The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the risk factors set forth in Item 1A of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis. Certain amounts and percentages in this discussion and analysis have been rounded for convenience of presentation. Unless otherwise noted, the figures in the following quarterly or year-to-date discussions are unaudited.

Overview
We are a medical device company focused exclusively on the design, development and commercialization of products that promote healing in patients with spine disorders. We are an engineering-driven company with a history of rapidly developing and commercializing products that assist surgeons in effectively treating their patients, respond to evolving surgeon needs and address new treatment options. Since our inception in 2003, we have launched over 100 products and offer a comprehensive product portfolio of innovative and differentiated products addressing a broad array of spinal pathologies, anatomies and surgical approaches.
We sell implants and related disposables to our customers, primarily hospitals, for use by surgeons to treat spine disorders. All of our products fall into one of two categories: innovative fusion or disruptive technologies. Spinal fusion is a surgical procedure to correct problems with the individual vertebrae, the interlocking bones making up the spine, by preventing movement of the affected bones. Our innovative fusion products are used in cervical, thoracolumbar, sacral, and interbody/corpectomy fusion procedures to treat degenerative, deformity, tumor, and trauma conditions.
We define disruptive technologies as those that represent a significant shift in the treatment of spine disorders by allowing for novel surgical procedures, improvements to existing surgical procedures, the treatment of spine disorders by new physician specialties, and surgical intervention earlier in the continuum of care. Our current portfolio of approved and pipeline products includes a variety of disruptive technology products, which we believe offer material improvements to fusion procedures, such as minimally invasive surgical ("MIS") techniques, as well as new treatment alternatives including motion preservation technologies, such as dynamic stabilization, total disc replacement and interspinous process spacer products, and advanced biomaterials technologies, as well as interventional pain management solutions, including treatments for vertebral compression fractures.
To date, the primary market for our products has been the United States, where we sell our products through a combination of direct sales representatives employed by us and distributor sales representatives employed by our exclusive independent distributors, who distribute our products on our behalf for a commission that is generally based on a percentage of sales. We believe there is significant opportunity to strengthen our position in the U.S. market by increasing the size of our U.S. sales force and we intend to add additional direct and distributor sales representatives by the end of 2012. As of June 30, 2012, we had also hired additional sales representatives to market and sell our current and planned interventional pain management products, including our existing AFFIRM kyphoplasty product, which we market under the trade name Algea Therapies. We also believe there is a significant opportunity to strengthen our position by increasing the size of this separate sales force and intend to recruit additional sales representatives strategically to grow that business.

During the six months ended June 30, 2012, our international sales accounted for approximately 7% of our total sales. Our international distributors purchase our products directly from us and independently sell them. We believe there are significant opportunities for us to increase our presence in both existing and new international markets through the expansion of our direct and distributor sales forces and the commercialization of additional products. Results of Operations

Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011
Sales
The following table sets forth, for the periods indicated, our sales by product category and geography expressed as dollar amounts and the changes in sales between the specified periods expressed in dollar amounts and as percentages:

                                      Three Months Ended             Change
                                     June 30,      June 30,
(In thousands, except percentages)     2012          2011          $         %
Innovative Fusion                  $    61,233    $  55,758    $  5,475     9.8 %
Disruptive Technology                   34,744       25,178       9,566    38.0 %
Total sales                        $    95,977    $  80,936    $ 15,041    18.6 %

The increase in total sales was attributable primarily to an increase in sales of our disruptive technology products, led by new products launched in 2011, including CALIBER (an expandable lumbar fusion device), CALIBER-L (an expandable lateral lumbar interbody fusion device), SP-FIX (a spinous process fixation device), and INTERCONTINENTAL (a next-generation system in minimally invasive lateral fixation). Innovative fusion sales increased due to strong sales of REVERE (a pedicle screw and rod system), ELLIPSE (a posterior occipital cervical thoracic system) and FORTIFY (an expandable corpectomy device) which includes the growth of innovative fusion sales in international markets, partially offset by a decrease in sales of products that have been replaced by next-generation products.

