S-1 1 b63591s1sv1.htm INSULET CORPORATION sv1
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As filed with the Securities and Exchange Commission on February 14, 2007
Registration Statement No. 333-      
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
INSULET CORPORATION
(Exact name of registrant as specified in its charter)
 
         
Delaware   3841   04-3523891
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
 
 
 
9 Oak Park Drive
Bedford, Massachusetts 01730
(781) 457-5000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
Duane DeSisto
President and Chief Executive Officer
Insulet Corporation
9 Oak Park Drive
Bedford, Massachusetts 01730
(781) 457-5000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
     
Raymond C. Zemlin, Esq.
Daniel P. Adams, Esq.
Goodwin Procter LLP
Exchange Place
Boston, Massachusetts 02109
(617) 570-1000
Fax: (617) 523-1231
  Gerald S. Tanenbaum, Esq.
Cahill Gordon & Reindel LLP
80 Pine Street
New York, New York 10104
(212) 701-3000
Fax: (212) 269-5420
 
 
 
 
Approximate date of commencement of proposed sale to public:  As soon as practicable after this Registration Statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is used to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
    Amount of
Title of Each Class of
    Aggregate
    Registration
Securities to be Registered     Offering Price(1)     Fee(2)
Common Stock, $0.001 par value per share
    $86,250,000     $ 9,229
             
 
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
 
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
 
SUBJECT TO COMPLETION, DATED               , 2007
 
Prospectus
 
          Shares
 
 
(INSULET CORPORATION)
 
 
Common Stock
 
 
Insulet Corporation is selling           shares of common stock. This is the initial public offering of our common stock. The estimated initial public offering price is between $      and $      per share.
 
Prior to this offering, there has been no public market for our common stock. We have applied to have our common stock listed on the Nasdaq Global Market under the symbol “PODD.”
 
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 8.
 
                 
    Per Share   Total
 
Initial public offering price
  $           $        
Underwriting discount
  $       $    
Proceeds to Insulet Corporation, before expenses
  $       $  
 
We have granted the underwriters an option for a period of 30 days to purchase up to           additional shares of our common stock on the same terms and conditions set forth above to cover overallotments, if any.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares of common stock to investors on          , 2007.
 
JPMorgan Merrill Lynch & Co.
 
Thomas Weisel Partners LLC Leerink Swann & Company
 
, 2007


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  F-1
 Ex-10.1 Development and License Agreement, dated January 23, 2002
 Ex-10.2 Lease between William J Callahan and Insulet Corporation, dated July 15, 2004
 Ex-10.3 Credit and Security Agreement, dated as of December 27, 2006
 Ex-21.1 List of Subsidiaries
 Ex-23.2 Consent of Ernst & Young LLP
 
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.
 
No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.
 
OMNIPOD and the OMNIPOD design are registered trademarks of ours, and INSULET and POD are trademarks of ours. Other products, services and company names mentioned in this prospectus are the service marks/trademarks of their respective owners, including, but not limited to, FREESTYLE, which is a registered trademark of Abbott Diabetes Care, Inc., and NAVIGATOR, which is a registered trademark of Abbott Laboratories.
 
Our estimates of market share and market size in this prospectus were based on, in certain cases, public disclosure, industry and trade publications and reports prepared by third parties, which we believe to be reliable, but the accuracy and completeness of this information is not guaranteed. While we believe that these market data and industry forecasts are reliable, we have not independently verified, and make no representation as to the accuracy of, this information.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. Because this section is only a summary, it does not contain all of the information that may be important to you or that you should consider before making an investment decision. For a more complete understanding of this offering, we encourage you to read this entire prospectus, including the information contained in the section entitled “Risk Factors.” You should read the following summary together with the more detailed information and consolidated financial information and the notes thereto included in this prospectus. In this prospectus, unless the context otherwise requires, the terms “Insulet,” “we,” “us,” “our” and “our company” refer to Insulet Corporation, a Delaware corporation, and its wholly-owned subsidiary.
 
Our Business
 
We are a medical device company that develops, manufactures and markets an innovative, discreet and easy-to-use insulin infusion system for people with insulin-dependent diabetes. Our proprietary OmniPod Insulin Management System, which consists of our OmniPod disposable insulin infusion device and our handheld, wireless Personal Diabetes Manager, is the only commercially-available insulin infusion system of its kind. Conventional insulin pumps require people with insulin-dependent diabetes to learn to use, manage and wear a number of cumbersome components, including up to 42 inches of tubing. In contrast, the OmniPod System features only two discreet, easy-to-use devices that eliminate the need for a bulky pump, tubing and separate blood glucose meter, provide for virtually pain-free automated cannula insertion, communicate wirelessly and integrate a blood glucose meter. We believe that the OmniPod System’s unique proprietary design offers significant lifestyle benefits to people with insulin-dependent diabetes.
 
The U.S. Food and Drug Administration, or FDA, approved the OmniPod System in January 2005 and we began commercial sale of the OmniPod System in the United States in October 2005. As of December 31, 2006, we had sold the OmniPod System to approximately 1,200 people in the United States.
 
Our Market
 
Diabetes is a chronic, life-threatening disease for which there is no known cure. Diabetes is caused by the body’s inability to produce or effectively utilize the hormone insulin. This inability prevents the body from adequately regulating blood glucose levels. Glucose, the primary source of energy for cells, must be maintained at certain concentrations in the blood in order to permit optimal cell function and health. In people with diabetes, blood glucose levels fluctuate between very high levels, a condition known as hyperglycemia, and very low levels, a condition called hypoglycemia. Hyperglycemia can lead to serious short-term complications, such as confusion, vomiting, dehydration and loss of consciousness; long-term complications, such as blindness, kidney disease, nervous system disease, amputations, stroke and cardiovascular disease; or death. Hypoglycemia can lead to confusion, loss of consciousness or death.
 
The International Diabetes Federation, or IDF, estimated that diabetes currently affects 246 million people worldwide. The IDF expects that by 2025, 380 million people worldwide will be affected by diabetes due to increasing overall life expectancy, worsening diet trends, increasingly sedentary lifestyles and the growing incidence of obesity. Frost & Sullivan estimated that in 2006, 20.7 million people in the United States, or approximately 7% of the population, had diabetes, and reported that it expected this number to increase to 23.9 million people by 2011. Diabetes is typically classified as either Type 1, which is characterized by the body’s nearly complete inability to produce insulin, or Type 2, which is the more common form and is characterized by the body’s inability to either properly utilize or produce enough insulin. Some Type 2 diabetes patients can control their blood glucose levels using exercise, diet and/or oral medications. However, all Type 1 diabetes patients and a subset of Type 2 diabetes patients require daily insulin therapy, typically administered via injections or conventional insulin pumps, to survive. Throughout this prospectus, we refer to both Type 1 diabetes and insulin-requiring Type 2 diabetes as insulin-dependent diabetes. Frost & Sullivan estimated that in 2006, there were 4.9 million people with insulin-dependent diabetes in the United States.
 
Many healthcare professionals believe that blood glucose levels are controlled more effectively when insulin therapy more closely mimics the functioning of a normal pancreas; that is, when it is more


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physiological. Intensive insulin management has emerged as the best way for people with insulin-dependent diabetes to achieve near-normal blood glucose levels. Today, there are two primary methods for practicing intensive insulin management: multiple daily injection, or MDI, therapy with syringes or insulin pens, or continuous subcutaneous insulin infusion, or CSII, therapy using conventional insulin pumps. CSII therapy is considered the more physiological therapy of the two, and several studies have proven its clinical superiority over MDI therapy.
 
To date, CSII therapy has required the use of conventional insulin pumps. Conventional insulin pumps are generally pager-sized, cartridge-loaded devices typically worn on the patient’s belt or in a pocket with up to 42 inches of external tubing connected to a cannula that is manually inserted beneath the patient’s skin using relatively large and painful introducer needles. Conventional insulin pumps also require patients to use a separate blood glucose meter. According to Frost & Sullivan, the market for equipment relating to CSII therapy, consisting of conventional insulin pumps and pump supplies, was $564.4 million in 2003 and is expected to increase at a compounded annual growth rate of 15.9% through 2010. Although CSII therapy has been shown to be clinically superior to MDI therapy for managing diabetes, we currently estimate that of the approximately 1.2 million people with Type 1 diabetes in the United States, only approximately 250,000, or 21%, of these people use CSII therapy. We believe that the utilization of CSII therapy among people with insulin-dependent diabetes has been impeded by the obtrusive design, complexity and large up-front cost of conventional insulin pumps.
 
Our Solution: The OmniPod System
 
The OmniPod Insulin Management System utilizes award-winning proprietary designs and technology to combine the functionality of a conventional insulin pump with that of a blood glucose meter in an innovative, discreet and easy-to-use two-part system consisting of the OmniPod and the Personal Diabetes Manager.
 
  •  The OmniPod, measuring 1.6 x 2.4 x 0.7 inches and weighing 1.2 ounces, is a small, lightweight, self-adhesive, disposable insulin infusion device that the patient wears directly on the skin beneath clothing for up to three days and then replaces. During wear, the OmniPod delivers precise, personalized doses of insulin through a small, flexible tube, called a cannula, inserted beneath the skin once at the beginning of wear via an automated, hands-free insertion process. The OmniPod is watertight and does not need to be removed for showering, swimming or exercise, thereby eliminating the interruptions of therapy associated with the disconnecting of conventional insulin pumps.
 
  •  The Personal Diabetes Manager, or PDM, measuring 2.6 x 4.3 x 1.0 inches, is a wireless, menu-driven, hand-held device, similar in size and appearance to a personal digital assistant. The patient uses the PDM to program the OmniPod with personalized insulin delivery instructions and to check blood glucose levels using FreeStyle test strips. The PDM facilitates diabetes management by seamlessly integrating blood glucose results into suggested bolus calculations, incorporating a food reference library, and storing and displaying carbohydrate, insulin delivery and blood glucose records in one device. The PDM also features a large display, large font and a backlight to enhance readability for people with various levels of vision acuity in any setting. When the PDM is not in use, it can be stored conveniently in a purse, pocket, backpack or briefcase.
 
We believe that there is a very strong consumer element to diabetes management. The OmniPod System was designed to provide an innovative diabetes management solution to people with insulin-dependent diabetes and expand the use of CSII therapy by overcoming many of the key drawbacks of conventional insulin pumps. A significant portion of our customers report being former long-term insulin-injecting Type 1 diabetes patients who have now decided to switch to CSII therapy. Based on these reports, we believe we are expanding the market for CSII therapy by attracting MDI therapy users who had previously foregone the proven clinical benefits of CSII therapy. We believe that the OmniPod System’s proprietary designs and unique functionality offer patients unprecedented discretion, comfort and ease in using CSII therapy to manage their diabetes, while providing a low up-front cost alternative for patients and third-party payors and reducing the training burden for healthcare professionals.


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We believe that the following attributes of our solution will lead to the rapid adoption of the OmniPod System as a leading technology in CSII therapy:
 
  •  discreet, two-part design;
 
  •  no tubing;
 
  •  virtually pain-free automated cannula insertion;
 
  •  easy to train, learn and use; and
 
  •  low up-front cost and pay-as-you-go pricing structure.
 
Our Strategy
 
Our goals are to expand the use of CSII therapy and to become a leading provider of CSII technology for people with insulin-dependent diabetes. We believe that the OmniPod System’s innovative design and ease-of-use will significantly expand the pool of candidates and the market for CSII therapy and make it the CSII therapy system of choice for healthcare professionals, people with insulin-dependent diabetes and third-party payors. The principal elements of our business strategy include:
 
  •  promoting awareness of the OmniPod System among thought leaders, key academic centers, diabetes clinics and top insulin-prescribing healthcare professionals;
 
  •  promoting awareness and trial experience of the OmniPod System among people with insulin-dependent diabetes;
 
  •  expanding third-party payor coverage for the OmniPod System;
 
  •  enhancing our automated manufacturing capabilities to increase capacity and reduce per unit production costs;
 
  •  continuing research and development efforts to enhance the features of the OmniPod System and reduce per unit production costs; and
 
  •  maintaining a customer-focused approach.
 
Our Sales and Marketing Strategy
 
Our sales and marketing effort is focused on generating demand and acceptance of the OmniPod System among healthcare professionals, people with insulin-dependent diabetes and third-party payors. We believe that focusing efforts on these three key participants is important given the instrumental role they each play in the decision-making process for diabetes therapy. Our marketing strategy is to build awareness of the benefits of the OmniPod System through a wide range of education programs, patient demonstration programs, support materials and events at the national, regional and local levels.
 
To date, we have focused our sales and marketing efforts on the East Coast region of the United States in order to align the demand for the OmniPod System with our current capacity to manufacture the OmniPod. As we automate and expand our manufacturing capabilities, we plan to expand our sales and marketing efforts across the United States and internationally and commence broader direct-to-consumer campaigns.
 
Our Manufacturing Strategy
 
We believe a key contributing factor to the overall attractiveness of the OmniPod System is the OmniPod disposable insulin infusion device. To manufacture sufficient volumes of the OmniPod, each of which is worn for up to three days and then replaced, and to achieve a low per unit production cost, we have designed the OmniPod to be manufactured through a highly automated process.
 
We are currently producing the OmniPod on a partially automated manufacturing line at our facility in Bedford, Massachusetts. During 2008, we intend to complete the planned automation of our existing line and begin construction of a second manufacturing line. The construction of automated manufacturing lines is


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important to increase volumes and thereby reduce the per unit cost to manufacture the OmniPod and allow us to achieve profitability. Increased volumes will allow for volume purchase discounts to reduce raw material costs and improve absorption of manufacturing overhead costs. We continue to explore alternative site and contract manufacturing capabilities both domestically and abroad to ensure that we have sufficient capacity to meet future product demand and are able to achieve cost efficiencies as we grow our business. For example, to that end, we recently entered into a contract manufacturing agreement with a subsidiary of Flextronics International Ltd. for the supply of a sub-assembly of some of the OmniPod’s components.
 
Risk Factors
 
Our business is subject to numerous risks as discussed more fully in the section entitled “Risk Factors” immediately following this prospectus summary. Principal risks of our business include:
 
  •  We have incurred significant operating losses since inception, are currently selling the OmniPod System at a loss and cannot assure you that we will achieve profitability.
 
  •  We currently rely entirely on sales of our sole product, the OmniPod System, to generate revenues. The failure of the OmniPod System to achieve and maintain significant market acceptance or any factors that negatively impact sales of this product will adversely affect our business, financial condition and results of operations.
 
  •  Our ability to achieve profitability from a current net loss level will depend on our ability to reduce the per unit cost of manufacturing the OmniPod through the successful implementation of our automated manufacturing strategy or otherwise.
 
  •  Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations.
 
  •  Failure to secure or retain adequate coverage or reimbursement for the OmniPod System by third-party payors could adversely affect our business, financial condition and results of operations.
 
  •  We face competition from numerous competitors, most of whom have far greater resources than we have, which may make it more difficult for us to achieve significant market penetration and which may allow them to develop additional products for the treatment of diabetes that compete with the OmniPod System.
 
  •  The patent rights on which we rely to protect the intellectual property underlying the OmniPod System may not be adequate, which could enable third parties to use our technology and would harm our continued ability to compete in the market.
 
  •  Claims that our current or future products infringe or misappropriate the proprietary rights of others could adversely affect our ability to sell those products and cause us to incur additional costs.
 
Our Corporate Information
 
Insulet Corporation is a Delaware corporation formed in 2000. Our principal offices are located at 9 Oak Park Drive, Bedford, Massachusetts 01730, and our telephone number is (781) 457-5000. Our website address is http://www.MyOmniPod.com. We do not incorporate the information on, or accessible through, our website into this prospectus, and you should not consider it part of this prospectus.


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The Offering
 
Common stock offered:           shares.
 
Common stock to be outstanding immediately following the offering:           shares.
 
Use of proceeds: We expect to receive net proceeds from this offering of approximately $      million. We intend to use the proceeds to complete and enhance our automated manufacturing capabilities thereby increasing our manufacturing capacity, to expand our sales and marketing activities, to fund research and development, and for general corporate purposes. See the section entitled “Use of Proceeds.”
 
Dividend policy: We do not anticipate paying any cash dividends on our common stock.
 
Proposed Nasdaq Global Market symbol: “PODD.”
 
The number of shares of our common stock to be outstanding immediately following this offering is based on 47,030,895 shares of our common stock outstanding as of December 31, 2006 (as adjusted to reflect the conversion of all our outstanding preferred stock into 45,830,219 shares of our common stock upon the closing of this offering), which excludes:
 
  •  6,089,765 shares of our common stock issuable upon the exercise of outstanding stock options as of December 31, 2006, at a weighted average exercise price per share of $1.20;
 
  •  577,831 shares of our common stock issuable upon the exercise of warrants outstanding as of December 31, 2006, at a weighted average exercise price per share of $2.94; and
 
  •  1,539,799 shares of our common stock reserved for future issuance under our 2000 Stock Option and Incentive Plan.
 
Unless otherwise indicated, the information in this prospectus assumes that the underwriters will not exercise the overallotment option granted to them by us, and has been adjusted to reflect:
 
  •  the filing of our Eighth Amended and Restated Certificate of Incorporation and the adoption of our Amended and Restated By-Laws immediately prior to the effectiveness of this offering;
 
  •  conversion of all of our outstanding preferred stock into 45,830,219 shares of our common stock upon the closing of this offering;
 
  •  automatic conversion of the existing warrants to purchase 330,579 shares of Series D preferred stock and 247,252 shares of Series E preferred stock into warrants to purchase 330,579 and 247,252 shares of our common stock, respectively, upon the closing of this offering; and
 
  •  the filing of our Ninth Amended and Restated Certificate of Incorporation upon the closing of this offering.


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Summary Consolidated Financial Data
 
The summary consolidated financial data for the years ended December 31, 2003, 2004 and 2005 have been derived from our historical financial statements audited by Ernst & Young LLP, an independent registered public accounting firm. The summary consolidated financial data for the nine months ended September 30, 2005 and 2006 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus, which in our opinion contain all adjustments necessary for a fair presentation of the consolidated financial data. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, the unaudited consolidated financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. Results for interim periods are not necessarily indicative of results that may be expected for a full fiscal year. Historical results are not necessarily indicative of the results expected in the future.
 
The following summary consolidated financial data should be read in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Consolidated Financial Data” and our consolidated financial statements and the accompanying notes to those consolidated financial statements included in this prospectus.
 
                                         
                      Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2003     2004     2005     2005     2006  
                      (Unaudited)  
    (In thousands, except share and per share data)  
 
Consolidated Statements of Operations Data:
                                       
Revenue
  $     $     $ 50     $     $ 2,022  
Cost of revenue
                1,530             11,718  
                                         
Gross loss
                (1,480 )           (9,696 )
                                         
Operating expenses:
                                       
Research and development
    8,659       9,026       10,764       8,675       5,891  
General and administrative
    2,809       3,950       5,490       4,111       5,574  
Sales and marketing
    546       1,177       3,771       2,369       4,286  
                                         
Total operating expenses
    12,014       14,153       20,025       15,155       15,751  
                                         
Loss from operations
    (12,014 )     (14,153 )     (21,505 )     (15,155 )     (25,447 )
Other income (expense), net
    73       332       (131 )     33       377  
                                         
Net loss
    (11,941 )     (13,821 )     (21,636 )     (15,122 )     (25,070 )
Accretion of redeemable convertible preferred stock
    (77 )     (64 )                 (222 )
                                         
Net loss attributable to common stockholders
  $ (12,018 )   $ (13,885 )   $ (21,636 )   $ (15,122 )   $ (25,292 )
                                         
Net loss per share basic and diluted(1)
  $ (16.81 )   $ (18.22 )   $ (27.01 )   $ (19.01 )   $ (27.57 )
                                         
Weighted-average number of shares used in calculating net loss per share
    714,780       762,128       801,069       795,267       917,276  
Pro forma net loss per share basic and diluted(1)(2)
                  $ (0.65 )           $ (0.56 )
Pro forma weighted-average number of shares used in calculating net loss per share(2)
                    33,085,540               45,417,357  
 
 
(1)  See note 3 to our consolidated financial statements included in this prospectus for an explanation of the method used to calculate basic and diluted net loss per common share and pro forma basic and diluted net loss per common share.
 
(2)  Pro forma numbers assume all preferred stock is converted one-for-one into common stock in connection with this offering.


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                            As of
 
    As of December 31,     As of
    September 30, 2006
 
    2003     2004     2005     September 30, 2006     As Adjusted(1)  
                      (Unaudited)  
    (In thousands)  
 
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 4,328     $ 23,999     $ 7,660     $ 25,090     $    
Working capital
  $ 2,841     $ 22,151     $ 5,168     $ 19,934     $    
Total assets
  $ 4,958     $ 27,121     $ 16,792     $ 44,907     $    
Long-term debt, net of current portion
  $     $     $ 8,302     $ 6,339     $    
Other long-term liabilities
  $ 11     $     $ 315     $ 487     $    
Redeemable convertible preferred stock and warrants
  $ 34,000     $ 69,500     $ 69,751     $ 119,760     $    
Total stockholders’ deficit
  $ (30,650 )   $ (44,509 )   $ (66,091 )   $ (90,916 )   $             
 
 
(1) On an as adjusted basis to give effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock into common stock upon the closing of this offering, and to reflect the sale of shares of our common stock in this offering at an assumed initial public offering price of $       per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, the mid-point of the range reflected on the cover page of this prospectus, would increase (decrease) each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $       million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase of 1.0 million shares in the number of shares offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price of $       per share, would increase each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $       million. Similarly, each decrease of 1.0 million shares in the number of shares offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price of $           per share, would decrease each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $           million. The pro forma information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.
 


