According to a report published in the April 2004 Journal of the American Medical Association, approximately 44 million people in the United States suffer from mild Obstructive Sleep Apnea, or OSA, and approximately 15 million people suffer from moderate or more severe OSA. In a separate report, the AAO estimates that approximately 55 million people suffer from habitual snoring. Because most people who have OSA snore, the number of people with OSA overlaps significantly with the number of people who snore.

Awareness of sleep breathing disorders and the negative health consequences associated with both OSA and snoring has been increasing in recent years among both physicians and patients. The negative health consequences of sleep disordered breathing add an estimated $15 billion to the national healthcare bill annually.

OSA is a serious, potentially life-threatening condition that is far more common than generally understood. OSA occurs in all age groups and both genders. Recent studies have linked OSA with increased risks of cardiovascular morbidity, high blood pressure, stroke, heart attack, Type II diabetes and depression. OSA typically causes excessive daytime sleepiness, resulting in memory loss, lack of concentration, slower reaction time that can cause difficulty driving or operating equipment and sexual dysfunction, such as impotence and reduced libido.

The Company researched each of these requirements extensively by utilizing state-of-the-art imaging technologies, aerodynamic modeling, mathematical modeling and pre-clinical animal studies. The Company designed its Pillar System to stiffen and increase the structural integrity of the soft palate and improve its response to airflow, without interfering with normal soft palate functions such as swallowing or speech.

Each precisely braided Pillar insert is approximately 18 mm (0.7 inches) in length and has an outer diameter of 2 mm (0.08 inches). The Company selected the Pillar insert design after significant screening work was done on a wide range of biomaterials. The Company braids its Pillar inserts to its precise specifications from a polyethylene terephthalate fiber that has been used for many years in implantable medical products such as surgical sutures and heart valve cuffs.

Each Pillar insert is implanted in the soft palate using the Company’s specially-designed, single use delivery tool. At its facilities in St. Paul, the Company preloads each insert into a delivery tool and enclose each delivery tool individually in a sterile package. The implantation of the Pillar inserts into the soft palate tissue triggers the body’s natural fibrotic response to injury and the introduction of foreign bodies, which encapsulates and stimulates tissue growth into and around the inserts.

The proprietary surface texture of the Pillar inserts promotes the growth of tissue into the inserts, providing structural support and serving to anchor and connect the Pillar inserts. In addition to the structural support provided by the inserts themselves, this natural fibrotic response further stiffens the soft palate tissue, effectively reducing or eliminating the tissue flutter that causes snoring and the retropalatal collapse that can obstruct the airway and cause OSA.

International net sales increased from $7,860 in the year ended December 31, 2004 to $1.4 million in the year ended December 31, 2005.

Cost of sales increased by $850,585, or 108%, from $790,805 in the year ended December 31, 2004 to $1.6 million in the year ended December 31, 2005.

Interest income declined by $36,651, or 22%, from $169,072 in the year ended December 31, 2004 to $132,421 in the year ended December 31, 2005.

Interest expense decreased by $401,304, or 94%, from $426,120 in the year ended December 31, 2004 to $24,816 in the year ended December 31, 2005.

Other income (expense) decreased by $1.6 million, or 154%, from $1.0 million of income in the year ended December 31, 2004 to $553,125 of expense in the year ended December 31, 2005.