Lumbar Spinal Stenosis, or LSS, is a narrowing or constriction of the spinal canal, which causes impingement on the spinal cord and nerve roots that extend from the spine to the legs. LSS is most often caused by degenerative or arthritic conditions that lead to changes in the intervertebral discs, ligaments and facet joints surrounding the spinal canal. LSS most commonly occurs in the lower three levels of the lumbar spine.

The impinged nerves commonly cause pain, weakness and numbness in the lower back or buttocks that further radiates to the thighs and lower legs. When seated or bending forward, patients experience symptom relief as the spine is in flexion, resulting in a widening of the lumbar spinal canal. Physical symptoms tend to worsen while the patient is walking or standing upright, when the spine is in extension, decreasing the space available for the nerve roots. As a result, patients suffering from LSS typically live with significant lifestyle constraints that limit daily activities and quality of life.

Physicians can often quickly assess if a patient is likely suffering from LSS if the patient feels pain while their spine is extended and relief when the spine is in flexion. Subsequent to this initial symptomatic assessment, physicians can confirm a diagnosis of LSS using a combination of tools, including medical history, physical examination and a range of imaging modalities, including X-rays, MRIs, or CT scans.

According to Verispan, a market research organization, there are currently approximately 1.4 million individuals in the United States with a primary or secondary diagnosis of LSS. Approximately 500,000 of these patients are treated with conservative, non-operative therapies. Approximately 140,000 additional patients in the United States undergo spinal surgery for LSS annually. In addition, many LSS sufferers do not seek treatment. These individuals may view their LSS symptoms simply as common back pain that is an inevitable consequence of aging and not as a disease state for which treatment alternatives exist. The aging of the U.S. population as well as increases in the prevalence of obesity are expected to contribute to growth in the incidence of LSS.

The X STOP is the first less invasive, non-fusion motion-preserving device to receive FDA premarket approval for the treatment of LSS. The X STOP mechanically limits extension and is able to increase the dimensions of the spinal canal and the neural foramina, thereby enlarging the openings through which nerve roots traverse; to reduce biomechanical loads on facet joints; and to decrease pressure on intervertebral discs.

The design of the X STOP enables it to be inserted without removing bone or ligaments, resulting in a procedure that can be performed under local anesthesia. The X STOP is not physically attached to bone or other structures in the spinal area. This makes the procedure reversible, which preserves future treatment options for the patient should they be necessary.

The X STOP consists of two components: spacer assembly and adjustable wing. The spacer assembly is a “T” shaped implant that consists of a tapered edge and an oval spacer with a fixed wing. This design allows the device to be inserted laterally. The spacer is placed between the spinous processes through the interspinous ligament. The spacer assembly is designed to prevent forward or backward migration of the device. The adjustable wing is attached with a locking screw and the two wings together prevent lateral motion of the implant.

The X STOP is currently offered in five sizes in the United States, ranging from 6 to 14 mm and six sizes in Europe, ranging from 6 to 16 mm. The X STOP is currently made either entirely from titanium or with titanium wings and a PEEK spacer. Because PEEK has a stiffness profile that is similar to that of human bone, it is currently believed to be preferable for implantation around bones.

In addition to the X STOP, the Company developed a range of surgical instruments for use by the surgeon in implanting the X STOP. These surgical instruments include tissue dilators, a sizing distractor for determining the appropriate size of the X STOP and tools for insertion of the spacer and attachment of the wing. These surgical instruments are sterilizable and reusable.

Cost of revenues increased from $536,000 in the six months ended June 30, 2005 to $2.1 million in the six months ended June 30, 2006.

Research and development expenses increased from $1.4 million in the six months ended June 30, 2005 to $1.7 million in the six months ended June 30, 2006.

Sales and marketing expenses increased from $2.6 million in the six months ended June 30, 2005 to $8.9 million in the six months ended June 30, 2006.

Interest income decreased from $41,000 in the six months ended June 30, 2005 to $33,000 in the six months ended June 30, 2006.