                                      Three Months Ended             Change
                                     June 30,      June 30,
(In thousands, except percentages)     2012          2011          $         %
United States                      $    88,579    $  75,581    $ 12,998    17.2 %
International                            7,398        5,355       2,043    38.2 %
Total sales                        $    95,977    $  80,936    $ 15,041    18.6 %

Sales growth in the United States was due primarily to increased sales of our disruptive technology products and increased market penetration in new and existing territories. We believe there is significant opportunity to strengthen our position in existing markets and in new sales territories by increasing the size of our U.S. sales force.
The increase in international sales was attributable to increased market penetration in both new and existing territories. We increased our international presence by selling in countries in the three months ended June 30, 2012 in which we had no sales in the three months ended June 30, 2011. We believe there is significant opportunity for us to expand our international presence through increased market penetration in existing territories, expansion into new territories, expansion of our direct and distributor sales force and the commercialization of additional products.

Cost of Goods Sold
                                      Three Months Ended           Change
                                    June 30,      June 30,
(In thousands, except percentages)    2012          2011         $         %

The increase in cost of goods sold was due to $2.1 million of increased sales volume, which was offset by a $1.0 million decrease in inventory reserves, write-offs and other costs.

Research and Development Expenses
                                      Three Months Ended            Change
                                     June 30,      June 30,
(In thousands, except percentages)     2012          2011         $         %

The increase in research and development expenses was due to an increase of $0.5 million in employee compensation including taxes, benefits and stock compensation and an increase of $0.7 million in supplies, outside services and other costs.

Selling, General and Administrative Expenses

                                       Three Months Ended           Change
                                     June 30,      June 30,
(In thousands, except percentages)     2012          2011         $         %
Selling, general and administrative $  41,231     $ 33,753     $ 7,478    22.2 %
Percentage of sales                      43.0 %       41.7 %

The increase in selling, general and administrative expenses was due primarily to an increase of $5.5 million in compensation costs in the United States to support increased sales volume and company growth, including hiring of additional sales representatives, inclusive of our Algea Therapies sales representatives, and general administrative personnel; an increase of $1.2 million to support international sales growth and expansion into new international territories; and an increase of $0.7 million in U.S. sales and marketing expenses including travel and entertainment, training and other costs.

Provision for Litigation Settlements
                                         Three Months Ended                Change
                                        June 30,       June 30,
(In thousands, except percentages)        2012           2011          $            %

The decrease in provision for litigation settlements of $1.5 million was due primarily to the favorable settlement of a lawsuit during the quarter.

Other Expense

Other expense of $0.3 million in the three months ended June 30, 2012 was
attributable primarily to a loss due to the effect of changes in foreign
exchange rates on payables and receivables held in currencies other than their
functional (local) currency.

Income Tax Provision
                                      Three Months Ended            Change
                                     June 30,      June 30,
(In thousands, except percentages)     2012          2011         $         %

The increase was primarily due to a $6.5 million increase in taxable income as a result of increased operating profits. The effective rate for the three months ended June 30, 2011 was favorably affected by the reversal of a $0.9 million tax provision related to a Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48") reserve resulting from the completion of IRS examinations with respect to the 2005 through 2008 tax years.

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Sales

The following table sets forth, for the periods indicated, our sales by product
category and geography expressed as dollar amounts and the changes in sales
between the specified periods expressed in dollar amounts and as percentages:
                                      Six Months Ended             Change
                                    June 30,     June 30,
(In thousands, except percentages)    2012         2011          $         %
Innovative Fusion                  $ 122,721    $ 111,973    $ 10,748     9.6 %
Disruptive Technology                 67,973       47,242      20,731    43.9 %
Total sales                        $ 190,694    $ 159,215    $ 31,479    19.8 %

The increase in total sales was attributable primarily to an increase in sales of our disruptive technology products, led by new products launched in 2011, including CALIBER (an expandable lumbar fusion device), CALIBER-L (an expandable lateral lumbar interbody fusion device), SP-FIX (a spinous process fixation device), and INTERCONTINENTAL (a next-generation system in minimally invasive lateral fixation). Innovative fusion sales increased due to strong sales of REVERE (a pedicle screw and rod system), ELLIPSE (a posterior occipital cervical thoracic system) and FORTIFY (an expandable corpectomy device) which includes the growth of innovative fusion sales in international markets, partially offset by a decrease in sales of products that have been replaced by next-generation products.