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RISK FACTORS
 
You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before investing in our common stock. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, you may lose all or part of your investment. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially adversely affect our business, financial condition or results of operations.
 
Risks Relating to Our Business
 
We have incurred significant operating losses since inception, are currently selling the OmniPod System at a loss and cannot assure you that we will achieve profitability.
 
Since our inception in 2000, we have incurred losses every quarter. We began commercial sales of the OmniPod System in October 2005 and we are currently not able to manufacture and sell the OmniPod System at a cost and in volumes sufficient to allow us to achieve profitability. The extent of our future operating losses and the timing of profitability are highly uncertain, and we may never achieve or sustain profitability. We have incurred a significant net loss since our inception, including a net loss of $25.1 million for the nine months ended September 30, 2006. As of September 30, 2006, we had an accumulated deficit of $91.2 million.
 
We currently rely entirely on sales of our sole product, the OmniPod System, to generate revenues. The failure of the OmniPod System to achieve and maintain significant market acceptance or any factors that negatively impact sales of this product will adversely affect our business, financial condition and results of operations.
 
Our sole product is the OmniPod System, which we introduced to the market in October 2005. We expect to derive substantially all of our revenue from the sale of this product. Accordingly, our ability to generate revenues is entirely reliant on our ability to market and sell the devices that comprise the OmniPod System. Our sales of the OmniPod System may be negatively impacted by many factors, including:
 
  •  the failure of the OmniPod System to achieve acceptance among opinion leaders in the diabetes treatment community, insulin-prescribing physicians, third-party payors and people with insulin-dependent diabetes;
 
  •  manufacturing problems;
 
  •  changes in reimbursement rates or policies relating to the OmniPod System by third-party payors;
 
  •  claims that any portion of the OmniPod System infringes on patent rights or other intellectual property rights owned by other parties;
 
  •  adverse regulatory or legal actions relating to the OmniPod System;
 
  •  damage, destruction or loss of any of our automated assembly units;
 
  •  competitive pricing and related factors; and
 
  •  results of clinical studies relating to the OmniPod System or our competitors’ products.
 
If any of these events occurs, our ability to generate revenues could be significantly reduced.
 
Our ability to achieve profitability from a current net loss level will depend on our ability to reduce the per unit cost of manufacturing the OmniPod through the successful implementation of our automated manufacturing strategy or otherwise.
 
Currently, the sale price of the OmniPod System is not sufficient to cover our direct manufacturing costs. We are in the process of completing the construction, testing and installation of automated manufacturing equipment to be used in the assembly of the OmniPod in order to increase our manufacturing volume. Increased volumes will allow for volume purchase discounts to reduce our raw material costs and improve


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absorption of manufacturing overhead costs. During 2008, we expect to complete the planned automation of our existing manufacturing line, which is designed exclusively for the manufacture of the OmniPod, and begin construction of a second manufacturing line. Pending construction and installation of the remaining automated manufacturing equipment that we plan to use, we are manually performing these steps in the manufacturing process, which limits our ability to increase our manufacturing capacity and decrease our per unit cost of goods sold, thereby causing us to incur negative gross margins. We are also exploring alternative site manufacturing capabilities both domestically and abroad. We cannot assure you that we will successfully complete the planned automation of our existing manufacturing line or subsequent lines in the future or otherwise reduce the per unit cost of manufacturing the OmniPod. Failure to do so would limit our production capacity and our ability to reduce raw material and manufacturing overhead costs. If we are unable to reduce raw material and manufacturing overhead costs through volume purchase discounts and increased production capacity, our ability to achieve profitability will be severely constrained.
 
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations.
 
We rely on a number of suppliers who manufacture the components of the OmniPods and PDMs. For example, we rely on Phillips Plastic Corporation to manufacture and supply a number of injection molded components of the OmniPod and Freescale Semiconductor, Inc. to manufacture and supply the application specific integrated circuit that is incorporated into the OmniPod. Each of these suppliers is a sole-source supplier. In addition, we have entered into a contract manufacturing agreement with a subsidiary of Flextronics International Ltd. for the supply of a sub-assembly of some of the OmniPod’s components. We do not have long-term supply agreements with the suppliers of most of our components, and, in most cases, we purchase these components on a purchase order basis. In some other cases, where we do have agreements in place, our agreements with our suppliers can be terminated by either party upon short notice. Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these third-party suppliers also subjects us to other risks that could harm our business, including:
 
  •  we are not a major customer of many of our suppliers, and these suppliers may therefore give other customers’ needs higher priority than ours;
 
  •  we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms;
 
  •  our suppliers, especially new suppliers, may make errors in manufacturing components that could negatively affect the efficacy or safety of the OmniPod System or cause delays in shipment;
 
  •  we may have difficulty locating and qualifying alternative suppliers for our sole-source supplies;
 
  •  switching components may require product redesign and submission to the U.S. Food and Drug Administration, or FDA, of a 510(k) supplement;
 
  •  our suppliers manufacture products for a range of customers, and fluctuations in demand for the products these suppliers manufacture for others may affect their ability to deliver components to us in a timely manner; and
 
  •  our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements.
 
We may not be able to quickly establish additional or replacement suppliers, particularly for our sole-source components, in part because of the FDA approval process and because of the custom nature of various parts we require. Any interruption or delay in the supply of components, or our inability to obtain components from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competing products.


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Failure to secure or retain adequate coverage or reimbursement for the OmniPod System by third-party payors could adversely affect our business, financial condition and results of operations.
 
We expect that sales of the OmniPod System will be limited unless a substantial portion of the sales price of the OmniPod System is paid for by third-party payors, including private insurance companies, health maintenance organizations, preferred provider organizations and other managed care providers. As of December 31, 2006, we have entered into contracts establishing reimbursement for the OmniPod System with national and regional third-party payors that cover an estimated 78 million lives. While we anticipate entering into additional contracts with other third-party payors doing business in these states, we cannot assure you that we will be successful in doing so. In addition, these contracts can generally be terminated by the third-party payor without cause. Also, healthcare market initiatives in the United States may lead third-party payors to decline or reduce reimbursement for the OmniPod System. Moreover, compliance with administrative procedures or requirements of third-party payors may result in delays in processing approvals by those payors for patients to obtain coverage for the use of the OmniPod System. Failure to secure or retain adequate coverage or reimbursement for the OmniPod System by third-party payors could have a material adverse effect on our business, financial condition and results of operations.
 
We face competition from numerous competitors, most of whom have far greater resources than we have, which may make it more difficult for us to achieve significant market penetration and which may allow them to develop additional products for the treatment of diabetes that compete with the OmniPod System.
 
The medical device industry is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The OmniPod System competes with a number of existing insulin delivery devices as well as other methods for the treatment of diabetes. Medtronic MiniMed, a division of Medtronic, Inc., has been the market leader for many years and has the majority share of the conventional insulin pump market in the United States. Other significant suppliers in the United States are Animas Corporation, a division of Johnson & Johnson, and Deltec, a division of Smiths Medical MD, Inc. In October 2006, following the lifting of an FDA ban on the import of Disetronic insulin pumps, Roche Disetronic, a division of Roche Diagnostics, announced its re-entry into the conventional insulin pump market in the United States.
 
All of these competitors are large, well-capitalized companies with significantly more market share and resources than we have. As a consequence, they are able to spend more aggressively on product development, marketing, sales and other product initiatives than we can. Many of these competitors have:
 
  •  significantly greater name recognition;
 
  •  established relations with healthcare professionals, customers and third-party payors;
 
  •  established distribution networks;
 
  •  additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or other incentives to gain a competitive advantage;
 
  •  greater experience in conducting research and development, manufacturing, clinical trials, marketing and obtaining regulatory approval for products; and
 
  •  greater financial and human resources for product development, sales and marketing and patent litigation.
 
We also compete with multiple daily injection, or MDI, therapy, which is substantially less expensive than CSII therapy. MDI therapy has been made more effective by the introduction of long-acting insulin analogs by both sanofi-aventis and Novo Nordisk AS. While we believe that CSII therapy, in general, and the OmniPod System, in particular, have significant competitive and clinical advantages over traditional MDI therapy, improvements in the effectiveness of MDI therapy may result in fewer people with insulin-dependent diabetes converting from MDI therapy to CSII therapy than we expect and may result in negative price pressure.
 
Our current competitors or other companies may at any time develop additional products for the treatment of diabetes. For example, there is an inhaled insulin product that was recently introduced by Pfizer Inc., and


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other diabetes-focused pharmaceutical companies, including Abbott Laboratories, Eli Lilly and Company, MannKind Corporation, Novo Nordisk AS and Takeda Pharmaceuticals Company Limited, are developing similar products. All of these competitors are large, well-capitalized companies with significantly greater product development resources than we have. If an existing or future competitor develops a product that competes with or is superior to the OmniPod System, our revenues may decline. In addition, some of our competitors may compete by changing their pricing model or by lowering the price of their insulin delivery systems or ancillary supplies. If these competitors’ products were to gain acceptance by healthcare professionals, people with insulin-dependent diabetes or third-party payors, a downward pressure on prices could result. If prices were to fall, we may not improve our gross margins or sales growth sufficiently to achieve profitability.
 
Technological breakthroughs in diabetes monitoring, treatment or prevention could render the OmniPod System obsolete.
 
The diabetes treatment market is subject to rapid technological change and product innovation. The OmniPod System is based on our proprietary technology, but a number of companies, medical researchers and existing pharmaceutical companies are pursuing new delivery devices, delivery technologies, sensing technologies, procedures, drugs and other therapeutics for the monitoring, treatment and/or prevention of insulin-dependent diabetes. For example, FDA approval of a commercially viable “closed-loop” system that combines continuous “real-time” glucose sensing or monitoring and automatic continuous subcutaneous insulin infusion in a manner that delivers appropriate amounts of insulin on a timely basis without patient direction could have a material adverse effect on our revenues and future profitability. We have an agreement with Abbott Diabetes Care, Inc., a global healthcare company that develops continuous glucose monitoring technology, to develop a product that will integrate the receiver portion of Abbott’s continuous glucose monitor, the FreeStyle Navigator, with the OmniPod System PDM. The FreeStyle Navigator is currently pending FDA approval and is not available on the market. Medtronic, Inc. has developed an FDA-approved product combining continuous glucose sensing and CSII therapy and if we fail to do so, we may be at a significant competitive disadvantage, which could negatively impact our business. In addition, the National Institutes of Health and other supporters of diabetes research are continually seeking ways to prevent, cure or improve the treatment of diabetes. Any technological breakthroughs in diabetes monitoring, treatment or prevention could render the OmniPod System obsolete, which may have a material adverse effect on our business, financial condition and results of operations.
 
If our existing license agreement with Abbott Diabetes Care, Inc. is terminated or we fail to enter into new license agreements allowing us to incorporate a blood glucose meter into the OmniPod System, our business may be materially adversely impacted.
 
Our rights to incorporate the FreeStyle blood glucose meter into the OmniPod System are governed by a development and license agreement with Abbott Diabetes Care, Inc., as the successor to TheraSense, Inc. This agreement provides us with a non-exclusive, fully paid, non-transferable and non-sublicensable license in the United States under patents and other relevant technical information relating to the FreeStyle blood glucose meter during the term of the agreement. The term of the agreement is for seven years, with automatic renewals for subsequent three-year periods unless either party provides written notice of termination at least 90 days prior to the scheduled expiration of the then-current term. The current term is scheduled to expire in January 2009. The agreement may also be terminated by Abbott if it discontinues its FreeStyle blood glucose meter or test strips or by either party if the other party is acquired by a competitor of the first party or materially breaches its obligations under the agreement. Termination of this agreement could require us to either remove the blood glucose meter from PDMs to be sold in the future, which would impair the functionality of the OmniPod System, or attempt to incorporate an alternative blood glucose meter into the PDM, which would require us to acquire rights to or develop an alternative blood glucose meter, incorporate it into the OmniPod System and obtain regulatory approval for the new OmniPod System. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.
 
Additionally, in the future, we may need additional licenses to intellectual property owned by third parties in order to commercialize new products. If we cannot obtain these additional licenses, we may not be able to


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develop or commercialize these future products. Our rights to use technologies licensed to us by third parties are not entirely within our control, and we may not be able to continue selling the OmniPod System or sell future products without these technologies.
 
The patent rights on which we rely to protect the intellectual property underlying the OmniPod System may not be adequate, which could enable third parties to use our technology and would harm our continued ability to compete in the market.
 
Our success will depend in part on our continued ability to develop or acquire commercially-valuable patent rights and to protect these rights adequately. Our patent position is generally uncertain and involves complex legal and factual questions. The risks and uncertainties that we face with respect to our patents and other related rights include the following:
 
  •  the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents;
 
  •  the claims of any patents that are issued may not provide meaningful protection;
 
  •  we may not be able to develop additional proprietary technologies that are patentable;
 
  •  other parties may challenge patents, patent claims or patent applications licensed or issued to us; and
 
  •  other companies may design around technologies we have patented, licensed or developed.
 
We also may not be able to protect our patent rights effectively in some foreign countries. For a variety of reasons, we may decide not to file for patent protection. Our patent rights underlying the OmniPod System may not be adequate, and our competitors or customers may design around our proprietary technologies or independently develop similar or alternative technologies or products that are equal or superior to ours without infringing on any of our patent rights. In addition, the patents licensed or issued to us may not provide a competitive advantage. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.
 
Other rights and measures we have taken to protect our intellectual property may not be adequate, which would harm our ability to compete in the market.
 
In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, confidentiality, non-disclosure and assignment of invention agreements and other contractual provisions and technical measures to protect our intellectual property rights. While we currently require employees, consultants and other third parties to enter into confidentiality, non-disclosure or assignment of invention agreements, or a combination thereof where appropriate, any of the following could still occur:
 
  •  the agreements may be breached;
 
  •  we may have inadequate remedies for any breach;
 
  •  trade secrets and other proprietary information could be disclosed to our competitors; or
 
  •  others may independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technologies.
 
If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and have a material adverse effect on our business, financial condition and results of operations.
 
We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.
 
We rely on patents to protect a portion of our intellectual property and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in the medical device industry are generally uncertain. In order to protect or


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enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to:
 
  •  assert claims of infringement;
 
  •  enforce our patents;
 
  •  protect our trade secrets or know-how; or
 
  •  determine the enforceability, scope and validity of the proprietary rights of others.
 
Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.
 
Claims that our current or future products infringe or misappropriate the proprietary rights of others could adversely affect our ability to sell those products and cause us to incur additional costs.
 
Substantial litigation over intellectual property rights exists in the medical device industry. We expect that we could be increasingly subject to third-party infringement claims as our revenues increase, the number of competitors grows and the functionality of products and technology in different industry segments overlaps. Third parties may currently have, or may eventually be issued, patents on which our current or future products or technologies may infringe. For example, we are aware of certain patents and patent applications owned by our competitors that cover different aspects of insulin infusion and the related devices. Any of these third parties might make a claim of infringement against us. Any litigation, regardless of its outcome, would likely result in the expenditure of significant financial resources and the diversion of management’s time and resources. In addition, litigation in which we are accused of infringement may cause negative publicity, adversely impact prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing or selling our current or future products, require us to develop non-infringing technology, make substantial payments to third parties or enter into royalty or license agreements, which may not be available on acceptable terms or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our revenues may decrease substantially and we could be exposed to significant liability. A court could enter orders that temporarily, preliminarily or permanently enjoin us or our customers from making, using, selling, offering to sell or importing our current or future products, or could enter an order mandating that we undertake certain remedial activities. Claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our reputation, business, financial condition or results of operations.
 
We are subject to extensive regulation by the U.S. Food and Drug Administration, which could restrict the sales and marketing of the OmniPod System and could cause us to incur significant costs.
 
We sell medical devices that are subject to extensive regulation by the FDA. These regulations relate to manufacturing, labeling, sale, promotion, distribution and shipping. Before a new medical device, or a new use of or claim for an existing product, can be marketed in the United States, it must first receive either 510(k) clearance or pre-market approval from the FDA, unless an exemption applies. We may be required to obtain a new 510(k) clearance or pre-market approval for significant post-market modifications to the OmniPod System. Each of these processes can be expensive and lengthy, and entail significant user fees, unless exempt. The FDA’s process for obtaining 510(k) clearance usually takes three to twelve months, but it can last longer. The process for obtaining pre-market approval is much more costly and uncertain and it generally takes from one to three years, or longer, from the time the application is filed with the FDA.
 
Medical devices may be marketed only for the indications for which they are approved or cleared. We have obtained 510(k) clearance for the current clinical applications for which we market our OmniPod System, which includes the use of U-100, which is a common form of insulin. However, our clearances can be revoked


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if safety or effectiveness problems develop. Further, we may not be able to obtain additional 510(k) clearances or pre-market approvals for new products or for modifications to, or additional indications for, the OmniPod System in a timely fashion or at all. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner which in turn would harm our revenue and future profitability. We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices. We also are subject to numerous post-marketing regulatory requirements, which include quality system regulations related to the manufacturing of our devices, labeling regulations and medical device reporting regulations, which require us to report to the FDA if our devices cause or contribute to a death or serious injury, or malfunction in a way that would likely cause or contribute to a death or serious injury. In addition, these regulatory requirements may change in the future in a way that adversely affects us. If we fail to comply with present or future regulatory requirements that are applicable to us, we may be subject to enforcement action by the FDA, which may include any of the following sanctions:
 
  •  untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
 
  •  customer notification, or orders for repair, replacement or refunds
 
  •  voluntary or mandatory recall or seizure of our current or future products;
 
  •  administrative detention by the FDA of medical devices believed to be adulterated or misbranded;
 
  •  imposing operating restrictions, suspension or shutdown of production;
 
  •  refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses or modifications to the OmniPod System;
 
  •  rescinding 510(k) clearance or suspending or withdrawing pre-market approvals that have already been granted; and
 
  •  criminal prosecution.
 
The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.
 
If we or our component suppliers fail to comply with the FDA’s quality system regulations, the manufacturing and distribution of our devices could be interrupted, and our product sales and operating results could suffer.
 
We and our component suppliers are required to comply with the FDA’s quality system regulations, which is a complex regulatory framework that covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The FDA enforces its quality system regulations through periodic unannounced inspections. We cannot assure you that our facilities or our component suppliers’ facilities would pass any future quality system inspection. If our or any of our component suppliers’ facilities fails a quality system inspection, the manufacturing or distribution of our devices could be interrupted and our operations disrupted. Failure to take adequate and timely corrective action in response to an adverse quality system inspection could force a suspension or shutdown of our packaging and labeling operations or the manufacturing operations of our contract manufacturers, or a recall of our devices. If any of these events occurs, we may not be able to provide our customers with the quantity of OmniPods they require on a timely basis, our reputation could be harmed and we could lose customers, any or all of which may have a material adverse effect on our business, financial condition and results of operations.
 
Our current or future products are subject to recalls even after receiving FDA clearance or approval, which would harm our reputation, business and financial results.
 
The FDA and similar governmental bodies in other countries have the authority to require the recall of our current or future products if we or our contract manufacturers fail to comply with relevant regulations


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pertaining to manufacturing practices, labeling, advertising or promotional activities, or if new information is obtained concerning the safety or efficacy of these products. A government-mandated recall could occur if the FDA finds that there is a reasonable probability that the device would cause serious, adverse health consequences or death. A voluntary recall by us could occur as a result of manufacturing defects, labeling deficiencies, packaging defects or other failures to comply with applicable regulations. Any recall would divert management attention and financial resources and harm our reputation with customers. A recall involving the OmniPod System would be particularly harmful to our business, financial condition and results of operations because it is currently our only product.
 
We are subject to federal and state laws prohibiting “kickbacks” and false or fraudulent claims, which, if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.
 
A federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state laws, prohibit payments that are intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. These laws constrain our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Because we may provide some coding and billing information to purchasers of the OmniPod System, and because we cannot assure that the government will regard any billing errors that may be made as inadvertent, these laws are potentially applicable to us. In addition, these laws are potentially applicable to us because we provide reimbursement to healthcare professionals for training patients on the use of the OmniPod System. Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance, which can be substantial. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to respond to, and thus could have a material adverse effect on our business, financial condition and results of operations.
 
If we are found to have violated laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business.
 
There are a number of federal and state laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we are found to be in violation of the privacy rules under HIPAA, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
 
Product liability suits, whether or not meritorious, could be brought against us due to an alleged defective product or for the misuse of our devices. These suits could result in expensive and time-consuming litigation, payment of substantial damages, and an increase in our insurance rates.
 
If our current or future products are defectively designed or manufactured, contain defective components or are misused, or if someone claims any of the foregoing, whether or not meritorious, we may become subject to substantial and costly litigation. Misusing our devices or failing to adhere to the operating guidelines of the OmniPod System could cause significant harm to patients, including death. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. While we believe that we are reasonably insured against these risks, we may not have sufficient


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insurance coverage for all future claims. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and could reduce revenues. Product liability claims in excess of our insurance coverage would be paid out of cash reserves harming our financial condition and adversely affecting our results of operations.
 
Our ability to grow our revenues depends in part on our retaining a high percentage of our customer base.
 
A key to driving our revenue growth is the retention of a high percentage of our customers. We have developed retention programs aimed at both the healthcare professionals and the patients, which include appeals assistance, patient training, 24/7 customer support and an automatic re-order program for patients. Since we began shipping the OmniPod System in October 2005, we have had a very high customer retention rate; however, we cannot assure you that we will maintain this retention rate in the future. The failure to retain a high percentage of our customers would negatively impact our revenue growth and may have a material adverse effect on our business, financial condition and results of operations.
 
