Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from            toCommission File Number 000-50856




NEUROMETRIX, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

04-3308180(I.R.S. Employer
Identification No.)62 Fourth Avenue, Waltham, Massachusetts(Address of principal executive offices)

02451(Zip Code)(781) 890-9989(Registrant's telephone number, including area code)


Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety
(90) days. Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,773,855 shares of common stock,
par value $0.0001 per share, were outstanding as of November 1, 2008.



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Table of Contents

NEUROMETRIX, INC.
FORM 10-Q
INDEX



PART IFINANCIAL INFORMATION


2Item 1.

Financial Statements


2Balance Sheets (unaudited) as of September 30, 2008 and
December 31, 2007


2Statements of Operations (unaudited) for the three and nine months ended
September 30, 2008 and 2007


3Statements of Cash Flows (unaudited) for the nine months ended
September 30, 2008 and 2007


4Notes to Financial Statements (unaudited)


5Item 2.

Management's Discussion and Analysis of Financial Condition and
Results of Operations


19Item 3.

Quantitative and Qualitative Disclosures About Market
Risk


42Item 4.

Controls and Procedures


42PART IIOTHER INFORMATION


43Item 1.

Legal Proceedings


43Item 1A.

Risk Factors


43Item 2.

Unregistered Sales of Equity Securities and Use of
Proceeds


44Item 3.

Defaults Upon Senior Securities


44Item 4.

Submission of Matters to a Vote of Security Holders


44Item 5.

Other Information


44Item 6.

Exhibits


44Signatures


45


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Table of Contents

PART I  FINANCIAL INFORMATION

Item 1.    Financial Statements

NeuroMetrix, Inc.        Balance Sheets        (Unaudited)

September 30,
2008

December 31,
2007(Consolidated)AssetsCurrent assets:Cash and cash equivalents

$
21,592,093

$
7,097,239Short-term held-to-maturity investments





22,621,741Restricted cash


25,000


45,000Accounts receivable, net of allowance for doubtful accounts of $700,000 and $906,000 at September 30, 2008 and December 31, 2007,
respectively


3,689,599


5,731,697Inventories


6,311,205


5,354,338Prepaid expenses and other current assets


388,074


710,159Current portion of deferred costs


486,661


464,061Total current assets


32,492,632


42,024,235Restricted cash


408,000


1,458,598Fixed assets, net


868,707


2,973,718Long-term available-for-sale investment


273,546


1,058,255Goodwill





5,833,464Intangible assets, net


1,837,500


2,800,000Deferred costs


136,476


226,304Other long-term asset


96,393


Total assets

$
36,113,254

$
56,374,574Liabilities, Minority Interest and Stockholders' EquityCurrent liabilities:Accounts payable

$
1,540,354

$
2,627,889Accrued compensation


1,386,721


2,127,546Other accrued expenses


2,373,669


2,308,563Current portion of deferred revenue


1,735,790


1,643,026Current portion of capital lease obligation


12,900


12,900Total current liabilities


7,049,434


8,719,924Deferred revenue


512,788


891,958Capital lease obligationnet of current portion


8,600


18,275Other long-term liabilities





14,546Total liabilities


7,570,822


9,644,703Minority interest


1,968,750


Commitments and contingencies (Notes 9, 10, 12 and 13)Stockholders' equity:Preferred stock, $0.001 par value, 5,000,000 shares authorized, none outstanding





Common stock, $0.0001 par value; 50,000,000 shares authorized 13,773,855 and 13,690,134 shares issued and outstanding at September 30, 2008 and
December 31, 2007, respectively


1,377


1,369Additional paid-in capital


112,225,495


110,235,835Accumulated deficit


(85,653,190
)

(62,065,588
)Accumulated other comprehensive loss





(1,441,745
)Total stockholders' equity


26,573,682


46,729,871Total liabilities, minority interest and stockholders' equity

$
36,113,254

$
56,374,574


The accompanying notes are an integral part of these financial statements.

2

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NeuroMetrix, Inc.        Statements of Operations        (Unaudited)

Three Months Ended

Nine Months EndedSeptember 30,
2008

September 30,
2007

September 30,
2008

September 30,
2007(Consolidated)



(Consolidated)Revenues:Medical equipment

$
416,826

$
925,307

$
1,679,039

$
3,427,684Consumables


6,660,412


10,094,330


22,261,690


30,415,444Other


203,315


270,367


930,950


680,171Total revenues


7,280,553


11,290,004


24,871,679


34,523,299Costs and expenses:Cost of revenues, excluding amortization


2,259,761


3,048,014


7,247,160


9,210,267Research and development expenses


1,471,463


1,290,652


4,648,275


3,772,415Sales and marketing expenses


2,706,403


6,044,049


12,333,376


18,039,934General and administrative expenses


3,497,389


4,905,146


11,276,992


11,116,014Charge for impaired goodwill








5,833,464


Asset impairment and restructuring charge


4,960,151





4,960,151


Amortization of intangible assets


245,000





682,500


Total costs and expenses


15,140,167


15,287,861


46,981,918


42,138,630Loss from operations


(7,859,614
)

(3,997,857
)

(22,110,239
)

(7,615,331
)Loss on available-for-sale investment


(169,289
)




(2,226,454
)

Interest income


124,256


426,932


617,841


1,376,133Loss before minority interest


(7,904,647
)

(3,570,925
)

(23,718,852
)

(6,239,198
)Minority interest


52,500





131,250


Net loss

$
(7,852,147
)
$
(3,570,925
)
$
(23,587,602
)
$
(6,239,198
)Net loss per common share (basic and diluted):

$
(0.57
)
$
(0.28
)
$
(1.72
)
$
(0.49
)Weighted average shares used to compute net loss per common share (basic and diluted):


13,773,855


12,624,465


13,719,346


12,609,761


The
accompanying notes are an integral part of these financial statements.

3

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NeuroMetrix, Inc.        Statements of Cash Flows        (Unaudited)

Nine Months EndedSeptember 30,
2008

September 30,
2007(Consolidated)Cash flows from operating activities:Net loss

$
(23,587,602
)
$
(6,239,198
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


1,402,977


323,751Compensation expense associated with stock options


1,889,531


2,307,243Provision for doubtful accounts


185,533


424,017Accretion of discount on investments


(38,159
)

(10,986
)Loss on available-for-sale investment


2,226,454


Charge for impaired goodwill


5,833,464


Asset impairment and restructuring charge


4,960,151


Minority interest


(131,250
)

Changes in operating assets and liabilities:Accounts receivable


1,730,649


933,005Inventories


(956,867
)

(1,337,872
)Prepaid expenses and other current assets


(245,680
)

84,650Other long-term asset


(96,393
)

Accounts payable


(1,087,535
)

(270,066
)Accrued expenses and compensation


(902,847
)

(823,857
)Other long-term liabilities


(14,546
)

(43,636
)Deferred revenue and deferred costs


(219,178
)

(109,662
)Net cash used in operating activities


(9,051,298
)

(4,762,611
)Cash flows from investing activities:Purchases of investments


(1,050,598
)

(25,971,888
)Maturities of investments


23,710,498


29,590,712Purchases of fixed assets


(274,807
)

(229,005
)Release of restricted cash


1,070,598


Net cash provided by investing activities


23,455,691


3,389,819Cash flows from financing activities:Proceeds from sale of stock under employee stock purchase plan


94,733


143,253Proceeds from exercise of stock options


5,403


23,749Payments on capital lease


(9,675
)

(4,300
)Net cash provided by financing activities


90,461


162,702Net increase (decrease) in cash and cash equivalents


14,494,854


(1,210,090
)Cash and cash equivalents, beginning of period


7,097,239


7,909,778Cash and cash equivalents, end of period

$
21,592,093

$
6,699,688Supplemental disclosure of non-cash investing activities:Contribution of intangible asset to joint venture by Cyberkinetics

$
2,100,000

$
Equipment acquired under capital lease





38,700


The accompanying notes are an integral part of these financial statements.

4

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Table of Contents

NeuroMetrix, Inc.        Notes to Unaudited Financial Statements

1. Business and Basis of Presentation

Business

NeuroMetrix, Inc. (the "Company"), a Delaware corporation, was founded in June 1996. The Company designs, develops and markets
proprietary medical devices that aid physicians in the assessment and treatment of diseases and injuries of peripheral nerves and that provide regional anesthesia and pain control. The Company's
primary focus to date has been on products that help physicians with the assessment of neuropathies. The Company currently markets two products that are cleared by the United States Food and Drug
Administration ("FDA"), the ADVANCE System and the NC-stat System for the assessment of neuropathies. The Company initiated sales and marketing efforts for the ADVANCE System, a
traditional nerve conduction and needle electromyography ("NCS/nEMG") system for the assessment of neuropathies, after receiving 510(k) clearance from the FDA in April 2008. The Company operates in
one business segment. The Company also marketed a device for the evaluation of retinal disorders called the DigiScope. However, effective November 1, 2008 the Company discontinued the sale,
support and marketing of its DigiScope product.

In
February 2008, the Company and Cyberkinetics Neurotechnology Systems, Inc., ("Cyberkinetics"), a related party, formed PNIR (Peripheral Nerve Injury Repair) LLC,
("PNIR"), a joint venture incorporated in Delaware, and entered into a Collaboration Agreement and Operating Agreement to develop and commercialize products for the treatment of peripheral nerve
injury. Expenditures by either party to the joint venture have not been material to date. (See Note 9.)

Prior
to the formation of the joint venture, in November 2007, the Company made an investment of $2.5 million for the purchase of approximately 5.4 million shares of common
stock of Cyberkinetics, representing approximately 13% of Cyberkinetics' issued and outstanding shares at the time of the investment, at a price of $0.46 per share. The Company also received a warrant
to purchase up to approximately 2.7 million shares of Cyberkinetics common stock. (See Note 7.)

On
December 26, 2007, the Company acquired substantially all of the assets of EyeTel Imaging, Inc. ("EyeTel") for an aggregate purchase price of 1,050,297 shares of the
Company's common stock valued at $9.8 million, $175,000 in cash, and $150,000 in acquisition costs for total consideration of $10.1 million. The Company also assumed certain specified
liabilities totaling $804,900. EyeTel was engaged in the design, development, and commercialization of proprietary medical devices, including the DigiScope. The Company had previously entered into an
exclusive licensing agreement with EyeTel pursuant to which the Company had sales and marketing rights to the DigiScope in the primary diabetes care physician market. On September 30, 2008, the
Company approved a plan for the closure of its facility in Columbia, Maryland and discontinuance of sales and support of DigiScopes and DigiScope related services, effective November 1, 2008.
The Company plans to close the Maryland facility by the end of the fourth quarter of 2008. (See Note 13.) The Company will report the results of the DigiScope business as Discontinued
Operations upon cessation.

The
Company expects to continue to incur net losses and negative cash flows from operations for the foreseeable future. Based upon its current plans, the Company believes that its
existing capital resources, including cash and cash equivalents, as of September 30, 2008 are sufficient to finance its ongoing operations into 2010, including the anticipated operating
expenses and capital expenditures described above. However, the Company is currently facing significant challenges and uncertainties and, as a result, its available capital resources may be consumed
more rapidly than currently expected due to (a) changes in its estimated future revenues; (b) changes the Company makes to its ongoing operating expenses; (c) future changes in
the Company's business strategy; (d) decisions the Company makes

5

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

1. Business and Basis of Presentation (Continued)

regarding
the size of its sales force and the magnitude of its sales and marketing programs; (e) research and development spending plans; (f) the outcome of the DOJ investigation that
the Company is currently subject to; and (g) other items affecting the Company's level of expenditures and its use of existing cash and cash equivalents. Accordingly, the Company may need to
raise additional funds to support its operating and capital needs. Without additional funds, the Company may be forced to delay, scale back or eliminate some of its sales and marketing efforts,
research and development activities or other operations and potentially delay its product development efforts. The Company may attempt to obtain additional funding through public or private financing,
collaborative arrangements with strategic partners or through additional credit lines or other debt financing sources to increase the funds available to fund its operations. However, there are no
assurances that the Company will be able to secure such financing on favorable terms, if at all.

On
October 25, 2008 the American Medical Association ("AMA") CPT Editorial Panel ("CPT Panel") considered nerve testing as an agenda item. The CPT Panel voted on whether to
create a new Category I CPT code for nerve conduction studies performed with pre-configured electrode arrays, such
as are utilized with the NeuroMetrix NC-stat System. Following its procedures, the CPT Panel will release the outcome of the vote when the minutes of the meeting are finalized and approved.

The
accompanying unaudited consolidated balance sheet as of September 30, 2008, unaudited statements of operations for the three and nine month periods ended September 30,
2008 (consolidated) and 2007 and the unaudited statements of cash flows for the nine month periods ended September 30, 2008 (consolidated) and 2007 have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair statement of the results of operations have
been included. Operating results for the three and nine month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2008 or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year ended December 31, 2007 included in
the Company's Annual Report on Form 10-K (File No. 000-50856). The accompanying balance sheet as of December 31, 2007 has been derived from audited
financial statements prepared at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Revenue

Medical equipment revenues, (formerly referred to as diagnostic device revenues), consist of sales of NC-stat devices and
NC-stat docking stations and the ADVANCE device and related modules.

