Lower back pain affects over six million people annually in the United States and is a leading cause of healthcare expenditures globally. According to Millennium Research Group, in 2006, 233,300 instrumented lumbar fusion procedures were performed in the United States, of which 46,460 were single-level L5/S1, 40,430 were two-level L4/L5/S1 and 51,170 were more than two level procedures involving the L4/L5/S1 level. These single-level, two-level and multi-level procedures represent an estimated market opportunity of $1.4 billion in the United States that is anticipated to exceed $1.8 billion by 2011.

In recent years, the trend in surgical procedures for the spine has been toward more minimally invasive alternatives. Historically, meaningful technology improvements to conventional therapies have resulted in surgical procedures being performed earlier in the patient continuum of care, such as minimally invasive knee arthroscopy in the sports medicine market and coronary angioplasty in the cardiovascular surgery markets, resulting in larger market opportunities. Certain minimally invasive spine surgery procedures could have the same impact on lower back surgery.

Developments are being made in non-fusion technologies including dynamic stabilization devices, artificial discs, nuclear disc prosthetics, annulus repair and facet arthroplasty devices. The 2006 non-fusion market was valued at $128 million and is forecasted to be valued at $1.8 billion by 2011. In 2006, dynamic lumbar stabilization devices and artificial lumbar discs were the only non-fusion technologies available in the United States and accounted for $104 million and $24 million, respectively. In 2011, the non-fusion market is anticipated to be comprised of dynamic stabilization devices totaling $815 million, artificial lumbar discs totaling $397 million, artificial cervical discs totaling $450 million, partial disc replacement totaling $92 million, annulus repair totaling $29 million and facet arthroplasty totaling $22 million.

The Company’s AxiaLIF implant is a threaded titanium rod, called 3D Axial Rod, that comes in varying lengths to enable one-level L5/S1 fusions and two-level L4/L5/S1 fusions. As it is implanted, the proprietary thread design on the Company’s rod separates the vertebrae, restoring disc height, which relieves pressure on the nerve, and provides immediate rigid fixation.

The Company’s proprietary AxiaLIF 360° implants consist of 3D Axial Rod plus titanium facet screws for supplemental posterior fixation. The Company’s AxiaLIF 360° facet screws are implanted using the proprietary delivery system, and requires a second 1.5 cm incision in the patient’s back, through which the facet screws are delivered.

The Company’s TranS1 approach requires the use of a sterile set of surgical instruments that are used to create a safe and reproducible working channel and to prepare the disc and vertebrae for the Company’s implant. The instrumentation contained in the set includes stainless steel navigation tools and access cannulae to create the working channel, and nitinol cutters and brushes to cut and remove the degenerated disc material and prepare the disc space for the Company’s implant. Surgeons must have access to imaging technology to navigate the tools.

The Company is focused on developing novel percutaneous implants that will utilize and leverage its TranS1 approach to the lumbar spine. The Company currently has two products in development that are intended to be used as a surgical therapy earlier in the progression of degenerative disc disease than fusion, as they are designed to preserve motion in the lumbar spine while providing stabilization. The Company’s motion preservation product development efforts include its PNR and PDR implants.

The Company’s proprietary Percutaneous Nucleus Replacement, or PNR, implant incorporates a soft polymer that facilitates normal range of motion and restores disc height to simulate the performance of a healthy disc.

The Company’s proprietary Partial Disc Replacement, or PDR, implant is PNR implant with the addition of a cobalt chrome rod incorporating a ball-and-socket design intended to provide additional stability while preserving normal range of motion.

Cost of revenue increased from $618,000 in the six months ended June 30, 2006 to $1.5 million in the six months ended June 30, 2007.

Research and development expenses increased from $2.1 million in the six months ended June 30, 2006, to $2.3 million in the six months ended June 30, 2007.

Sales and marketing expenses increased from $4.0 million in the six months ended June 30, 2006, to $6.8 million in the six months ended June 30, 2007.

Other and interest income decreased from $528,000 in the six months ended June 30, 2006, to $343,000 in the six months ended June 30, 2007.