We intend to sponsor market studies seeking to demonstrate certain aspects of the efficacy of the OmniPod System, which may fail to produce favorable results.
 
To help improve, market and sell the OmniPod System, we intend to sponsor market studies to assess various aspects of its functionality and its relative efficacy. The data obtained from the studies may be unfavorable to the OmniPod System or may be inadequate to support satisfactory conclusions. In addition, in the future we may sponsor clinical trials to assess certain aspects of the efficacy of the OmniPod System. If future clinical trials fail to support the efficacy of our current or future products, our sales may be adversely affected and we may lose an opportunity to secure clinical preference from prescribing clinicians, which may have a material adverse effect on our business, financial condition and results of operations.
 
If future clinical studies or other articles are published, or diabetes associations or other organizations announce positions that are unfavorable to the OmniPod System, our sales efforts and revenues may be negatively affected.
 
Future clinical studies or other articles regarding our existing products or any competing products may be published that either support a claim, or are perceived to support a claim, that a competitor’s product is clinically more effective or easier to use than the OmniPod System or that the OmniPod System is not as effective or easy to use as we claim. Additionally, diabetes associations or other organizations that may be viewed as authoritative could endorse products or methods that compete with the OmniPod System or otherwise announce positions that are unfavorable to the OmniPod System. Any of these events may negatively affect our sales efforts and result in decreased revenues.
 
If we expand, or attempt to expand, into foreign markets, we will be affected by new business risks that may adversely impact our business, financial condition and results of operations.
 
If we expand, or attempt to expand, into foreign markets, we will be subject to new business risks, including:
 
  •  failure to fulfill foreign regulatory requirements on a timely basis or at all to market the OmniPod System or other future products;
 
  •  availability of, and changes in, reimbursement within prevailing foreign health care payment systems;
 
  •  adapting to the differing laws and regulations, business and clinical practices, and patient preferences in foreign countries;
 
  •  difficulties in managing foreign relationships and operations, including any relationships that we establish with foreign distributors or sales or marketing agents;
 
  •  limited protection for intellectual property rights in some countries;
 
  •  difficulty in collecting accounts receivable and longer collection periods;


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  •  costs of enforcing contractual obligations in foreign jurisdictions;
 
  •  recessions in economies outside of the United States;
 
  •  political instability and unexpected changes in diplomatic and trade relationships;
 
  •  currency exchange rate fluctuations; and
 
  •  potentially adverse tax consequences.
 
If we are successful in introducing our current or future products into foreign markets, we will be affected by these additional business risks, which may adversely impact our business, financial condition and results of operations. In addition, expansion into foreign markets imposes additional burdens on our executive and administrative personnel, research and sales departments and general managerial resources. Our efforts to introduce our current or future products into foreign markets may not be successful, in which case we may have expended significant resources without realizing the expected benefit. Ultimately, the investment required for expansion into foreign markets could exceed the results of operations generated from this expansion.
 
All of our operations are currently conducted at a single location and any disruption at our facility could increase our expenses.
 
All of our operations are currently conducted at a single location in Bedford, Massachusetts. We take precautions to safeguard our facility, including insurance, health and safety protocols and off-site storage of computer data. However, a natural or other disaster, such as a fire or flood, could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against fires, floods and other natural disasters may not be adequate to cover our losses in any particular case. With or without insurance, damage to our manufacturing facility or our other property, or to any of our suppliers, due to fire, flood or other natural disaster or casualty event may have a material adverse effect on our business, financial condition and results of operations.
 
Our success will depend on our ability to attract and retain our personnel.
 
We have benefited substantially from the leadership and performance of our senior management, especially Duane DeSisto, our President and Chief Executive Officer, and Carsten Boess, our Chief Financial Officer. Our success will depend on our ability to retain our current management and to attract and retain qualified personnel in the future, including clinicians, engineers and other highly skilled personnel. Competition for senior management personnel, as well as clinicians and engineers, is intense and there can be no assurances that we will be able to retain our personnel. The loss of the services of Mr. DeSisto, Mr. Boess, certain other members of our senior management, clinicians or engineers could prevent or delay the implementation and completion of our objectives, or divert management’s attention to seeking a qualified replacement.
 
Additionally, the sale and after-sale support of the OmniPod System is logistically complex, requiring us to maintain an extensive infrastructure of field sales personnel, diabetes educators, customer support, insurance specialists, and billing and collections personnel. We face considerable challenges in recruiting, training, managing, motivating and retaining these teams, including managing geographically dispersed efforts. If we fail to maintain and grow an adequate pool of trained and motivated personnel, our reputation could suffer and our financial position could be adversely affected.
 
If we do not effectively manage our growth, our business resources may become strained, we may not be able to deliver the OmniPod System in a timely manner and our results of operations may be adversely affected.
 
To date, we have primarily focused our sales and marketing efforts on the East Coast region of the United States. As we expand our sales into the balance of the United States and internationally, we will need to obtain coverage contracts with additional third-party payors in those areas. Failure to obtain such contracts would limit our ability to successfully penetrate those areas. In addition, the geographic expansion of our business will require additional manufacturing capacity to supply those markets as well as additional sales and marketing resources.


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Subsequent to this offering, we expect to significantly increase our manufacturing capacity, our personnel and the scope of our sales and marketing efforts on a phased basis into the rest of the United States and internationally. This growth, as well as any other growth that we may experience in the future, will provide challenges to our organization and may strain our management and operations. In order to manage future growth, we will be required to improve existing, and implement new, management systems, sales and marketing efforts and distribution channels. We may also need to partner with additional third-party suppliers to manufacture certain components of the OmniPod System and complete the planned automation of our existing line as well as subsequent lines in the future. A transition to new suppliers may result in additional costs or delays. We may misjudge the amount of time or resources that will be required to effectively manage any anticipated or unanticipated growth in our business or we may not be able to manufacture sufficient inventory or attract, hire and retain sufficient personnel to meet our needs. If we cannot scale our business appropriately, maintain control over expenses or otherwise adapt to anticipated and unanticipated growth, our business resources may become strained, we may not be able to deliver the OmniPod System in a timely manner and our results of operations may be adversely affected.
 
Our future capital needs are uncertain and we may need to raise additional funds in the future, and these funds may not be available on acceptable terms or at all.
 
We believe that our current cash and cash equivalents, including the proceeds from this offering, together with our short-term investments and the cash to be generated from expected product sales, will be sufficient to meet our projected operating requirements for at least the next 12 months. However, we may seek additional funds from public and private stock offerings, borrowings under credit lines or other sources. Our capital requirements will depend on many factors, including:
 
  •  revenues generated by sales of the OmniPod System and any other future products that we may develop;
 
  •  costs associated with adding further manufacturing capacity;
 
  •  costs associated with expanding our sales and marketing efforts;
 
  •  expenses we incur in manufacturing and selling the OmniPod System;
 
  •  costs of developing new products or technologies and enhancements to the OmniPod System;
 
  •  the cost of obtaining and maintaining FDA approval or clearance of our current or future products;
 
  •  costs associated with any expansion;
 
  •  costs associated with capital expenditures;
 
  •  costs associated with litigation; and
 
  •  the number and timing of any acquisitions or other strategic transactions.
 
As a result of these factors, we may need to raise additional funds, and these funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to enhance the OmniPod System or develop new products, execute our business plan, take advantage of future opportunities or respond to competitive pressures or unanticipated customer requirements. If any of these events occur, it could adversely affect our business, financial condition and results of operations.


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We may experience significant fluctuations in our quarterly results of operations.
 
The fluctuations in our quarterly results of operations have resulted, and will continue to result, from numerous factors, including:
 
  •  delays in shipping due to capacity constraints;
 
  •  practices of health insurance companies and other third-party payors with respect to reimbursement for our current or future products;
 
  •  market acceptance of the OmniPod System;
 
  •  our ability to manufacture the OmniPod efficiently;
 
  •  timing of regulatory approvals and clearances;
 
  •  new product introductions;
 
  •  competition; and
 
  •  timing of research and development expenditures.
 
These factors, some of which are not within our control, may cause the price of our stock to fluctuate substantially. In particular, if our quarterly results of operations fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. We believe the quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
 
If we choose to acquire or invest in new businesses, products or technologies, instead of developing them ourselves, these acquisitions or investments could disrupt our business and could result in the use of significant amounts of equity, cash or a combination of both.
 
From time to time we may seek to acquire or invest in new businesses, products or technologies, instead of developing them ourselves. Acquisitions and investments involve numerous risks, including:
 
  •  the inability to complete the acquisition or investment;
 
  •  disruption of our ongoing businesses and diversion of management attention;
 
  •  difficulties in integrating the acquired entities, products or technologies;
 
  •  risks associated with acquiring intellectual property;
 
  •  difficulties in operating the acquired business profitably;
 
  •  the inability to achieve anticipated synergies, cost savings or growth;
 
  •  potential loss of key employees, particularly those of the acquired business;
 
  •  difficulties in transitioning and maintaining key customer, distributor and supplier relationships;
 
  •  risks associated with entering markets in which we have no or limited prior experience; and
 
  •  unanticipated costs.
 
In addition, any future acquisitions or investments may result in one or more of the following:
 
  •  dilutive issuances of equity securities, which may be sold at a discount to market price;
 
  •  the use of significant amounts of cash;
 
  •  the incurrence of debt;
 
  •  the assumption of significant liabilities;
 
  •  increased operating costs or reduced earnings;


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  •  financing obtained on unfavorable terms;
 
  •  large one-time expenses; and
 
  •  the creation of certain intangible assets, including goodwill, the write-down of which in future periods may result in significant charges to earnings.
 
Any of these factors could materially harm our stock price, business, financial condition and results of operations.
 
Our credit and security agreement contains restrictions and covenants that may limit our operating flexibility and which, if violated, could result in the acceleration of the amounts due under this agreement.
 
On December 27, 2006, we entered into a credit and security agreement with a group of lenders led by Merrill Lynch Capital pursuant to which we borrowed $30.0 million in a term loan. This term loan is secured by all of our assets other than our intellectual property assets. The credit and security agreement imposes certain limitations on us, including limitations on our ability to do the following, subject to certain exceptions:
 
  •  transfer all or any part of our businesses or properties, other than transfers done in the ordinary course of business;
 
  •  engage in any business other than the business of designing, manufacturing, distributing and selling drug delivery devices and providing associated services or a reasonably related business;
 
  •  merge or consolidate with or into any other business organization;
 
  •  suffer or permit a change of control;
 
  •  incur additional indebtedness;
 
  •  incur liens with respect to any of our properties;
 
  •  pay dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock;
 
  •  directly or indirectly acquire or own, or make any investment in, any entity;
 
  •  directly or indirectly enter into or permit to exist any transaction with any of our affiliates except transactions that are on terms that are no less favorable to us than would be obtained in an arm’s length transaction with a non-affiliate;
 
  •  acquire any assets other than in the ordinary course of business;
 
  •  incur any liability for rental payments except in the ordinary course of business; or
 
  •  enter into any sale and leaseback transaction.
 
Additionally, under the agreement, we must complete construction of a second manufacturing line for the OmniPods by March 31, 2009, which deadline may be extended to June 30, 2009 in specified circumstances.
 
Complying with these restrictions and covenants may make it more difficult for us to successfully execute our business strategy and compete against companies who are not subject to similar restrictions and covenants. Additionally, if we violate any of these restrictions or covenants, our lenders under this agreement may accelerate all of our outstanding indebtedness and other amounts due under the credit and security agreement and, if we do not pay these amounts, proceed against the collateral securing these obligations.
 
We will incur increased costs as a result of recently enacted and proposed changes in laws and regulations relating to corporate governance matters.
 
The laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted thereunder by the Securities and Exchange Commission, or SEC, will result in increased costs to us as we become a publicly-traded company. As a public company, we will be required to comply with many of these rules and regulations, and may be required to comply with additional rules and


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regulations in the future. For example, we are evaluating our internal controls systems in order to allow us to report on, and our independent registered public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. In addition, these efforts will divert management’s time and attention away from our business in order to ensure compliance with these regulatory requirements. This diversion of management’s time and attention may have a material adverse effect on our business, financial condition and results of operations. These new rules and regulations may also make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.
 
If we are unable to successfully maintain effective internal control over financial reporting and disclosure controls and procedures, investors may lose confidence in our reported financial information and our stock price and our business may be adversely impacted.
 
As a public company, after an initial transition period, we will be required to maintain internal control over financial reporting and our management will be required to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year. Additionally, we will be required to disclose in our annual reports on Form 10-K our management’s assessment of the effectiveness of our internal control over financial reporting and a registered public accounting firm’s attestation report on this assessment. As a public company, we will also be required to maintain disclosure controls and procedures, which encompass most of our internal control over financial reporting. Our principal executive officer and principal financial officer will be required to evaluate our disclosure controls and procedures as of the end of each quarter and disclose in our annual reports on Form 10-K and our quarterly reports on Form 10-Q their conclusions regarding the effectiveness of these controls and procedures. If we are not successful in establishing effective internal control over financial reporting or disclosure controls and procedures, there could be inaccuracies or omissions in the information we are required to file with the Securities and Exchange Commission, including our consolidated financial information. Additionally, even if there are no inaccuracies or omissions, we will be required to publicly disclose the conclusion of our management that our internal control over financial reporting or disclosure controls and procedures are not effective. These events could cause investors to lose confidence in our reported financial information, adversely impact our stock price, result in increased costs to remediate any deficiencies, attract regulatory scrutiny or lawsuits that could be costly to resolve and distract management’s attention, limit our ability to access the capital markets or cause our stock to be delisted from the Nasdaq Global Market or any other securities exchange on which it is then listed.
 
Risks Relating to this Offering
 
Our common stock has not been publicly traded and we expect that the price of our common stock will fluctuate substantially.
 
Prior to this offering, there has been no public market for shares of our common stock. An active public trading market may not develop following completion of this offering or, if developed, may not be sustained. The price of the shares of our common stock sold in this offering will be determined by negotiation between the underwriters and us. This price will not necessarily reflect the market price of our common stock following this offering. The market price of our common stock following this offering will be affected by a number of factors, including:
 
  •  failure to maintain and increase manufacturing capacity and reduce per unit production costs;
 
  •  changes in the availability of third-party reimbursement in the United States or other countries;
 
  •  volume and timing of orders for the OmniPod System;
 
  •  developments in administrative proceedings or litigation related to intellectual property rights;
 
  •  issuance of patents to us or our competitors;


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  •  the announcement of new products or product enhancements by us or our competitors;
 
  •  the announcement of technological or medical innovations in the treatment or diagnosis of diabetes;
 
  •  changes in governmental regulations or in the status of our regulatory approvals or applications;
 
  •  developments in our industry;
 
  •  publication of clinical studies relating to the OmniPod System or a competitor’s product;
 
  •  quarterly variations in our or our competitors’ results of operations;
 
  •  changes in earnings estimates or recommendations by securities analysts; and
 
  •  general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
 
Future sales of shares of our common stock in the public market, or the perception that such sales may occur, may depress our stock price and make it difficult for you to recover the full value of your investment in our shares.
 
If our existing stockholders sell substantial amounts of our common stock in the public market following this offering, or if there is a perception that these sales may occur, the market price of our common stock could decline. Upon closing of this offering, we will have outstanding           shares of our common stock. Of these shares, only           shares held by former employees of ours who did not enter into lock-up agreements and the shares of our common stock sold in this offering, plus any of the shares purchased pursuant to the exercise of the underwriters’ overallotment option, will be freely tradable, without restriction, in the public market. We have obtained lock-up agreements from our current stockholders representing over 98% of our outstanding common stock preventing, with limited exceptions, those stockholders from selling their stock for a period of 180 days from the date of this prospectus, subject to certain extensions described under the section entitled “Underwriting,” unless waived prior to the expiration of the applicable period.
 
After the lock-up agreements pertaining to this offering expire, approximately           additional shares will be eligible for sale in the public market at various times, subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended. Holders of substantially all of such shares of our common stock have the right to require us to register such shares for sale under the Securities Act in certain circumstances and also have the right to include those shares in a registration initiated by us. If we are required to include the shares of our common stock of these stockholders pursuant to these registration rights in a registration initiated by us, sales made by such stockholders may adversely affect the price of our common stock and our ability to raise needed capital. In addition, if these stockholders exercise their demand registration rights and cause a large number of shares to be registered and sold in the public market or demand that we register their shares on a shelf registration statement, such sales or shelf registration may have an adverse effect on the market price of our common stock.
 
Following this offering, we also intend to file one or more registration statements with the SEC covering, as of December 31, 2006, 1,539,799 shares of our common stock available for future issuance under our 2000 Stock Option and Incentive Plan and 6,089,765 shares of our common stock issuable upon the exercise of our outstanding stock options. Upon effectiveness of such registration statements, any shares subsequently issued under such plans will be eligible for sale in the public market, except to the extent that they are restricted by the lock-up agreements referred to above and subject to compliance with Rule 144 in the case of our affiliates. Sales of a large number of shares of our common stock issued under these plans in the public market may have an adverse effect on the market price of our common stock. For more information regarding the sale of shares subsequently issued under such plans and the permissible sale of our common stock by existing stockholders after the closing of this offering, see the section entitled “Shares Eligible for Future Sale.”
 
You will incur immediate and substantial dilution as a result of this offering.
 
The initial public offering price is substantially higher than the book value per share of our common stock. As a result, purchasers in this offering will experience immediate and substantial dilution of $      per


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share in the tangible book value of our common stock from the initial public offering price assuming an initial public offering price of $      per share (the midpoint of the range on the front cover of this prospectus). In addition, to the extent that currently outstanding options to purchase common stock are exercised, there will be further dilution. For more information, see the section entitled “Dilution.”
 
We have broad discretion in the use of the net proceeds we receive from this offering and may not use them effectively.
 
We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in “Use of Proceeds.” Accordingly, you will have to rely upon the judgment of our management with respect to the use of the net proceeds, with only limited information concerning management’s specific intentions. Our management may spend a portion or all of the net proceeds we receive from this offering in ways that our stockholders may not desire or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds we receive from this offering in a manner that does not produce income or that loses value.
 
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
 
Our restated certificate of incorporation and restated bylaws to be in effect upon completion of this offering contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions:
 
  •  authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of our common stock;
 
  •  provide for a classified board of directors, with each director serving a staggered three-year term;
 
  •  prohibit our stockholders from filling board vacancies, calling special stockholder meetings or taking action by written consent;
 
  •  provide for the removal of a director only with cause and by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of our directors; and
 
  •  require advance written notice of stockholder proposals and director nominations.
 
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our restated certificate of incorporation, restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including a merger, tender offer or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.
 
We do not intend to pay cash dividends.
 
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of our existing debt facility prohibits us from paying any dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of potential gain for the foreseeable future.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
The statements contained in this prospectus, including under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this prospectus that are not purely historical, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. Forward-looking statements in this prospectus may include, for example, statements about:
 
  •  our estimates regarding revenues, expenses, capital requirements and needs for additional financing;
 
  •  the timing of our completion of the planned automation of our existing production line as well as subsequent lines in the future;
 
  •  our manufacturing capacity in future periods;
 
  •  our ability to reduce the per unit production cost of the OmniPod;
 
  •  our research, development, commercialization, and other activities and projected expenditures;
 
  •  our ability to obtain regulatory approvals for any future products;
 
  •  our intellectual property position;
 
  •  our use of proceeds from this offering;
 
  •  our cash needs;
 
  •  our plans to pursue the use of the OmniPod System technology for the delivery of drugs other than insulin;
 
  •  the implementation of our business strategies, including our alternative manufacturing strategies and the expansion of our sales and marketing efforts across the United States and internationally; and
 
  •  our financial performance.
 
The forward-looking statements contained in this prospectus 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, those factors described in the section entitled “Risk Factors.” 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 publicly 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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USE OF PROCEEDS
 
We estimate that the net proceeds from the sale of           shares of our common stock that we are offering will be approximately $      million, based on an assumed initial public offering price of $      per share (the midpoint of the range on the front cover of this prospectus) and after deducting the estimated underwriting discount and estimated offering expenses payable by us. If the underwriters’ overallotment option is exercised in full, we estimate that we will receive net proceeds of approximately $      million.
 
We intend to use the proceeds from this offering for:
 
  •  the completion and enhancement of our automated manufacturing capabilities to increase our manufacturing capacity;
 
  •  the expansion of our sales and marketing activities;
 
  •  the funding of research and development; and
 
  •  general corporate purposes.
 
As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. The amounts and timing of our actual expenditures will depend on numerous factors, including the implementation of our manufacturing strategy, the status of our product development efforts, our sales and marketing activities, the amount of cash generated or used by our operations and competition. Accordingly, our management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering.
 
Until we use the net proceeds of this offering for the above purposes, we intend to invest the funds in short-term, investment-grade, interest-bearing securities. We cannot predict whether these investments will yield a favorable return.
 
DIVIDEND POLICY
 
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings in our business, and we do not anticipate paying any cash dividends. Whether or not to declare any dividends will be at the discretion of our board of directors, considering then-existing conditions, including the terms of our credit arrangements as well as our financial condition and results of operations, capital requirements, business prospects and other factors that our board of directors considers relevant.


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CAPITALIZATION
 
The following table presents our cash and cash equivalents and total capitalization as of September 30, 2006:
 
  •  on an actual basis; and
 
  •  on an as adjusted basis to reflect: (1) the conversion of all of our outstanding preferred stock into 45,830,219 shares of our common stock upon the closing of this offering, (2) the automatic conversion of the existing warrant to purchase 330,579 shares of Series D preferred stock into a warrant to purchase 330,579 shares of our common stock upon the closing of this offering, and (3) the sale of           shares of our common stock in this offering at an assumed initial public offering price of $      per share, after deducting the estimated underwriting discount and estimated offering expenses payable by us.
 