Consumables
revenues, (formerly referred to as biosensor revenues), consist of sales of nerve specific electrodes.

Other
revenues currently consist entirely of revenues relating to the DigiScope.

6

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

1. Business and Basis of Presentation (Continued)

Principles of Consolidation

The consolidated financial statements as of and for the three and nine months ended September 30, 2008 reflect the Company's
financial statements and those of PNIR, a joint venture with Cyberkinetics. In accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 46, Consolidation of Variable Interest Entities (revised
December 2003)an interpretation of ARB No. 51, ("FIN 46(R)"), the
Company consolidates variable interest entities in which the Company is the primary beneficiary. For such consolidated entities in which the Company owns less than a 100% interest, the Company records
minority interest in its consolidated statements of operations for the ownership interest of the minority owner. All material intercompany balances and transactions have been eliminated in
consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In May 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 162, "The
Hierarchy of Generally Accepted Accounting Principles"("SFAS No. 162"). SFAS No. 162 transfers the hierarchy of generally accepted accounting principals ("GAAP")
from the auditing literature to the accounting standards and identifies a consistent hierarchy for selecting accounting principles to be used in applying U.S. GAAP. SFAS No. 162 is
effective 60 days following the SEC's approval of PCAOB Auditing Standard No. 6, "Evaluating Consistency of Financial Statements"("AS/6"). The company does not expect the adoption of SFAS No. 162 to have any effect on its results of operations or cash flows.

In
April 2008, the FASB issued Staff Position Statement of Financial Accounting Standards ("FSP SFAS") No. 142-3, "Determination of the
Useful Life of Intangible Assets"("FSP SFAS No. 142-3"). FSP SFAS No. 142-3 amends SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No. 142") to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure
the fair value of the asset under FASB SFAS No. 141, "Business Combinations"("SFAS No. 141"), and other U.S. GAAP.
FSP SFAS No. 142-3 is effective for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of a recognized intangible
asset is to be applied prospectively for intangibles acquired after the adoption date. Certain disclosure requirements will impact existing intangibles. The Company is currently evaluating the impact
of the adoption of FSP SFAS No. 142-3.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS
No. 160"). SFAS No. 160 requires that noncontrolling interests be reported as stockholders equity, a change that will affect financial statement presentation of minority interests in its
consolidated subsidiaries. SFAS No. 160 also establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary as long as that ownership change does not
result in deconsolidation. SFAS No. 160 is required to be applied prospectively in 2009, except for the presentation and disclosure requirements which are to be applied retrospectively. SFAS
No. 160 is

7

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

1. Business and Basis of Presentation (Continued)

effective
for fiscal years beginning after December 15, 2008. Except for certain reclassifications required upon adoption of SFAS No. 160 and subject to change in ownership of PNIR, the
joint venture, if any, the Company does not expect the adoption of SFAS No. 160 to have a material impact to its financial position, results of operations or cash flows.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 does
not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company did not elect to measure at fair value any additional assets or liabilities that are not already measured at fair value under existing standards. The adoption of
SFAS No. 159 did not have a material impact on its financial position, results of operations or cash flows.

In
September 2006, the FASB issued SFAS No. 157,"Fair Value Measurements"("SFAS No. 157"). SFAS No. 157 defines
fair value in numerous accounting pronouncements, establishes a framework for measuring fair value in GAAP and expands disclosures related to the use of fair value measures in financial statements.
SFAS No. 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. SFAS No. 157 emphasizes that fair value is a
market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS No. 157
establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity's own fair value assumptions as the lowest level. SFAS No. 157 is effective
for assets and liabilities as of January 1, 2008. In February 2008, the FASB issued FASB Statement of Position, ("FSP") No. 157-2 "Partial Deferral of
the Effective Date of Statement 157," ("FSP No. 157-2"), which delays the effective date of SFAS No. 157 for all non-financial assets and
non-financial liabilities, except those that are
recognized or disclosed at fair value in the financials statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The adoption of SFAS
No. 157 did not have a material effect on the Company's financial position, results of operations or its cash flows. (See Note 10.)

2. Comprehensive Loss

SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. In November 2007, the Company made an investment of $2.5 million in shares and warrants for Cyberkinetics common stock and is
accounting for this investment as an available-for-sale security under the provisions of SFAS No. 115,"Accounting for Certain Investments in
Debt and Equity Securities". At December 31, 2007, the Company recorded $1.4 million as a temporary impairment within other comprehensive income. For the three
and nine months ended September 30, 2008, the Company reassessed its investment in Cyberkinetics and based on the outlook for Cyberkinetics and the period of the time that the common stock of
Cyberkinetics has traded below the price paid by the

8

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

2. Comprehensive Loss (Continued)

Company
for its investment, has recognized losses of $169,289 and $2.2 million, respectively, due to an impairment in the value of the investment that the Company determined was
other-than-temporary.

Three Months Ended

Nine Months EndedSeptember 30,
2008

September 30,
2007

September 30,
2008

September 30,
2007(Consolidated)



(Consolidated)Comprehensive loss: Revenues:Net loss

$
(7,852,147
)
$
(3,570,92591
)
$
(23,587,602
)
$
(6,239,198
)Other comprehensive income:Reclassification adjustment for recognized loss included in net earnings








1,441,745


Other comprehensive income








1,441,745


Comprehensive loss

$
(7,852,147
)
$
(3,570,925
)
$
(22,145,857
)
$
(6,239,198
)


The
Company may be required to record future losses on its Cyberkinetics investment if there is not an improvement in the Cyberkinetics outlook or if their common stock price declines
further. At September 30, 2008, the fair value of the Company's investment in Cyberkinetics was $273,546.

3. Net Loss Per Common Share

The Company accounts for and discloses net loss per common share in accordance with SFAS No. 128, "Earnings Per Share". Basic net
loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing net loss by the weighted
average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options (using the
treasury stock method.)

The
following potentially dilutive common shares were excluded from the calculation of diluted net loss per common share because their effect was antidilutive for each of the periods
presented:

Three Months Ended

Nine Months EndedSeptember 30,
2008

September 30,
2007

September 30,
2008

September 30,
2007Options outstanding


2,260,590


1,750,266


2,260,590


1,750,266


4. Inventories

Inventories consist of the following:

September 30,
2008

December 31,
2007Purchased components

$
1,689,273

$
1,216,758Finished goods


4,621,932


4,137,580$
6,311,205

$
5,354,338


9

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

5. Acquisition

On December 26, 2007, the Company acquired substantially all of the assets of EyeTel for an aggregate purchase price of 1,050,297 shares of the Company's common stock valued at
$9.8 million, $175,000 in cash, and $150,000 in acquisition costs for a total consideration of $10.1 million. The Company also assumed certain specified liabilities totaling $804,900.
EyeTel was engaged in the design, development, and commercialization of proprietary medical devices, including the DigiScope, a device that helps physicians detect eye disorders such as diabetic
retinopathy, the leading cause of blindness in patients with diabetes. The Company had previously entered into an exclusive licensing agreement with EyeTel pursuant to which the Company had sales and
marketing rights to the DigiScope in the primary diabetes care physician market. On September 30, 2008, the Company approved a plan for the closure of its facility in Columbia, Maryland and
discontinuance of sales and support of DigiScopes and DigiScope related services, effective November 1, 2008. The Company plans to close the Maryland facility by the end of the fourth quarter
of 2008. (See Note 13.) The Company will report the results of the DigiScope business as Discontinued Operations upon cessation.

Pro Forma Financial Summary (Unaudited)

The following pro forma financial summary is presented as if the acquisition of EyeTel was completed as of the beginning of each period
presented. The pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on that date, or of the future operations
of the combined entities.

Pro Forma ResultsThree Months Ended
September 30, 2007

Nine Months Ended
September 30, 2007Total revenues

$
11,327,235

$
34,695,207Net loss

$
(5,554,719
)
$
(12,401,328
)Net loss per common share (basic and diluted):

$
(0.41
)
$
(0.91
)Weighted average shares used to compute net loss per common share (basic and diluted):


13,674,762


13,660,058


6. Goodwill and Intangible Assets

Goodwill

As a result of the acquisition of substantially all of the assets of EyeTel on December 26, 2007, the Company recorded
approximately $5.8 million of goodwill on its balance sheet at December 31, 2007. In accordance with the provisions of SFAS No. 142, the Company is required to assess the
realizability of goodwill annually, and whenever events or changes in circumstances suggest that the carrying amount may not be recoverable. The operations of EyeTel were incorporated into the
Company's one segment and the Company determined that it is comprised of a single reporting unit for goodwill impairment testing. Subsequent to the AMA CPT Panel meeting in February 2008, the
Company's common stock price declined significantly such that as of March 31, 2008, the Company's publicly traded market value was below its net book value. Based on this, the Company
determined that an interim goodwill impairment test was required. As the net book value of the Company's assets

10

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

6. Goodwill and Intangible Assets (Continued)

exceeded
the enterprise value, the Company performed step two of its SFAS No. 142 impairment test in which it assessed the fair value of all recorded and unrecorded tangible and intangible
assets and liabilities, including its recently acquired EyeTel and PNIR intangible assets. The Company determined that no assets were impaired and determined that there was no residual value of
goodwill. Accordingly, the Company recorded a charge of $5.8 million to write off the goodwill balance during the three months ended March 31, 2008.

Intangible Assets

Intangible assets at September 30, 2008 and December 31, 2007 were $1.8 million and $2.8 million,
respectively. As of September 30, 2008, intangible assets consisted of $2.1 million of gross intangible assets representing the value of the contribution of technology and intellectual
property by Cyberkinetics upon the formation of PNIR. (See Note 1.) As a result of the acquisition of substantially all of the assets of EyeTel on December 26, 2007, the Company recorded
$2.8 million of gross intangibles assets representing the fair value of technology and intellectual property. On September 30, 2008, the Company approved a plan for the closure of its
facility in Columbia, Maryland and discontinuance of sales and support of DigiScopes and DigiScope related services, effective November 1, 2008. The Company plans to close the Maryland facility
by the end of the fourth quarter of 2008. As a result of the discontinuance of the DigiScope business operation, the Company recorded an impairment charge of $2.4 million on the remaining
balance of intangible assets related to DigiScope during the three months ended September 30, 2008. (See Note 13.)

Intangible
assets are comprised of:

As of September 30, 2008

As of December 31, 2007Gross
Intangible
Asset

Accumulated
Amortization

Asset
Impairment

Net
Intangible
Asset

Gross
Intangible
Asset

Accumulated
Amortization

Net Intangible AssetTechnology

$
2,800,000

$
(420,000
)
$
(2,380,000
)
$


$
2,800,000

$


$
2,800,000Contribution of technology


2,100,000


(262,500
)




1,837,500








Total

$
4,900,000

$
(682,500
)
$
(2,380,000
)
$
1,837,500

$
2,800,000

$


$
2,800,000


Accumulated
amortization of intangible assets at September 30, 2008 and December 31, 2007 was $262,500 and $0, respectively. Amortization expense for the three and nine
months ended September 30,
2008 was $245,000 and $682,500, respectively. There was no amortization expense for the same periods in 2007.

The
Company amortizes its intangible assets using the straight-line method over their estimated economic lives, which is estimated to be five years.

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

6. Goodwill and Intangible Assets (Continued)

The
estimated future amortization expense for intangible assets for the remainder of 2008, the four succeeding fiscal years and thereafter is as follows:

Estimated
Amortization
Expense2008 (remaining three months)

$
105,0002009


420,0002010


420,0002011


420,0002012


420,000Thereafter


52,500


The
recoverability of the Company's remaining intangible asset is dependent upon its ability to successfully develop marketable products from PNIR, its joint venture with Cyberkinetics.
If there are events or conditions that suggest the Company's ability to recover the carrying value of these or other long lived assets is in doubt, the Company will be required to perform future
impairment tests of long lived assets under SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". Impairment
charges, if any, could be material to the Company's results of operations and financial condition.

7. Long-Term Available-For-Sale Investment

In November 2007, the Company made an investment of $2.5 million for the purchase of approximately 5.4 million shares of common stock of Cyberkinetics, representing
approximately 13% of Cyberkinetics' issued and outstanding shares at the time of the investment, at a price of $0.46 per share. The Company also received a warrant to purchase up to approximately
2.7 million shares of Cyberkinetics common stock. The warrant is exercisable at $0.46 per share and has a term of five years, but will be required to be exercised if Cyberkinetics receives FDA
approval of an Humanitarian Device Exemption ("HDE") filing for the Andara Oscillating Field Stimulator ("Andara OFS") device for acute spinal cord injuries by
December 31, 2008.

The
Company accounts for the investment in Cyberkinetics as an available-for-sale investment and reviews the carrying value of this investment quarterly to
determine whether an other-than-temporary decline in market value exists. The Company marked this investment to market for the three and nine months ended September 30,
2008 and recognized losses of $169,289 and $2.2 million, respectively, in the consolidated statements of operations because the decline in the value of this investment was considered
other-than-temporary. The Company considered factors such as the length of time the value of the investment has been below its original purchase price, the financial condition
of the investee and near-term prospects for the investee's recovery to original purchase price and the Company's intent with regard to the underlying investment. The Company may record
future losses on its Cyberkinetics investment if there is not an improvement in the Cyberkinetics outlook or if the market value of their common stock declines further.

