You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and the accompanying notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. For a description of factors that may cause our actual results to differ materially from those anticipated in these forward-looking statements, please refer to the below section of this Quarterly Report on Form 10-Q titled "Cautionary Note Regarding Forward-Looking Statements." Unless the context otherwise requires, all references to "we", "us", the "Company", or "NeuroMetrix" in this Quarterly Report on Form 10-Q refer to NeuroMetrix, Inc.

Overview

We are a science-based health care company transforming patient care through neurotechnology. We develop and market innovative products for the detection, diagnosis, and monitoring of peripheral nerve and spinal cord disorders such as those associated with diabetes, carpal tunnel syndrome, lumbosacral disc disease, and spinal stenosis.

Our primary focus is diabetes, specifically the detection and monitoring of diabetic peripheral neuropathy, or DPN, which is a common complication of the disease. We view diabetes as representing the largest and fastest growing opportunity for our proprietary technology as countries around the world struggle to cope with an epidemic of Type II diabetes. Neuropathy is a common and serious complication of the disease that may lead to foot ulcers and limb amputation. We have over a decade of experience in neuropathy detection and believe we are uniquely positioned to address the unmet need for a rapid, cost-effective, objective test for DPN. In June 2011, we achieved the marketing launch of NC-stat DPNCheck, which is a modified version of our NC-stat device designed for assessment of systemic neuropathies such as DPN at the point-of-care. We anticipate that commercial shipments of this device for physician evaluations will begin late in the third quarter of 2011. In support of our efforts, we have assembled a scientific advisory board of international experts and are recruiting a dedicated endocrinology sales force.

In January 2011, we restructured our historical neurodiagnostic activities to more efficiently focus on supporting our installed base of active accounts and to reduce cash consumption. This involved reductions in staffing, reassignment of responsibilities and the elimination of our U.S. direct sales force. Our goal is to manage neurodiagnostics to achieve a positive net cash contribution while maintaining a high standard of customer support. For the six months ended June 30, 2011, our neurodiagnostics activities generated a positive net cash contribution to the Company. We believe we are on track to achieve a positive cash contribution for the full year 2011.

Within neurodiagnostics we currently market a medical device cleared by the FDA which is used for the assessment of neuropathies such as carpal tunnel syndrome, diabetes, and sciatica. Our ADVANCE™ NCS/EMG System, or the ADVANCE System, is a comprehensive platform for the performance of traditional nerve conduction studies and invasive electromyography procedures. We focus our sales efforts for the ADVANCE System on physician offices and clinics. Our ADVANCE System is comprised of: (1) various types of electrodes and needles, (2) our ADVANCE device and related modules, and (3) a communication hub that enables the physician's office to network their device to our servers for data archiving, report generation, and other network services. We sold a predecessor device, the NC-stat System, to a broad group of physicians from its initial market launch in May 1999 through September 2010. Our NC-stat System is a point-of-care device for the performance of nerve conduction studies. We do not intend to support the NC-stat System beyond 2011 and are transitioning our NC-stat customers to the ADVANCE System. Our neurodiagnostic equipment is used in over 3,400 physicians' offices, clinics, and hospitals. Over 1.5 million patient studies have been performed with our neurodiagnostic devices since 1999.

Results of Operations

Comparison of Quarters Ended June 30, 2011 and 2010

Revenues

The following table presents a historical view of our active customers and
studies performed:

                                     Year Ending December 31, 2011             Year Ended December 31, 2010
                                      Second               First            Fourth          Third        Second
                                     Quarter              Quarter          Quarter         Quarter       Quarter

Installed base (active testing
accounts)                                  3,419                3,658          3,875          4,044         4,167
Patient studies                           27,765               29,852         28,041         32,064        34,638

The following table summarizes our revenues:

Quarters Ended June 30,
2011 2010 Change % Change

Revenues include sales of medical equipment consisting of sales of the ADVANCE device and, in 2010, the NC-stat device, accessories, extended service agreements, and sales of consumables consisting of various electrodes, which are used with our ADVANCE and NC-stat Systems, and EMG needles which are used with our ADVANCE System. Revenues for the second quarter of 2011 declined $1.3 million to $2.6 million, compared to $3.9 million for the second quarter of 2010 reflecting an 18% contraction of our installed base that has contributed to lower electrodes sales. In addition, the January 2011 elimination of our direct sales force contributed to lower sales of medical devices. We shipped 18 devices, net, during the second quarter of 2011, compared with 77 devices, net, during the second quarter of 2010. For the full year 2011, we expect neurodiagnostics revenue in the range of $9 million to $10 million.

