The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to our financial statements included in this report. The following discussion contains forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements" on page 1 of this report.

Overview

We are a medical device company focused on designing, developing and marketing products that implement our proprietary minimally invasive surgical approach to treat degenerative disc disease and instability affecting the lower lumbar region of the spine. Using this pre-sacral approach, a surgeon can access discs in the lower lumbar region of the spine through a 1.5 cm incision adjacent to the tailbone and can perform an entire fusion procedure through a small tube that provides direct access to the degenerative disc. We developed our pre-sacral approach to allow spine surgeons to access and treat degenerative lumbar discs without compromising important surrounding soft tissue. We believe this approach enables fusion procedures to be performed with low complication rates, short procedure times, low blood loss, short hospital stays, fast recovery times and reduced pain. We have developed and currently market in the United States and Europe two single-level fusion products, AxiaLIF and AxiaLIF 360°, and a two-level fusion product, the AxiaLIF 2L. All of our products are delivered using our pre-sacral approach.

From our incorporation in 2000 through 2004, we devoted substantially all of our resources to research and development and start-up activities, consisting primarily of product design and development, clinical trials, manufacturing, recruiting qualified personnel and raising capital. We received FDA 510(k) clearance for our AxiaLIF product in the fourth quarter of 2004, and commercially introduced our AxiaLIF product in the United States in the first quarter of 2005. We received FDA 510(k) clearance for our AxiaLIF 360° product in the United States in the third quarter of 2005 and began commercialization in the United States in the third quarter of 2006. We received a CE mark to market AxiaLIF in the European market in the first quarter of 2005 and began commercialization in the first quarter of 2006. For AxiaLIF 360°, we received a CE mark in the first quarter of 2006. We received a CE mark for our AxiaLIF 2L product in the third quarter of 2006 and began commercialization in the European market in the fourth quarter of 2006. We received 510(k) clearance for the AxiaLIF 2L from the FDA and began marketing this product in the United States in the second quarter of 2008. We currently sell our products through a direct sales force, independent sales agents and international distributors.

We rely on third parties to manufacture most of our products and their components. We believe these manufacturing relationships allow us to work with suppliers who have the best specific competencies while we minimize our capital investment, control costs and shorten cycle times, all of which allows us to compete with larger volume manufacturers of spine surgery products.

Since inception, we have been unprofitable. As of December 31, 2008, we had an accumulated deficit of $47.9 million.

We expect to continue to invest in creating a sales and marketing infrastructure for our AxiaLIF, AxiaLIF 360° and AxiaLIF 2L products in order to gain wider acceptance for these products. We also expect to continue to invest in research and development and related clinical trials, and increase general and administrative expenses as we grow. As a result, we will need to generate significant revenue in order to achieve profitability.

Financial Operations

Revenue

We generate revenue from the sales of our procedure kits and implants used in our AxiaLIF fusion procedure for the treatment of degenerative disc disease and instability. Our revenue is generated by our direct sales force, independent sales agents and independent distributors. Our sales representatives or independent sales agents hand deliver the procedure kit to the customer on the day of the surgery or several days prior to

the surgery. The sales representative or independent agent is then responsible for reporting the delivery of the procedure kit, and the date of the operation to the corporate office for proper revenue recognition. We recognize revenue upon the confirmation that the procedure kit has been used in a surgical procedure. The other sales method is for sales to distributors outside the United States. These distributors order multiple procedure kits at one time to have on hand. These transactions require the customer to send in a purchase order before shipment will be made to the customer. We determine revenue recognition on a case by case basis dependent upon the terms and conditions of each individual distributor agreement. Under the distributor agreements currently in place, a distributor only has the right of return for defective products and, accordingly, revenue is recognized upon shipment of our products to our independent distributors. Although we intend to continue to expand our international sales and marketing efforts, we expect that a substantial amount of our revenues will be generated in the United States in future periods.

Cost of Revenue

Cost of revenue consists primarily of material and overhead costs related to our AxiaLIF, AxiaLIF 360° and AxiaLIF 2L instruments and implants. Cost of revenue also includes facilities-related costs, such as rent, utilities and depreciation.

Research and Development

Research and development expenses consist primarily of personnel costs, including stock-based compensation expense, within our product development, regulatory and clinical functions and the costs of clinical studies and product development projects. Research and development expenses also include legal expenses related to the development and protection of our intellectual property portfolio and facilities-related costs. In future periods, we expect research and development expenses to grow as we continue to invest in basic research, clinical trials, product development and in our intellectual property.

Sales and Marketing

Sales and marketing expenses consist of personnel costs, including stock-based compensation expense, sales commissions paid to our direct sales representatives and independent sales agents, and costs associated with physician training programs, promotional activities, and participation in medical conferences. In future periods, we expect sales and marketing expenses to increase as we expand our sales and marketing efforts.