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

8. Other Balance Sheet Items

Other accrued expenses consist of the following:

September 30,
2008

December 31,
2007Professional services

$
715,762

$
706,952Sales taxes


407,746


489,555Other


1,250,161


1,112,056$
2,373,669

$
2,308,563


Product
Warranty Costs

The
Company accrues estimated product warranty costs at the time of sale which are included in cost of sales in the statements of operations. The amount of the
accrued warranty liability is based on historical information such as past experience, product failure rates, number of units repaired and estimated cost of material and labor. The liability for
product warranty costs is included in accrued expenses in the balance sheet.

The
following is a rollforward of the Company's accrued warranty liability for the three and nine month periods ended September 30, 2008 and 2007:

Three Months Ended

Nine Months EndedSeptember 30,
2008

September 30,
2007

September 30,
2008

September 30,
2007Balance at beginning of period

$
231,292

$
280,203

$
251,948

$
231,725Accrual for warranties


117,837


175,427


451,097


572,403Settlements made


(150,867
)

(200,365
)

(504,783
)

(548,863
)Balance at end of period

$
198,262

$
255,265

$
198,262

$
255,265


9. Joint Venture with Cyberkinetics

In February 2008, the Company and Cyberkinetics formed PNIR and entered into a Collaboration Agreement and Operating Agreement to develop and commercialize products for the treatment of
peripheral nerve injury. The joint venture is initially 50% owned by the Company and 50% owned by Cyberkinetics. Under the terms of the joint venture, the Company has agreed to fund the initial
$2.0 million in product development costs and the Company and Cyberkinetics will share equally in all costs in excess of the initial $2.0 million. Cyberkinetics has contributed
technology,
know-how and intellectual property, primarily relating to their Andara OFS technology, to the joint venture.

The
Company obtained sales and marketing rights and Cyberkinetics obtained commercial manufacturing rights to any products commercialized under the joint venture. Each party will charge
the joint venture at cost for all expenses incurred in connection with their respective commercialization activities. Profits and losses realized from the joint venture will be split equally between
the Company and Cyberkinetics based on the initial ownership percentage. Expenditures by either party to the joint venture have not been material to date.

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

9. Joint Venture with Cyberkinetics (Continued)

The
joint venture is considered to be a variable interest entity under the provisions of FIN 46(R). The Company has determined that it is the primary beneficiary based on a review
of the relative economic risks of the two parties to the joint venture. As a result, the Company has consolidated the joint venture and recorded the $2.1 million contribution of technology and
intellectual property by Cyberkinetics to intangible assets and a minority interest of $2.1 million at the formation date of the joint venture. The fair value of the intangible assets was
determined primarily by an assessment made by the Company's management applying the income approach and a relief from royalty approach.

Cyberkinetics,
in its Form 8-K filed on November 3, 2008, disclosed that its existing cash and cash equivalents are only sufficient to meet their projected
operating requirements for approximately 30 days. Cyberkinetics stated that this disclosure was based on their most recent informal communication with the FDA that indicates that they do not
anticipate receiving approval of its HDE filing for the Andara OFS device for acute spinal cord injuries before the end of 2008, if at all, and on their unsuccessful attempt to raise additional
capital. If Cyberkinetics is required to cease operations or seek bankruptcy protection, or if other adverse developments relating to its business or financial condition occur, the value of the
Company's investment in Cyberkinetics could be adversely affected and its joint venture with Cyberkinetics would dissolve.

10. Commitments and Contingencies

Cyberkinetics

In connection with the Company's investment in Cyberkinetics, the Company received a warrant to purchase up to approximately
2.7 million shares of Cyberkinetics common stock. The warrant, exercisable at $0.46 per share, or approximately $1.25 million, has a term of five years, and is required to be exercised
if Cyberkinetics receives FDA approval of an HDE filing for the Andara OFS device for acute spinal cord injuries by December 31, 2008.

Under
the terms of the PNIR joint venture, the Company has agreed to fund the initial $2.0 million in product development costs and has agreed to share equally in all costs in
excess of the initial $2.0 million. As of September 30, 2008, there have not been material expenses or cash funding in connection with PNIR other than amortization of the intangible
asset.

Operating Leases

In February 2008, the Company amended the Lease Agreement dated October 18, 2000 between Fourth Avenue LLC and the
Company for office and engineering laboratory space. The amendment extends the term of the lease, previously scheduled to expire on March 31, 2009, through March 31, 2013. Base rent for
the period April 2009 through March 2013 was reduced from $930,000 annually to a range of $675,000 to $765,000 annually. This amendment also provides the Company reimbursement from Fourth
Avenue LLC for certain improvements and renovations to the facility up to a maximum of $240,000.

In
connection with the amendment of the lease, the amount of the irrevocable letter of credit required to be maintained by the Company for the benefit of the lessor was reduced from
$1,430,000 to $400,000. The letter of credit must be secured by a certificate of deposit in an amount equal to 102% of the letter of credit as security.

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

10. Commitments and Contingencies (Continued)

As
a result of the acquisition of substantially all of the assets of EyeTel on December 26, 2007, the Company assumed a Lease Agreement between Copt Montpelier, LLC and
EyeTel for office space in Columbia, Maryland. The lease is scheduled to expire on October 31, 2009.

Future
minimum lease payments under the Company's two noncancelable operating leases as of September 30, 2008 are as follows:

2008 (remaining three months)

$
296,5222009


952,1552010


697,5002011


727,5002012


757,500Thereafter


191,250Total minimum lease payments

$
3,622,427


11. Fair Value Measurements

The Company adopted SFAS No. 157 effective January 1, 2008 for its financial assets and liabilities that are re-measured and reported at fair value at each
reporting period. In accordance with the provisions of FSP No. 157-2, the Company elected to defer implementation of SFAS No. 157 as it related to its
non-financial assets and liabilities that are recognized and disclosed at fair value in the financial statements on a non-recurring basis until January 1, 2009. The
Company is evaluating the impact, if any, that SFAS No. 157 will have on its non-financial assets and liabilities.

The
adoption of SFAS No. 157 with respect to financial assets and liabilities and non-financial assets and liabilities that are re-measured and reported at
fair value at least annually was not material to the Company's financial position, results of operations or its cash flows for the period ended September 30, 2008. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in applying generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 identifies
two kinds of inputs that are used to determine the fair value of assets and liabilities: observable and unobservable. Observable inputs are based on market data or independent sources while
unobservable inputs are based on the company's own market assumptions. Once inputs have been characterized, SFAS No. 157 requires companies to prioritize the inputs used to measure fair value
into one of three broad levels. Fair values determined by Level 1 inputs utilized quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values identified by
Level 2 inputs utilize observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values identified by Level 3 inputs are
unobservable data points and are used to measure fair value to the extent that observable inputs are not available. Unobservable inputs reflect the Company's own assumptions about the assumptions that
market participants would use at pricing the asset or liability.

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

11. Fair Value Measurements (Continued)

The
following table provides fair value measurement information for the Company's major categories of financial assets and liabilities measured on a recurring basis:

Fair Value Measurements at Reporting Date UsingSeptember 30,
2008

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Assets:Cash equivalents

$
19,910,057

$
19,910,057

$


$
Long-term available-for-sale investment


273,546


273,546





Total

$
20,183,603

$
20,183,603

$


$



As
of September 30, 2008, the Company's long-term investment consisted of an investment in Cyberkinetics, a publicly traded security whose fair value is readily
determinable.

12. Legal Matters

In March and April 2008, a series of putative securities class action and shareholder derivative lawsuits were filed against the Company and certain of its current and former executive
officers and directors alleging, among other things, that the Company violated the federal securities laws and other laws by allegedly making material false and misleading statements for various
periods from August 2004 through the dates the lawsuits were filed and by allegedly failing to disclose material information to the investing public. The Company believes that the claims in the cases
are without merit and will vigorously contest these lawsuits.

In
the second quarter of 2006, the Company received a subpoena from the Office of Inspector General ("OIG") of the Department of Health and Human Services requesting documents in
connection with an investigation of potential violations of the federal anti-kickback statute and False Claims Act. In addition, on June 21, 2007, the Company received a subpoena
from the U.S. Attorney's Office for the District of Massachusetts requesting documents in connection with an investigation by the United States Department of Justice ("DOJ"). The DOJ is investigating
various aspects of the Company's practices relating to the NC-stat System, including sales and marketing practices. The Company is cooperating with both investigations. During 2007, the
Company formed a Special Committee of its Board of Directors to provide oversight of an ongoing independent review of the Company's sales and marketing practices and of the Company's continuing
cooperation with the DOJ and OIG investigations. The Company cannot predict the ultimate outcome of these investigations. The Company is unable to determine when these matters will be resolved or
whether any additional areas of inquiry will be opened, or any outcome of this matter and accordingly these financial statements do not include any amounts related to the outcome of this matter. Any
resulting fines, penalties, additional government oversight or program exclusions, could have a material adverse effect on the Company's financial condition, results of operations, and cash flows.

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

13. Restructuring Related Activities

Direct Sales Force Reduction

In May 2008, the Company implemented a plan to reduce the size of its direct sales force and to take certain other actions to reduce
its operating expenses, largely as a result of a decline in revenues. These actions affected 24 positions, substantially all of which were in sales. The total cost associated with these actions,
including severance and benefit costs, was $318,981, all of which has been paid.

Effective
May 31, 2008, the Chief Operating Officer of the Company entered into a separation agreement with the Company. Under the terms of the separation agreement, he will
receive continuation of his salary, car allowance and health benefits for nine months following the effectiveness of his resignation, equal to $217,970, which the Company recorded during the quarter
ended March 31, 2008 under the provisions of SFAS No. 112"Employers Accounting for Postemployment Benefits an amendment of FAS Statements No. 5 and
43."In addition, he received a lump sum payment equal to three months salary and car allowance totaling $69,810, which the Company recorded during the quarter ended
June 30, 2008 under the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."

DigiScope

On September 30, 2008, the Company approved a plan for the closure of its facility in Columbia, Maryland and discontinuance of
sales and support of DigiScopes and DigiScope
related services effective November 1, 2008. The Company plans to close the Maryland facility by the end of the fourth quarter of 2008. This decision was made as part of the Company's ongoing
focus on cost-efficiencies in all areas of its business, and its refocused efforts towards its core business, which is the sale of the ADVANCE System and support for its existing
NC-stat System customers. The Company recorded a $5.0 million charge relating to this closure in the third quarter of 2008, of which approximately $2.4 million related to the
impairment of intangible assets, approximately $2.3 million related to the impairment of fixed assets, $125,917 related to other asset write-downs and $111,083 related to other exit costs. All
remaining charges are expected to be less than $200,000 and to be substantially incurred over the subsequent twelve month period. On November 7, 2008, the Company signed an Asset Purchase
Agreement with Advanced Diagnostics, LLC relating to the sale of substantially all of the EyeTel/DigiScope assets of the Company. Advanced Diagnostics, LLC will assume certain identified
commitments of approximately $400,000 and make a cash payment of $50,000. The CEO and President of Advanced Diagnostics, LLC is a former executive of NeuroMetrix, Inc. who continues to
receive payments under a previous separation agreement with the Company.

The
following table provides a rollforward of the current liability balance for the actions taken, substantially all of which was recorded as sales and marketing expense on the Company's
Consolidated

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Table of Contents

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements (Continued)

13. Restructuring Related Activities (Continued)

Statement
of Operations, the balance of which will be paid out in semi-monthly installments through February 28, 2009.

Three Months Ended
September 30, 2008

Nine Months Ended
September 30, 2008Balance at beginning of period

$
229,621

$
Accrual for severance(1)





606,761Severance payments made(1)


(108,526
)

(485,666
)Other exit costs(2)


111,083


111,083Balance at end of period

$
232,178

$
232,178






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Table of Contents

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

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 section of this Quarterly Report on Form 10-Q titled "Cautionary Note Regarding Forward-Looking Statements." Unless the content otherwise requires,
all references to "we", "us", "the Company" or "NeuroMetrix" in this Quarterly Report on Form 10-Q refers to NeuroMetrix, Inc. and its consolidated entities unless the
content requires otherwise.

Overview

NeuroMetrix was founded in June 1996. We design, develop and market proprietary medical devices that aid physicians in the assessment
and treatment of diseases and injuries of peripheral nerves and that provide regional anesthesia and pain control. Our focus to date has been on products that help physicians with the assessment of
neuropathies and neurovascular conditions. We currently market two products that have been cleared by the United States Food and Drug Administration, or FDA, the ADVANCE System and the
NC-stat System for the assessment of neuropathies. We initiated our sales and marketing efforts in May 2008 for the ADVANCE System, a traditional nerve conduction and needle
electromyography, or NCS/nEMG, system for the assessment of neuropathies, which received 510(k) clearance from the FDA in April 2008. We had also marketed a device for the evaluation of retinal
disorders, however, effective November 1, 2008, we discontinued the sales and marketing of this device.