You should read this table together with our consolidated financial statements and related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.
 
                 
    As of September 30, 2006  
    Actual     As Adjusted  
    (Unaudited)  
    (In thousands, except share data)  
 
Cash and cash equivalents
  $ 25,090     $        
                 
Current portion of long-term debt
    2,648          
Long-term debt, net of current portion
    6,339          
Other long-term liabilities
    487          
Warrants for redeemable convertible preferred stock
    251          
Redeemable convertible preferred stock, $0.001 par value; 46,160,798 shares authorized, actual; 45,830,219 shares issued and outstanding, actual; no shares issued and outstanding, as adjusted
    119,509          
Stockholders’ deficit:
               
Common stock, $0.001 par value; 65,000,000 shares authorized, actual;       shares authorized, as adjusted; 1,025,757 shares issued and outstanding, actual; and          issued and outstanding, as adjusted
    1          
Additional paid-in capital
    262          
Accumulated deficit
    (91,160 )        
Subscription receivable
    (19 )        
                 
Total stockholders’ deficit
    (90,916 )   $  
                 
Total capitalization
  $ 38,318     $  
                 
 
The number of shares of our common stock to be outstanding after this offering is based on 1,025,757 shares outstanding as of September 30, 2006 on an actual basis and excludes:
 
  •  6,195,367 shares of our common stock issuable upon the exercise of outstanding stock options as of September 30, 2006, at a weighted average exercise price per share of $1.14; 
 
  •  1,609,116 shares of our common stock reserved for future issuance under our 2000 Stock Option and Incentive Plan; and
 
  •  330,579 shares of our common stock issuable upon the exercise of an outstanding warrant as of September 30, 2006, at an exercise price of $2.42 per share, assuming the automatic conversion of the existing warrant to purchase 330,579 shares of Series D preferred stock into a warrant to purchase 330,579 shares of our common stock, which will occur upon the closing of this offering.


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DILUTION
 
If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share you will pay in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.
 
Our pro forma net tangible book value per share as of September 30, 2006 was approximately $28.8 million, or $0.61 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets minus total liabilities, divided by the total number of shares of common stock outstanding as of September 30, 2006, after giving effect to the conversion of all of our outstanding preferred stock into 45,830,219 shares of our common stock and the automatic conversion of the existing warrant to purchase 330,579 shares of Series D preferred stock into a warrant to purchase 330,579 shares of our common stock upon the closing of this offering.
 
After giving effect to the sale of the           shares of our common stock we are offering at an assumed initial public offering price of $      per share, and after deducting the estimated underwriting discount and our estimated offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2006 would have been approximately $     , or $      per share. This represents an immediate increase in pro forma net tangible book value of $      per share and an immediate dilution of $      per share to new investors. The following table illustrates this calculation on a per share basis:
 
                 
Assumed initial public offering price per share
              $        
Pro forma net tangible book value per share of common stock as of September 30, 2006
  $ 0.61          
Increase per share attributable to this offering
               
                 
Pro forma as adjusted net tangible book value per share of common stock after this offering
               
                 
Pro forma dilution per share to new investors
          $    
                 
 
If the underwriters exercise their overallotment option in full, pro forma as adjusted net tangible book value will increase to $      per share, representing an increase to existing holders of $      per share, and there will be an immediate dilution of $      per share to new investors.
 
The following table summarizes, on a pro forma as adjusted basis as of September 30, 2006, after giving effect to this offering at an assumed initial public offering price of $      per share and the pro forma adjustments referred to above, the total number of shares of our common stock purchased from us and the total consideration and average price per share paid by existing stockholders and by new investors:
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     Percentage     Amount     Percentage     per Share  
 
Existing Stockholders
    46,855,976       %   $ 119,642,246       %   $ 2.55  
                                         
New Investors
            %             %        
                                         
Total
            100 %   $         100 %        
                                         
 
If the underwriters exercise their overallotment option in full, the following will occur:
 
  •  the pro forma as adjusted percentage of shares of our common stock held by existing stockholders will decrease to approximately     % of the total number of pro forma as adjusted shares of our common stock outstanding after this offering and the total consideration paid for those shares, as a percentage of the total consideration paid for all of our shares of our common stock outstanding after this offering on a pro forma as adjusted basis, will decrease to     %; and
 
  •  the pro forma as adjusted number of shares of our common stock held by new public investors will increase to          , or approximately     % of the total pro forma as adjusted number of shares of our common stock outstanding after this offering and the total consideration paid for those shares, as a


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  percentage of the total consideration paid for all shares of our common stock outstanding after this offering on a pro forma as adjusted basis, will increase to     %.
 
The tables and calculations above are based on 1,025,757 shares of our common stock outstanding as of September 30, 2006, on an actual basis, and exclude:
 
  •  6,195,367 shares of our common stock issuable upon the exercise of outstanding stock options as of September 30, 2006, at a weighted average exercise price per share of $1.14, and
 
  •  330,579 shares of our common stock issuable upon the exercise of an outstanding warrant as of September 30, 2006, at an exercise price per share of $2.42, assuming the conversion of the existing warrant to purchase 330,579 shares of Series D preferred stock into a warrant to purchase 330,579 shares of our common stock, which is to occur at the closing of this offering.
 
If all of our outstanding options and our outstanding warrant as of September 30, 2006, had been exercised as of that date, the pro forma as adjusted net tangible book value per share after this offering would be $      per share and total dilution to new investors would be $      per share.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The selected consolidated financial data for the years ended December 31, 2002, 2003, 2004 and 2005 have been derived from our historical financial statements audited by Ernst & Young LLP, an independent registered public accounting firm. The selected consolidated financial data for the year ended December 31, 2001 have been derived from our unaudited consolidated financial statements not included in this prospectus. The selected consolidated financial data for the nine months ended September 30, 2005 and 2006 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus, which in our opinion contain all adjustments necessary for a fair presentation of the consolidated financial data. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, the unaudited financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. Results for interim periods are not necessarily indicative of results that may be expected for a full fiscal year. Historical results are not necessarily indicative of the results expected in the future.
 
The following selected consolidated financial data should be read in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes to those consolidated financial statements included in this prospectus.
 
                                                         
                                  Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2001     2002     2003     2004     2005     2005     2006  
    (Unaudited)                             (Unaudited)  
    (In thousands, except share and per share data)  
 
Consolidated Statements of Operations Data:
                                                       
Revenue
  $     $     $     $     $ 50     $     $ 2,022  
Cost of revenue
                            1,530             11,718  
                                                         
Gross loss
                            (1,480 )           (9,696 )
                                                         
Operating expenses:
                                                       
Research and development
    4,431       9,458       8,659       9,026       10,764       8,675       5,891  
General and administrative
    994       2,534       2,809       3,950       5,490       4,111       5,574  
Sales and marketing
    360       680       546       1,177       3,771       2,369       4,286  
                                                         
Total operating expenses
    5,785       12,672       12,014       14,153       20,025       15,155       15,751  
                                                         
Loss from operations
    (5,785 )     (12,672 )     (12,014 )     (14,153 )     (21,505 )     (15,155 )     (25,447 )
Other income (expense), net
    84       92       73       332       (131 )     33       377  
                                                         
Net loss
    (5,701 )     (12,580 )     (11,941 )     (13,821 )     (21,636 )     (15,122 )     (25,070 )
Accretion of redeemable convertible preferred stock
    (74 )     (93 )     (77 )     (64 )                 (222 )
                                                         
Net loss attributable to common stockholders
  $ (5,775 )   $ (12,673 )   $ (12,018 )   $ (13,885 )   $ (21,636 )   $ (15,122 )   $ (25,292 )
                                                         
Net loss per share basic and diluted(1)
  $ (9.00 )   $ (16.22 )   $ (16.81 )   $ (18.22 )   $ (27.01 )   $ (19.01 )   $ (27.57 )
                                                         
Weighted-average number of shares used in calculating net loss per share
    641,941       781,122       714,780       762,128       801,069       795,267       917,276  
Pro forma net loss per share basic and diluted(1)(2)
                                  $ (0.65 )           $ (0.56 )
Pro forma weighted-average number of shares used in calculating net loss per share(2)
                                    33,085,540               45,417,357  
 
 
(1)  See note 3 to our consolidated financial statements included in this prospectus for an explanation of the method used to calculate basic and diluted net loss per common share and pro forma basic and diluted net loss per common share.
 
(2)  Pro forma numbers assume all preferred stock is converted one-for-one into common stock in connection with this offering.


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                                        As of
 
    As of December 31,     As of
    September 30, 2006
 
    2001     2002     2003     2004     2005     September 30, 2006     As Adjusted(1)  
    (Unaudited)                             (Unaudited)  
    (In thousands)  
 
Consolidated Balance Sheet Data:
                                                       
Cash and cash equivalents
  $ 6,959     $ 16,964     $ 4,328     $ 23,999     $ 7,660     $ 25,090     $        
Working capital
  $ 5,447     $ 15,435     $ 2,841     $ 22,151     $ 5,168     $ 19,934     $        
Total assets
  $ 7,551     $ 17,511     $ 4,958     $ 27,121     $ 16,792     $ 44,907     $        
Long-term debt, net of current portion
  $     $     $     $     $ 8,302     $ 6,339     $        
Other long-term liabilities
  $     $     $ 11     $     $ 315     $ 487     $        
Redeemable convertible preferred stock and warrants
  $ 12,000     $ 34,000     $ 34,000     $ 69,500     $ 69,751     $ 119,760     $        
Total stockholders’ deficit
  $ (6,044 )   $ (18,653 )   $ (30,650 )   $ (44,509 )   $ (66,091 )   $ (90,916 )   $        
 
 
(1) On an as adjusted basis to give effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock into common stock upon the closing of this offering, and to reflect the sale of shares of our common stock in this offering at an assumed initial public offering price of $       per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, the mid-point of the range reflected on the cover page of this prospectus, would increase (decrease) each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $       million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase of 1.0 million shares in the number of shares offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price of $       per share, would increase each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $       million. Similarly, each decrease of 1.0 million shares in the number of shares offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price of $           per share, would decrease each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $           million. The pro forma information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.


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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 selected financial data, our financial statements and the accompanying notes to those financial statements included in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.
 
Overview
 
We are a medical device company that develops, manufactures and markets an innovative, discreet and easy-to-use insulin infusion system for people with insulin-dependent diabetes. Our proprietary OmniPod Insulin Management System, which consists of our OmniPod disposable insulin infusion device and our handheld, wireless Personal Diabetes Manager, is the only commercially-available insulin infusion system of its kind. Conventional insulin pumps require people with insulin-dependent diabetes to learn to use, manage and wear a number of cumbersome components, including up to 42 inches of tubing. In contrast, the OmniPod System features only two discreet, easy-to-use devices that eliminate the need for a bulky pump, tubing and separate blood glucose meter, provide for virtually pain-free automated cannula insertion, communicate wirelessly and integrate a blood glucose meter. We believe that the OmniPod System’s unique proprietary design offers significant lifestyle benefits to people with insulin-dependent diabetes.
 
We believe that the advantages of the OmniPod System over conventional insulin pumps create an attractive market opportunity for the OmniPod System, when combined with:
 
  •  the established clinical data showing the superiority of intensive insulin management therapies over conventional therapies in delaying the onset and reducing the severity of diabetes-related medical complications;
 
  •  the existing market for equipment relating to continuous subcutaneous insulin infusion, or CSII, therapy, which was $564.4 million in 2003 according to Frost & Sullivan; and
 
  •  the potential for growth in the market due to the relatively low number of people with insulin-dependent diabetes who are using CSII therapy.
 
Since inception, we have devoted substantially all of our efforts to designing and developing the OmniPod System, raising capital and recruiting personnel. As a result, we were considered a development stage company pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by Development Stage Enterprises, through December 31, 2005. The year 2006 is the first year during which we are an operating company and are no longer in the development stage. In October 2005, we shipped our first commercial OmniPod System. Since October 2005, in order to align the demand for the OmniPod System with our capacity to manufacture the OmniPod, we have engaged in limited marketing efforts focused on the East Coast region of the United States and with some key diabetes practitioners, academic centers and clinics elsewhere in the United States. Our total revenues were $2.0 million for the nine months ended September 30, 2006. As of December 31, 2006, we had sold the OmniPod System to approximately 1,200 customers.
 
At present, the expansion of our business is constrained by our current capacity to manufacture the OmniPod insulin infusion device, and our primary near-term goal is to expand our manufacturing volume for OmniPods. Currently, the sale price of the OmniPod System is not sufficient to cover our direct manufacturing costs. We are in the process of completing the construction, testing and installation of automated manufacturing equipment to be used in the assembly of the OmniPod in order to increase our manufacturing volume. Increased volumes will allow for volume purchase discounts to reduce our raw material costs and improve absorption of manufacturing overhead costs.
 
During 2008, we expect to complete the planned automation of our existing manufacturing line, which is designed exclusively for the manufacture of the OmniPod, and begin construction of a second manufacturing


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line. Pending construction and installation of the remaining automated manufacturing equipment that we plan to use, we are manually performing these steps in the manufacturing process, which limits our ability to increase our manufacturing capacity and decrease our per unit cost of goods sold, thereby causing us to incur negative gross margins. We are exploring alternative site manufacturing capabilities both domestically and abroad. No assurances can be given that we will successfully complete the planned automation of our existing manufacturing line or subsequent lines in the future or otherwise reduce the per unit cost of manufacturing the OmniPod. Failure to do so would limit our production capacity and not allow us to achieve per unit cost improvements, which could severely constrain our ability to achieve profitability.
 
Additionally, as a medical device company, reimbursement from third-party payors is an important element of our success. If patients are not adequately reimbursed for the costs of using the OmniPod System, it will be much more difficult for us to penetrate the market. As of December 31, 2006, we have entered into contracts establishing reimbursement for the OmniPod System with national and regional third-party payors that cover an estimated 78 million lives, and we believe that substantially all of the units sold have been reimbursed by third-party payors, subject to applicable deductible and co-payment amounts. As we expand our sales and marketing focus and increase our manufacturing capacity, we will need to maintain and expand available reimbursement for the OmniPod System.
 
Since our inception in 2000, we have incurred losses every quarter. In the nine month period ended September 30, 2006, we incurred a net loss of $25.1 million compared to a net loss of $15.1 million for the same period in 2005. As of September 30, 2006, we had an accumulated deficit of $91.2 million. We have financed our operations through the private placement of equity securities and secured indebtedness. As of September 30, 2006, we had $9.0 million of secured debt outstanding, and, since inception, we had received net proceeds of $119.5 million from the issuance of redeemable convertible preferred stock. We entered into a new credit and security agreement on December 27, 2006 with a group of lenders led by Merrill Lynch Capital pursuant to which we borrowed $30.0 million in a term loan that was used in part to repay the $9.0 million secured debt outstanding as of September 30, 2006.
 
Our long-term financial objective is to achieve and sustain profitable growth. Our efforts in 2007 will be focused primarily on expanding our manufacturing capacity, reducing our per unit production costs and expanding our sales and marketing efforts for the OmniPod System. The expansion of our manufacturing capacity will allow us to increase production volumes which will help us to achieve lower material costs due to volume purchase discounts and improve the absorption of manufacturing overhead costs. Achieving these objectives is expected to require additional investments in manufacturing and additional hiring of sales and administrative personnel with the goal of increasing our market penetration. We believe that we will continue to incur net losses in the near term in order to achieve these objectives, although we believe that the accomplishment of these combined efforts will have a positive impact on our financial condition in the future.
 
Financial Operations Overview
 
Revenues.  Revenues are recognized in accordance with Securities and Exchange Staff Accounting Bulletin No. 104, or SAB 104 and Statement of Financial Accounting Standards No. 48, Revenue Recognition when the Right of Return Exists, or SFAS 48. We derive all of our revenues from the sale of the OmniPod System directly to patients. The OmniPod System is comprised of two devices: the OmniPod, a disposable insulin infusion device that the patient wears for up to three days and then replaces; and the Personal Diabetes Manager, or PDM, a handheld device much like a personal digital assistant that wirelessly programs the OmniPod with insulin delivery instructions, assists the patient with diabetes management and incorporates a blood glucose meter. Revenues are derived from the sale to new customers of OmniPods and Starter Kits, which include the PDM, two OmniPods, the OmniPod System User Guide and our Interactive Training CD, and from the follow-on sales of OmniPods to existing customers. Customers generally order a three-month supply of OmniPods. Our first commercial shipment was in October 2005, and we recognized no revenue before this time. During the year ended December 31, 2005 and the nine months ended September 30, 2006, all of our revenues were derived from sales within the United States. During that period, we deferred recognition of revenue from the OmniPods and Starter Kit shipped as part of a customer’s initial shipment for 30 days during which time the items could be returned and completely refunded.


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In 2007, we expect our revenues to increase, but we expect that this increase will continue to be limited by our OmniPod manufacturing capacity. We expect our OmniPod manufacturing capacity to grow as we continue the process of automating our OmniPod manufacturing process, but we do not expect the most significant increase in manufacturing capacity to occur until substantially all of the OmniPod manufacturing process is automated. We expect that by increasing the automation of our current manufacturing line, we could increase its maximum output significantly above the output as of September 30, 2006. However, we are still in the process of designing and testing the custom equipment that we will need in order to automate our OmniPod manufacturing process, and we cannot be assured that our efforts will be successful. Additionally, increased revenues will be dependent upon the success of our sales efforts and subject to many risk and uncertainties, some of which are detailed in the section of this prospectus titled “Risk Factors.”
 
Cost of revenues.  Cost of revenues consists primarily of raw material, labor, warranty and overhead costs related to the OmniPod System. Cost of revenues also includes depreciation, distribution, and freight and packaging costs. Currently, the sale price of the OmniPod System is not sufficient to cover the direct manufacturing costs. Accordingly, inventory has been adjusted down to reflect the values at the lower of cost or market. In 2007, we expect the cost of revenues to decrease as a percentage of revenues due to expected reductions in per unit raw materials costs associated with volume purchase discounts and increases in our OmniPod manufacturing capacity as our OmniPod manufacturing process becomes more automated. The increase in our OmniPod manufacturing capacity is expected to reduce the per unit cost of manufacturing the OmniPods by allowing us to spread our fixed and semi-fixed overhead costs over a greater number of units. However, if sales volumes do not increase or we are not successful in our efforts to fully automate the OmniPod manufacturing process, then the average cost of revenues per OmniPod may not decrease and we may continue to realize negative gross margins.
 
Research and development.  Research and development expenses consist primarily of personnel costs within our product development, regulatory and clinical functions, and the costs of market studies and product development projects. We expense all research and development costs as incurred. In 2007, we expect overall research and development spending to increase to support our current research and development efforts, which are focused primarily on increased functionality, design for ease of use and reduction of production cost, as well as developing a new OmniPod System that incorporates continuous glucose monitoring technology.
 
Sales and marketing.  Sales and marketing expenses consist primarily of personnel costs within our sales, marketing, reimbursement support, customer support and training functions, sales commissions paid to our sales representatives and costs associated with participation in medical conferences, physician symposia and promotional activities, including distribution of units used in our demonstration kit programs. In 2007, we expect sales and marketing expenses to more than double compared to 2006 as we hire additional sales and marketing personnel, incur additional sales commission expense related to sales growth and expand our sales and marketing efforts, which will include the implementation of broader direct-to-consumer marketing programs and the roll-out of our Patient Demonstration Kit Program.
 
General and administrative.  General and administrative expenses consist primarily of salaries and other related costs for personnel serving the executive, finance, information technology and human resource functions, as well as legal fees, accounting fees, insurance costs and facilities-related costs. We expect general and administrative expenses to increase as we increase personnel and become subject to reporting requirements as a publicly-held company.
 
Stock based compensation expense.  Prior to January 1, 2006, we accounted for our stock option plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by the Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, or SFAS 123. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS Statement No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, using the prospective method and therefore we have not restated our financial results for prior periods.


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Results of Operations
 
The following table presents certain statement of operations information for the years ended December 31, 2003, 2004 and 2005 and the nine months ended September 30, 2005 and 2006:
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2003     2004     2005     2005     2006  
                      (Unaudited)  
    (Audited)              
    (In thousands)  
 
Revenues
  $     $     $ 50     $     $ 2,022  
Cost of revenues
                1,530             11,718  
                                         
Gross loss
                (1,480 )           (9,696 )
Operating expenses:
                                       
Research and development
    8,659       9,026       10,764       8,675       5,891  
General and administrative
    2,809       3,950       5,490       4,111       5,574  
Sales and marketing
    546       1,177       3,771       2,369       4,286  
                                         
Total operating expenses
    12,014       14,153       20,025       15,155       15,751  
                                         
Loss from operations
    (12,014 )     (14,153 )     (21,505 )     (15,155 )     (25,447 )
Other income (expense), net
    73       332       (131 )     33       377  
                                         
Net loss(1)
    (11,941 )     (13,821 )     (21,636 )     (15,122 )     (25,070 )
                                         
 
 
(1) Net loss for the nine months ended September 30, 2006 includes $400,000 for stock based compensation expense attributable to common stockholders as required by SFAS 123R. We adopted SFAS 123R on a prospective basis so previous periods are not restated.
 
Comparison of Nine Months Ended September 30, 2006 and September 30, 2005
 
Revenues
 
Our total revenues were $2.0 million for the nine months ended September 30, 2006. We had no revenues for the nine months ended September 30, 2005 as we did not begin commercial shipment of the OmniPod System until October 2005. As we continue our sales and marketing efforts into 2007, we expect our revenues to increase, but this increase will continue to be limited by our OmniPod manufacturing capacity.
 
