We develop, manufacture and market our proprietary and patented Pillar^® palatal implant system (“Pillar System”)(Pillar System). The Pillar System is a simple, innovative, minimally invasive, implantable medical device used to treat sleep disordered breathing, which includes mild to moderate obstructive sleep apnea, or OSA, and habitual or socially disruptive snoring. During the Pillar Procedure^®, a physician implants three small, braided, proprietary polyester inserts into the muscle of the soft palate. These Pillar inserts, together with the body’s natural fibrotic response to the implanted Pillar inserts, add structural support and stiffen the soft palate, thereby minimizing or eliminating the palatal tissue vibration that can cause snoring and the collapse that can obstruct the upper airway and cause OSA. We believe the Pillar Procedure is a safe, clinically effective, long-lasting and low-risk procedure with minimal pain or complications that offers significant benefits to both patients and physicians over other available treatment options.

Our Pillar System was cleared by the United States Food and Drug Administration, or FDA, for snoring in December 2002 and for mild-to-moderatemild to moderate OSA in July 2004. Our Pillar System received CE Mark certification for both snoring and mild to moderate OSA from the European Commission in May 2003 and December 2004, respectively.

We currently market and sell our Pillar System to otolaryngologists (ear, nose and throat physicians) and to a limited number of oral maxillofacial surgeons. We employ a direct sales force in the United States currently consisting of 15 sales representatives and 3 regional sales directors, and market our products in more than 20 countries outside the United States through independent distributors. We expect to incur net losses through at least 2008 as we continue to invest in the development of the market for the Pillar System.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The application of GAAP requires that we make estimates that affect our reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates.

A description of the Company’s critical accounting policies that represent the more significant judgments and estimates used in the preparation of the Company’s financial statements was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.2007.

Net Sales.Net sales decreasedincreased by $628,$269, or 36%24%, to $1,124$1,393 for the three months ended March 31, 20072008 from $1,752$1,124 in the same period in 2006. The majority of the decrease in total net sales is the result of lower international sales.2007.

The following table summarizes the geographic dispersion of the Company’s revenue:

General and administrative expenses.Our general and administrative expenses consist primarily of salaries and other personnel-related expenses, including stock-based compensation for executive, accounting and administrative personnel, professional service fees and other general corporate expenses. General and administrative expenses decreased by $202,$144, or 13%11%, to $1,315$1,171 for the three months ended March 31, 2007first quarter of 2008 from $1,517 for$1,315 in the three months ended March 31, 2006.first quarter of 2007. The decrease in expenses isin the first quarter of 2008 was due primarily to a decrease in professional fees of $478 compared to fees we incurred during 2006 in connection with our IPO, offset primarily by increases of $180 in stock-based compensation and $81 in insurance expense.of $217, which is mainly a result of issuing options with a lower fair value, partially offset by increased administrative expenses.

Sales and marketing expenses.Our sales and marketing expenses consist primarily of salaries, commissions and other personnel-related expenses, including stock-based compensation, for employees engaged in sales, marketing and support of our products, trade show, co-marketing, promotional and public relations expenses and management and administration expenses in support of sales and marketing. Sales and marketing expenses increaseddecreased by $858,$729, or 46%27%, to $2,734$2,005 for the three months ended March 31, 2007first quarter of 2008 from $1,876$2,734 in the first quarter of 2007. A decrease in advertising, promotion, public relation and professional fees of $450, and a decrease in travel expenses of $50 and personnel recruiting fees of $58 accounted for the comparable perioddecrease in 2006. This increase was primarily attributable to additional compensation related expenses between the first quarter of $650 related to the hiring of additional sales2007 and marketing personnel, including an increase in stock-based compensation of $65, and a $188 increase in advertising, promotional and travel expenses.2008.

Interest income. Interest income increaseddecreased by $256$165 to $119 for the first quarter of 2008 from $284 for the first quarter of 2007. The decrease in the three months ended March 31, 2007, from $28 for the three months ended March 31, 2006. This increase is attributable to the change in the cash available for investing activities and interest earned from the investment of the proceeds of our IPO completed in May 2006.those investments.

Interest expense. Interest expense increaseddecreased by $112$69 to $127 for the first quarter of 2008 from $196 for the three months ended March 31, 2007 from $84 forfirst quarter of 2007. The decrease in the three months ended March 31, 2006. The increasethree-month period was due to the interest expense resulting from draws on our loan facility with Lighthouse Capital Partners during the fourth quarter of 2005 and the first quarter of 2006 prior to our IPO.IPO, and the subsequent pay down of the loan facility and the correlating decrease in expense.

Preferred stock warrant lossImpairment of short-term investments.. InWe recognized an expense for the three months ended March 31, 2006, we recognizedother-than-temporary impairment of short-term investments of $623 for the first quarter of 2008 as a loss due to an increaseresult of the decrease in the estimated fair value of our preferred stock warrants subject to redemption of $163. Following our IPO in May 2006, all preferred stock and preferred stock warrants were converted to common stock and common warrants.auction rate securities.