We
believe that our neuropathy assessment systems can improve the quality and efficiency of patient care by offering physicians the ability to objectively assess patients with
neuropathies, resulting in earlier and more accurate detection, and, potentially improved clinical outcomes. We are presently focusing our medical equipment sales efforts primarily on the ADVANCE
System and we are marketing this system primarily to specialist physicians with peripheral nerve expertise, including neurologists, physical medicine and rehabilitation physicians, neurosurgeons,
orthopedic and hand surgeons and pain medicine physicians. The ADVANCE System is a system for the performance of traditional nerve conduction studies and needle electromyography procedures. The
ADVANCE System is comprised of: (1) single use surface electrodes and needles, (2) the ADVANCE device and related modules, and (3) a communication hub that enables the physician's
office to network their device to our onCall Information System for data archiving, report generation and other network services.

The
NC-stat System, our first product for the assessment of neuropathies, has been sold historically to a broad group of physicians, including primary care physicians and
specialists since its initial market launch in May 1999 and is used in over 5,300 physician's offices and clinics in the United States. Over 1.2 million patients have had nerve conduction tests
performed using the NC-stat System. Substantially all of our revenues to date have been derived from sales of the NC-stat System. Due to reimbursement uncertainty described in
further detail below, we are presently focusing our medical equipment sales efforts primarily on sales of the ADVANCE System to specialist physicians with peripheral nerve expertise. We continue to
sell electrodes to and support our NC-stat customer base, work with our existing NC-stat customers in specialty practices to convert them to the ADVANCE System and provide
solutions that enable our customers to provide this important diagnostic service to their patients.

Corporate Collaborations

In November 2007, we made an investment of $2.5 million for the purchase of approximately 5.4 million shares of common
stock of Cyberkinetics Neurotechnology Systems, Inc., or Cyberkinetics.

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Table of Contents

We
also received a warrant to purchase up to approximately 2.7 million shares of Cyberkinetics common stock, exercisable at a price of $0.46 per share. The warrant will be required to be
exercised if Cyberkinetics receives FDA approval of a Humanitarian Device Exemption, or HDE, filing for the Andara Oscillating Field Stimulator, or Andara OFS, device for
acute spinal cord injuries by December 31, 2008. In connection with the investment in Cyberkinetics, we also received certain rights, including a right of first negotiation for the acquisition
of Cyberkinetics and a right of first negotiation for the commercialization of the Andara OFS device for the treatment of acute spinal cord injuries. This right of first negotiation for the
acquisition of Cyberkinetics has expired.

In
February 2008, we entered into a Collaboration Agreement and Operating Agreement with Cyberkinetics to develop and commercialize products for the treatment of peripheral nerve injury
and formed PNIR (Peripheral Nerve Injury Repair) LLC, or PNIR, a joint venture with 50% ownership held by us and 50% ownership held by Cyberkinetics. Expenditures by either party to the joint
venture have not been material to date.

Business Developments

Historically, we have derived substantially all of our revenues from the sales of the NC-stat System, including the sale of
medical equipment and consumables, which we also refer to as nerve specific electrodes. During the second quarter of 2008, we recognized our initial revenues from sales of the ADVANCE System to
specialist physicians with peripheral nerve expertise. We also derived revenues from sales of the DigiScope to physician groups and optometry clinics. However, on September 30, 2008, we
approved a plan for the closure of our facility in Columbia, Maryland and discontinuance of sales and support of DigiScopes and DigiScope related services, effective November 1, 2008. We plan
to close the Maryland facility by the end of the fourth quarter of 2008.

Our
revenues declined to $7.3 million for the three months ended September 30, 2008, compared to $11.3 million for the same period in 2007. Additionally, we incurred
a net loss of $7.9 million for the three months ended September 30, 2008, compared to a net loss of $3.6 million for the same period in
2007. We believe that the decline in our revenues has been caused primarily by the current environment relating to the reimbursement by third-party payers of nerve conduction studies performed using
the NC-stat System and we expect that our revenues from sales of the NC-stat System may continue to be adversely affected by the uncertainty regarding reimbursement.

Significant
developments impacting and relating to our financial condition and results of operations as of and for the three and nine months ended September 30, 2008 and expected
to impact future periods, include:



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Reimbursement
from third-party payers is an important element of success for medical device companies. As our presence in the market over the last several years has expanded with the use
of the NC-stat System, physicians using NC-stat have experienced and may continue to experience an increased focus from third-party payers and governmental agencies regarding
the reimbursement of nerve conduction studies performed using this device and an increased focus from these organizations regarding the professional requirements for performing nerve conduction
studies in general. A number of third-party payers, including commercial payers, have taken and may continue to take the position of not reimbursing our customers for procedures performed using the
NC-stat System.

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Table of Contents

During
the second half of 2006 and in 2007, several local Medicare carriers issued draft local coverage determinations, or LCDs, final LCDs or coding articles particularly addressing
coverage and reimbursement policies under Medicare for nerve conduction studies performed using the NC-stat System. Several of these carriers indicated that they will not reimburse
physicians under Medicare for nerve conduction studies performed using the NC-stat System under the three existing Current Procedural Terminology, or CPT, codes for conventional nerve
conduction studies (95900, 95903 and 95904), which provide for levels of reimbursement fixed by the Center for Medicaid and Medicare Services but rather that physicians must submit claims for
reimbursement for these procedures under a miscellaneous CPT code (95999), in which case the local carriers may determine the level of reimbursement to be paid, if any. Currently, there are four local
Medicare carriers with final LCDs which address coverage and reimbursement policies under Medicare for nerve conduction studies performed using the NC-stat System. In certain regions
impacted by these reimbursement decisions, our customers have experienced lower levels of reimbursement and higher levels of claims denials. If physicians do not receive adequate reimbursement under
the miscellaneous CPT code from those local carriers, our existing customers may continue to limit or curtail their use of the NC-stat System and we may be unable to obtain new customers,
both of which could materially and adversely impact our revenues and profitability.

The
AMA formed a work group in early 2007 to examine the reimbursement coding of nerve conduction studies performed using nerve conduction equipment, including the NC-stat
System. The findings of this work group were presented to the AMA CPT Panel at a meeting in February 2008. During the CPT Panel meeting, several proposals for new Category I CPT codes, which
generally are included in the Medicare physician fee schedule and are assigned specified reimbursement values, were presented by the chairpersons of the work group and were supported by several
physician societies. Although the AMA approved a Category III code describing nerve conduction studies performed with pre-configured electrodes at its February 2008 meeting, the AMA
did not publish any new Category III CPT codes for nerve conduction studies on July 1, 2008 when it published its list of new Category III CPT codes. On October 25, 2008
the AMA CPT Panel considered nerve testing as an agenda item. The CPT Panel voted on whether to create a new Category I CPT code for nerve conduction studies performed with
pre-configured electrode arrays, such as are utilized with the NC-stat System. Following its procedures, the CPT Panel will release the outcome of the vote when the minutes of
the meeting are finalized and approved.

The
LCDs and coding articles issued by local Medicare carriers have also addressed a number of other issues, including (1) the background and training of physicians supervising or
performing nerve conduction studies, (2) the level of training requirements for technicians performing a nerve conduction study, (3) whether nerve conduction tests should be required to
be performed concomitantly with a needle electromyography procedure and (4) whether the NC-stat System is comparable to conventional nerve conduction testing equipment. We do not
believe that these LCDs prohibit physicians from receiving reimbursement under Medicare for medically necessary nerve conduction studies performed using the NC-stat System. However, these
LCDs do appear to be targeted at limiting access to perform and/or reimbursement for nerve conduction studies. In certain cases, these LCDs are being interpreted or implemented in a manner that
impacts the ability of physicians to receive reimbursement under Medicare, including lower levels of reimbursement and an increase in the number of claims being denied, for nerve conduction studies
performed using the NC-stat System, which are having an adverse impact on our revenues.

Additionally,
a significant number of commercial payers, including the majority of regional Blue Cross Blue Shield carriers, and other major private payers, have adopted policies
indicating that they will not provide reimbursement for the use of the NC-stat System. These commercial payers have cited various reasons for their reimbursement policies, including, among
others, that the NC-stat System is experimental and investigational. We are in the process of communicating with these payers directly, through our customers or through our network of
reimbursement consultants, to attempt to address

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their
concerns. Third-party payers may also impose requirements on physicians to submit additional paperwork supporting the medical necessity of nerve conduction studies performed using the
NC-stat System. We believe these requirements are negatively impacting the use of the NC-stat System by existing customers and our sales to new customers, both of which are
having an adverse impact on our revenues.

Additional
third-party payers, including local Medicare carriers and commercial payers, could potentially take a position that could reduce or eliminate the reimbursement for nerve
conduction studies performed with the NC-stat System and could have the impact of deterring usage by our customers which could have an adverse impact on our revenues.

In
the second quarter of 2008, we received 510(k) clearance from the FDA for the marketing in the United States of the ADVANCE System, a system for the performance of traditional nerve
conduction studies and needle electromyography procedures. The ADVANCE System was cleared by the FDA with the primary predicate, or comparable, device being the Keypoint device originally manufactured
and marketed by Medtronic, Inc. to neurologists and physical medicine and rehabilitation physicians for the performance of nerve conduction studies and needle electromyography procedures. The
ADVANCE System is a traditional system that supports nerve conduction testing with any electrode methodology, real-time waveform review and cursor editing, needle electromyography
procedures and conventional reports with the results of the testing. We launched our sales and marketing efforts for the
ADVANCE System to specialists with peripheral nerve expertise such as neurologists, physical medicine and rehabilitation physicians, neurosurgeons, orthopedic and hand surgeons and pain medicine
physicians in May 2008. Our success in selling the ADVANCE System will be dependent, among other things, on our customers' receiving, and our potential customers' belief that they will receive,
sufficient reimbursement from third-party payers for performing procedures using the ADVANCE System. We do not believe that the final LCDs or policies adopted by major private payers impacting
reimbursement for procedures performed using the NC-stat System will apply to procedures performed by specialists with peripheral nerve expertise using the ADVANCE System. However, these
final LCDs and policies are subject to the interpretation of, and may be modified by, the applicable third-party payer, whose interpretations may differ from ours. Additionally, the outcome of the
ongoing process with the AMA CPT Panel regarding reimbursement coding of nerve conduction studies could impact future reimbursement of procedures performed using the ADVANCE System.

One
of the primary challenges we face in our business is successfully expanding the market for nerve conduction studies and needle electromyography procedures. A successful market
expansion will depend upon, in part, our targeting of specialist physicians with peripheral nerve expertise. Historically, our strategy had been to sell our neuropathy assessment systems through a
combination of independent sales agencies and a direct sales force of experienced sales representatives. Due to a significant decline in the percentage of new customers being sourced through our
independent sales agency network in 2007, we eliminated the independent sales agencies in the second half of 2007 and focused our selling efforts exclusively through our direct sales force. We believe
the decision to terminate the independent sales agency relationships has contributed to the decline in revenues and could potentially have an adverse impact on our revenues and our ability to secure
new customers in future periods as well.

We
reduced the size of our direct sales force in the second quarter of 2008 to approximately 30 regional sales managers from the previous level of approximately 50 regional sales
managers. We took this action to reduce our sales and marketing expenses as a result of the decline in revenues we have experienced and due to our expectation that there will be further declines in
revenues over the next several quarters. This action resulted in a charge for severance and benefit costs of $318,981 in the second quarter of 2008 and we expect that this action, coupled with other
cost reduction steps taken, will reduce our operating expenses by approximately $5.0 million on an annualized basis compared to operating expense levels prior to these actions being taken. Our
direct sales force is primarily focused

23

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Table of Contents

on
sales of our ADVANCE System to specialist physicians with peripheral nerve expertise and on sales of electrodes to, and account management of, our existing customer base.

Our
business is currently facing significant challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to
changes in our estimated future revenues, changes we make to our ongoing operating expenses, future changes in our business strategy, decisions we make regarding the size of our sales force and the
magnitude of our sales and marketing programs, research and development spending plans, the outcome of the DOJ investigation that we are currently subject to, and other items affecting our level of
expenditures and our use of existing cash and cash equivalents and short-term investments. Accordingly,
we may need to raise additional funds to support our operating and capital needs. Without additional funds, we may be forced to delay, scale back or eliminate some of our sales and marketing efforts,
research and development activities or other operations and potentially delay our product development efforts. We may attempt to obtain additional funding through public or private financing,
collaborative arrangements with strategic partners or through credit lines or other debt financing sources to increase the funds we have available to us to fund our operations. However, there are no
assurances that we will be able to secure such financing on favorable terms, if at all.

Disposition

On September 30, 2008, we approved a plan for the closure of our facility in Columbia, Maryland and discontinuance of sales and
support of DigiScopes and DigiScope related services, effective November 1, 2008. We plan to close the Maryland facility by the end of the fourth quarter of 2008. Previously, in December 2007,
we had acquired substantially all of the assets of EyeTel Imaging, Inc., or EyeTel, and their product, the DigiScope, a product used for the detection of eye disorders such as diabetic
retinopathy, an eye disease prevalent in patients with diabetes. The decision to shut down our DigiScope business was made as part of our ongoing focus on cost-efficiencies in all areas of
our business, and our refocused efforts towards our core business, which is the sale of the ADVANCE System and support for our existing NC-stat System customers. As a result of this
decision, we recorded a $5.0 million charge relating to this closure in the third quarter of 2008, of which approximately $2.4 million related to the impairment of intangible assets,
approximately $2.3 million relates to the impairment of fixed assets and $237,000 related to other asset write-downs and exit costs Any remaining charges are expected to be substantially
incurred over the subsequent twelve month period.