                                      Six Months Ended             Change
                                    June 30,     June 30,
(In thousands, except percentages)    2012         2011          $         %
United States                      $ 176,570    $ 150,581    $ 25,989    17.3 %
International                         14,124        8,634       5,490    63.6 %
Total sales                        $ 190,694    $ 159,215    $ 31,479    19.8 %

Sales growth in the United States was due primarily to increased sales of our disruptive technology products and increased market penetration in existing territories. We believe there is significant opportunity to strengthen our position in new and existing markets and in new sales territories by increasing the size of our U.S. sales force.

The increase in international sales was attributable to increased market penetration in existing territories and the addition of new sales territories, as we increased our international presence by selling in countries in the six months ended June 30, 2012 in which we had no sales in the six months ended June 30, 2011. We believe there is significant opportunity for us to expand our international presence through increased market penetration in existing territories, expansion into new territories, expansion of our direct and distributor sales force and the commercialization of additional products.

Cost of Goods Sold
                                      Six Months Ended            Change
                                    June 30,     June 30,
(In thousands, except percentages)    2012         2011         $         %

The increase in cost of goods sold was due primarily to $4.2 million of increased sales volume, an increase of $0.8 million in depreciation of surgical instruments and cases, offset by a $0.4 million decrease in inventory reserves and other costs.

Research and Development Expenses
                                      Six Months Ended            Change
                                    June 30,     June 30,
(In thousands, except percentages)    2012         2011         $         %

The increase in research and development expenses was due primarily to an increase of $1.2 million in employee compensation including taxes, benefits and stock compensation and an increase of $1.1 million in supplies and outside services, partially offset by a decrease of $0.4 million in clinical trial and other costs.
Selling, General and Administrative Expenses

                                       Six Months Ended             Change
                                     June 30,     June 30,
(In thousands, except percentages)     2012         2011          $         %
Selling, general and administrative $ 82,456     $ 67,767     $ 14,689    21.7 %
Percentage of sales                     43.2 %       42.6 %

The increase in selling, general and administrative expenses was due primarily to an increase of $9.5 million in compensation costs in the United States to support increased sales volume and company growth, including hiring of additional sales representatives, inclusive of our Algea Therapies sales representatives, and general administrative personnel; an increase of $2.8 million to support international sales growth and expansion into new international territories; an increase of $1.4 million in U.S. sales and marketing expenses including travel and entertainment, training and other costs; and an increase of $1.0 million in legal and consulting fees, outside services and other related support costs.

Provision for Litigation Settlements
                                         Six Months Ended                Change
                                       June 30,      June 30,
(In thousands, except percentages)       2012          2011          $            %

The decrease in provision for litigation settlements of $1.2 million was due primarily to the favorable settlement of a lawsuit during the six months ended June 30, 2012.

Other Expense

Other expense of $0.1 million in the six months ended June 30, 2012 was
attributable primarily to a loss due to the effect of changes in foreign
exchange rates on payables and receivables held in currencies other than their
functional (local) currency.

Income Tax Provision
                                      Six Months Ended            Change
                                    June 30,     June 30,
(In thousands, except percentages)    2012         2011         $         %

The increase was due primarily to a $11.4 million increase in taxable income as a result of increased operating profits. The effective rate for the six months ended June 30, 2011 was favorably affected by the reversal of a $0.9 million tax provision related to a FIN 48 reserve resulting from the completion of IRS examinations with respect to the 2005 through 2008 tax years.

Non-GAAP Financial Measures

Adjusted EBITDA represents net income before interest (income)/expense, net and other non-operating expenses, provision for income taxes, depreciation and amortization, stock-based compensation, changes in the fair value of contingent consideration in connection with business acquisitions and provision for litigation settlements. This financial measure is not calculated in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") within the meaning of Item 10 of Regulation S-K. We present Adjusted EBITDA because we believe it is a useful indicator of our operating performance. Our management uses Adjusted EBITDA principally as a measure of our operating performance and believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. We also believe Adjusted EBITDA is useful to our management and investors as a measure of comparative operating performance from period to period and among companies as it is reflective of changes in pricing decisions, cost controls and other factors that affect operating performance, and it removes the effect of our capital structure (primarily interest expense), asset base (primarily depreciation and amortization) and items outside the control of our management (primarily income taxes and interest income and expense). Our management also uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections.