General and Administrative

General and administrative expenses consist of personnel costs, including stock-based compensation, related to the executive, finance, business development and information technology and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs and general corporate expenses. We expect general and administrative expenses to increase as we grow our business and as we incur additional professional fees, increased insurance costs and other general corporate expenses related to operating as a public company.

Interest Income

Interest income is primarily composed of interest earned on our cash, cash equivalents and available-for-sale securities.

Results of Operations

Comparison of the Years Ended December 31, 2008, 2007 and 2006

Revenue. Revenue increased to $25.3 million in 2008 from $16.5 million in 2007 and $5.8 million in 2006. The $8.8 million increase in revenue from 2007 to 2008 was primarily attributable to an increase in the number of products sold, which we believe resulted from the continued market acceptance of our AxiaLIF and AxiaLIF 360° products and the commercialization of our AxiaLIF 2L product in the United States, which

began in the second quarter of 2008. None of this increase was attributable to price increases. Domestically, sales of our AxiaLIF 360° product, which began commercialization in the United States in the third quarter of 2006, increased to $8.5 million in 2008 from $6.8 million in 2007 and $530,000 in 2006. Sales of our AxiaLIF 2L product, which began commercialization in the United States in the second quarter of 2008 and which have a higher selling price than our other products, were $3.3 million in 2008. As a result, average selling prices in the United States increased to approximately $9,850 in 2008 from approximately $9,250 in 2007 and $8,200 in 2006. In 2008, 2007 and 2006, we recorded 2,280, 1,591 and 661 domestic AxiaLIF cases, respectively. This included 852, 677 and 53 AxiaLIF 360° cases in 2008, 2007 and 2006, respectively, and 229 AxiaLIF 2L cases in 2008. Additionally, in 2008 and 2007, we generated $868,000 and $359,000, respectively, in revenues from stand alone sales of our percutaneous facet screw system. Revenue generated outside the United States increased to $2.0 million in 2008 from $1.4 million in 2007 and $359,000 in 2006. In 2008 and 2007, initial stocking shipments to new distributors were $382,000 and $438,000, respectively. Our AxiaLIF 360° product began commercialization outside the United States in 2007 and our AxiaLIF 2L began commercialization in Europe in the fourth quarter of 2007, although we did not generate significant revenues from either the AxiaLIF 2L or the AxiaLIF 360° during 2007. In 2008, AxiaLIF 360 and AxiaLIF 2L revenues outside the U.S. were approximately $60,000 and $475,000, respectively. In 2008, 2007 and 2006, 92%, 92% and 94%, respectively, of our revenues were generated in the United States.

Cost of Revenue. Cost of revenue increased to $4.3 million in 2008 from $3.0 million in 2007 and $1.6 million in 2006. The $1.3 million increase from 2007 to 2008 and the $1.4 million increase from 2006 to 2007 were primarily the result of higher material and overhead costs associated with increased sales volumes of our AxiaLIF, AxiaLIF 360° and AxiaLIF 2L products. As a percentage of revenue, cost of revenue was 17.1% in 2008, 18.5% in 2007 and 27.2% in 2006. The decrease in cost of revenue as a percentage of revenue was primarily attributable to increased efficiencies associated with higher production and sales volumes from 2006 to 2007 and to 2008.

Research and Development. Research and development expenses increased to $5.0 million in 2008 from $4.8 million in 2007 and $4.2 million in 2006. The $0.2 million increase in expense from 2007 to 2008 was primarily the result of increases in personnel related costs, including stock-based compensation expense, of $0.4 million, partially offset by reductions in project related research and development and clinical trial costs of $0.2 million. The $0.6 million increase in expense in 2007 compared to 2006 was primarily the result of increases in personnel related costs, including stock-based compensation expense, of $0.6 million and increased cost of $0.5 million related to the enhancement of our intellectual property portfolio, partially offset by reductions in project related research and development and clinical trial costs of $0.4 million and occupancy costs of $0.1 million.

Sales and Marketing. Sales and marketing expenses increased to $29.4 million in 2008 from $15.7 million in 2007 and $9.3 million in 2006. The increase in expense from 2007 to 2008 of $13.7 million was primarily attributable to increased personnel related costs, including commissions and stock-based compensation expense, of $7.2 million, as we continued to build out our sales and marketing organization in order to continue to drive global market acceptance of our AxiaLIF products, increased travel costs of $2.7 million related to our expanded sales force, increased training costs of $1.7 million and increased tradeshow and promotional activities of $1.2 million. The increase in expenses from 2006 to 2007 of $6.4 million was primarily attributable to increased personnel related costs of $5.4 million, increased training costs of $0.4 million and increased tradeshow and promotional activities of $0.4 million.