Cost of Revenues and Gross Margin

The following table summarizes our cost of revenues and gross margin:

                     Quarters Ended June 30,
                       2011             2010         Change       % Change
                                (in thousands)
Cost of revenues   $    1,110.1       $ 1,405.3     $ (295.2 )        (21.0 )%
Gross margin       $    1,461.8       $ 2,447.1     $ (985.3 )        (40.3 )

Our cost of revenues decreased $295,200 to $1.1 million, or 43.2% of revenues, for the quarter ended June 30, 2011, compared to $1.4 million, or 36.5% of revenues for the same period in 2010. The decrease is due primarily to lower shipment volume, partially offset by the impact of higher electrode costs due to reduced purchasing volume, compared with the second quarter of 2010. Our gross margin percentage of 56.8% of revenues for the quarter ended June 30, 2011 decreased from 63.5% of revenues for the same period in 2010. We expect our gross margin percentage to be in the mid 50% range over the remainder of 2011.

Operating Expenses

The following table presents a breakdown of our operating expenses:

                               Quarters Ended June 30,
                                 2011             2010          Change        % Change
                                           (in thousands)
Operating expenses:
Research and development     $    1,123.5       $ 1,658.0     $   (534.5 )        (32.2 )%
Sales and marketing               1,479.5         3,143.5       (1,664.0 )        (52.9 )
General and administrative        1,301.5         2,176.1         (874.6 )        (40.2 )
Total operating expenses     $    3,904.5       $ 6,977.6     $ (3,073.1 )        (44.0 )

For the full year 2011, we expect operating expenses in the range of $17 million to $18 million trending upward from the third quarter onward, as we launch NC-stat DPNCheck into the diabetes market.

Research and Development

Research and development expenses for the quarters ended June 30, 2011 and 2010 were $1.1 million and $1.7 million, respectively. The comparative results included decreases of $435,000 in personnel related costs, $141,000 in expenditures for clinical studies and product development costs, and $88,000 in costs of consulting and outside services. These decreases were partially offset by an impairment charge of $192,500 to write off the remaining value of intangible assets following a decision made in the second quarter of 2011 to terminate development efforts relating to certain technological and intellectual property assets acquired in 2009. We expect our research and development expenses to increase during the second half of 2011 for clinical costs related to NC-stat DPNCheck.

Sales and Marketing

Sales and marketing expenses decreased to $1.5 million for the quarter ended June 30, 2011 from $3.1 million for the quarter ended June 30, 2010. Personnel costs decreased $1.2 million and travel and entertainment costs decreased $148,000 as we eliminated our direct sales force in January 2011. In addition, recruiting costs decreased $114,000, advertising and promotions costs decreased $86,000, and consulting costs decreased $84,000. We expect our sales and marketing expenses to increase during the second half of 2011 due to the addition of a dedicated endocrinology sales force for promotion of NC-stat DPNCheck.

General and Administrative

General and administrative expenses decreased to $1.3 million for the quarter ended June 30, 2011 from $2.2 million for the quarter ended June 30, 2010. This decrease included $212,000 from personnel costs, reflecting reduced headcount, $139,000 from insurance costs due to lower negotiated premiums, $152,000 from professional fees, $113,000 from supplies and equipment costs, $96,000 from bad debt expense, $43,000 from taxes, licenses, and fees, $33,000 from stock-based compensation, and $37,000 from consulting and temporary labor costs. General and administrative expenses may increase modestly over the second half of 2011 reflecting seasonal spending patterns which are weighted more heavily toward year-end.