Since our inception and prior to May 2006, we funded our operations primarily through issuances of convertible preferred stock and related warrants, which provided us with aggregate gross proceeds of $39.9 million. On May 22, 2006, we sold 4,000,000 shares of common stock in an IPO for aggregate gross proceeds of $32.0 million to finance current operations and provide for general corporate purposes, including expanding domestic and international marketing and sales organizations and programs, increasing product development efforts and increasing our clinical study initiatives. After deducting the underwriters’ commissions and discounts, we received net proceeds of approximately $27.7 million. As of March 31, 2008, we had total cash, cash equivalents and short-term investments totaling $6.5 million.

At March 31, 2008 the Company had $2.2 million of cash and cash equivalents and $5.0 million, par value, of investments in auction rate securities (with a fair value of $4.3 million as discussed in Note 4 of the Notes to Condensed Financial Statements). Auction rate securities are variable-rate debt securities and have a long-term maturity with the interest rate reset through Dutch auctions that are typically held every 7, 28 or 35 days. The securities trade at par and are callable at par on any interest payment date at the option of the issuer. Interest is paid at the end of each auction period. Our futureauction rate securities are all AAA/Aaa rated and collateralized by student loans substantially guaranteed by the U.S. government under the Federal Family Education Loan Program. Until February 2008, the auction rate securities market was highly liquid. Beginning the week of February 11, 2008, substantially all auctions for auction rate securities have “failed” as a result of negative overall capital requirementsmarket conditions, meaning that there was not enough demand to sell the securities at auction. The result of failed auctions, which does not signify a default by the issuers, is that these securities continue to pay interest in accordance with their terms, but we will depend uponnot be able to liquidate any of these securities until there are successful auctions or until such time as other markets for these investments develop.

As discussed in Note 11, on April 22, 2008, the Company, Medtronic and MRM Merger Corporation, a numberwholly owned subsidiary of factors, including, but not limitedMedtronic (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Merger Sub will be merged with and into the Company. As a result of the Merger, the separate corporate existence of Merger Sub will cease and the Company will continue as the surviving corporation in the Merger and as a wholly owned subsidiary of Medtronic.

The Merger Agreement provides that at the effective time of the Merger (the “Effective Time”), and as a result thereof, the Company’s shareholders will receive, in exchange for each share of Company common stock they own immediately prior to the completion of the Merger, the right to receive a cash payment in the amount of cash generated$1.60 per share, subject to adjustment if the outstanding capital stock, options and warrants of the Company would cause the aggregate consideration to exceed to $26,333,800. The closing of the Merger is subject to approval by operations, the rateholders of growtha majority of our businessoutstanding shares at a special meeting to be held as soon as reasonably practicable, and changes in competitionother customary closing conditions. We anticipate the Merger will close within 90 days.

Medtronic has also agreed to purchase from us a total of up to approximately $5 million par value of our auction rate securities. On each of up to five specified dates between the date of the Merger Agreement and technologies. Althoughthe Effective Time, between $750,000 and $1,100,000 par value of such securities would be purchased by Medtronic, at purchase prices between approximately 86.7 percent and 88.2 percent of the par value thereof (plus accrued but unpaid interest). We will fund our operations through the completion of the Merger with the $2.2 million of cash and cash equivalents we have been successful in raising fundshad on hand as of March 31, 2008 and through proceeds generated from the sale of our auction rate securities to Medtronic pursuant to the terms of Merger Agreement. Medtronic’s obligation to purchase auction rate securities from the Company will terminate immediately upon the earlier to occur of the Effective Time of the Merger or the termination of the Merger Agreement.

In the event that the Merger Agreement is terminated or the Merger is otherwise not completed, we will require additional capital to fund our operations in the past, there is no assuranceform of equity or debt financing or through licensing our intellectual property. Any sale of additional equity or issuance of debt will result in dilution to our current stockholders, and we cannot be certain that any such financingsadditional public or borrowings canprivate financing will be obtainedavailable in the futureamounts or on terms acceptable to us.us, or at all. If we are unable to obtain additional financing, we will need to significantly reduce the scope of our operations including a reduction in the size of our sales and marketing, research and development, administrative and manufacturing staff combined with the elimination of the significant programs and initiatives planned by each of those functional groups. These changes would have a material adverse effect on our business. Any inability to satisfy our liabilities as they come due could result in the need to file for bankruptcy.

The following table aggregates all contractual commitments and commercial obligations that affect our financial condition and liquidity position at March 31, 20072008 (in thousands):

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenue or other financial items, any statement of the plans and objectives of management for future operations, any statements concerning proposed new product development, any statements regarding future economic conditions or performance and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or “continue” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including, but not limited to the following factors:

As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)“Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

During the most recent fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

On May 22, 2006, we completed our IPO of 4,000,000 shares of common stock (the IPO Shares). We sold the IPO Shares to the public at a price of $8.00 per share. Our sale of IPO Shares was registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (Registration Stmt. No. 333-132368), which was declared effective by the Securities and Exchange Commission on May 16, 2006. We received net proceeds from the sale of the IPO Shares, after deducting the underwriting discount and offering expenses, of approximately $27.7 million. The net proceeds have been invested in money market funds, investment grade commercial paper and debt instruments of the U.S. government and its agencies. During the quarterthree months ended March 31, 2007,2008, we used approximately $4.6$3.1 million of the net proceeds from the IPO for general corporate purposes, including expanding domestic marketing and sales organizations and programs, increasing product development efforts and increasing our clinical study initiatives.purposes.

The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.