General and Administrative. General and administrative expenses increased to $6.2 million in 2008 from $2.9 million in 2007 and $1.2 million in 2006. The increase in expenses from 2007 to 2008 of $3.3 million was primarily attributable to increased personnel related costs, including stock-based compensation expenses, of $1.0 million, increased professional fees of $1.5 million related to our operating as a public company, including accounting, legal and board of director expenses, increased directors and officers insurance expense of $0.3 million and higher franchise taxes of $0.2 million. The increase in expenses from 2006 to 2007 of $1.7 million was primarily attributable to increased personnel related costs, including stock-based compensation expenses, of $0.8 million, increased professional fees related to planning and preparation for our initial

public offering of $0.5 million, increased occupancy cost of $0.3 million and increased directors and officers insurance expense of $0.1 million.

Other and Interest Income (Expense). Other and interest income increased to $2.5 million in 2008 from $1.4 million in 2007 and $1.0 million in 2006. The increases of $1.1 million in other and interest income from 2007 to 2008 and $0.4 million from 2006 to 2007 was primarily due to interest income on higher average cash and investment balances from the net proceeds to the Company of $86.7 million from our October 2007 IPO.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in 2000, we have incurred significant losses and, as of December 31, 2008, we had an accumulated deficit of $47.9 million. We have not yet achieved profitability, and anticipate that we will continue to incur losses in the near term. We expect that research and development, sales and marketing and general and administrative expenses will continue to grow and, as a result, we will need to generate significant revenues to achieve profitability. To date, our operations have been funded primarily with proceeds from the sale of preferred stock and, most recently, the net proceeds from our October 2007 initial public offering. Gross proceeds from our preferred stock sales totaled $40.5 million to date, and the net proceeds from our October 2007 initial public offering were approximately $86.7 million.

As of December 31, 2008, we did not have any outstanding debt financing arrangements, we had working capital of $84.2 million and our primary source of liquidity was $77.3 million in cash, cash equivalents and short-term investments. We currently invest our cash and cash equivalents primarily in money market treasury funds and high grade commercial paper. We currently place our short-term investments primarily in U.S. agency backed debt instruments and high grade corporate bonds, certificates of deposit and commercial paper.

Cash, cash equivalents and short-term investments decreased from $93.9 million at December 31, 2007 to $77.3 million at December 31, 2008. The decrease of $16.6 million was primarily the result of net cash used in operating activities of $15.7 million and purchases of property and equipment of $1.1 million.

Cash, cash equivalents and short-term investments increased from $15.0 million at December 31, 2006 to $93.9 million at December 31, 2007. The increase of $78.9 million was primarily the result of the net proceeds to the Company from our October 2007 initial public offering of approximately $86.7 million partially offset by cash used in operations of $7.3 million and purchases of property and equipment of $0.5 million.

Cash Flows

Net Cash Used in Operating Activities. Net cash used in operating activities was $15.7 million in 2008, $7.3 million in 2007 and $10.4 million in 2006. For each of these periods, net cash used in operating activities was attributable primarily to net losses after adjustment for non-cash items, such as depreciation and stock-based compensation expense, and increases in working capital requirements to support the introduction and increased market acceptance of our AxiaLIF products. The increases in working capital requirements for each of the periods were driven by the growth in inventories, and related payables, to support forecasted demand and the increases in accounts receivable resulting from increasing revenues exceeding cash inflow from customer collections and smaller changes in prepaid assets and accrued expenses due to the timing of activities in those accounts.

Net Cash Used in Investing Activities. Net cash used in investing activities was $7.1 million in 2008, $19.8 million in 2007 and $5.1 million in 2006. For each of these periods, this amount reflected purchases or sales and maturities of investments and purchases of property and equipment, primarily for research and development, information technology, manufacturing operations and capital improvements to our facilities.

Net Cash Provided by Financing Activities. Net cash provided by financing activities in 2008 was $0.2 million, representing proceeds from the issuance of shares of our common stock upon the exercise of stock options. Net cash provided by financing activities in 2007 was $86.8 million, which represented the net

proceeds to the Company of our October 2007 initial public offering of 6,325,000 shares of our common stock, resulting in net proceeds to us, after deducting underwriting discounts, commissions and offering expenses, of approximately $86.7 million and $0.1 million in proceeds from the issuance of shares of our common stock upon the exercise of stock options. There was no significant net cash provided by financing activities in 2006.