Business Focus

Our long-term financial objectives are to grow our business through the sale of proprietary medical equipment and to
achieve and sustain profitability. However, during 2008 our revenues are likely to continue to decline and we are likely to continue to incur losses as a result of the reimbursement and other issues
we are currently facing and there are no assurances that we will achieve these objectives over the longer term. We expect to focus our efforts for the balance of 2008 on (1) efforts to
stabilize third-party reimbursement for procedures performed with the NC-stat System, (2) sales of the NC-stat System, including sales of electrodes to, and
on-going account management of, our existing NC-stat System customer base, (3) sales of the ADVANCE System to specialist physicians with peripheral nerve expertise,
(4) seeking regulatory clearance from the FDA for portions of the onCall Information System, (5) cooperating with, and working to resolve, the government investigations of which we are
subject and (6) our ongoing research and development programs.

Our
launch of the ADVANCE System took place in May 2008 following 510(k) clearance by the FDA for marketing the ADVANCE System in the United States. In September 2008, we also received
510(k) clearance for our Universal Electrodes which are consumables designed to be used in conjunction with our ADVANCE System. During the fourth quarter of 2006, at the request of the FDA, we
submitted a 510(k) filing relating to the onCall Information System which is currently in use.

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Table of Contents

The
510(k) is still pending before the FDA. If 510(k) clearance for the portions of the onCall Information System that are under review is not obtained, it may require additional product development
and potential changes in the configuration of the NC-stat System and onCall Information System, and the status of our currently distributed products using the onCall Information System may
be uncertain. The portions of the onCall System under review through this 510(k) filing do not impact use of the ADVANCE System.

During
the remainder of 2008, we expect our research and development programs to (1) continue efforts to develop new consumables, (2) make improvements to and develop
accessories for our existing products, (3) continue to develop our system for regional anesthesia and pain control, for which we anticipate filing one or more 510(k) applications with the FDA
in the fourth quarter of 2008, and on a potential product for the treatment of peripheral nerve injury in collaboration with Cyberkinetics.

Results of Operations

The following table presents certain statement of operations information stated as a percentage of total revenues, of which certain
columnar subtotal amounts found in the table below may not sum due to rounding:

Three Months
Ended
September 30,

Nine Months
Ended
September 30,2008

2007

2008

2007Revenues:Medical equipment


5.7
%

8.2
%

6.8
%

9.9
%Consumables


91.5


89.4


89.5


88.1Other


2.8


2.4


3.7


2.0Total revenues


100.0


100.0


100.0


100.0Costs and expenses:Cost of revenues, excluding amortization


31.0


27.0


29.1


26.7Research and development


20.2


11.4


18.7


10.9Sales and marketing


37.2


53.5


49.6


52.3General and administrative


48.0


43.4


45.3


32.2Charge for impaired goodwill








23.5


Asset impairment and restructuring charge


68.1





19.9


Amortization of intangible assets


3.4





2.7


Total cost and expenses


208.0


135.4


188.9


122.1Loss from operations


(108.0
)

(35.4
)

(88.9
)

(22.1
)Loss on available-for-sale investment


(2.3
)




(9.0
)

Interest income


1.7


3.8


2.5


4.0Loss before minority interest


(108.6
)

(31.6
)

(95.4
)

(18.1
)Minority interest


0.7





0.5


Net loss


(107.9
)%

(31.6
)%

(94.8
)%

(18.1
)%


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Comparison of Three Months Ended September 30, 2008 and September 30, 2007

The following tables present a breakdown of our customers, consumables units used, revenues, costs and expenses and net loss, of which
certain columnar subtotal amounts found in the table below may not sum due to rounding:

12-Month
Period Ended
September 30,2008

2007

Change

% ChangeActive NC-stat and ADVANCE customers


5,329


5,523


(194
)

(3.5
)%




Three Months Ended
September 30,2008

2007

Change

% ChangeConsumables units used


194,400


257,900


(63,500
)

(24.6
)%




Three Months Ended
September 30,2008

2007

Change

% Change($ in thousands, except for
percentage data)Revenues:Medical equipment

$
416.8

$
925.3

$
(508.5
)

(55.0
)%Consumables


6,660.4


10,094.3


(3,433.9
)

(34.0
)Other


203.3


270.4


(67.1
)

(24.8
)Total revenues


7,280.6


11,290.0


(4,009.5
)

(35.5
)Costs and expenses:Cost of medical equipment revenues


258.0


206.9


51.0


24.7Cost of consumables revenues


1,824.8


2,638.4


(813.6
)

(30.8
)Cost of other revenues


177.0


202.7


(25.7
)

(12.7
)Research and development expenses


1,471.5


1,290.7


180.8


14.0Sales and marketing expenses


2,706.4


6,044.0


(3,337.6
)

(55.2
)General and administrative expenses


3,497.4


4,905.1


(1,407.8
)

28.7Asset impairment and restructuring charge


4,960.2





4,960.2


N/AAmortization of intangible assets


245.0





245.0


N/ATotal costs and expenses


15,140.2


15,287.9


(147.7
)

(1.0
)Loss from operations


(7,859.6
)

(3,997.9
)

(3,861.8
)

96.6Loss on available-for-sale investment


(169.3
)




(169.3
)

N/AInterest income


124.3


426.9


(302.7
)

(70.9
)Loss before minority interest


(7,904.6
)

(3,570.9
)

(4,333.7
)

121.4Minority interest


52.5





52.5


N/ANet loss

$
(7,852.1
)
$
(3,570.9
)
$
(4,281.2
)

119.9
%


Revenues:

Medical equipment revenues, (formerly referred to as diagnostic device revenues), consisting of the NC-stat devices,
NC-stat docking stations and ADVANCE devices and related modules, which we began to market and sell in May 2008, were $416,800 and $925,300 for the three months ended September 30,
2008 and 2007, respectively, a decrease of $508,500, or 55.0%. This decrease is primarily attributable to a lower number of NC-stat Systems sold and a decrease in the average selling price
of

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the
NC-stat system, which we believe resulted primarily from uncertainty and adverse developments relating to the reimbursement for procedures performed. Also contributing to this decline
was our decision to reduce our direct sales force by 40% in May 2008, and our decision to terminate our relationships with all independent sales agencies during the second half of 2007. Medical
equipment revenues accounted for 5.7% and 8.2% of our total revenues for the three months ended September 30, 2008 and 2007, respectively.

Consumables
revenue, (formerly referred to as biosensor revenues), consisting of revenue from sales of single use nerve specific electrodes which are used with our NC-stat
System and our ADVANCE System, was $6.7 million and $10.1 million for the three months ended September 30, 2008 and 2007, respectively, a decrease of $3.4 million, or
34.0%. This decrease is attributable to lower sales of consumables, which we believe resulted primarily from uncertainty and adverse developments relating to the reimbursement for procedures performed
with the NC-stat System. Consumables revenue accounted for 91.5% and 89.4% of our total revenues for the three months ended September 30, 2008 and 2007, respectively.

Our
customers used 194,400 nerve specific electrodes and 257,900 nerve specific electrodes in the three months ended September 30, 2008 and 2007, respectively, a decrease of
63,500 nerve specific electrodes, or 24.6%. This decrease in nerve specific electrodes usage is primarily the result of a decline in the average usage per customer and a decrease in our active
customer base. During the 12-month period ending September 30, 2008, a total of 5,329 customers used our NC-stat and ADVANCE Systems compared to 5,523 customers for the
same period ending September 30, 2007. This represents a 3.5% year-over-year decrease in the number of customers that use our NC-stat or ADVANCE Systems. The
average usage per account declined 23.4% to 36 nerve specific electrodes per customer for the quarter ended September 30, 2008 from 47 nerve specific electrodes per customer for the quarter
ended September 30, 2007.

Other
revenues, which are attributable to the DigiScope, were $203,300 and $270,400 for the three months ended September 30, 2008 and 2007, respectively, a decrease of $67,100, or
24.8%. As a result of our announced plan to discontinue sales and support of the DigiScope and DigiScope related services, in the third quarter of 2008, we only recognized revenue from sales of
DigiScope and DigiScope related service to the extent to which we had received payment for during the quarter. The decrease in revenues was primarily attributable to this change in the manner in which
we recognize revenue. Additionally, as a result of our decision to discontinue sales and support of the DigiScope and DigiScope related services, future revenue from the DigiScope will be limited and
will be classified in discontinued operations.

Our
total revenues were $7.3 million and $11.3 million for the three months ended September 30, 2008 and 2007, respectively, a decrease of $4.0 million, or
35.5%. The decline in our total revenues is primarily attributable to the reasons discussed above.

We
anticipate that revenues for the remainder of 2008 will continue to decline. In the third quarter of 2008, we experienced a decline in revenues of 14.3% from the second quarter of
2008, which we believe primarily resulted from the uncertainty and adverse developments created by the on-going AMA CPT Panel process, the issuance of draft LCDs, final LCDs and coding
articles addressing reimbursement for nerve conduction studies and policies issued by commercial payers intended to deter usage or limit the reimbursement for the NC-stat System. These
developments and other future reimbursement decisions could continue to adversely impact reimbursement for procedures performed using the NC-stat System. Our revenues for the remainder of
2008 are likely to be impacted by (a) the level of reimbursement, if any, established for procedures performed using the NC-stat System by insurance carriers and other third-party
payers; (b) the level of reimbursement for procedures performed using the ADVANCE System; (c) whether final LCDs are applied in a manner that places additional restrictions or
qualifications on the performance of these procedures; (d) any other reimbursement determinations relating to nerve conduction studies that may be issued by third-party

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payers;
and (e) any other events causing uncertainty as to the existence or amount of reimbursement physicians are likely to receive for performing procedures using our nerve conduction product
offerings. Separately, we expect revenues to be positively impacted by expanded sales and marketing efforts for our launch of the ADVANCE System. Overall, revenues could be impacted by a variety of
factors, including the level of demand for our products, potential for changes in third-party reimbursement for nerve conduction studies, the decision to terminate our relationships with independent
sales agencies, the overall economy, competitive factors and the factors described in the section of this Quarterly Report on Form 10-Q titled "Cautionary Note Regarding
Forward-Looking Statements."

Cost of revenues

Cost of medical equipment revenues increased to $258,000, or 61.9% of medical equipment revenues, for the three months ended
September 30, 2008, as compared to $206,900, or 22.4% of medical equipment revenues, for the same period in 2007. The increase in the cost of medical equipment revenues and the cost of medical
equipment revenues as a percentage of medical equipment revenues is primarily attributable to increased discounting, in part, resulting from our introduction of the ADVANCE System, particularly
related to the transition of existing NC-stat System customers to the ADVANCE System and the higher cost of revenues of the ADVANCE System as compared to the NC-stat System.

Cost
of consumables revenue decreased to $1.8 million, or 27.4% of consumables revenue, for the three months ended September 30, 2008, as compared to $2.6 million,
or 26.1% of consumables revenue, for the same period in 2007. The decrease in the cost of consumables revenue is primarily attributable to lower sales volumes. The increase in the cost of consumables
revenues as a percentage of consumables revenue is primarily attributable to higher discounting resulting in a decrease of their average selling price.

Cost
of other revenues, which related entirely to the DigiScope, decreased to $177,000, or 87.0% of DigiScope revenues, for the three months ended September 30, 2008, as compared
to $202,700, or 75.0% of DigiScope revenues, for the same period in 2007. In 2007, DigiScopes were sold under a license agreement with EyeTel.

Our
overall cost of revenues decreased to $2.3 million, or 31.0% of revenues, for the three months ended September 30, 2008, compared to $3.0 million, or 27.0% of
revenues for the same period in 2007.

Our
cost of revenues as a percentage of revenues may increase during the remainder of 2008 compared to the corresponding period in 2007 due to our launch of the ADVANCE System and
its higher cost of revenues as compared to the NC-stat System.

Research and Development

Our research and development, or R&D, expenses include expenses associated with our research, product development, clinical, regulatory
and quality assurance departments.

R&D
expenses increased $180,800, or 14.0%, to $1.5 million for the three months ended September 30, 2008 from $1.3 million for the same period in 2007. As a
percentage of revenues, R&D expenses were 20.2% and 11.4% for the three months ended September 30, 2008 and September 30, 2007, respectively. The increase in expenses was primarily due
to an increase of $201,100 in employee compensation and benefit costs primarily attributable to the hiring of additional employees for our product development efforts. Also contributing to the change
in expenses are an increase in $29,000 in license fees, primarily fees paid to the Wilmer Eye Institute at Johns Hopkins University offset by a decrease of $44,200 in consulting services.

We
expect our spending on R&D will be relatively unchanged during the remainder of 2008 as compared to the level of expenses for the third quarter of 2008. This amount may vary,
however, depending on the opportunities and challenges that arise during the remainder of the year.

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Table of Contents

Sales and Marketing

Our sales and marketing expenses include expenses from the marketing, field sales, sales administration and reimbursement departments.