Cost of Revenues
 
Cost of revenues for the nine months ended September 30, 2006 was $11.7 million, attributable to the commercial sales of the OmniPod System. Since we did not commence commercial sales of the OmniPod System until October 2005, we did not have any cost of revenues for the nine months ended September 30, 2005. Cost of revenues include inventory write down and indirect costs. Since the OmniPods are sold at a price below direct manufacturing costs, inventory was adjusted down $1.1 million as of September 30, 2006 to reflect values at the lower of cost or market. Stock based compensation expense for the nine month period ended September 30, 2006 allocated to cost of revenues was $27,000.
 
Research and Development
 
Research and development expense decreased $2.8 million, or 32.1%, to $5.9 million for the nine months ended September 30, 2006 from $8.7 million for the same period in 2005. The decrease in research and development expense was primarily related to reductions of salary, consulting fees, materials and supplies incurred in connection with testing and design of the prototypes amounting to $2.8 million. More specifically, the decrease in research and development expense was attributable to a reduction of $936,000 in employee related expenses, $762,000 in consulting expenses, which was attributable to the reduced need for design services in 2006, $555,000 in prototype expenses, $381,000 in temporary employees and $308,000 in tools and services. Stock based compensation expense for research and development was $127,000 for the nine month period ended September 30, 2006.


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General and Administrative
 
General and administrative expenses increased $1.5 million, or 35.6%, to $5.6 million for the nine months ended September 30, 2006 from $4.1 million for the same period in 2005. The increase in expenses was primarily due to an increase of $1.1 million in employee compensation and benefit costs, $209,000 in stock based compensation and $109,000 in bad debt expense, as well as an expense of $344,000 related to the disposal of equipment, partially offset by a reduction in outside consulting expenses.
 
Sales and Marketing
 
Sales and marketing expenses increased $1.9 million, or 81.0%, to $4.3 million for the nine months ended September 30, 2006 from $2.4 million for the same period in 2005. The increase in expenses was primarily due to an increase of $890,000 in employee compensation and benefit costs resulting from the hiring of eleven additional employees in our sales and marketing department and an increase of $518,000 in demonstration kit units, $206,000 in marketing consultants, $310,000 on travel and tradeshow expenses used to support our selling efforts and stock based compensation expense for sales and marketing for the nine month period ended September 30, 2006 of $37,000.
 
Other Income (Expense)
 
Interest income was $1.2 million and $393,000 during the nine months ended September 30, 2006 and September 30, 2005, respectively, representing an increase of $807,000. Interest income was earned from investments in cash and cash equivalents. Interest income increased primarily due to higher combined average cash and cash equivalents resulting from the issuance of Series E preferred stock in February 2006. Interest expense was $792,000 and $360,000 during the nine months ended September 30, 2006 and 2005, respectively, representing an increase of $432,000. The increase in interest expense was primarily attributable to the interest expense on the $10.0 million loan from Lighthouse Capital Partners V, L.P. that we borrowed in June 2005 including the amortization of the discount associated with the warrant issued in connection with the term loan from Lighthouse Capital Partners. The warrant is valued at $251,240 and is being amortized over the 54-month repayment period. The amortization of the debt discount for the nine months ended September 30, 2006 was $42,000 compared to $19,000 for the same period in 2005 due to the warrant having been issued on June 2, 2005. In December 2006, we repaid the remaining balance of the term loan from Lighthouse Capital Partners in full with a portion of the proceeds from a $30.0 million term loan from a group of lenders led by Merrill Lynch Capital. Accordingly, we expect interest expense to increase in 2007. See “— Liquidity and Capital Resources.”
 
Comparison of Years Ended December 31, 2005 and December 31, 2004
 
Revenues
 
Our total revenues were $50,000 in 2005. Since we did not commence commercial sales of the OmniPod System until October 2005, we had no revenues in the year ended December 31, 2004.
 
Cost of Revenues
 
Cost of revenues for the year ended December 31, 2005 were $1.5 million, attributable to the commercial sales of the OmniPod System. Since we did not commence commercial sales of the OmniPod System until October 2005, we did not have any cost of revenues for the year ended December 31, 2004. Cost of revenues include inventory writedown and indirect costs.
 
Research and Development
 
Research and development expenses increased $1.7 million, or 19.2%, to $10.8 million for the year ended December 31, 2005 from $9.0 million for the year ended December 31, 2004. The increase in expenses was primarily due to an increase in expenses of $1.3 million in employee compensation and benefit costs resulting


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from the hiring of additional employees in our research and development department and an increase in cost of temporary employees of $853,000, partially offset by a decrease of $524,000 in outside consulting costs.
 
General and Administrative
 
General and administrative expenses increased $1.5 million, or 39.0%, to $5.5 million for the year ended December 31, 2005 from $3.9 million for the year ended December 31, 2004. The increase in expenses was primarily due to an increase of $884,000 in depreciation, an increase of $490,000 in rent expense for our new facility and an increase of $186,000 in employee compensation and benefit costs resulting from the hiring of additional employees.
 
Sales and Marketing
 
Sales and marketing expenses increased $2.6 million, or 220.3%, to $3.8 million for the year ended December 31, 2005 from $1.2 million for the year ended December 31, 2004. The increase in expenses was primarily due to an increase of $1.2 million in employee compensation and benefit costs resulting from the hiring of additional employees in our sales and marketing department, $645,000 increase in travel and trade show expenses, $365,000 increase in demonstration kit units and $337,000 increase in expenses relating to marketing studies used to support our selling efforts.
 
Other Income (Expense)
 
Interest income was $505,000 and $333,000 for the years ended December 31, 2005 and December 31, 2004, respectively, representing an increase of $172,000. Interest income increased primarily due to higher combined balance of average cash and cash equivalents from the issuance of Series D preferred stock. Interest expense was $636,000 for the year ended December 31, 2005 and $1,000 for the year ended December 31, 2004. The increase in interest expense was primarily attributable to the interest associated with the $10.0 million loan from Lighthouse Capital Partners that we borrowed in June 2005, including the amortization of the debt discount of $32,000 for the year ended December 31, 2005.
 
Comparison of Years Ended December 31, 2004 and December 31, 2003
 
Revenues
 
Since we did not commence commercial sales of the OmniPod System until October 2005, we had no revenues for the years ended December 31, 2004 and 2003.
 
Cost of Revenues
 
Since we did not commence commercial sales of the OmniPod System until October 2005, we did not have any cost of revenues for the years ended December 31, 2004 and 2003.
 
Research and Development
 
Research and development expenses increased $367,000 or 4.2%, to $9.0 million for the year ended December 31, 2004 from $8.7 million for the year ended December 31, 2003. This increase was due primarily to an increase of $808,000 in employee compensation and benefit costs resulting from the hiring of eleven additional employees in our research and development department and an increase of $705,000 for prototypes and tools, partially offset by a decrease of $1.2 million in outside consulting costs.
 
Sales and Marketing
 
Sales and marketing expenses increased $631,000, or 115.6%, to $1.2 million for the year ended December 31, 2004 from $546,000 for the year ended December 31, 2003. The increase in expenses was primarily due to an increase of $344,000 for consulting and market research, $247,000 in employee compensation and benefit costs resulting from the hiring of additional employees to establish our sales and


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marketing departments and increases in marketing materials and travel used to support the establishment of a sales organization.
 
General and Administrative
 
General and administrative expenses increased $1.1 million, or 40.6%, to $3.9 million for the year ended December 31, 2004 from $2.8 million for the year ended December 31, 2003. The increase in expenses was primarily due to increases of $481,000 in employee compensation and benefit costs resulting from hiring of additional employees, $351,000 in rent and utility costs, $88,000 in additional consulting and legal fees and $89,000 in insurance and other administration costs.
 
Other Income (Expense)
 
Interest income was $333,000 and $73,000 for the years ended December 31, 2004 and 2003, respectively, representing an increase of $260,000. Interest income increased primarily due to higher combined average cash and cash equivalents from the issuance of Series D preferred stock. Interest expense was $1,000 for the year ended December 31, 2004. We had no interest expense for the year ended December 31, 2003.
 
Liquidity and Capital Resources
 
We commenced operations in 2000 and have financed our operations through the private placement of equity securities and secured indebtedness. As of September 30, 2006, we had $9.0 million of secured debt outstanding. Since inception, we had received net proceeds of $119.5 million from the issuance of redeemable convertible preferred stock. In December 2006, we repaid our outstanding secured debt with a portion of the proceeds from $30.0 million of new secured debt. As of September 30, 2006, we had $25.1 million in cash and cash equivalents. We believe that our current cash and cash equivalents, including the proceeds from this offering, together with our short-term investments and the cash to be generated from expected product sales, will be sufficient to meet our projected operating requirements for at least the next twelve months.
 
The following table sets forth the amounts of cash used in operating activities and net loss for each of the periods indicated:
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2003     2004     2005     2005     2006  
    (Audited)     (Unaudited)  
    (In thousands)  
 
Cash Used in Operating Activities
  $ (12,279 )   $ (13,056 )   $ (20,321 )   $ (14,245 )   $ (20,780 )
Net Loss
  $ (11,941 )   $ (13,821 )   $ (21,636 )   $ (15,122 )   $ (25,070 )
 
Net cash used in operating activities primarily represents our net loss for the periods presented. The increase of $6.5 million in cash used in operating activities for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was due to an increase in net loss of $9.9 million, increased net accounts receivable of $876,000 and an increase in inventory of $1.4 million, partially offset by increases in accounts payable and accrued expenses of $3.5 million.
 
The following table sets forth the amounts of cash used in investing activities and cash provided by financing activities for each of the periods indicated:
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2003     2004     2005     2005     2006  
    (Audited)     (Unaudited)  
    (In thousands)  
 
Cash Used in Investing Activities
  $ (287 )   $ (2,708 )   $ (6,022 )   $ (4,294 )   $ (10,807 )
Cash (Used in) Provided by Financing Activities
  $ (70 )   $ 35,435     $ 10,004     $ 10,006     $ 49,017  


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Cash used in investing activities was primarily for the purchase of fixed assets for use in the development and manufacturing of the OmniPod System. Cash provided by financing activities was primarily generated from the issuance of preferred stock in February 2006 and February 2004 and the issuance of $10.0 million of long-term debt provided by Lighthouse Capital Partners in June 2005.
 
In February 2006, we sold 13,738,661 shares of Series E preferred stock for net proceeds of $49.8 million. In February 2004, we sold 14,669,421 shares of Series D preferred stock for net proceeds of $35.4 million. All of these shares will convert into shares of common stock on a one-for-one basis upon the closing of this offering.
 
On June 2, 2005, we entered into a term loan and security agreement with Lighthouse Capital Partners V, L.P. pursuant to which we borrowed $10.0 million. This term loan was secured by all of our assets other than our intellectual property assets. Our borrowings under the term loan bore interest at a rate of 8% per annum. Interest was payable on a monthly basis during the term of the loan and, beginning on June 1, 2006, we were required to repay the principal in 42 equal monthly installments until the loan matured in December 2009. Upon the prepayment or final maturity of the term loan, we were required to pay the lender an additional amount equal to $1.0 million of the original loan amount. In connection with the term loan, we issued a warrant to the lender to purchase up to 330,579 shares of Series D preferred stock at a purchase price of $2.42 per share. The warrant automatically converts into a warrant to purchase common stock on a one-for-one basis upon the closing of this offering. We recorded the $251,240 value of the warrant as a discount to this term loan. The cost of the warrant is being amortized to interest expense over the 54 month life of this term loan. The fair value of the warrant was calculated using the Black-Scholes option pricing model with the following assumptions: seven year expected life risk-free, interest rate of 3.89% and no dividend yield. At December 31, 2005, there are 330,579 shares of common stock reserved for the exercise of the warrant. Accordingly, the discount on the long term debt is being accreted over the repayment term of 42 months.
 
On December 27, 2006, we entered into a credit and security agreement with a group of lenders led by Merrill Lynch Capital pursuant to which we borrowed $30.0 million in a term loan. This term loan is secured by all of our assets other than our intellectual property assets. Our borrowings under the term loan bear interest at a floating rate equal to the LIBOR rate plus 6% per annum. Interest is payable on a monthly basis during the term of the loan and, beginning on October 1, 2007, we will be required to repay the principal in 33 equal monthly installments until the loan matures in June 2010. We are also required to prepay the term loan with the proceeds of any asset disposition that is not permitted under the credit and security agreement. Upon the prepayment or final maturity of the term loan, we are required to pay the lender an exit fee equal to $900,000. In addition, upon the prepayment of any portion of the term loan, we will be required to pay a prepayment fee of either 3%, 2% or 1% of the amount prepaid depending on whether the prepayment occurs prior to the first anniversary, between the first and second anniversaries or after the second anniversary of the loan. In connection with the term loan, we issued seven-year warrants expiring in December 2013 to the lenders to purchase up to 247,252 shares of Series E preferred stock at a purchase price of $3.64 per share. The warrants automatically convert into warrants to purchase common stock on a one-for-one basis upon the closing of this offering. We used $9.5 million of the proceeds from this term loan to repay all remaining amounts owed under the term loan with Lighthouse Capital Partners that we had entered into in June 2005.
 
The credit and security agreement contains limitations, subject to certain exceptions, on, among other things, our ability to incur additional indebtedness or liens, make dividends or distributions to our stockholders, repurchase shares of our stock, acquire or dispose of any assets other than in the ordinary course of business, make investments in other entities, merge or consolidate with another entity or engage in a change of control, a new business or a non-arms’ length transaction with one of our affiliates. Additionally, under the agreement, we are obligated to complete construction of a second OmniPod manufacturing line by March 31, 2009, which deadline may be extended to June 30, 2009 in specified circumstances. If we are not in compliance with these covenants, breach any representation or warranty in the credit and security agreement, default in any payment due under the credit and security agreement or related promissory notes or any other indebtedness above a specified amount, fail to discharge a judgment against us above a specified amount, cease to be solvent or experience other insolvency related events, then the administrative agent may declare all of the amounts owed under the term loan immediately due and payable.


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We lease our facilities, which are accounted for as operating leases. The lease generally provides for a base rent plus real estate taxes and certain operating expenses related to the lease. We entered into a new lease in 2004 which contains renewal options, escalating payments and leasehold allowances over the life of the lease. As of September 30, 2006, we had an outstanding letter of credit which totaled $500,000 to cover our security deposits for lease obligations. This letter of credit will expire October 30, 2009.
 
During 2007, we will be expending funds in connection with, among other things, our efforts to expand our automated manufacturing process and increase our manufacturing capacity, and expand our sales and marketing activities. We expect to spend at least $10.0 million or more during 2007 for capital equipment purchases in connection with our efforts to expand our automated manufacturing process and increase our manufacturing capacity.
 
Off-Balance Sheet Arrangements
 
As of September 30, 2006, we did not have any off-balance sheet financing arrangements.
 
Contractual Obligations
 
The following table summarizes our principal contractual obligations as of September 30, 2006. As of September 30, 2006, we did not have contractual obligations for any payments due in 2010 or beyond.
 
                                         
    Payments Due in  
Contractual Obligations
  Total     Q4 2006     2007     2008     2009  
 
Long-term debt
obligations(1)
  $ 11,334,354     $ 815,870     $ 3,263,480     $ 3,263,480     $ 3,991,524  
Operating lease obligations
    1,601,076       203,793       508,103       508,103       381,077  
Purchase obligations
    10,523,573       621,942       9,901,631              
                                         
Total contractual obligations
  $ 23,459,003     $ 1,641,605     $ 13,673,214     $ 3,771,583     $ 4,372,601  
                                         
 
 
(1) All of our long-term debt obligations referred to in the table above are amounts that, as of September 30, 2006, were required to be paid under our term loan with Lighthouse Capital Partners. In December 2006, we repaid all amounts owed under this term loan with a portion of the proceeds from the $30.0 million term loan obtained from a group of lenders led by Merrill Lynch Capital.
 
Critical Accounting Policies and Estimates
 
Our financial statements are based on the selection and application of generally accepted accounting principles, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies and estimates used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results.
 
Revenue Recognition
 
Revenues are generated from the sale of Starter Kits and OmniPods direct to patients. Customers have a thirty day right of return on their initial shipment of product. Revenues are recognized in accordance with Staff Accounting Bulletin No. 104 (“SAB 104”). Since we do not have adequate historical experience to reasonably estimate our future returns, we have applied Statement of Financial Accounting Standards (“SFAS”) No. 48, “Revenue Recognition when the Right of Return Exists.” In accordance with SFAS No. 48, we defer the revenue and related costs of all initial shipments until the thirty day right of return has lapsed. We had deferred revenue of $116,000 and $188,000 as of December 31, 2005 and September 30, 2006, respectively.


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For follow-on sales of OmniPods to existing customers, revenue is recognized for product sales when title to products and risk of loss are transferred to customers, which is generally when product is shipped to the customer. Additional conditions for recognition of revenue are that the collection of sales proceeds is reasonably assured and no further performance obligations exist.
 
Product Warranty Costs
 
We provide a four-year warranty on the PDM and we replace any OmniPods that do not function in accordance with product specifications. Warranty expense is recorded in the period the shipment occurs. The expense is based on historical experience, and the estimated cost to service the claims. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, user error, variability in physiology and anatomy of our customers, material usage and delivery costs. Should actual product failure and user error rates, material usage or delivery costs differ from our estimates, the amount of actual warranty costs could materially differ from our estimates.
 
Inventories
 
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. Costs for the OmniPod System include raw material, labor and manufacturing overhead. Market value is determined as the lower of replacement cost or net realizable value. Currently, the value of inventories is below the cost of manufacturing the OmniPod System; therefore, all labor, overhead and excess materials costs are expensed as incurred and inventory is valued at net realizable value.
 
Asset Valuation
 
Asset valuation includes assessing the recorded value of certain assets, including accounts receivable, inventory and fixed assets. We use a variety of factors to assess valuation, depending upon the asset. Accounts receivable consist of amounts due from third-party payors and patients. We account for bad debts using the allowance method. The bad debt allowances are recorded in the period when the revenue is recorded. Due to our limited operational history, the allowance is based upon competitive benchmarks and is adjusted currently for any changes in estimated collections. Should current market and economic conditions deteriorate, our actual bad debt experience could exceed our estimate. Fixed property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over their useful life or the life of the lease, whichever is shorter. We review long-lived assets, including property and equipment and intangibles, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. We consider various valuation factors, principally discounted cash flows, to assess the fair values of long-lived assets.
 
Income Taxes
 
At September 30, 2006, we had approximately $73.3 million and $2.2 million of federal net operating loss carryforwards and research and development and other tax credits, respectively, that, if not utilized, these carryforwards will begin to expire in 2020 for federal tax purposes and 2005 for state tax purposes. As of December 31, 2005, we had approximately $47.6 million and $2.1 million of federal net operating loss carryforwards and research and development and other tax credits, respectively. The utilization of such net operating loss carryforwards and realization of tax benefits in future years depends predominantly upon having taxable income. Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may result in a limitation on the amount of net operating loss carryforwards and tax credit carryforwards which may be used in future years. As there were significant issuances of Series C, Series D and Series E redeemable convertible preferred stock in 2003, 2005 and 2006, respectively, to mostly new investors, it is probable that there will be a yearly limitation placed on the amount of net operating loss and tax credit carryforwards available for use in future years.


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Stock Based Compensation
 
Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, which is a revision of Statement No. 123, Accounting for Stock Based Compensation. SFAS 123R supersedes Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, or APB 25, and amends Financial Accounting Standards Board, or FASB, Statement No. 95 Statement of Cash Flows. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
 
Prior to January 1, 2006, we accounted for employee stock based compensation in accordance with the provisions of APB 25 and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB No. 25, and complied with the disclosure provisions of SFAS 123, and related SFAS No. 148, Accounting for Stock-Based Compensation — Transaction and Disclosure. Under APB 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the stock and the exercise price of the option. The stock based compensation is amortized using the straight-line method over the vesting period.
 
SFAS 123R requires nonpublic companies that used the minimum value method in SFAS 123R for either recognition or pro forma disclosures to apply SFAS 123R using the prospective-transition method. As such, we will continue to apply APB 25 in future periods to equity awards outstanding at the date of SFAS 123R’s adoption that were measured using the minimum value method. In accordance with the requirements of SFAS 123R, we will not present pro forma disclosures for periods prior to the adoption of SFAS 123R, as the estimated fair value of our stock options granted through December 31, 2005 was determined using the minimum value method.
 
Effective January 1, 2006 with the adoption of SFAS 123R, we elected to use the Black-Scholes option pricing model to determine the weighted-average fair value of options granted. In accordance with SFAS 123R, we will recognize the compensation expense of share-based awards on a straight-line basis over the vesting period of the award. Stock based compensation expense recognized under SFAS 123R for the nine months ended September 30, 2006 was $400,000.
 
The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We do not have a history of market prices of our common stock as we are not a public company, and as such, we estimate volatility in accordance with Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, Share-Based Payment, or SAB 107, using historical volatilities of similar public entities. The expected life of the awards is estimated based on the “SEC Shortcut Approach” as defined in SAB 107, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of the awards. The dividend yield assumption is based on company history and expectation of paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock based compensation expense recognized in the financial statements in 2006 and thereafter is based on awards that are ultimately expected to vest. We evaluate the assumptions used to value the awards on a quarterly basis and if factors change and different assumptions are utilized, stock based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock based compensation expense.
 