Interest Income

Interest income was $6,000 for the quarter ended June 30, 2011 and $11,000 for the quarter ended June 30, 2010. Interest income was earned from investments in cash equivalents and short-term investments.

Comparison of Six Months Ended June 30, 2011 and 2010

Revenues

The following table summarizes our revenues:

Six Months Ended June 30,
2011 2010 Change % Change

Revenues for the six months ended June 30, 2011 declined $1.9 million to $5.5 million, compared with $7.4 million for the six months ended June 30, 2010, which reflects an 18% contraction of our installed base that has contributed to lower electrodes sales. In addition, the elimination of our direct sales force in January 2011 contributed to our lower sales of medical devices. We shipped 44 devices, net, during the first six months of 2011, compared with 152 devices, net, during the first six months of 2010. For the full year 2011, we expect neurodiagnostics revenue in the range of $9 million to $10 million.

Cost of Revenues and Gross Margin

The following table summarizes our cost of revenues and gross margin:

                     Six Months Ended June 30,
                       2011               2010          Change        % Change
                                  (in thousands)
Cost of revenues   $     2,365.6       $  2,701.4     $   (335.8 )        (12.4 )%
Gross margin       $     3,111.0       $  4,717.5     $ (1,606.5 )        (34.1 )

Our cost of revenues decreased $335,800 to $2.4 million, or 43.2% of revenues, for the first six months of 2011, compared with $2.7 million, or 36.4% of revenues for the same period in 2010. This decrease is due primarily to lower shipment volume, largely offset by the impact of higher electrode costs due to reduced purchasing volume, compared with the first six months of 2010. Our gross margin percentage of 56.8% of revenues for the first six months of 2011 decreased from 63.6% of revenues for the same period in 2010. We expect our gross margin percentage to be in the mid 50% range over the remainder of 2011.

Operating Expenses

The following table presents a breakdown of our operating expenses:

                               Six Months Ended June 30,
                                 2011               2010          Change        % Change
                                            (in thousands)
Operating expenses:
Research and development     $     2,220.3       $  3,332.5     $ (1,112.2 )        (33.4 )%
Sales and marketing                3,354.1          6,383.8       (3,029.7 )        (47.5 )
General and administrative         2,683.6          4,315.7       (1,632.1 )        (37.8 )
Total operating expenses     $     8,258.0       $ 14,032.0     $ (5,774.0 )        (41.1 )

The restructuring instituted in January 2011 involved a 27% reduction in headcount, realignment of responsibilities, and a charge of approximately $2.2 million, which included charges for severance of $393,000 that was charged primarily to sales and marketing expense, and inventory of $1.8 million that was charged to cost of revenues. In accordance with generally accepted accounting principles, $2.0 million of the charge was recorded in the fourth quarter of 2010, and the remaining $185,000 in severance was recorded in the first quarter of 2011.

For the full year 2011, we expect operating expenses in the range of $17 million to $18 million trending upward from the third quarter onward, as we launch NC-stat DPNCheck into the diabetes market.

Research and Development

Research and development expenses for the six months ended June 30, 2011 and 2010 were $2.2 million and $3.3 million, respectively. The comparative results included decreases of $825,000 in personnel related costs, $200,000 in costs of consulting and outside services, $111,000 for clinical studies and product development costs, $95,000 for licenses and fees, and $66,000 for stock-based compensation. These decreases were partially offset by an impairment charge of $192,500 to write off the remaining value of intangible assets following a decision made in the second quarter of 2011 to terminate development efforts relating to certain technological and intellectual property assets acquired in 2009. We expect our research and development expenses to increase during the second half of 2011 for clinical costs related to NC-stat DPNCheck.

Sales and Marketing

Sales and marketing expenses decreased to $3.4 million for the six months ended June 30, 2011 from $6.4 million for the six months ended June 30, 2010. Personnel costs decreased $2.1 million and travel and entertainment costs decreased $460,000 as we eliminated our direct sales force in January 2011. In addition, recruiting costs decreased $255,000, advertising and promotions costs decreased $110,000, and stock-based compensation decreased $102,000. We expect our sales and marketing expenses to increase during the second half of 2011 due to the addition of a dedicated endocrinology sales force for promotion of NC-stat DPNCheck.