Sales
and marketing expenses decreased $3.3 million, or 55.2%, to $2.7 million for the three months ended September 30, 2008 from $6.0 million for the same
period in 2007. As a percentage of revenues, sales and marketing expenses were 37.2% and 53.5% for the three months ended September 30, 2008 and 2007, respectively. The decrease in expenses was
primarily due to (a) a decrease of $1.7 million in employee compensation and benefit costs primarily attributable to the decrease in commissions, bonuses and salaries resulting from the
reduction of the size of our direct sales force in May 2008; (b) a decrease of $827,000 in third-party sales commissions due to our decision to terminate our relationships with all independent
sales agencies and focus our selling efforts exclusively through our direct sales force; (c) a decrease of $193,800 in consulting services due to less activity involving our reimbursement
matters; (d) a decrease of $164,900 in stock compensation expense; and (e) decreases of $106,000 in recruiting expenses, $73,700 in postage expenses, $73,400 in telephone expenses, and
$67,900 in travel related expenses all attributable to the reduction of our direct sales force and our continuing effort of cost reduction.

We
expect sales and marketing expenses to remain relatively unchanged during the remainder of 2008 as compared to the level of expenses for the third quarter of 2008. However,
this may vary, depending primarily on our revenues for the remainder of 2008. Our direct sales force will focus their sales and marketing efforts of our neuropathy assessment business on sales of the
ADVANCE System to specialist physicians with peripheral nerve expertise. We continue to support our NC-stat customer base, work with our existing NC-stat customers in specialty
practices to convert them to the ADVANCE System and provide solutions that enable our customers to provide this important diagnostic service to their patients.

General and Administrative

Our general and administrative expenses include expenses from the executive, finance, administrative, customer service and information
technology departments.

General
and administrative expenses decreased $1.4 million, or 28.7%, to $3.5 million for the three months ended September 30, 2008 from $4.9 million for the
same period in 2007. As a percentage of revenues, general and administrative expenses were 48.0% and 43.4% for the three months ended September 30, 2008 and 2007, respectively. The decrease in
expenses was primarily due to a decrease of $1.6 million in professional fees primarily relating to decreased legal fees and a decrease of $195,000 in stock compensation expense. These amounts
were offset by an increase in bad debt expense of $179,300, an increase of $109,300 in facilities costs and an increase of $85,000 in employee compensation and benefit costs primarily attributable to
the employees from EyeTel.

We
believe the level of our general and administrative expenses will decrease slightly during the remainder of 2008 as compared to the level of expenses for the third quarter
of 2008, as a result of our decision to cease business activities related to the DigiScope.

Asset impairment and restructuring charge

On September 30, 2008, we approved a plan for the closure of our facility in Columbia, Maryland and discontinuance of sales and
support of DigiScopes and DigiScope related services, effective November 1, 2008. We plan to close the Maryland facility by the end of the fourth quarter of 2008. This decision was made as part
of our ongoing focus on cost-efficiencies in all areas of our business, and our refocused efforts towards our core business, which is the sale of the ADVANCE System and support for our
existing NC-stat System customers. As a result of this decision, we recorded a

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$5.0 million
charge relating to this closure in the third quarter of 2008, of which approximately $2.4 million related to the impairment of intangible assets, approximately
$2.3 million relates to the impairment of fixed assets and $237,000 related to other asset write-downs and exit costs. All remaining charges, which are expected to be less than $200,000 and to
be substantially incurred over the subsequent twelve month period. On November 7, 2008, we signed an Asset Purchase Agreement with Advanced Diagnostics, LLC relating to the sale of
substantially all of our EyeTel/DigiScope assets. Advanced Diagnostics, LLC will assume certain identified commitments of approximately $400,000 and make a cash payment of $50,000. The CEO and
President of Advanced Diagnostics, LLC is a former executive of ours who continues to receive payments under a previous separation agreement with us.

Amortization of intangible assets

Amortization of intangible assets is attributable to (a) the intangible assets representing the fair value of technology and
intellectual property recorded in connection with our acquisition of EyeTel in December 2007 and (b) the value of the technology and intellectual property contributed by Cyberkinetics upon
formation of PNIR, our newly formed joint venture with Cyberkinetics to develop and commercialize a therapeutic product for peripheral nerve injury based on Cyberkinetics' Andara (TM) Oscillating
Field Stimulator (OFS(TM)) neurostimulation technology platform. As of September 30, 2008, we approved a plan for the closure of our facility in Columbia, Maryland and discontinuance of sales
and support of DigiScopes and DigiScope related services, effective November 1, 2008 and recorded an impairment of $2.4 million included in the asset impairment and restructuring charge
line of our statements of operations for the three months ended September 30, 2008. The recoverability of our remaining intangible assets is dependent upon our ability to successfully develop
marketable products from PNIR, our joint venture with Cyberkinetics. (See Note 6.)

Loss on available-for-sale investment

In November 2007, we purchased approximately 5.4 million shares of common stock of Cyberkinetics, representing approximately 13%
of the Cyberkinetics' issued and outstanding shares at the time of the investment, at a price of $0.46 per share. We also received a warrant to purchase up to approximately 2.7 million shares
of Cyberkinetics common stock. The warrant is exercisable at $0.46 per share and has a term of five years, but will be required to be exercised if Cyberkinetics receives FDA approval of an HDE filing
for the Andara OFS device for acute spinal cord injuries by December 31, 2008.

We
review the carrying value of this investment periodically to determine whether an other-than-temporary decline in market value exists. We consider factors such
as the length of time the value of the investment has been below its original purchase price, the financial condition of the investee and near-term prospects for the investee's recovery to
original purchase price and our intent with regard to the underlying investment. We marked this investment to market as of September 30, 2008 and, taking into account the factors noted above,
recorded a $169,300 charge because we believe the decline in the value of this investment is other-than-temporary. We may record future losses on our Cyberkinetics investment
if there is not an improvement in the Cyberkinetics outlook or if the market value of their common stock declines further.

Interest Income

Interest income was $124,300 and $426,900 for the three months ended September 30, 2008 and September 30, 2007,
respectively. Interest income was earned from investments in cash equivalents and short-term investments. The decrease in interest income for the quarter ended September 30, 2008,
as compared to the quarter ended September 30, 2007, is primarily due to lower average invested balances and lower rates of return.

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Minority Interest

In February 2008, we formed PNIR, a joint venture with Cyberkinetics with 50% ownership held by us and 50% ownership held by
Cyberkinetics. The minority interest in the net loss of the joint venture represents 50% of the net loss during the three months ended September 30, 2008, which consists of amortization expense
attributable to the $2.1 million contribution of intellectual property made by Cyberkinetics when the joint venture was formed. For the three months ended September 30, 2008, there have
been no expenses or cash funding in connection with PNIR other than amortization of the intangible asset.

Comparison of Nine Months Ended September 30, 2008 and September 30, 2007

The following tables present a breakdown of our customers, consumables units used, revenues, costs and expenses and net loss, of which
certain columnar subtotal amounts found in the table below may not sum due to rounding:

12-Month Period Ended September 30,2008

2007

Change

% ChangeActive NC-stat and ADVANCE customers


5,329


5,523


(194
)

(3.5
)%




Nine Months Ended September 30,2008

2007

Change

% ChangeConsumables units used


642,000


827,000


(185,000
)

(22.4
)%


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Nine Months Ended September 30,2008

2007

Change

% Change($ in thousands, except for
percentage data)Revenues:Medical equipment

$
1,679.0

$
3,427.7

$
(1,748.6
)

(51.0
)%Consumables


22,262.7


30,415.4


(8,153.8
)

(26.8
)Other


931.0


680.2


250.8


36.9Total revenues


24,871.7


34,523.3


(9,651.6
)

(28.0
)Costs and expenses:Cost of medical equipment revenues


676.8


672.9


3.9


0.6Cost of consumables revenues


6,024.6


8,003.8


(1,979.2
)

(24.7
)Cost of other revenues


545.8


533.6


12.2


2.3Research and development expenses


4,648.3


3,772.4


875.9


23.2Sales and marketing expenses


12,333.4


18,039.9


(5,706.6
)

(31.6
)General and administrative expenses


11,277.0


11,116.0


161.0


1.4Charge for impaired goodwill


5,833.5





5,833.5


NAAsset impairment and restructuring charge


4,960.2





4,960.2


NAAmortization of intangible assets


682.5





682.5


NATotal costs and expenses


46,981.9


42,138.6


4,843.3


11.5Loss from operations


(22,110.2
)

(7,615.3
)

(14,494.9
)

190.3Loss on available-for-sale investment


(2,226.5
)




(2,226.5
)

NAInterest income


617.8


1,376.1


(758.3
)

(55.1
)Loss before minority interest


(23,718.9
)

(6,239.2
)

(17,479.7
)

280.2Minority interest


131.3





131.3


NANet loss

$
(23,587.6
)
$
(6,239.2
)
$
(17,348.4
)

278.1
%


Revenues:

Medical equipment revenues, (formerly referred to as diagnostic device revenues), consisting of the NC-stat devices,
NC-stat docking stations and ADVANCE devices and related modules, which we began to market and sell in May 2008, were $1.7 million and $3.4 million for the nine months ended
September 30, 2008 and 2007, respectively, a decrease of $1.7 million, or 51.0%. This decrease is primarily attributable to a lower number of NC-stat Systems sold and a
decrease in the average selling price of the NC-stat system, which we believe resulted primarily from uncertainty and adverse developments relating to the reimbursement for procedures
performed. Also contributing to this decline was our decision to reduce our direct sales force by 40% in May 2008, and our decision to terminate our relationships with all independent sales agencies
during the second half of 2007. Medical
equipment revenues accounted for 6.8% and 9.9% of our total revenues for the nine months ended September 30, 2008 and 2007, respectively.

Consumables
revenue, (formerly referred to as biosensor revenues), consisting of single use nerve specific electrodes which are used with our NC-stat System and our ADVANCE
System, was $22.3 million and $30.4 million for the nine months ended September 30, 2008 and 2007, respectively, a decrease of $8.2 million, or 26.8%. This decrease is
attributable to lower sales of consumables, which we believe resulted primarily from uncertainty and adverse developments relating to the reimbursement for procedures performed with the
NC-stat System. Consumables revenue accounted for 89.5% and 88.1% of our total revenues for the nine months ended September 30, 2008 and 2007, respectively.

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Our
customers used 642,000 nerve specific electrodes and 827,000 nerve specific electrodes in the nine months ended September 30, 2008 and 2007, respectively, a decrease of
185,000 nerve specific electrodes, or 22.4%. This decrease in nerve specific electrodes usage is primarily the result of a decline in the average usage per customer and a decrease in our active
customer base. During the 12-month period ending September 30, 2008, a total of 5,329 customers used our NC-stat and ADVANCE Systems compared to 5,523 customers for the
same period ending September 30, 2007. This represents a 3.5% year-over-year decrease in the number of customers that used our NC-stat or ADVANCE Systems.
The average usage per account declined 20.0% to 120 nerve specific electrodes for the nine months ended September 30, 2008 from 150 nerve specific electrodes the nine months ended
September 30, 2007.

Other
revenues, which are attributable to the DigiScope, were $931,000 and $680,200 for the nine months ended September 30, 2008 and 2007, respectively, an increase of $250,800,
or 36.9%. The increase is primarily attributable to an increase in the number of DigiScopes placed in service as a result of our acquisition of EyeTel in December 2007.

Our
total revenues were $24.9 million and $34.5 million for the nine months ended September 30, 2008 and 2007, respectively, a decrease of $9.7 million, or
28.0%. The decline in our total revenues is primarily attributable to the reasons discussed above.

Cost of revenues

Cost of medical equipment revenues increased to $676,800, or 40.3% of medical equipment revenues, for the nine months ended
September 30, 2008, as compared to $672,900, or 19.6% of medical equipment revenues, for the same period in 2007. The increase in the cost of medical equipment revenues and in the cost of
medical equipment revenues as a percentage of medical equipment revenues is primarily attributable to increased discounting, in part, resulting from our introduction of the ADVANCE System,
particularly related to the transition of existing NC-stat System customers to the ADVANCE System and the higher cost of revenues of the ADVANCE System as compared to the
NC-stat System.

Cost
of consumables revenue decreased to $6.0 million, or 27.1% of consumables revenue, for the nine months ended September 30, 2008, as compared to $8.0 million, or
26.3% of consumables revenue, for the same period in 2007. The decrease in the cost of consumables revenue is primarily attributable to lower sales volumes. The increase in the cost of consumables
revenues as a percentage of consumables revenue is primarily attributable to higher discounting resulting in a decrease of their average selling price.

Cost
of other revenues, which related entirely to the DigiScope, increased to $545,800, or 58.6% of DigiScope revenues, for the nine months ended September 30, 2008, as compared
to $533,600, or 78.5% of DigiScope revenues, for the same period in 2007. In 2007, DigiScopes were sold under a license agreement with EyeTel.

Our
overall cost of revenues decreased to $7.2 million, or 29.1% of revenues, for the nine months ended September 30, 2008, compared to $9.2 million, or 26.7% for
the same period in 2007.