The assumptions used in the Black-Scholes option-pricing model are as follows:
 
     
    Nine Months Ended
    September 30, 2006
 
Dividend yield
  0.00%
Expected volatility
  71.36%
Risk-free interest rate
  4.29% - 5.19%
Expected life (in years)
  6.25


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The following table presents the exercise price and fair value per share for grants issued during 2006:
 
                                 
                Retrospective Fair
       
    Number of Options
    Exercise
    Value per Common
    Intrinsic
 
Grant Date
  Granted     Price     Share     Value  
 
January 1, 2006
    368,560     $ 1.85-2.26     $ 1.85-2.26     $  
April 1, 2006
    55,000       2.46       3.04       31,900  
June 1, 2006
    576,910       2.46       3.06       346,146  
August 1, 2006
    60,050       2.46       3.40       56,447  
 
Prior to April 1, 2006, the exercise prices for options granted were set by our board of directors based upon guidance set forth by the American Institute of Certified Public Accountants, or the AICPA, in the AICPA Technical Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” or the AICPA Practice Aid. To that end, our board of directors considered a number of factors in determining the option price, including the following factors: (1) prices for our preferred stock, which we had sold to outside investors in arms-length transactions, and the rights, preferences and privileges of our preferred stock and common stock in the Series A through Series E financing, (2) obtaining FDA 510(k) clearance, (3) launching the OmniPod System and (4) achievement of budgeted revenue and results.
 
In connection with the preparation of the financial statements for this offering, we performed a retrospective determination of fair value based on the input from an independent third party of the common stock underlying stock options granted since April 1, 2006. We retrospectively estimated the fair value of our common stock based upon several factors, including the following factors: (1) operating and financial performance, (2) progress and milestones attained in the business, (3) past sales of convertible preferred stock, (4) the results of the retrospective independent valuations, and (5) the expected valuation obtained in an initial public offering. We believe this to have been a reasonable methodology based on the factors above and based on several arm’s-length transactions involving our stock supportive of the results produced by this valuation methodology.
 
See note 10 to our consolidated financial statements included in this prospectus for a summary of the stock option activity under our employee stock based compensation plan.
 
Recent Accounting Pronouncements
 
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for the Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, or FIN 48, which clarifies the accounting uncertainty in tax positions. This interpretation requires that we recognize in our consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of 2007, with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our consolidated financial statements.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States, and expands disclosure about fair value measurements. This pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We will be required to adopt SFAS 157 in the first quarter of 2008. We are currently evaluating the requirements of SFAS 157 and have not yet determined the impact on our consolidated financial statements.
 
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, cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses and long-term obligations. We consider investments that, when


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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 maintain an average maturity of six 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.


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BUSINESS
 
Overview
 
We are a medical device company that develops, manufactures and markets an innovative, discreet and easy-to-use insulin infusion system for people with insulin-dependent diabetes. Our proprietary OmniPod Insulin Management System, which consists of our OmniPod disposable insulin infusion device and our handheld, wireless Personal Diabetes Manager, is the only commercially-available insulin infusion system of its kind. Conventional insulin pumps require people with insulin-dependent diabetes to learn to use, manage and wear a number of cumbersome components, including up to 42 inches of tubing. In contrast, the OmniPod System features only two discreet, easy-to-use devices that eliminate the need for a bulky pump, tubing and separate blood glucose meter, provide for virtually pain-free automated cannula insertion, communicate wirelessly and integrate a blood glucose meter. We believe that the OmniPod System’s unique proprietary design offers significant lifestyle benefits to people with insulin-dependent diabetes.
 
The U.S. Food and Drug Administration, or FDA, approved the OmniPod System in January 2005 and we began commercial sale of the OmniPod System in the United States in October 2005. As of December 31, 2006, we had sold the OmniPod System to approximately 1,200 people in the United States.
 
Market Opportunity
 
Diabetes is a chronic, life-threatening disease for which there is no known cure. Diabetes is caused by the body’s inability to produce or effectively utilize the hormone insulin. This inability prevents the body from adequately regulating blood glucose levels. Glucose, the primary source of energy for cells, must be maintained at certain concentrations in the blood in order to permit optimal cell function and health. In people with diabetes, blood glucose levels fluctuate between very high levels, a condition known as hyperglycemia, and very low levels, a condition called hypoglycemia. Hyperglycemia can lead to serious short-term complications, such as confusion, vomiting, dehydration and loss of consciousness; long-term complications, such as blindness, kidney disease, nervous system disease, amputations, stroke and cardiovascular disease; or death. Hypoglycemia can lead to confusion, loss of consciousness or death.
 
The International Diabetes Federation, or IDF, estimated that diabetes currently affects 246 million people worldwide. The IDF expects that by 2025, 380 million people worldwide will be affected by diabetes due to increasing overall life expectancy, worsening diet trends, increasingly sedentary lifestyles and the growing incidence of obesity. Frost & Sullivan estimated that in 2006, 20.7 million people in the United States, or approximately 7% of the population, had diabetes, and reported that it expected this number to increase to 23.9 million people by 2011.
 
Diabetes is typically classified as Type 1 or Type 2 diabetes.
 
  •  Type 1 diabetes is characterized by the body’s nearly complete inability to produce insulin. It is frequently diagnosed during childhood or adolescence. Individuals with Type 1 diabetes require daily insulin therapy, typically administered via injections or conventional insulin pumps, to survive. Frost & Sullivan estimated that in 2006, 1.2 million people in the United States had Type 1 diabetes.
 
  •  Type 2 diabetes, the more common form of diabetes, is characterized by the body’s inability to either properly utilize insulin or produce enough insulin. Historically, Type 2 diabetes has occurred in later adulthood, but its incidence is increasing among the younger population due primarily to increasing childhood obesity. Initially, many people with Type 2 diabetes attempt to manage their diabetes with improvements in diet, exercise and/or oral medications. As their diabetes advances, some patients progress to multiple drug therapy, which often includes insulin therapy. Recent guidelines, including those published by the American Diabetes Association in 2006, suggest more aggressive treatment for people with Type 2 diabetes, including the early adoption of insulin therapy and more frequent testing. It is now becoming more accepted for insulin therapy to be started earlier in people with Type 2 diabetes, and, in some cases, as part of the initial treatment. Frost & Sullivan estimated that in 2006, 19.5 million people in the United States had Type 2 diabetes, of which 14.1 million people have been


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  diagnosed. Frost & Sullivan also estimated that approximately 26% of diagnosed Type 2 patients, or 3.7 million people, used insulin therapy in 2006.
 
Frost & Sullivan estimated that in 2006, there were 4.9 million people with insulin-dependent diabetes in the United States. Throughout this prospectus, we refer to both Type 1 diabetes and insulin-requiring Type 2 diabetes as insulin-dependent diabetes. Given the current growth expectations for diabetes, we believe there will be increased demand for better ways to treat diabetes through insulin therapy.
 
Managing Diabetes
 
Diabetes Management Challenges
 
Diabetes is often frustrating and difficult for patients to manage. Blood glucose levels can be affected by the carbohydrate and fat content of meals, exercise, stress, illness or impending illness, hormonal releases, variability in insulin absorption and changes in the effects of insulin on the body. For people with insulin-dependent diabetes, many corrections, consisting of the administration of additional insulin or ingestion of additional carbohydrates, are needed throughout the day in order to maintain blood glucose levels within normal ranges. Achieving this result can be very difficult without multiple daily injections of insulin or the use of continuous subcutaneous insulin infusion, or CSII, therapy. Patients attempting to control their blood glucose levels tightly to prevent the long-term complications associated with fluctuations in blood glucose levels are at greater risk for overcorrection and the resultant hypoglycemia, which can cause confusion, loss of consciousness or death. As a result, many patients have difficulty managing their diabetes optimally. Additionally, the time spent in managing diabetes, the swings in blood glucose levels and the fear of hypoglycemia can all render diabetes management overwhelming to patients and their families.
 
Current Insulin Therapy
 
People with insulin-dependent diabetes need a continuous supply of insulin, known as basal insulin, to provide for background metabolic needs. In addition to basal insulin, people with insulin-dependent diabetes require supplemental insulin, known as bolus insulin, to compensate for carbohydrates ingested during meals or snacks or for a high blood glucose level.
 
There are three primary types of insulin therapy practiced today: conventional therapy; multiple daily injection, or MDI, therapy using syringes or insulin pens; and CSII therapy using conventional insulin pumps. Both MDI and CSII therapies are considered intensive insulin management therapies.
 
Many healthcare professionals believe that blood glucose levels are controlled more effectively when insulin therapy more closely mimics the functioning of a normal pancreas; that is, when it is more physiological. Before the mid-1990s, conventional therapy, considered the least physiological approach to insulin therapy, was the most widely-used insulin therapy. Beginning in the 1990s, several landmark clinical trials demonstrated the superiority of intensive insulin management therapies over conventional therapies in delaying the onset and reducing the severity of diabetes-related complications. Intensive insulin management therapy in the trials involved frequent blood glucose monitoring coupled with MDI or CSII therapy. These trials included:
 
  •  the Diabetes Control and Complications Trial, which was completed in 1993, showed that intensive insulin management reduces the risk of eye, kidney and nerve disease in people with Type 1 diabetes;
 
  •  the Epidemiology of Diabetes Interventions and Complications Study, which was completed in 2005, showed that intensive diabetes management in Type 1 diabetes also protects against the occurrence of cardiovascular disease; and
 
  •  the United Kingdom Prospective Diabetes Study, which was completed in 1997, demonstrated that intensive insulin management significantly reduces the risk of eye, kidney and nerve disease in people with Type 2 diabetes.
 
Today, the goal of intensive insulin management is to achieve near-normal blood glucose levels without risking hypoglycemia. We believe that the results of these studies, coupled with newer insulin formulations,


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have significantly expanded the use of intensive insulin management therapies, and that many Type 1 patients manage their diabetes using an intensive insulin management therapy. A significantly smaller percentage of people with insulin-requiring Type 2 diabetes manage their diabetes using an intensive insulin management therapy.
 
The following table summarizes the primary methods of insulin therapy and what we believe to be the primary advantages and disadvantages of each.
 
             
Type of Therapy     Advantages     Disadvantages
Conventional therapy
           
             
1 to 2 injections of insulin per day, typically a mixture of a long-acting and regular insulin
   
• Easiest to train, learn and administer

• Minimal up-front cost and lowest ongoing cost of supplies
   
• Least physiological approach, leading to highest long-term complication rates

• Painful daily injections
required

• Hypoglycemic and hyperglycemic events are common

• Severe diet and exercise restrictions
MDI therapy
           
1 to 2 injections per day of long-acting insulin or a mixture of long-acting and regular insulin
— plus —

1 injection of a rapid-acting insulin before all meals and snacks and as needed
   
• Enables intensive therapy

• More physiological approach, leading to fewer long-term complications than conventional therapy


• Less complicated to teach, learn and administer than CSII therapy with conventional insulin pumps


• Minimal up-front cost of supplies and lower ongoing cost of supplies than CSII therapy with conventional insulin pumps
   
• Less physiological approach than CSII therapy with conventional insulin pumps

• Frequent painful injections (as many as six per day are not unusual)

• Significant diet and exercise restrictions
CSII therapy with
conventional insulin pumps
           
Continuous infusion of basal rapid-acting insulin via subcutaneous infusion set, with ability to infuse bolus rapid-acting insulin before all meals and snacks and as needed; infusion set is inserted once every three days on average
   
• Enables intensive therapy

• Most physiological approach, leading to fewer long-term complications than conventional therapy

• Fewest diet and exercise restrictions

• Best glycemic control

• No painful injections
   
• Most complicated to teach, learn and administer

• Highest up-front and ongoing cost

• Cumbersome to wear and least discreet alternative
             
 
In addition to the three primary therapies described above, there is also an inhaled insulin product on the market. However, current inhaled insulin technology is a newly-introduced alternative therapy for people with insulin-dependent diabetes and market acceptance of this therapy is undetermined.


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CSII Therapy Opportunity
 
CSII therapy is widely considered to be the most physiological and most advanced of all insulin therapies. This therapy closely mimics the action of a normally-functioning pancreas in that it uses rapid-acting insulin and allows the patient to customize basal and bolus insulin doses to meet their specific and varying daily insulin needs. CSII therapy has also been shown to provide people with insulin-dependent diabetes with numerous advantages relative to MDI therapy, including:
 
  •  Best Glycemic Control.  There have been several studies demonstrating the superiority of CSII therapy over MDI therapy. CSII therapy has been shown to provide better glycemic control, reduced glycemic variability and a reduction in hypoglycemic events as compared to MDI therapy. CSII therapy also provides greater consistency in basal insulin absorption over MDI therapy through the use of rapid-acting, as opposed to long-acting, insulin and in bolus therapy through the ability to bolus in smaller and more precise increments.
 
  •  Increased Lifestyle Flexibility.  CSII therapy gives patients flexibility with respect to eating and exercise. With MDI therapy, patients must eat whether they are hungry or not to compensate for peaking insulin, falling blood glucose level or exercise. With CSII therapy, insulin peaking is reduced and patients can generally handle falling blood glucose level or exercise without being forced to eat by temporarily reducing their basal rate of insulin. Moreover, CSII therapy frees the patient from frequent painful injections.
 
We believe that these advantages, coupled with wider adoption of intensive insulin management therapies generally, have generated demand for CSII therapy using conventional insulin pumps. Frost & Sullivan estimated that the size of market for equipment relating to CSII therapy, consisting of insulin pumps and pump supplies, was $564.4 million in 2003 and is expected to increase at a compounded annual growth rate of 15.9% through 2010.
 
Although the market for CSII therapy has been growing rapidly, in 2006 this therapy had been adopted by only about 250,000 patients, or 21% of the Type 1 population in the United States, and less than 1% of the people with insulin-requiring Type 2 diabetes. We believe that several factors of conventional insulin pumps have limited the adoption of CSII therapy among people with insulin-dependent diabetes. These factors include:
 
  •  Obtrusive design.  Conventional insulin pumps can make a person’s diabetes very obtrusive. Pumps are about the size of a large pager and are typically worn on the patient’s belt or in a pocket. To experience truly continuous insulin infusion therapy, the patient must be connected to the pump via up to 42 inches of tubing 24 hours a day, which interferes with normal movement, sleep and exercise. The tubing can kink, leak or be accidentally disconnected, resulting in inconsistent or interrupted insulin delivery and requiring the patient to take the time to insert a new infusion set. Additionally, patients often disconnect their tubing and remove the pump in order to shower, swim and exercise, which is both an inconvenience and an interruption of continuous insulin therapy. Conventional insulin pumps also require manual insertion of infusion sets which necessitates the use of relatively large and painful introducer needles, causes discomfort and can lead to scarring.
 
  •  Complexity.  Conventional insulin pumps require that patients manage numerous components, including the pump, insulin reservoir, tubing, infusion set, insertion device, batteries and separate blood glucose testing supplies. Conventional insulin pumps also require a significant number of steps to initiate insulin delivery, including connecting and priming various components of the system and manually inserting the infusion set, either with or without an insertion device. In addition, most conventional insulin pumps have user interfaces that require the user to learn specific coding instructions. As a result, programming conventional insulin pumps and interpreting pump messages can be difficult, which may limit the use of advanced therapy features. These attributes make pumps costly to teach and difficult to use, limiting a patient’s ability to optimize their diabetes management. We believe that this significantly limits healthcare professionals’ willingness to recommend CSII therapy and the number of patients that they consider to be good candidates for CSII therapy.


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  •  Large up-front cost.  Conventional insulin pumps have a list price of between $5,000 and $6,500 as an up-front investment, and the infusion sets, insulin reservoirs and batteries cost up to $200 per month. These expenses are generally at least partially covered by third-party payors, but co-payments and deductibles can still render the large up-front costs of pumps burdensome to the average person with insulin-dependent diabetes. The large up-front costs of pumps are also a significant burden for third-party payors, especially given the relatively short average length of time patients remain with the same health plan and the risk that they may abandon CSII therapy.
 
We believe that the relatively limited adoption of CSII therapy to date among people with insulin-dependent diabetes has been largely due to these shortcomings of conventional insulin pumps.
 
Our Solution
 
The OmniPod Insulin Management System was specifically designed to provide people with insulin-dependent diabetes with a diabetes management solution which provides significant lifestyle and other benefits and to expand the use of CSII therapy by addressing the barriers presented by conventional insulin pumps. A significant portion of our customers report being former long-term insulin-injecting Type 1 diabetes patients who have now decided to switch to CSII therapy. Based on these reports, we believe we are expanding the market for CSII therapy by attracting MDI therapy users who had previously foregone the proven clinical benefits of CSII therapy. We believe that the following attributes of our solution will lead to the adoption of the OmniPod System as the leading technology in CSII therapy and expand use of CSII therapy among people with insulin-dependent diabetes:
 
  •  Discreet, two-part design.  Unlike conventional insulin pumps, the OmniPod System consists of just two discreet, easy-to-use devices that communicate wirelessly: the OmniPod, a small, lightweight, disposable insulin infusion device worn beneath clothing that integrates an infusion set, automated cannula insertion, insulin reservoir, drive mechanism and batteries; and the Personal Diabetes Manager, or PDM, a handheld device much like a personal digital assistant that wirelessly programs the OmniPod with insulin delivery instructions, assists the patient with diabetes management and integrates a blood glucose meter. We believe our innovative patented design enables people with insulin-dependent diabetes to experience all of the lifestyle benefits and clinical superiority of CSII therapy in a more discreet and convenient manner than possible with conventional insulin pumps.
 
  •  No tubing.  The OmniPod System’s innovative, proprietary design dramatically reduces the size of the insulin delivery mechanism, thereby eliminating the need for the external tubing required by conventional pumps. As a result of this design, the OmniPod can be worn discreetly beneath clothing and patients can move, dress, bathe, sleep and exercise without the encumbrance of the up to 42 inches of tubing required by conventional insulin pumps. In addition to untethering people with insulin-dependent diabetes, the OmniPod System’s lack of tubing eliminates interruptions in insulin delivery resulting from kinking, leaking or disconnecting, which leads to more consistent delivery of insulin.
 
  •  Virtually pain-free automated cannula insertion.  The OmniPod is the only CSII therapy device to feature a fully automated, hands-free cannula insertion system. This virtually pain-free insertion system features the world’s fastest insertion and the smallest-gauge introducer needle available for insulin infusion systems. Cannula insertion is activated wirelessly using the PDM, so the patient never sees or handles an introducer needle, which we believe promotes consistent insertion, reduces patient anxiety and increases the number of insertion sites available to patients. We believe that the OmniPod’s proprietary insertion system is a significant differentiating factor for people with insulin-dependent diabetes who are frustrated with the painful and cumbersome manual insertions required with existing conventional pumps or frequent injections required by MDI therapy.
 
  •  Easy to train, learn and use.  We have designed the OmniPod System to fit within the normal daily routines of patients. The OmniPod System requires the fewest steps to start insulin delivery of all CSII therapies on the market by automating much of the process. In addition, the OmniPod System consists of just two devices, as opposed to up to seven for conventional insulin pumps. We have also designed the PDM’s user interface to be much more intuitive and user-friendly than those used in conventional


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  insulin pumps. As a result, the OmniPod System is easier for patients to use, which reduces the training burden on healthcare professionals. We believe that the OmniPod System’s overall ease of use will make it very attractive to those people with insulin-dependent diabetes who are frustrated or discouraged by the conventional insulin pumps. We also believe that the OmniPod System’s ease of use and substantially lower training burden will help redefine which diabetes patients are appropriate for CSII therapy, enabling healthcare professionals to prescribe CSII therapy to a broader pool of patients.
 
  •  Low up-front cost and pay-as-you-go pricing structure.  The OmniPod System’s unique patented design and proprietary manufacturing process have enabled us to provide CSII therapy at a relatively low up-front investment without removing any of the functionality of conventional insulin pumps. Whereas current list prices of conventional insulin pumps require an up-front investment of $5,000 to $6,500 and ongoing monthly supplies cost up to $200, the current list price of our Starter Kit, which includes the PDM, two OmniPods, the OmniPod System User Guide and our Interactive Patient Training CD, is $800, and the OmniPods, each worn for up to three days, have a list price of $34.50 per unit. We believe this pay-as-you-go pricing model significantly reduces the risk of investing in CSII therapy for third-party payors and makes CSII therapy much more accessible for people with insulin-dependent diabetes.
 
We believe that the OmniPod System’s award-winning proprietary designs and unique functionality offer patients unprecedented discretion, comfort and ease in using CSII therapy to manage their diabetes, while providing a low up-front cost alternative for patients and third-party payors and reducing the training burden associated with recommending CSII therapy for healthcare professionals.
 
Our Strategy
 
Our goals are to expand the use of CSII therapy and to become a leading provider of CSII technology for people with insulin-dependent diabetes. We believe that the OmniPod System’s innovative design and ease-of-use will significantly expand the pool of candidates and the market for CSII therapy and make it the CSII therapy system of choice for healthcare professionals, people with insulin-dependent diabetes and third-party payors. The principal elements of our business strategy include:
 
  •  Promote awareness of the OmniPod System among thought leaders, key academic centers, diabetes clinics and top insulin-prescribing healthcare professionals.  We plan to use our healthcare professional sales force to cultivate relationships with thought leaders, key academic centers, clinics and top insulin-prescribing healthcare professionals throughout the United States to help establish market acceptance of the OmniPod System. We believe that early acceptance of the OmniPod System by thought leaders and key recommenders will be important in establishing the OmniPod System as the system of choice for CSII therapy. We also plan to use our healthcare professional sales force to educate the broader referral base of physicians, certified diabetes educators and other clinicians focused on diabetes about the advantages of the OmniPod System. To date, in order to align the demand for the OmniPod System with our capacity to manufacture the OmniPod, we have only engaged in limited marketing efforts focused on the East Coast region of the United States and with some key diabetes practitioners, academic centers and clinics elsewhere in the United States. As we further automate and expand our manufacturing capabilities, we plan to expand our sales and marketing efforts across the United States and internationally, and commence broader direct-to-consumer campaigns. We also intend to sponsor marketing studies seeking to demonstrate certain aspects of the efficacy of the OmniPod System.
 