General and Administrative

General and administrative expenses decreased to $2.7 million for the six months ended June 30, 2011 from $4.3 million for the six months ended June 30, 2010. This decrease included $417,000 from personnel costs, reflecting reduced headcount, $340,000 from professional fees, $249,000 from insurance costs, $181,000 from consulting and temporary labor costs, $98,000 from stock-based compensation, $96,000 from supplies and equipment costs, $68,000 from taxes, licenses, and fees, $62,000 from recruiting costs, $38,000 from board fees, and $29,000 from bad debt expense. General and administrative expenses may increase modestly over the second half of 2011 reflecting seasonal spending patterns which are weighted more heavily toward year-end.

Interest Income

Interest income was $13,000 for the six months ended June 30, 2011 and $31,000 for the six months ended June 30, 2010.

Liquidity and Capital Resources

Our principal source of liquidity is our cash and cash equivalents. As of June 30, 2011, cash and cash equivalents totaled $13.6 million. Our ability to generate cash from operations is dependent upon our ability to generate revenue from sales of our products, as well as our ability to manage our operating costs and net assets. Our ability to generate revenue will largely depend on the success of our ongoing shift in our business focus to diabetes, specifically detection and monitoring of diabetic neuropathy which is a common complication of the disease. At the same time, we will continue to support our neurodiagnostic business, which we intend to manage to optimize cash flow. A further decrease in demand for our products or unanticipated increases in our operating costs would likely have an adverse effect on our liquidity and cash generated from operations. The following table sets forth information relating to our liquidity:

                             June 30,       December 31,
                               2011             2010            Change        % Change
                                          ($ in thousands)

Cash and cash equivalents   $ 13,622.4     $     16,986.8     $ (3,364.4 )        (19.8 )%

We have a one year Loan and Security Agreement, or the credit facility, with a bank, which permits us to borrow up to $7.5 million on a revolving basis. The facility expires in March 2012. Amounts borrowed under the facility bear interest equal to the prime rate plus 0.5%. Borrowings are secured by our cash, accounts receivable, inventory, and equipment. We have not borrowed any funds under this credit facility.

During the first six months of 2011, our cash and cash equivalents decreased by $3.4 million, primarily due to net cash used in operating activities.

In managing our working capital, two of the financial measurements we monitor are days sales outstanding (DSO), and inventory turnover rate, which are presented in the table below for the quarters ended June 30, 2011 and 2010, and the year ended December 31, 2010:

                                             Quarter Ended         Year Ended
                                                June 30,          December 31,
                                            2011        2010          2010

Days sales outstanding (days) *                 38         48                51

Our payment terms extended to our customers generally require payment within 30 days from invoice date. As is reflected in the table, DSO has improved over the past year due to improved collection efforts.

Our inventory turnover rate for the quarter ended June 30, 2011 was 2.4 times per year, compared with 1.1 times per year for the quarter ended June 30, 2010 and 2.0 times per year for the year ended December 31, 2010. The increase in the inventory turnover rate for the quarter ended June 30, 2011 reflects improved inventory management.

The following table sets forth information relating to the sources and uses of our cash:

                                                          Six Months Ended
                                                              June 30,
                                                         2011           2010

                                                           (in thousands)

Net cash used in operating activities                 $ (3,462.1 )   $ (8,887.8 )
Net cash provided by investing activities                   93.2        4,886.6
Net cash (used in) provided by financing activities         (4.5 )        143.9

Our operating activities used $3.5 million in the six months ended June 30, 2011. The primary drivers for the use of cash in our operating activities during the first six months of 2011 were our net loss of $5.1 million, which included non-cash expenses of $338,000 for stock-based compensation, $209,000 for depreciation and amortization, and $192,500 for an intangible asset impairment charge. Cash outflows were partially offset by reduced working capital balances, particularly a $673,000 decrease in inventories due to improved management of inventories and a $536,000 decrease in accounts receivable reflecting lower sales and improved collection efforts. For the six months ended June 30, 2010, our operating activities used $8.9 million in cash. This use of cash resulted largely from the net loss for the six months of $9.3 million.