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash and cash equivalents, together with cash received from sales of our products, will be sufficient to meet our cash needs for at least the next two years. We intend to spend substantial sums on sales and marketing initiatives to support the ongoing commercialization of our products and on research and development activities, including product development, regulatory and compliance, clinical studies in support of our currently marketed products and future product offerings, and the enhancement and protection of our intellectual property. We may need to obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to take advantage of opportunities that may arise. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.

Contractual Obligations

The following table discloses information about our contractual obligations by
the year in which payments are due as of December 31, 2008:


                                                   Payments Due by Year
                                        Less Than                                      After 5
  Contractual Obligations   Total        1 Year        1-3 Years       4-5 Years        Years

  Operating leases(1)       $  254     $       161     $       93     $         -     $       -

(1) We rent office space under an operating lease which expires in 2010.

Off-Balance Sheet Arrangements

As of December 31, 2008, we did not have any outstanding debt or available debt financing arrangements or off-balance sheet liabilities.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and disclosures of contingent assets and liabilities at the date of the financial statements. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, income taxes and stock-based compensation. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition. Revenue is recognized in accordance with Staff Accounting Bulletin, or SAB, No. 101 as amended by SAB No. 104, "Revenue Recognition". We recognize revenue based on the following criteria: (i) persuasive evidence that an arrangement exists with the customer; (ii) the delivery of the products

and/or services has occurred (title has transferred); (iii) the selling price has been fixed for the products or services delivered; and (iv) the collection is reasonably assured. Revenue is generated from the sale of our implants and procedure kits, which consist of disposable instruments. We have two distinct sale methods. The first method is when procedure kits are sold directly to hospitals or surgical centers. Our sales representatives or independent sales agents hand deliver the procedure kit to the customer on the day of the surgery or several days prior to the surgery. The sales representative or independent agent is then responsible for reporting the delivery of the procedure kit, and the date of the operation to our corporate office for proper revenue recognition. We recognize revenue upon the confirmation that the procedure kit has been used in a surgical procedure. The other sales method is for sales to distributors outside the United States. These distributors order multiple procedure kits at one time to have on hand. These transactions require the customer to send in a purchase order before shipment will be made to the customer. We determine revenue recognition on a case by case basis dependent upon the terms and conditions of each individual distributor agreement. Under the distributor agreements currently in place, a distributor only has the right of return for defective products and, accordingly, revenue is recognized upon shipment.

Accounts Receivable and Allowances. We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While our credit losses have historically been within our expectations and the allowance established, we may not continue to experience the same credit loss rates that we have in the past. We make estimates on the collectability of customer accounts based primarily on analysis of historical trends and experience and changes in customers' financial condition. Management uses its best judgment, based on the best available facts and circumstances, and records a reserve against the amounts due to reduce the receivable to the amount that is expected to be collected.

These reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved.

Inventory. We state our inventories at the lower of cost or market, computed on a standard cost basis, which approximates actual cost on a first-in, first-out basis and market being determined as the lower of replacement cost or net realizable value. Costs are monitored on an annual basis and updated as necessary to reflect changes in supplier costs and the rate of our overhead absorption is adjusted based on projections of our manufacturing department costs and production plan. Inventory reserves are established when conditions indicate that the selling price could be less than cost due to obsolescence, usage, or we deem we hold excessive levels of inventory based on market demand.

Accounting for Income Taxes. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a full valuation allowance on our net deferred tax assets as of December 31, 2008 due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future.

Stock-Based Compensation. Effective January 1, 2006, we adopted SFAS 123(R) using the prospective transition method, which requires the measurement and recognition of compensation expense for all share-based payment awards granted, modified and settled to our employees and directors after January 1, 2006. The fair value of stock options was estimated using a Black-Scholes option pricing model. This model requires the input of subjective assumptions in implementing SFAS 123(R), including expected stock price volatility, expected life and estimated forfeitures of each award. The fair value of equity-based awards is amortized over the vesting period of the award, and we have elected to use the straight-line method of amortization. Due to the limited amount of historical data available to us, particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ materially from our expectations.

Recent Accounting Pronouncements

New Accounting Standards

In February 2008, the Financial Accounting Standards Board, or FASB, issued Staff Position No. FAS 157-2, which delayed the effective date of Statement of Financial Accounting Standards No. 157, "Fair Value Measurements", for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. We are currently evaluating the effect of the implementation of SFAS 157 on our non-financial assets and non-financial liabilities, but do not believe that it will have a material impact on our financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115". SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The amendment to SFAS 115 applies to all entities with investments in available-for-sale or trading securities. The statement was effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008; however, no fair value elections were made for any of our assets or liabilities, other than those required by current accounting principles to be accounted for at fair value.

In May 2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS 162 identifies the sources of accounting principles to be used in the preparation of financial statements. SFAS 162 is effective sixty days following the SEC's approval of the Public Company Accounting . . .