Research and Development

R&D expenses increased $875,900, or 23.2%, to $4.6 million for the nine months ended September 30, 2008 from
$3.8 million for the same period in 2007. As a percentage of revenues, R&D expenses were 18.7% and 10.9% for the nine months ended September 30, 2008 and 2007, respectively. The increase
in expenses was primarily due to an increase of $628,500 in employee compensation and benefit costs primarily attributable to the employees retained from EyeTel and to the hiring of additional
employees for our product development efforts. Also contributing to the change in expenses

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are
(a) an increase of $111,000 in outside development costs; (b) an increase in $93,500 in license fees, primarily fees paid to the Wilmer Eye Institute at Johns Hopkins University;
(c) an increase of $29,000 in recruiting expenses attributable to the hiring of additional employees; and (d) an increase of $25,300 in stock-based compensation expense. These amounts
were offset by a decrease of $73,100 in consulting expenses.

Sales and Marketing

Sales and marketing expenses decreased $5.7 million, or 31.6%, to $12.3 million for the nine months ended
September 30, 2008 from $18.0 million for the same period in 2007. As a percentage of revenues, sales and marketing expenses were 49.6% and 52.3% for the nine months ended
September 30, 2008 and 2007, respectively. The decrease in expenses was primarily due to (a) a decrease of $2.6 million in third-party sales commissions due to our decision to
terminate our relationships with all independent sales agencies and focus our selling efforts exclusively through our direct sales force; (b) a decrease of $1.8 million in employee
compensation and benefit costs primarily attributable to the decrease in commissions, bonuses and salaries resulting from the reduction of the size of our direct sales force in May 2008; (c) a
decrease of $321,000 in consulting services due to less activity involving our reimbursement matters; (d) decreases of $271,000 in recruiting expenses and $94,700 in travel expenses both
attributable to the reduction of our direct sales force; (e) a decrease of $268,500 in stock compensation expense; (f) a decrease of $199,100 in advertising costs, largely attributable
to a 2007 sales promotion; and (g) a decrease of $109,500 in telephone related expenses.

General and Administrative

General and administrative expenses increased $161,000, or 1.4%, to $11.3 million for the nine months ended September 30,
2008 from $11.1 million for the same period in 2007. As a percentage of revenues, general and administrative expenses were 45.3% and 32.2% for the nine months ended September 30, 2008
and 2007, respectively. The increase in expenses was primarily due to a second quarter 2007 reversal of a $1.7 million sales tax liability as a result of receiving amnesty from a number of
states and receiving relief from other states in the form of a limited look back period and waiver of penalties. Also contributing to the increase was an increase of $655,100 in employee compensation
and benefit costs primarily attributable to the employees retained from EyeTel; and an increase of $302,600 in facilities costs primarily from our December 2007 acquisition of EyeTel. These amounts
were offset by a decrease of $2.0 million in professional fees resulting from decreased legal fees, particularly relating to the government investigations by the OIG and the DOJ that we are
subject to and a decrease in bad debt expense of $239,200 and a decrease of $174,500 in stock compensation expense.

Charge for impaired goodwill

We are required to perform impairment tests related to our goodwill under Statement of Financial Accounting Standards, or SFAS,
No. 142,"Goodwill and Other Intangible Assets,"or SFAS No. 142, annually and whenever events or changes in circumstances suggest that
the carrying value of an asset may not be recoverable, such as the decline in the market capitalization of our common stock that occurred during the first quarter of 2008. EyeTel's operations were
incorporated into our one segment and we determined that we are comprised of a single reporting unit for goodwill impairment testing. Subsequent to the AMA CPT Panel meeting in February 2008, our
common stock price declined significantly such that as of March 31, 2008, our publicly traded market value was below our net book value. We determined that an interim goodwill impairment test
was required. As the net book value of our assets exceeded the enterprise value, we performed step two of the SFAS No. 142 impairment test in which we assessed the fair value of all recorded
and unrecorded tangible and intangible assets and liabilities, including our recently acquired EyeTel and PNIR intangibles. We determined that no assets were impaired and determined that there was no
residual value of goodwill. Accordingly, we recorded a charge of $5.8 million to write off goodwill during the first quarter of 2008.

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Asset impairment and restructuring charge

On September 30, 2008, we approved a plan for the closure of our facility in Columbia, Maryland and discontinuance of sales and
support of DigiScopes and DigiScope related services, effective November 1, 2008. We plan to close the Maryland facility by the end of the fourth quarter of 2008. This decision was made as part
of our ongoing focus on cost-efficiencies in all areas of our business, and our refocused efforts towards our core business, which is the sale of the ADVANCE System and support for our
existing NC-stat System customers. As a result of this decision, we recorded a $5.0 million charge relating to this closure in the third quarter of 2008, of which approximately
$2.4 million related to the impairment of intangible assets, approximately $2.3 million relates to the impairment of fixed assets and $237,000 related to other asset write-downs and exit
costs. All remaining charges, which are expected to be less than $200,000 and to be substantially incurred over the subsequent twelve month period. On November 7, 2008, we signed an Asset
Purchase Agreement with Advanced Diagnostics, LLC relating to the sale of substantially all of our EyeTel/DigiScope assets. Advanced Diagnostics, LLC will assume certain identified
commitments of approximately $400,000 and make a cash payment of $50,000. The CEO and President of Advanced Diagnostics, LLC is a former executive of ours who continues to receive payments
under a previous separation agreement with us.

Amortization of intangible assets

Amortization of intangible assets is attributable to (a) the intangible assets representing the fair value of technology and
intellectual property recorded in connection with our acquisition of EyeTel in December 2007 and (b) the value of the technology and intellectual property contributed by Cyberkinetics upon
formation of PNIR, our newly formed joint venture with Cyberkinetics to develop and commercialize a therapeutic product for peripheral nerve injury based on Cyberkinetics' Andara Oscillating Field
Stimulator (OFS) neurostimulation technology platform. As of September 30, 2008, we approved a plan for the closure of our facility in Columbia, Maryland and discontinuance of sales and support
of DigiScopes and DigiScope related services, effective November 1, 2008 and recorded an impairment of $2.4 million included in the asset impairment and restructuring charge line of our
statements of operations for the nine months ended September 30, 2008. The recoverability of our remaining intangible assets is dependent upon our ability to successfully develop marketable
products from PNIR, our joint venture with Cyberkinetics. (See Note 6.)

Loss on available-for-sale investment

In November 2007, we purchased approximately 5.4 million shares of common stock of Cyberkinetics, representing approximately 13%
of the Cyberkinetics' issued and outstanding shares at the time of the investment, at a price of $0.46 per share. We also received a warrant to purchase up to approximately 2.7 million shares
of Cyberkinetics common stock. The warrant is exercisable at $0.46 per share and has a term of five years, but will be required to be exercised if Cyberkinetics receives FDA approval of an HDE filing
for the Andara OFS device for acute spinal cord injuries by December 31, 2008.

We
review the carrying value of this investment periodically to determine whether an other-than-temporary decline in market value exists. We consider factors such
as the length of time the value of the investment has been below its original purchase price, the financial condition of the investee and near-term prospects for the investee's recovery to
original purchase price and our intent with regard to the underlying investment. We marked this investment to market as of September 30, 2008 and, taking into account the factors noted above,
have recorded year to date charges of $2.2 million because we believe the decline in the value of this investment is other-than-temporary. We may record future losses on
our Cyberkinetics investment if there is not an improvement in the Cyberkinetics outlook or if the market value of their common stock declines further.

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Interest Income

Interest income was $617,800 and $1.4 million for the nine months ended September 30, 2008 and September 30, 2007,
respectively. Interest income was earned from investments in cash equivalents and short-term investments. The decrease in interest income for the nine months ended September 30,
2008, as compared to the same period a year ago is primarily due to lower average invested balances and lower rates of return.

Minority Interest

In February 2008, we formed PNIR, a joint venture with Cyberkinetics with 50% ownership held by us and 50% ownership held by
Cyberkinetics. The minority interest in the net loss of the joint venture represents 50% of the net loss during the nine months ended September 30, 2008, which consists of amortization expense
attributable to the $2.1 million contribution of intellectual property made by Cyberkinetics when the joint venture was formed. For the nine months ended September 30, 2008, there have
been no expenses or cash funding in connection with PNIR other than amortization of the intangible asset.

Liquidity and Capital Resources

Our principal source of liquidity is our current cash and cash equivalents. 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 manage our investments in inventories and other components of working capital.
A decrease in demand for our products or unanticipated increases in our operating costs or investments in inventories and other components of working capital would likely have an adverse effect on our
liquidity and cash generated from operations. The following sets forth information relating to our liquidity:

September 30,
2008

December 31,
2007

Change

% Change($ in thousands)Cash and cash equivalents

$
21,592.1

$
7,097.2

$
14,494.9


204.2
%Short-term held-to-maturity investments





22,621.7


(22,621.7
)

(100.0
)Total cash, cash equivalents and short-term held-to-maturity investments

$
21,592.1

$
29,718.9

$
(8,126.8
)

(27.3
)%


During
the first nine months of 2008, our cash and cash equivalents and short-term held-to-maturity investments decreased by $8.1 million,
primarily due to $9.1 million of cash used in operations and $274,800 of cash used for capital expenditures, offset partially by a release of $1.0 million of restricted cash resulting
from the February 2008 amendment to our property lease and $94,700 of proceeds received from the issuance of common stock under our employee stock purchase plan. Our property lease, originally entered
into at the beginning of January 2001 and which was scheduled to expire on March 31, 2009, was amended to extend the term of the lease for a period of an additional four years. In connection
with this amendment, the amount of the irrevocable standby letter of credit, we are required to maintain, stating the lessor as the beneficiary, was reduced from $1,430,000 to $400,000. The letter of
credit must be secured by a certificate of deposit in an amount equal to 102% of the letter of credit as a security deposit. The certificate of deposit is renewable annually.

In
managing our working capital, two of the financial measurements we monitor are days' sales outstanding, or DSO, and inventory turnover rate, which are presented in the table below for
the three

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month
periods ended September 30, 2008 and September 30, 2007 and the year ended December 31, 2007:

Three Months
Ended
September 30,

Year Ended
December 31,2008

2007

2007Days' sales outstanding (days)


54


50


54Inventory turnover rate (times per year)


1.5


2.4


2.7


Our
payment terms extended to our customers generally require payment within 30 days from invoice date. At September 30, 2008, we experienced no change in our DSO which was
54 days at December 31, 2007.

Our
inventory turnover for the quarter ended September 30, 2008 was 1.5 times, compared with 2.7 times for the year ended December 31, 2007. The decrease in the inventory
turnover rate for the quarter ended September 30, 2008, as compared to the year ended December 31, 2007, was primarily due to decreased demand for the NC-stat System and an
increase in inventories of consumables and the ADVANCE System in support of our introduction of the ADVANCE System.

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

Nine Months Ended September 30,2008

2007(in thousands)Net cash used in operating activities

$
(9,051.3
)
$
(4,762.6
)Net cash provided by investing activities


23,455.7


3,389.8Net cash provided by financing activities


90.5


162.7


Our
operating activities used $9.1 million and $4.8 million of cash in the nine months ended September 30, 2008 and 2007, respectively. In the first nine months of
2008, a net loss of $23.6 million and a net use of cash of approximately $1.8 million for our investment in working capital were offset by $16.3 million in non-cash
items, mainly a $5.8 million charge for the impairment of goodwill, $5.0 million in asset impairment and restructuring charges with our decision to close our Maryland facility and
discontinue sales and support of DigiScope and related services, $2.2 million in charges for other-than-temporary impairments in the value of our investment in
Cyberkinetics common stock, $1.9 million in compensation expense associated with stock options and $1.4 million in the amortization of intangibles and accumulated depreciation. The
primary drivers for the uses of cash in our investment in working capital during the first nine months of 2008 were a decrease in accounts payable and accrued expense of $2.0 million primarily
due to decreased legal and commission payments, an increase in our inventories of $956,900, primarily related to an increase in consumables inventories and an increase in prepaid expenses of $245,700,
that consisted primarily of progress payments to our DigiScope supplier. These items were partially offset by a $1.7 million decrease in accounts receivable, excluding the provision for
doubtful accounts, due to a decline in revenues. In the first nine months of 2007, a net loss of $6.2 million and a net use of cash of approximately $1.6 million for our investment in
working capital was offset by $3.0 million in non-cash items, mainly compensation expense associated with stock options. The primary drivers for the uses of cash in our investment
in working capital were a decrease in accrued expenses of $823,900 due primarily to the reversal of $1.7 million of sales tax liability as a result of receiving amnesty from a number of states
and receiving relief from other states in the form of a limited look back period and waiver of penalties and an increase in our inventories of $1.3 million primarily for the production of the
ADVANCE System. These items were partially offset

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by
a $933,000 decrease in accounts receivable, excluding the provision for doubtful accounts, due to a decline in revenues.

As
a result of the decline in revenues and increase in expenses, we incurred a net loss in the first nine months of 2008 and we expect to experience net losses for the remainder of 2008.
This has had and will likely continue to have an adverse impact on our cash flows from operating activities for the remainder of 2008.

Our
investing activities provided $23.5 million and $3.4 million of cash in the nine months ended September 30, 2008 and 2007, respectively. In the first nine months
of 2008, $23.7 million in investment maturities and the release of $1.1 million of restricted cash provided cash which was partially offset by $1.1 million in investment purchases
and $274,800 used to fund purchases of fixed assets, primarily related to computer equipment and tooling equipment for new products. In the first nine months of 2007, $29.6 million in
investment maturities provided cash which was offset by $26.0 million in investment purchases and $229,000 used to fund purchases of fixed assets, primarily related to computer equipment and
tooling equipment for new products.