During the first six months of 2011, our investing activities included a $178,500 increase in cash resulting from a release of restricted cash, partially offset by $85,000 used for the acquisition of fixed assets. For the six months ended June 30, 2010, our investing activities provided $4.9 million in cash. This source of cash resulted primarily from $5.0 million provided by the maturities of investments.

During the first six months of 2011, our financing activities generated $16,000 from the issuance of common stock and used $11,000 for capital lease payments. For the six months ended June 30, 2010, our financing activities generated $158,000 from the issuance of common stock and used $14,000 for capital lease payments.

We expect to incur net losses and negative cash flows from operations for the foreseeable future. Based upon our current plans, we believe that our cash and cash equivalents, and the cash to be generated from expected product sales, will be sufficient to meet our projected operating requirements for at least the next twelve months. We are currently facing significant challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to (a) decreases in sales of our products and future revenues; (b) changes we make to our business that affect ongoing operating expenses; (c) changes in our business strategy; (d) regulatory developments affecting us and our products; (e) changes we make to research and development spending plans; and (f) other items affecting our forecasted level of expenditures and use of cash resources. Accordingly, we will likely need to raise additional funds to support operating and capital needs. We may attempt to obtain additional funding through public or private financing, collaborative arrangements with strategic partners, or through debt financing sources to increase the funds available to fund our operations. However, we may not be able to secure such financing in a timely manner and on favorable terms, if at all. Without additional funds, we may be forced to delay, scale back or eliminate our sales and marketing efforts, research and development activities, or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations.

Our common stock is quoted on the NASDAQ Capital Market under the symbol "NURO." One of the requirements for continued listing on the NASDAQ Capital Market is maintenance of a minimum closing bid price of $1.00. On June 30, 2011, the closing market price per share of our common stock was $0.41, as reported by the NASDAQ Capital Market. The NASDAQ Capital Market has provided us a grace period extending to September 19, 2011, to regain compliance with the minimum bid price rule. At our annual meeting held on May 16, 2011, our stockholders approved an amendment to our amended and restated certificate of incorporation, as amended, and authorized our board of directors, if in their judgment it is necessary, to effect a reverse stock split of our common stock, $0.0001 par value per share, at a ratio in the range of 1:2 to 1:8, such ratio to be determined in the discretion of our board of directors. Our board of directors' decision as to whether and when to effect the reverse stock split will be based on a number of factors, including market conditions, existing and expected trading prices for our common stock, and the continued listing requirements of the NASDAQ Capital Market. The reverse stock split, if deemed by the board of directors to be in the best interests of the Company and its stockholders, will be effected, if at all, at a time that is not later than twelve months from May 16, 2011. Even if the reverse stock split is effected, we cannot be sure that our share price will comply with the requirements for continued listing of our common shares on the NASDAQ Capital Market in the future or that we will comply with the other continued listing requirements. If our common shares lose their status on the NASDAQ Capital Market, our common shares would likely trade in the over-the-counter market.

Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments

As of June 30, 2011, we did not have any off-balance sheet financing arrangements.

See notes 7 and 9 of the notes to unaudited financial statements for information regarding commitments and contingencies.

Recent Accounting Pronouncements

Refer to Note 1, Business and Basis of Presentation, of the Notes to Unaudited Financial Statements for a discussion of recent accounting pronouncements.

Cautionary Note Regarding Forward-Looking Statements

The statements contained in this Quarterly Report on Form 10-Q include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, without limitation, statements regarding our or our management's expectations, hopes, beliefs, intentions or strategies regarding the future, such as our estimates regarding anticipated operating losses, future revenues and projected expenses for the remainder of 2011 and beyond; our expectations surrounding the timeline by which our diabetic neuropathy product could be commercially launched; our liquidity and our expectations regarding our needs for and ability to raise additional capital; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q or any document incorporated by reference herein or therein. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "plan" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this quarterly report are based on our . . .