  •  Promote awareness and trial experience of the OmniPod System among people with insulin-dependent diabetes.  As our production capability expands, we plan to engage in an increasing number of promotional activities directly targeted to people with insulin-dependent diabetes. Given the OmniPod System’s discreet and easy-to-use design, we believe we have a substantial advantage over our competitors in promoting the lifestyle benefits of our solution to patients. We have recently begun efforts to promote the OmniPod System directly to people with insulin-dependent diabetes through online direct-to-consumer channels and events. We also encourage diabetes patients to try the OmniPod


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  System through our Patient Demonstration Kit Program, which offers them the opportunity to experience the lifestyle and other benefits of the OmniPod System before making a purchase. We believe that this program is unique to the OmniPod System and will significantly differentiate the OmniPod System from conventional insulin pumps.
 
  •  Expand third-party payor coverage for the OmniPod System.  Third-party payor reimbursement is an extremely important determinant of patient use of CSII therapy. As of December 31, 2006, we have entered into contracts establishing reimbursement for the OmniPod System with national and regional third-party payors that cover an estimated 78 million lives. To date, we have primarily focused on negotiating contracts with private insurers with a presence in the areas where we have concentrated our initial sales and marketing efforts, which has been on the East Coast region of the United States. We plan to continue to work with additional third-party payors within these areas and, as we broaden our sales and marketing focus in the remainder of the United States, to enter into further coverage contracts.
 
  •  Enhance our automated manufacturing capabilities to increase capacity and reduce per unit production costs.  We are currently producing the OmniPod on a partially automated manufacturing line at our Bedford, Massachusetts facility. During 2008, we intend to complete the planned automation of our existing line and begin construction of a second manufacturing line. We are also exploring alternative site manufacturing capabilities both domestically and abroad to ensure that we have sufficient capacity to meet future product demand and are able to achieve appropriate cost efficiencies as we grow our business. For example, to that end, we recently entered into a contract manufacturing agreement with a subsidiary of Flextronics International Ltd. for the supply of a sub-assembly of some of the OmniPod’s components. We believe that the automation of our manufacturing process will substantially reduce our per unit cost of goods sold, leading to positive gross margins from a current negative level, and enable us to significantly increase our production capacity, while maintaining high levels of quality, reliability and product safety.
 
  •  Continue research and development efforts to enhance the features of the OmniPod System and reduce per unit production costs.  We plan to continue our research and development efforts to maintain our technology leadership in CSII therapy and reduce production costs of the OmniPod System. Our current research and development efforts are focused primarily on improving the functionality and design of the OmniPod System as well as developing a new OmniPod System that incorporates continuous glucose monitoring technology. We have partnered with Abbott Diabetes Care Inc., a global healthcare company that develops continuous glucose monitoring technology, to develop a product that will integrate the receiver portion of Abbott’s continuous glucose monitor, the FreeStyle Navigator, with the OmniPod System PDM. The FreeStyle Navigator is currently pending FDA approval and is not available on the market. We also plan to pursue the use of our proprietary OmniPod System technology for the delivery of other medications for the treatment of conditions other than diabetes.
 
  •  Maintain a customer-focused approach.  The easy-to-use patented design and straightforward user interface of the OmniPod System and our efficient and effective customer training programs are intended to reduce the amount of time and effort associated with training and supporting patients in the use of the OmniPod System. We also provide direct technical support by telephone and Internet 24 hours a day, 7 days a week to patients, physicians and diabetes educators to promote safe and successful use of the OmniPod System. We certify healthcare professionals to train patients on the OmniPod System and provide patients with state-of-the-art training tools. In addition, we have a team of in-house insurance specialists who assist physicians and patients in obtaining reimbursement from third-party payors. We believe that our customer-focused approach is critical to facilitating rapid conversion of new customers and creating life-long relationships with our existing customers.


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The OmniPod System
 
The OmniPod System utilizes proprietary designs and technology to combine the functionality of a conventional insulin pump with that of a blood glucose meter in an innovative, discreet and easy-to-use two-part system. We have achieved this patented design by integrating the insulin reservoir, tubing, infusion set, inserter, motor and power source of a conventional pump into one device, the OmniPod, that can be worn directly on the skin, and integrating the user interface and controls for the OmniPod, the diabetes management software and a blood glucose meter into a separate device, the PDM.
 
The OmniPod
 
The OmniPod, measuring 1.6 x 2.4 x 0.7 inches and weighing 1.2 ounces, is a small, lightweight, self-adhesive disposable insulin infusion device that the patient wears directly on the skin beneath clothing for up to three days and then replaces. During wear, the OmniPod delivers precise, personalized doses of insulin through a small, flexible tube, called a cannula, inserted beneath the skin once at the beginning of wear via an automated, hands-free insertion process. The OmniPod is watertight and does not need to be removed for showering, swimming or exercise, thereby eliminating the interruptions of therapy associated with the disconnecting of conventional insulin pumps.
 
(omnipod picture)
 
1  Automated cannula insertion system
 
2  Water tight housing
 
3  Insulin reservoir (capacity of 85 to 200 deliverable units)
 
4  Adhesive
 
5  Drive mechanism
 
6  Angled infusion set
 
7  Electronic circuitry for programming insulin delivery and enabling wireless communications
 
8  Power supply (batteries)
 
OmniPod shown does not include all components.


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The Personal Diabetes Manager
 
The PDM, measuring 2.6 x 4.3 x 1.0 inches, is a wireless, menu-driven, hand-held device, similar in size and appearance to a personal digital assistant. The patient uses the PDM to program the OmniPod with personalized insulin delivery instructions and to check blood glucose levels using FreeStyle test strips. The PDM facilitates diabetes management by seamlessly integrating blood glucose results into suggested bolus calculations, incorporating a food reference library, and storing and displaying carbohydrate, insulin delivery and blood glucose records in one device. The PDM also features a large display, large font and a backlight to enhance readability for people with various levels of vision acuity in any setting. When the PDM is not in use, it can be stored conveniently in a purse, pocket, backpack or briefcase.
 
(omnipod picture)
 
1  Large display with intuitive, menu-driven user interface
 
2  FreeStyle blood glucose test strip port
 
3  Incorporated food reference library
 
4  Diabetes management record storage (up to 5,400 records)
 
5  Infrared port for data download
 


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Key Design Elements
 
The key design elements of the OmniPod System include:
 
  •  Wireless communications.  The OmniPod and the PDM contain integrated electronic circuitry which enables wireless communications between the two devices at a range of up to two feet in any direction. The PDM is specifically linked to the particular OmniPod in use via a wireless protocol established during the OmniPod activation process, but the two devices only communicate with each other during programming of insulin delivery instructions and during OmniPod status checks. This design enables secure, unique and discreet communications between the OmniPod and the PDM, allowing the patient to manage their diabetes with discretion and store the PDM separately when it is not needed.
 
  •  Small, light weight and inexpensive drive mechanism.  The OmniPod provides safe, flexible and precise insulin delivery using a small, lightweight and inexpensive drive mechanism. This proprietary drive mechanism enables millions of carefully-controlled, precise insulin pulses in flow rates as small as 0.05 units per hour while minimizing the risk of runaway insulin delivery and enabling the device to be both wearable and disposable.
 
  •  Fully automated cannula insertion.  The OmniPod automatically inserts and immediately retracts the smallest-gauge introducer needle available for insulin infusion systems, leaving behind a nine millimeter cannula beneath the skin at a forty-five degree angle. The entire process, which is activated wirelessly by pressing a single button on the PDM, takes less than one second, is fully automated and is virtually pain-free for the patient. The automated insertion process promotes consistent placement of the cannula beneath the skin, reduces patient anxiety and increases the number of insertion sites available to patients.
 
  •  Designed for automated manufacturability.  The OmniPod design incorporates a multi-shot, molded chassis that serves as the backbone for all functional components in the device. The chassis facilitates a “plug-and-play” assembly process that eliminates the need for all of the solder and bonding operations traditionally required to create an electromechanical device and enables high-speed, automated manufacturing. This critical design element also reduces the OmniPod’s part count, improves manufacturability and quality and reduces production costs.
 
  •  Intuitive user interface.  The PDM software leverages the PDM’s large display with an intuitive menu-driven user interface. The patient is guided step-by-step through all operations with directions in complete sentences and plain English. The PDM’s innovative Setup Wizard walks the patient through the establishment of key starting parameters such as the current time and date, initial basal rate, maximum bolus dose and blood glucose level goals, as well as key therapeutic options such as the temporary basal rate and suggested bolus calculator settings.
 
  •  Fully-integrated blood glucose meter.  The PDM incorporates a blood glucose meter that eliminates the need for the patient to carry a separate meter. The patient inserts a FreeStyle test strip into the PDM’s test strip port, applies a blood sample of only 0.3 microliters, and the PDM, using FreeStyle technology, displays a blood glucose result in an average of seven seconds. The PDM facilitates diabetes management by automatically integrating these blood glucose results directly into suggested bolus calculations and diabetes management records.


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Using the OmniPod System
 
We designed the OmniPod System to simplify the use and training of CSII therapy, with the fewest steps to starting insulin delivery of any commercially-available CSII therapy system. We believe that the OmniPod System’s simple use model will enable more people with insulin-dependent diabetes to take advantage of CSII therapy and will significantly reduce the training burden for healthcare professionals recommending CSII therapy.
 
Once the patient has completed the initial set-up of the PDM, the patient simply:
 
  1.  fills a new OmniPod with the amount of insulin needed for up to three days. During fill, the PDM wirelessly downloads the patient’s insulin delivery instructions to the OmniPod;
 
  2.  applies the self-adhesive OmniPod to the preferred infusion site; and
 
  3.  presses Start on the PDM to activate virtually pain-free automated cannula insertion and begin basal insulin delivery.
 
Once insulin delivery is started, the patient uses the PDM to adjust basal rates, program bolus doses, review diabetes management history records and check blood glucose levels as needed. At the end of three days or when the insulin supply is depleted, the OmniPod System reminds the patient that they need to change the OmniPod. The patient then removes the OmniPod, and fills and applies a new one.
 
Sales and Marketing
 
Our sales and marketing effort is focused on generating demand and acceptance of the OmniPod System among healthcare professionals, people with insulin-dependent diabetes and third-party payors. Our marketing strategy is to build awareness for the benefits of the OmniPod System through a wide range of education programs, patient demonstration programs, support materials and events at the national, regional and local levels.
 
As of December 31, 2006, we had a sales and marketing team of 24 employees. To date, in order to align the demand for the OmniPod System with our capacity to manufacture the OmniPod, we have only engaged in limited marketing efforts focused on the East Coast region of the United States and with some key diabetes practitioners, academic centers and clinics elsewhere in the United States. As we further automate and expand our manufacturing capabilities, we plan to expand our sales and marketing efforts across the United States and internationally, and commence broader direct-to-consumer campaigns.
 
Healthcare professional focused initiatives.  We believe that healthcare professionals play an important role in selecting patients for CSII therapy and educating them about CSII technology options. As of December 31, 2006, our healthcare professional sales force consisted of one Key Account manager and five territory managers, who call on endocrinologists, internal medicine physicians focused on diabetes and certified diabetes educators. As of December 31, 2006, our territory managers were supported by two clinical specialists who certify healthcare professionals to train patients on the OmniPod and who provide ongoing clinical expertise and support during initial customer training. Our marketing to healthcare professionals focuses on positioning the OmniPod System as an innovative continuous insulin delivery system that makes CSII therapy easier to recommend. We plan to augment our healthcare professional focused marketing efforts with market studies to assess various aspects of the OmniPod System’s functionality and relative efficacy, which we believe will assist us in generating additional patient demand for the OmniPod System among the insulin-dependent diabetes population.
 
Some of our recent healthcare professional focused marketing initiatives include:
 
  •  the Key Account/Key Opinion Leader Program through which we cultivate relationships with industry thought leaders, key academic centers, clinics and top insulin-prescribing healthcare professionals throughout the United States in order to establish market acceptance of the OmniPod System;


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  •  presentations and product demonstrations at key industry meetings including the American Diabetes Association Scientific Sessions, the American Association of Diabetes Educators Annual Meeting and the Diabetes Technology Meeting; and
 
  •  the OmniPod System 30-Day Experience Program, through which clinicians can place their first patient on the OmniPod System for 30 days at no charge to gain personal experience with the OmniPod System and experience the ease of training patients on the OmniPod System.
 
Patient focused initiatives.  We sell the OmniPod System directly to patients through referrals from healthcare professionals and through patient leads generated through our promotional activities. Our marketing to patients focuses on positioning the OmniPod System as an innovative continuous insulin delivery system that makes diabetes a smaller part of life and strongly promotes the lifestyle benefits afforded by the OmniPod System.
 
Some of our recent patient focused marketing initiatives include:
 
  •  The Office Demonstration Kit Program, through which we provide healthcare professionals with an OmniPod System Starter Kit to enable them to demonstrate the OmniPod System to patients in the office.
 
  •  Our Patient Demonstration Kit Program that provides patients with a free trial of the OmniPod System by wearing a saline-filled OmniPod for three days and using a virtual PDM. This unique program enables potential customers to experience the lifestyle benefits, virtually pain-free insertion and ease of use of the OmniPod System before making a purchase. Given the unique design of the OmniPod System, we believe that we are the only manufacturer of CSII therapy devices capable of providing this type of program and believe it will provide us with a substantial advantage in marketing to patients that are considering or skeptical about CSII therapy.
 
  •  Our website, http://www.MyOmniPod.com, including PodWatch, our online newsletter, both of which have experienced substantial traffic since we launched the OmniPod System. Our website has been nominated for multiple design awards and includes product photography, animated product demonstrations, video of the OmniPod System in use and customer testimonials.
 
  •  Presentations and product demonstrations at our own OmniPod System consumer information sessions and other patient-focused diabetes conferences, events and support groups.
 
  •  Promotional materials distributed directly from us or through the healthcare professional highlighting the benefits of the OmniPod System.
 
Marketing research.  In addition to our initiatives focused on healthcare professionals and patients, we also plan to continue evaluating the benefits of the OmniPod System in marketing research efforts to assess certain aspects of the efficacy of the OmniPod System.
 
Some potential studies include:
 
  •  an evaluation of the OmniPod System by various user sub-populations, such as very young pediatric patients, women with gestational diabetes and cancer patients undergoing chemotherapy;
 
  •  an evaluation of the OmniPod System in the hospital setting, both for diabetes patients and for glucose control in non-diabetic patients after surgery, transplantation, trauma and other circumstances in which normal metabolic function may be disrupted; and
 
  •  our participation in studies funded by the Juvenile Diabetes Research Foundation concerning the development of an artificial pancreas.
 
Training and Customer Support
 
Given the chronic nature of diabetes, we believe that thorough training and ongoing customer support are important to developing a long-term relationship with the patient. We believe that it is crucial for patients to be trained as the experts in the management of their diabetes. At the same time, we believe that providing


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reliable and effective customer support reduces patients’ anxiety and contributes to overall product satisfaction. In order to provide a complete training and customer support solution, we utilize a combination of live training in the office of the healthcare professional, interactive media, as well as online and telephonic support that is available 24 hours a day, 7 days a week.
 
Training.  We believe that the amount of effort required for healthcare professional offices to train patients to use CSII therapy has been a key barrier limiting penetration of this therapy. With the fewest steps required to start insulin delivery, the OmniPod System was designed to be easy to use and to significantly reduce the burden associated with training patients to use CSII therapy.
 
We are committed to ensuring that each patient receives product training and education to take advantage of the benefits of the OmniPod System. To facilitate and make the customer training as efficient and effective as possible, we have developed an Interactive Training CD that is included with the Starter Kit shipped to new customers. The Interactive Training CD provides patients with an overview of CSII therapy and educates patients on how the OmniPod System works using easy-to-understand lessons and interactive tutorials. Utilization of the Interactive Training CD reduces product-related training time and allows clinic staff to spend more time on basic diabetes management training and therapy optimization.
 
Our training support for healthcare professional offices is tailored to the individual needs of recommending offices. In some cases, we certify office-based healthcare professionals to train patients on the OmniPod System through our Certified Pod Trainer, or CPT, program, assist them with the first customer training and then transition the ongoing training responsibilities to these healthcare professionals. In other cases, a member of our CPT consultant group will conduct the patient training for an office that does not have the capability or capacity to complete patient training. We have established a network of over 100 CPTs who will conduct customer training at the healthcare site. We provide all CPTs with a training kit that includes a methodology and documentation for training patients on effective use of the OmniPod System. We believe the CPT Program is a valuable way for us to develop and maintain relationships with key providers in the marketplace.
 
Customer Support.  We seek to provide our customers with high quality customer support, from product ordering to insurance investigation, fulfillment and ongoing support. We have integrated our customer support systems with our sales, reimbursement, billing, telephone and website in order to provide customers with seamless and reliable customer support.
 
Our customer support staff is proactively involved with both healthcare professionals and patients. When a patient initiates their order for the OmniPod System, our customer support staff assist the patient with completing order forms and collecting additional data as required by the patient’s insurance provider. Once the order forms are complete, we investigate the patient’s insurance coverage for the OmniPod System and contact the customer to notify them of benefits. We believe it is important from a customer satisfaction perspective, as well as a healthcare professional perspective, that we handle the insurance investigation process efficiently and promptly. We also offer healthcare professionals assistance in generating insurance appeals for customers who are denied coverage. We believe that our insurance investigation infrastructure will enable us to effectively support the growing demand for the OmniPod System.
 
Upon approval from the customer, the customer’s order is shipped to the customer’s home and our customer support staff notifies the provider of the ship date and reviews training plans with the customer. A customer support representative follows up with new customers at the first re-order and patients can subsequently be placed on automatic re-order for OmniPod supplies, simplifying the diabetes management process and preventing patients from experiencing inadvertent supply shortages.
 
Research and Development
 
As of December 31, 2006, our research and development staff consisted of 38 people, including 30 engineers with expertise in mechanical, electrical and software engineering disciplines. Our team of engineers has many years of experience in relevant areas of the medical device industry, including external and implantable insulin pumps, ambulatory pumps, heart pumps, pacemakers, infusion sets and numerous other


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critical care devices. Our current research and development efforts are focused primarily on increased functionality, design for ease-of-use and reduction of production costs of the OmniPod System.
 
We are also working towards the integration of our existing OmniPod System with continuous glucose monitoring technology. We have an agreement with Abbott Diabetes Care Inc., a global healthcare company that develops continuous glucose monitoring technology, to develop a system that will integrate the receiver portion of Abbott’s continuous glucose monitor, the FreeStyle Navigator, with the OmniPod System PDM. The FreeStyle Navigator is currently pending FDA approval and is not available on the market. To date, the FDA has approved, as an adjunct to traditional self-testing, a limited number of continuous glucose monitoring systems, including those manufactured by Medtronic, Inc. and DexCom Inc. All of these products have limited capabilities, and none of them is labeled as a substitute for current blood glucose testing where patients need to draw blood for testing. This means that no continuous glucose monitor, whether currently on the market or pending FDA approval, can be used to determine insulin infusion amounts. It is unknown when, if ever, any continuous glucose monitoring systems will be approved as a replacement for current blood glucose monitors.
 
We believe that the potential uses of our proprietory OmniPod System technology are not limited to the treatment of diabetes. We plan to pursue the use of the OmniPod System technology for the delivery of other medications that may be administered subcutaneously in precise and varied doses over an extended period of time. However, there can be no assurance that we will be able to adapt the OmniPod System technology for such uses or successfully compete in new areas.
 
Scientific Advisory Board
 
Our scientific advisory board provides specific expertise in the areas of clinical applications, physician education and research and development relevant to our business. Scientific advisory board members meet with our management from time to time to discuss our present and long-term activities in these areas. Our scientific advisory board members include:
 
Robert Sherwin, M.D. (Chairman).  Dr. Sherwin is C.N.H. Long Professor of Medicine, Director of the Yale Center for Clinical Investigation and Interim Section Chief of Endocrinology and Metabolism at Yale University in New Haven, Connecticut.
 
John Buse, M.D., Ph.D.  Dr. Buse is Chief of the Division of Endocrinology and Director of the Diabetes Care Center at the University of North Carolina in Chapel Hill, North Carolina.
 
Steven Edelman, M.D.  Dr. Edelman is Professor of Medicine, Diabetes and Endocrinology at the University of California in San Diego and Founder and Director of Taking Control of Your Diabetes.
 
Lois Jovanovic, M.D.  Dr. Jovanovic is Chief Executive Officer and Chief Scientific Officer at the Sansum Diabetes Research Institute in Santa Barbara, California.
 
Francine Kaufman, M.D.  Dr. Kaufman is Chair of the Division of Endocrinology and Metabolism at the Children’s Hospital Los Angeles and Professor of Pediatrics at the University of Southern California School of Medicine in Los Angeles, California.
 
Howard Wolpert, M.D.  Dr. Wolpert is Senior Physician and Director of the Insulin Pump Program at the Joslin Diabetes Center at Harvard Medical School in Boston, Massachusetts.
 
Manufacturing and Quality Assurance
 
We believe a key contributing factor to the overall attractiveness of the OmniPod System is the disposable OmniPod insulin infusion device. To manufacture sufficient volumes of the OmniPod, each of which is worn for up to three days and then replaced, and to achieve a low per unit production cost, we have designed the OmniPod to be manufactured through a highly automated process.
 
Currently, the sale price of the OmniPod System is not sufficient to cover our direct manufacturing costs. We are in the process of completing the construction, testing and installation of automated manufacturing equipment to be used in the assembly of the OmniPod in order to increase our manufacturing volume.