Our
financing activities provided $90,500 and $162,700 of cash in the nine months ended September 30, 2008 and 2007, respectively. Cash provided by financing activities in the
first nine months of 2008 represented the proceeds from the issuance of shares under our employee stock purchase plan and exercise of stock options offset by payments on a capital lease. Cash provided
by financing activities in the first nine months of 2007 represented the proceeds from the issuance of shares under our employee stock purchase plan and exercise of stock options.

During
the remainder of 2008, we expect to continue to maintain our cash and investments in money market funds. Additionally, we have agreed to fund up to the first $2.0 million
in expenses in connection with PNIR, our joint venture with Cyberkinetics, over the course of the next two years and we have a potential commitment to purchase an additional $1.25 million of
Cyberkinetics common stock pursuant to a warrant that we must exercise in certain circumstances. The warrant has a term of five years, but will be required to be exercised if Cyberkinetics receives
FDA approval of a HDE filing for the Andara OFS device for acute spinal cord injuries by December 31, 2008. As of September 30, 2008, there have been no expenses or cash funding in
connection with PNIR other than amortization of the intangible asset.

We
expect to continue to incur net losses and negative cash flows from operations for the foreseeable future. Based upon our current plans, we believe that our existing capital
resources, including cash and cash equivalents, as of September 30, 2008 are sufficient to finance our ongoing operations into 2010, including the anticipated operating expenses and capital
expenditures described above. However, our business is 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) changes in our estimated future revenues; (b) changes we make to our ongoing operating expenses; (c) future changes in our business strategy;
(d) decisions we make regarding the size of our sales force and the magnitude of our sales and marketing programs; (e) research and development spending plans; (f) the outcome of
the DOJ investigation that we are currently subject to; and (g) other items affecting our level of expenditures and our use of existing cash and cash equivalents. Accordingly, we may need to
raise additional funds to support our operating and capital needs. Without additional funds, we may be forced to delay, scale back or eliminate some of our sales and marketing efforts, research and
development activities or other operations and potentially delay our product development efforts. We may attempt to obtain additional funding through public or private financing, collaborative
arrangements with strategic partners or through additional credit lines or other debt financing sources to increase the funds we have available to us to fund our operations. However, there are no
assurances that we will be able to secure such financing on favorable terms, if at all.

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To
date, inflation has not had a material impact on our financial operations.

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

As of September 30, 2008, we did not have any off-balance sheet financing arrangements.

New Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board, or FASB issued SFAS No. 162, "The Hierarchy of
Generally Accepted Accounting Principles",or SFAS No. 162. SFAS No. 162 transfers the hierarchy of GAAP from the auditing literature to the accounting standards
and identifies a consistent hierarchy for selecting accounting principles to be used in applying U.S. GAAP. SFAS No. 162 is effective 60 days following the SEC's approval of PCAOB
Auditing Standard No. 6, "Evaluating Consistency of Financial Statements",or AS/6. We do not expect the adoption of SFAS No. 162 to have
any effect on our results of operations or cash flows.

In
April 2008, the FASB issued Staff Position, or FSP, SFAS No. 142-3, "Determination of the Useful Life of Intangible Assets",or FSP SFAS No. 142-3. FSP SFAS No. 142-3 amends SFAS
No. 142, "Goodwill and Other Intangible Assets",or SFAS No. 142 to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used
to measure the fair value of the asset under FASB SFAS No. 141, "Business Combinations",or SFAS No. 141, and other U.S. GAAP. FSP
SFAS No. 142-3 is effective for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of a recognized intangible asset is to be applied
prospectively for intangibles acquired after the adoption date. Certain disclosure requirements will impact existing intangibles. We are currently evaluating the impact of the adoption of FSP SFAS
No. 142-3.

In
December 2007, the FASB, issued SFAS, No. 160, "Noncontrolling Interests in Consolidated Financial Statements", or SFAS
No. 160. SFAS No. 160 requires that noncontrolling interests be reported as stockholders equity, a change that will affect financial statement presentation of minority interests in its
consolidated subsidiaries. SFAS No. 160 also establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary as long as that ownership change does not
result in deconsolidation. SFAS No. 160 is required to be applied prospectively in 2009, except for the presentation and disclosure requirements which are to be applied retrospectively. SFAS
No. 160 is effective for fiscal years beginning after December 15, 2008. Except for certain reclassifications required upon adoption of SFAS No. 160 and subject to change in
ownership of PNIR, our joint venture, if any, we do not expect the adoption of SFAS No. 160 to have a material impact to our financial position, results of operations or cash flows.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115", or SFAS No. 159. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 does
not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. We did not elect to measure at fair value any additional assets or liabilities that are not already measured at fair value under existing standards. Our adoption of SFAS
No. 159 did not have a material impact on our financial position, results of operations or cash flows.

In
September 2006, the FASB issued SFAS No. 157,"Fair Value Measurements",or SFAS No. 157. SFAS No. 157 defines
fair value in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles, or GAAP, and expands disclosures

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related
to the use of fair value measures in financial statements. SFAS No. 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and
guidance in GAAP. SFAS No. 157 emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an
asset or transfers a liability (exit price). SFAS No. 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity's own fair value
assumptions as the lowest level. SFAS No. 157 is effective for our assets and liabilities as of January 1, 2008. In February 2008, the FASB issued FASB Statement of Position, or FSP
No. 157-2 "Partial Deferral of the Effective Date of Statement 157," or FSP No. 157-2, which delays the effective
date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financials statements
on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The adoption of SFAS No. 157 did not have a material effect on our financial position, results
of operations or cash flows.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this Quarterly Report on Form 10-Q, including under the section titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report, 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, including, without limitation, statements regarding our or our management's
expectations, hopes, beliefs, intentions or strategies regarding the future. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "plan", "hope" 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 current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those
that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or
performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, risks associated with: our
dependence on the NC-stat System and its components; our ability to increase our customer base and expand the market for our products and our collaborators' products; our ability to manage
growth or declines in our business; obtaining necessary regulatory approvals, including regulatory approval for the onCall Information System; our reliance on
third-party manufacturers and suppliers; reimbursement by third-party payers to our customers for procedures performed using our products; potential limitations on the reimbursement for procedures
performed using the NC-stat System and/or the ADVANCE System as a result of the AMA CPT editorial panel process; compliance with applicable quality control and manufacturing standards; our
ability to retain key management and scientific personnel; delays in the development of new products or to planned improvements to our or our collaborators' products; effectiveness of our or our
collaborators' products compared to other medical device products; protection of our or our collaborators' intellectual property and other proprietary rights; conflicts with the intellectual property
of third-parties; the potential violation of federal or state laws prohibiting "kickbacks" and false or fraudulent claims or adverse affects of challenges to or investigations into the Company's
practices under these laws, including the investigation by the Office of the Inspector General within the Department of Health and Human Services and the United States Department of Justice that we
are subject to; product liability lawsuits or claims that may be brought against us; competition; dependence upon computer and communication infrastructure utilized by our products; publication of
future clinical studies or other articles or announcement of positions by physician associations or other organizations that are unfavorable to our or our collaborators' products; our capital and
financing needs; our successful integration of any acquired businesses or products; international business risks; the value and liquidity of our cash and cash equivalents and the financial condition
of the institutions that hold our cash and cash equivalents, in light of the current economic slowdown; and the other factors described in the section of our Annual Report on
Form 10-K titled "Item 1A. Risk Factors," as updated in Part II, Item1A of this Quarterly Report on Form 10-Q and our other filings. Should one or
more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking
statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under
applicable securities laws.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial
instruments consist of cash equivalents, accounts receivable, accounts payable, accrued expenses and long-term obligations. We consider investments that, when purchased, have a remaining
maturity of 90 days or less to be cash equivalents. The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs, and maximize
yields. To minimize our exposure to an adverse shift in interest rates, we invest mainly in cash equivalents and short-term investments and long-term investments with a
maturity of eighteen months or less and maintain an average maturity of twelve months or less. We do not believe that a 10% change in interest rates would
have a material impact on the fair value of our investment portfolio or our interest income.

Item 4.    Controls and Procedures



Our
management carried out an evaluation, with the participation of our Chief Executive Officer and our Treasurer (Principal Financial Officer), of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of
September 30, 2008. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and our Treasurer (Principal Financial Officer), to allow timely decisions regarding required disclosures.

Based
upon the evaluation described above, our Chief Executive Officer and Treasurer (Principal Financial Officer) have concluded that they believe our disclosure controls and procedures
were effective, as of the end of the period covered by this report, in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management, including our
principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures. We continue to review and document our disclosure controls and procedures,
including our internal controls over financial reporting, and may periodically make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.



There
was no change in our internal control over financial reporting that occurred during the three months ended September 30, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

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PART II  OTHER INFORMATION

Item 1.    Legal Proceedings

As previously disclosed in our periodic filings with the Securities and Exchange Commission pursuant to Section 13 or 15(d)
under the Securities Act of 1934, on March 17, 2008, a putative securities class action complaint was filed in the United States District Court for the District of Massachusetts against the
Company and certain of its officers. On March 27, 2008, a related putative securities class action complaint was filed in the same court, against the same defendants. The allegations in these
complaints are substantially similar. Both complaints allege, among other things, that between October 27, 2005 and March 6, 2007, defendants violated the federal securities laws by
allegedly making false and misleading statements and failing to disclose material information to the investing public. These two actions were subsequently consolidated, and the court appointed a lead
plaintiff. The plaintiffs are seeking unspecified damages. The Company believes that the claims in these cases are without merit and will vigorously contest these lawsuits.

As
previously disclosed in our periodic filings with the Securities and Exchange Commission pursuant to Section 13 or 15(d) under the Securities Act of 1934, on April 22,
2008, a putative shareholder derivative action was filed in the United States District Court for the District of Massachusetts against a number of current and former directors and officers of the
Company. The complaint alleges, among other things, that, between August 2004 and the dates the actions were filed, the defendants engaged in the same conduct alleged in the putative securities class
actions, causing the Company to make false and misleading statements, to fail to disclose material information to the public and to engage in improper business practices. The plaintiffs are seeking
various forms of monetary and
non-monetary relief. The Company believes that the claims in this case are without merit and will vigorously contest the lawsuit.

The
litigation process is inherently uncertain, and we cannot guarantee that the outcomes of the above lawsuits will be favorable for us or that they will not be material to our
business, results of operations or financial position.

As
previously disclosed in our periodic filings with the Securities and Exchange Commission pursuant to Section 13 or 15(d) under the Securities Act of 1934, in the second quarter
of 2006, we received a subpoena from the Office of Inspector General, or OIG, of the Department of Health and Human Services requesting documents from us in connection with an investigation of
potential violations of the federal anti-kickback statute and False Claims Act. In addition, on June 21, 2007, we received a subpoena from the U.S. Attorney's Office for the
District of Massachusetts requesting documents from us in connection with an investigation by the United States Department of Justice, or DOJ. We understand that the DOJ is investigating various
aspects of the Company's sales and marketing practices relating to the NC-stat System. We are cooperating with both investigations. We cannot predict the ultimate outcome of these
investigations. We are unable to determine when these matters will be resolved, whether any additional areas of inquiry will be opened, or any outcome of this matter and accordingly the financial
statements disclosed elsewhere in this Quarterly Report on Form 10-Q do not include any amounts related to the outcome of this matter. Any resulting fines, penalties, additional government
oversight or program exclusions, could have a material adverse effect on our financial condition, results of operations, and cash flows.

Item 1A.    Risk Factors

There have been no material changes in the risk factors described in "Item 1ARisk Factors" of our Annual Report on
Form 10-K for the year ended December 31, 2007, except as set forth below and to the extent additional factual information disclosed elsewhere in this Quarterly Report on
Form 10-Q relates to such risk factors.

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Adverse developments regarding Cyberkinetics' business or financial condition may adversely impact the value of our investment in, and our joint
venture with, Cyberkinetics.

Cyberkinetics, in its Form 8-K filed on November 3, 2008, disclosed that its existing cash and cash
equivalents are only sufficient to meet their projected operating requirements for approximately 30 days. This disclosure is based on their most recent informal communication with the FDA that
indicates that they do not anticipate receiving approval of its HDE filing for the Andara OFS device for acute spinal cord injuries before the end of 2008, if at all, and on their to date unsuccessful
attempt to raise additional capital. If Cyberkinetics is required to cease operations or seek bankruptcy protection, or if other adverse developments relating to its business or financial condition
occur, the value of the Company's investment in Cyberkinetics could be adversely affected and its joint venture with Cyberkinetics would dissolve.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

Item 5.    Other Information

None.

Item 6.    Exhibits

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report,
which Exhibit Index is incorporated herein by this reference.

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SIGNATURES

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.

NEUROMETRIX, INC.Date: November 10, 2008

/s/ SHAI N. GOZANI, M.D., PH. D. Shai N. Gozani, M.D., Ph. D. Chief Executive Officer and President/s/ JOSEPH A. CALO Joseph A. Calo Treasurer (Principal Financial Officer)


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Exhibit Index

*31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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