Adjusted EBITDA should not be considered in isolation or as a substitute for a measure of our liquidity or operating performance prepared in accordance with U.S. GAAP, and is not indicative of net income (loss) from operations as determined under U.S. GAAP. Adjusted EBITDA and other non-GAAP financial measures have limitations that should be considered before using these measures to evaluate our liquidity or financial performance. Adjusted EBITDA does not include certain expenses that may be necessary to review our operating results and liquidity requirements. Our definition and calculation of Adjusted EBITDA may differ from that of other companies.
The following is a reconciliation of Adjusted EBITDA to net income for the periods presented:

                                          Three Months Ended             Six Months Ended
(In thousands, except per share        June 30,        June 30,       June 30,       June 30,
amounts)                                 2012            2011           2012           2011
Net Income                           $    19,001     $   15,920     $   36,577     $   30,351
Interest (income)/expense, net               (53 )           75            (62 )           57
Provision for income taxes                11,260          7,864         21,967         16,749
Depreciation and amortization              4,507          4,054          8,888          7,876
EBITDA                                    34,715         27,913         67,370         55,033
Stock-based compensation                   1,026            585          2,137          1,386
Provision for legal settlements           (1,138 )          370           (831 )          384
Change in fair value of contingent
consideration                                 62            152            (40 )          152
Adjusted EBITDA                      $    34,665     $   29,020     $   68,636     $   56,955
Adjusted EBITDA as a percentage of                                        36.0 %         35.8 %
sales                                       36.1 %         35.9 %

Liquidity and Capital Resources

The following table highlights certain information related to our liquidity and
capital resources:
                                                               June 30,       December 31,
(In thousands)                                                   2012             2011
Cash and cash equivalents                                    $  165,577     $      142,668
Available borrowing capacity under revolving credit facility     50,000             50,000
Working capital                                              $  264,743     $      229,504

In addition to our existing cash balance, our principal sources of liquidity are cash flow from operating activities and our revolving credit facility, which was fully available as of June 30, 2012. We believe these sources, along with the net proceeds from our initial public offering, will provide sufficient liquidity for us to meet our liquidity requirements for the foreseeable future. Our principal liquidity requirements are to meet our working capital, research and development, including clinical trials, and capital expenditure needs, principally for our surgical sets required to maintain and expand our business. We expect to continue to make investments in surgical sets as we launch new products, increase the sizes of our U.S. and Algea Therapies sales forces, and expand into international markets. We may, however, require additional liquidity as we continue to execute our business strategy. Our liquidity may be negatively impacted as a result of a decline in sales of our products, including declines due to changes in our customers' ability to obtain third-party coverage and reimbursement for procedures that use our products, increased pricing pressures resulting from intensifying competition, and cost increases and slower product development cycles resulting from a changing regulatory environment. We anticipate that to the extent that we require additional liquidity, it will be funded through borrowings under our revolving credit facility, the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity.

Cash Flows
The following table summarizes, for the periods indicated, cash flows from
operating, investing and financing activities:

                                                    Six Months Ended         Change
                                                  June 30,     June 30,
 (In thousands)                                     2012         2011          $
Net cash provided by operating activities        $ 34,880     $ 30,432     $  4,448
Net cash used in investing activities             (11,849 )    (19,549 )      7,700
Net cash used in financing activities                 (63 )    (14,868 )     14,805
Effect of foreign exchange rate changes on cash       (59 )         36          (95 )
Increase/(decrease) in cash and cash equivalents $ 22,909     $ (3,949 )   $ 26,858

Cash Provided by Operating Activities

The increase in net cash provided by operating activities was attributable primarily to a $6.2 million increase in net income, a $3.9 million increase in the change in accounts payable and a $2.1 million increase in the change in accrued expenses and other liabilities, partially offset by a $3.2 million increase in the change in inventories and a $3.1 million increase in the change in accounts receivable.
Cash Used in Investing Activities
The decrease in net cash used in investing activities was attributable to $7.5 million of cash payments in connection with acquisitions in 2011 along with a slight decrease in purchases of property and equipment in the current year compared to the prior year period.
Cash Used in Financing Activities
Net cash used in financing activities decreased $14.8 million, attributable primarily to $10.0 million paid to repurchase common stock and the repayment of our long term debt in 2011.

Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.

Seasonality and Backlog
Our business is generally not seasonal in nature. However, our sales may be . . .