrae together. In 2004, the U.S. spine fusion market generated approximately $2.2 billion in revenues and is anticipated to grow to $3.0 billion by 2007.

There are four major categories of spine disorders: degenerative conditions, deformities, trauma and tumors.

The prescribed treatment for spine disorders depends on the severity and duration of the disorder. Initially, surgeons will prescribe non-operative procedures including bed rest, medication, lifestyle modification, exercise, physical therapy, chiropractic care and steroid injections. Non-operative treatment options are often effective as a first line therapy, although many patients ultimately require spine surgery. It is estimated that in excess of one million patients undergo spine surgery each year in the U.S., of which over 360,000 were spine fusion procedures in 2004, and the number of spine fusion procedures is expected to grow to over 450,000 per year by 2007.

The most common spine surgery procedures are: discectomy, the removal of all or part of a damaged disc; laminectomy, the removal of all or part of a lamina, or thin layer of bone, to relieve pinching of the nerve and narrowing of the spinal canal; and fusion, where two or more adjoining vertebrae are fused together with the use of implants such as spacers and plates to provide stability.

Lumbar, or lower back, fixation systems are used to facilitate fusion, the growth of a boney connection between two adjacent vertebrae. The purpose of fusion is to stop the motion caused by the instability between the vertebrae. The Company’s lumbar systems are designed to reduce the motion of the vertebrae during the months it takes for the vertebrae to fuse together. The system consists of multiple components made of titanium or stainless steel, including screws, rods, and locking mechanisms.

Over the past 20 years, screw, hook and rod systems have become the standard of care in the surgical treatment of spinal deformities such as scoliosis. These systems aid in the correction of spinal deformities because they allow movement of the spine into the correct alignment while providing fixation and stability to help achieve fusion.

A spinal spacer is intended to be inserted in the space between discs to provide support in order to restore disc space height, the spine\\\'s normal alignment, and the spine\\\'s weight-bearing function. While the first spinal spacers were principally fabricated from titanium, the Company and other manufacturers now offer products fabricated from PEEK. PEEK is radiolucent and therefore is not visible during an MRI, which allows the surgeon to better assess the progress of the fusion. Allograft spacers can be used in place of metallic and PEEK spacers and instead of autograft, which is bone tissue harvested from the patient undergoing the fusion procedure.

The use of allograft-derived products appeals to many surgeons, because they believe it allows patients to accelerate the creation of living bone cells and eventually incorporate the allograft into the newly created, living bone. Allograft-derived products are fabricated from cadaver bone and precision-machined into standardized shapes resembling non-tissue spacers. Tissue banks are responsible for recovering and processing donated tissue from cadavers in accordance with standards developed by the American Association of Tissue Banks and the FDA.

Product costs increased to $7.6 million for the nine months ended September 30, 2005, from $4.8 million in fiscal 2004.

Royalties increased to $1.9 million for the nine months ended September 30, 2005, from $0.7 million in fiscal 2004.

Research and development and in-process research and development expenses increased $2.6 million, to $3.7 million for the nine months ended September 30, 2005 from $1.2 million in fiscal 2004.

Other expense net was $0.9 million for the nine months ended September 30, 2005. During 2004, other income net was $0.4 million.