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Increased volumes will allow for volume purchase discounts to reduce our raw material costs and improve absorption of manufacturing overhead costs.
 
During 2008, we expect to complete the planned automation of our existing manufacturing line, which is designed exclusively for the manufacture of the OmniPod, and begin construction of a second manufacturing line. Pending construction and installation of the remaining automated manufacturing equipment that we plan to use, we are manually performing these steps in the manufacturing process, which limits our ability to increase our manufacturing capacity and decrease our per unit cost of goods sold, thereby causing us to incur negative gross margins. We are also exploring alternative site and contract manufacturing capabilities both domestically and abroad to ensure that we have sufficient capacity to meet future product demand and are able to achieve cost efficiencies as we grow our business. For example, to that end, we recently entered into a contract manufacturing agreement with a subsidiary of Flextronics International Ltd. for the supply of a sub-assembly of some of the OmniPod’s components.
 
While both the OmniPod and PDM are assembled and tested in our manufacturing facility in Bedford, Massachusetts, we rely on outside vendors for most of the components, some sub-assemblies, and various services used in the manufacture of the OmniPod System. For example, we rely on Phillips Plastic Corporation to manufacture and supply a number of injection molded components of the OmniPod and on Freescale Semiconductor, Inc. to manufacture and supply the application specific integrated circuit that is incorporated into the OmniPod. Each of these suppliers is a sole-source supplier. We have never experienced significant disruption of these components and services and we have created safety stocks of our components to address changes in market demand. However, for certain of these components, arrangements for additional or replacement suppliers will take time and result in delays, in part because of the FDA approval process and because of the custom nature of various parts we design. Any interruption or delay in the supply of components, or our inability to obtain components from alternate sources at acceptable prices in a timely manner, could harm our business, financial condition and results of operations.
 
Generally, all outside vendors produce the components to our specifications and in many instances to our designs and they are audited annually by our Quality Assurance Department to ensure conformity with the specifications, policies and procedures for our devices. Our Quality Assurance Department also inspects and tests our devices at various steps in the manufacturing cycle to facilitate compliance with our devices’ stringent specifications. We have received approval from TÜV America Inc., a Notified Body to the International Standards Organization, or ISO, of our quality system standards. These approvals are ISO 13485 standards that include design control requirements. Certain processes utilized in the manufacture and test of our devices have been verified and validated as required by the FDA and other regulatory bodies. As a medical device manufacturer, our manufacturing facility and the facilities of our suppliers and sterilizer are subject to periodic inspection by the FDA and certain corresponding state agencies.
 
As of December 31, 2006, we had 70 employees in operations, manufacturing and quality assurance.
 
Intellectual Property
 
We believe that to maintain a competitive advantage, we must develop and preserve the proprietary aspect of our technologies. We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property laws, non-disclosure agreements and other measures to protect our proprietary rights. Currently, we require our employees, consultants and advisors to execute non-disclosure agreements in connection with their employment, consulting or advisory relationships with us, where appropriate. We also require our employees, consultants and advisors who we expect to work on our current or future products to agree to disclose and assign to us all inventions conceived during the work day, developed using our property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of the OmniPod System or to obtain and use information that we regard as proprietary.
 
Patents.  As of December 31, 2006, we had obtained 17 issued United States patents, and had 33 additional pending U.S. patent applications. We believe it will take up to four years, and possibly longer,


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for the most recent of these U.S. patent applications to result in issued patents. Our issued U.S. patents expire between 2020 and 2022, assuming we pay all required maintenance fees. We are also seeking patent protection for our proprietary technology in Europe, China, Japan, India and other countries and regions throughout the world. The issued patents and pending patent applications cover, among other things:
 
  •  the basic architecture of the OmniPod System;
 
  •  the OmniPod shape memory alloy drive system;
 
  •  the OmniPod System cannula insertion system; and
 
  •  various novel aspects of the OmniPod System and potential next generation OmniPod Systems.
 
On January 23, 2002, we entered into a development and license agreement with TheraSense, Inc., regarding the incorporation of the FreeStyle blood glucose meter in the PDM. TheraSense was subsequently acquired by Abbott Laboratories and is currently a wholly-owned subsidiary of Abbott Laboratories known as Abbott Diabetes Care, Inc. Under this agreement, we were granted a non-exclusive, fully paid, non-transferable and non-sublicensable license in the United States under patents and other relevant technical information relating to the Abbott FreeStyle blood glucose meter for the purpose of making, using and selling the OmniPod System incorporating an Abbott FreeStyle blood glucose meter. The term of the agreement is for seven years, with automatic renewals for subsequent three-year periods unless either party provides written notice of termination at least 90 days prior to the scheduled expiration of the then-current term. The current term is scheduled to expire in January 2009. The agreement may also be terminated by Abbott Diabetes Care, Inc. if it discontinues its FreeStyle blood glucose meter or test strips or by either party if the other party is acquired by a competitor of the first party or materially breaches its obligations under the agreement.
 
Trademarks.  We have registered the trademarks OMNIPOD and the OMNIPOD design with the United States Patent and Trademark Office on the Principal Register. We have applied with the United States Patent and Trademark Office to register the trademarks INSULET and POD. The INSULET mark is subject to an ongoing opposition proceeding. The POD mark, which has been allowed and for which the opposition period has expired, will be registered upon filing a declaration of use.
 
Competition
 
The medical device industry is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The OmniPod System competes with a number of existing insulin delivery devices as well as other methods for the treatment of diabetes. Medtronic MiniMed, a division of Medtronic, Inc., has been the market leader for many years and has the majority share of the conventional insulin pump market in the United States. Other significant suppliers in the United States are Animas Corporation, a division of Johnson & Johnson, and Deltec, a division of Smiths Medical MD, Inc. In October 2006, following the lifting of an FDA ban on the import of Disetronic insulin pumps, Roche Disetronic, a division of Roche Diagnostics, announced its re-entry into the conventional insulin pump market in the United States.
 
All of these competitors are large, well-capitalized companies with significantly more market share and resources than we have. As a consequence, they are able to spend more aggressively on product development, marketing, sales and other product initiatives than we can. Many of these competitors have:
 
  •  significantly greater name recognition;
 
  •  established relations with healthcare professionals, customers and third-party payors;
 
  •  established distribution networks;
 
  •  additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or other incentives to gain a competitive advantage;
 
  •  greater experience in conducting research and development, manufacturing, clinical trials, marketing and obtaining regulatory approval for products; and


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  •  greater financial and human resources for product development, sales and marketing and patent litigation.
 
The OmniPod System and conventional insulin pumps, both of which provide CSII therapy, also face competition from conventional and MDI therapy, both of which are substantially less expensive than CSII therapy, as well as from newer methods for the treatment of diabetes, such as inhaled insulin. Existing diabetes-focused pharmaceutical companies, including those marketing or developing inhaled insulin products, include Abbott Laboratories, Eli Lilly and Company, MannKind Corporation, Novo Nordisk AS, Pfizer Inc. and Takeda Pharmaceuticals Company Limited.
 
Government Regulation
 
The OmniPod System is a medical device subject to extensive and ongoing regulation by the U.S. Food and Drug Administration, or FDA, and other regulatory bodies. FDA regulations govern product design and development, pre-clinical and clinical testing, manufacturing, labeling, storage, pre-market clearance or approval, advertising and promotion, and sales and distribution.
 
FDA’s Pre-Market Clearance and Approval Requirements.  Unless an exemption applies, each medical device we seek to commercially distribute in the United States will require either a prior 510(k) clearance or a pre-market approval, or PMA, from the FDA. We have obtained 510(k) clearance for the OmniPod System. We expect that the product which we are developing that integrates continuous glucose monitoring capability with our existing OmniPod System would require a PMA. Both of these processes can be expensive and lengthy and entail significant user fees, unless exempt.
 
In order to obtain pre-market approval and, in some cases, a 510(k) clearance, a product sponsor must conduct well controlled clinical trials designed to test the safety and effectiveness of the product. Conducting clinical trials generally entails a long, expensive and uncertain process that is subject to delays and failure at any stage. The data obtained from clinical trials may be inadequate to support approval or clearance of a submission. In addition, the occurrence of unexpected findings in connection with clinical trials may prevent or delay obtaining approval or clearance. If we conduct clinical trials, they may be delayed or halted, or be inadequate to support approval or clearance.
 
  •  510(k) Clearance.  To obtain 510(k) clearance for any of our potential future devices (or for certain modifications to devices that have received 510(k) clearance), we must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a pre-amendment device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA application. The FDA’s 510(k) clearance pathway generally takes from three to twelve months from the date the application is completed, but can take significantly longer. After a medical device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a significant change in its intended use, requires a new 510(k) clearance.
 
  •  PMA.  Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device or device in commercial distribution before May 28, 1976 for which PMAs have not been required, generally require a PMA before they can be commercially distributed. A PMA application must be supported by extensive data, including technical, pre-clinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. After a PMA application is complete, the FDA begins an in-depth review of the submitted information, which generally takes between one and three years, but may take significantly longer. After any pre-market approval, a new pre-market approval application or application supplement may be required in the event of modifications to the device, its labeling, intended use or indication or its manufacturing process. In addition, any PMA approval may be conditioned upon the manufacturer conducting post-market surveillance and testing.


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Ongoing Regulation by FDA.  Even after a device receives clearance or approval and is placed on the market, numerous regulatory requirements apply. These include:
 
  •  establishment registration and device listing;
 
  •  quality system regulation, which requires manufacturers, including third party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
 
  •  labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses, and other requirements related to promotional activities;
 
  •  medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;
 
  •  corrections and removals reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug and Cosmetic Act that may present a risk to health; and
 
  •  post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
 
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions: fines, injunctions, civil or criminal penalties, recall or seizure of our current or future products, operating restrictions, partial suspension or total shutdown of production, refusing our request for 510(k) clearance or PMA approval of new products, rescinding previously granted 510(k) clearances or withdrawing previously granted PMA approvals.
 
We are subject to announced and unannounced inspections by the FDA, and these inspections may include the manufacturing facilities of our subcontractors. We received our first FDA inspection of our facility in August 2006. During its inspection, the FDA issued a Form 483, which is a notice of inspection observations. Two minor items were identified and the corrective action for both were initiated prior to the completion of the inspection. The responses provided to the FDA were deemed adequate and no further action has been requested.
 
International sales of medical devices are subject to foreign government regulations, which may vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. There is a trend towards harmonization of quality system standards among the European Union, United States, Canada and various other industrialized countries.
 
Licensure.  Several states require that durable medical equipment, or DME, providers be licensed in order to sell products to patients in that state. Certain of these states require that DME providers maintain an in-state location. Although we believe we are in compliance with all applicable state regulations regarding licensure requirements, if we were found to be noncompliant, we could lose our licensure in that state, which could prohibit us from selling our current or future products to patients in that state. In addition, we are subject to certain state laws regarding professional licensure. We believe that our certified diabetes educators are in compliance with all such state laws. If our educators or we were to be found non-compliant in a given state, we may need to modify our approach to providing education, clinical support and customer service.
 
Federal Anti-Kickback and Self-Referral Laws.  The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce the:
 
  •  referral of a person;
 
  •  furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental programs; or
 
  •  purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid or other governmental programs.
 
We provide the initial training to patients necessary for appropriate use of the OmniPod System either through our own diabetes educators or by contracting with outside diabetes educators that have completed a Certified Pod Trainer training course. Outside diabetes educators are reimbursed for their services at fair


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market value. Although we believe that these arrangements do not violate the law, regulatory authorities may determine otherwise, especially as enforcement of this law historically has been a high priority for the federal government. In addition, because we may provide some coding and billing information to purchasers of the OmniPod System, and because we cannot assure that the government will regard any billing errors that may be made as inadvertent, the federal anti-kickback legislation may apply to us. Noncompliance with the federal anti-kickback legislation can result in exclusion from Medicare, Medicaid or other governmental programs, restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations.
 
Federal law also includes a provision commonly known as the “Stark Law,” which prohibits a physician from referring Medicare or Medicaid patients to an entity providing “designated health services,” including a company that furnishes durable medical equipment, in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement. Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant arrangement, civil penalties, and exclusion from Medicare, Medicaid or other governmental programs. Although we believe that we have structured our provider arrangements to comply with current Stark Law requirements, these arrangements may not expressly meet the requirements for applicable exceptions from the law.
 
Additionally, as some of these laws are still evolving, we lack definitive guidance as to the application of certain key aspects of these laws as they relate to our arrangements with providers with respect to patient training. We cannot predict the final form that these regulations will take or the effect that the final regulations will have on us. As a result, our provider arrangements may ultimately be found to be not in compliance with applicable federal law.
 
Federal False Claims Act.  The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. In addition, amendments in 1986 to the Federal False Claims Act have made it easier for private parties to bring “qui tam” whistleblower lawsuits against companies. Penalties include fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages that the federal government sustained because of the act of that person. At present, we do not receive reimbursement from, or submit claims to, the federal government, although we intend in the future to pursue reimbursement coverage under one or more federal programs, such as Medicare. In any event, we believe that we are in compliance with the federal government’s laws and regulations concerning the filing of reimbursement claims.
 
Civil Monetary Penalties Law.  The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil money penalties of up to $10,000 for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. We believe that our arrangements comply with the requirements of the Federal Civil Monetary Penalties Law.
 
State Fraud and Abuse Provisions.  Many states have also adopted some form of anti-kickback and anti-referral laws and false claims act. We believe that we are conforming to such laws. Nevertheless, a determination of liability under such laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.
 
Administrative Simplification of the Health Insurance Portability and Accountability Act of 1996.  The Health Insurance Portability and Accountability Act of 1996, or HIPAA, mandated the adoption of standards for the exchange of electronic health information in an effort to encourage overall administrative simplification and enhance the effectiveness and efficiency of the healthcare industry. Ensuring privacy and security of patient information is one of the key factors driving the legislation. We believe we are in substantial compliance with the applicable HIPAA regulations.


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Third-Party Reimbursement
 
Our products are generally purchased directly by patients, and we generally bill third-party payors on behalf of our patients. Our fulfillment and reimbursement systems are fully integrated such that product is shipped only after confirmation of a valid physician’s order and current health insurance information. We maintain an insurance benefits investigation department consisting of three people to simplify and expedite claims processing and to assist patients in obtaining third-party reimbursement.
 
As of December 31, 2006, we have entered into contracts establishing reimbursement for the OmniPod System with national and regional third-party payors that cover an estimated 78 million lives. To date, we have primarily focused on negotiating contracts with third-party payors with a presence in the areas where we have concentrated our initial sales and marketing efforts, which has been on the East Coast region of the United States. We are continuing to work with additional third-party payors within these areas and, as we expand our sales and marketing focus, in the remainder of the United States to establish coverage contracts. Our coverage contracts with third-party payors typically have a term of between one and three years and set coverage amounts during that term.
 
We are an approved Medicare provider and current Medicare coverage for CSII therapy does exist. However, existing Medicare coverage is based on the pricing structure developed for conventional insulin pumps. Currently, we are in the process of seeking codes for Medicare reimbursement of the OmniPod System. As a result, we have decided to focus our initial efforts in establishing reimbursement for the OmniPod System on negotiating contracts with private insurers.
 
Third-party payors may decline to reimburse for procedures, supplies or services determined not to be “medically necessary” or “reasonable.” In certain situations, some third-party payors have declined to reimburse for a particular patient because such patient failed to meet its criteria. We try to deter and reverse such decisions through education. Although our efforts are usually successful, such reimbursement may become less likely in the future as pressure increases for lower healthcare costs, particularly near-term costs.
 
There is widespread concern that healthcare market initiatives in the United States may lead third-party payors to decline or further limit reimbursement. The extent to which third-party payors may determine that use of the OmniPod System will save costs or will at least be cost effective is highly uncertain, and it is possible, especially for diabetes, that they will merely focus on the lower initial costs associated with injection therapy or will otherwise limit reimbursement for insulin infusion systems or other products we develop. Because of uncertainties regarding the possible healthcare reform measures that could be proposed in the future and initiatives to reduce costs by private payors, we cannot predict whether reimbursement for our current or future products will be affected or, if affected, the extent of any effect. The unavailability of third-party coverage or the inadequacy of reimbursement for our current or future products would adversely affect our business, financial condition and results of operations.
 
Employees
 
As of December 31, 2006, we had 150 full-time employees, including 10 in field sales and sales administration, four in marketing, one in clinical, three in reimbursement, seven in customer care, two in training, 52 in operations and manufacturing, 38 in engineering and research and development, 18 in quality assurance and 15 in general and administrative functions. None of our employees is represented by a collective bargaining agreement and we have never experienced any work stoppage. We believe that our employee relations are good.
 
Facilities
 
We lease approximately 53,000 square feet of manufacturing, laboratory and office space at 9 Oak Park Drive, Bedford, Massachusetts under a lease expiring in 2009.
 
Legal Proceedings
 
We are not currently subject to any material pending legal proceedings.


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MANAGEMENT
 
Executive Officers and Directors
 
The following table shows information about our executive officers and directors.
 
             
Name
 
Age
 
Position
 
Duane DeSisto
  52   President, Chief Executive Officer and Director
Carsten Boess
  40   Chief Financial Officer
Luis Malavé
  44   Chief Operating Officer
Ruthann DePietro
  47   Vice President of Quality and Regulatory Affairs
John Garibotto
  42   Vice President of Research, Development and Engineering
Shawna Gvazdauskas
  51   Vice President of Sales
Kevin Schmid
  48   Vice President of Manufacturing
Jeff Smith
  47   Vice President of Marketing and Business Development
R. Anthony Diehl, Esq. 
  38   General Counsel
Alison de Bord(1)(3)
  34   Director
Gary Eichhorn(2)(3)
  52   Director
Ross Jaffe, M.D.(2)(3)
  48   Director
Charles Liamos(1)
  47   Director
Gordie Nye
  53   Director
Jonathan Silverstein(2)
  39   Director
Steven Sobieski(1)
  50   Director
 
 
(1) Member of the audit committee.
 
(2) Member of the compensation committee.
 
(3) Member of the nominating and corporate governance committee.
 
Duane DeSisto.  Mr. DeSisto has served as our President, Chief Executive Officer and a director since 2003. From 2002 to 2003, he served as our President, Chief Financial Officer and acting Chief Executive Officer. From 2001 to 2002, he served as our Chief Financial Officer and Treasurer. From 1999 to 2001, Mr. DeSisto served in various positions at PaperExchange.com, Inc., a business solutions provider for the pulp and paper industry, including as president, chief executive officer and chief financial officer. From 1995 to 1999, Mr. DeSisto served as the chief financial officer of FGX International Holdings Limited (formerly AAI-Foster Grant, Inc.), an accessories wholesaler, where he had overall responsibility for the accounting, information technology and human resource departments. From 1986 to 1995, Mr. DeSisto served as the chief financial officer of ZOLL Medical Corporation, a medical device company specializing in noninvasive resuscitation devices and related software solutions. Mr. DeSisto currently serves on the board of directors of LeMaitre Vascular, Inc. Mr. DeSisto earned a Bachelor of Science from Providence College and a Master of Business Administration from Bryant College.
 
Carsten Boess.  Mr. Boess has served as our Chief Financial Officer since June 2006. From 2005 to May 2006, he served as the executive vice president of finance on the management team for Serono, Inc., a biotechnology company focusing on reproductive health, metabolic endocrinology and neurology. From 2004 to 2005, he served as the chief financial officer for Alexion Pharmaceuticals, Inc., a biotechnology company that develops antibody therapeutics. Mr. Boess began his career at insulin-maker Novo Nordisk AS in 1991 as corporate controller and subsequently took on various assignments including manager of investor relations and finance for Novo Nordisk of North America, Inc., senior director of finance and information technology for the North American operations of Novozymes AS and finally as vice president of finance for the international operations of Novo Nordisk AS. Mr. Boess earned Bachelor and Masters degrees in economics and finance from the University of Odense, Denmark.


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Luis Malavé.  Mr. Malavé has served as our Chief Operating Officer since January 2007. He also served as our Senior Vice President of Research, Development and Engineering from 2003 to December 2006 and our Vice President of Research and Development from 2002 to 2003. From 1986 to 2002, he served in various positions at Medtronic MiniMed, Inc., a company specializing in insulin infusion systems for intensive insulin management, including as the director of engineering and external products. Mr. Malavé earned a Bachelor of Science from the University of Minnesota, a Masters degree in software engineering from the University of St. Thomas in St. Paul and a Master of Business Administration from the University of Maryland.
 
Ruthann DePietro.  Ms. DePietro has served as our Vice President of Quality and Regulatory Affairs since March 2006. From 2000 to 2005, she served as the vice president in charge of quality and regulatory matters for ONUX Medical, Inc., a medical device company focusing on innovative surgical devices for minimally invasive and open procedures. Ms. DePietro has also worked at Bard Vascular Systems, Bard Interventional and USCI, each of which are divisions of C.R. Bard, Inc., as well as Adam Spence Corporation and Mallinckrodt Cardiology, in each case in positions relating to quality assurance. Ms. DePietro earned a Bachelor of Science from the University of Rochester and a Master of Business Administration from Northeastern University.
 
John Garibotto.  Mr. Garibotto has served as our Vice President of Research, Development and Engineering since January 2007. He also served as our Vice President of Engineering from 2003 to December 2006 and Director of Engineering from 2000 to 2003. From 1996 to 2000, Mr. Garibotto served in various positions at Transvascular Inc., a medical device company that developed a proprietary platform delivery technology for certain intravascular procedures that was purchased by Medtronic, Inc. in 2003. Mr. Garibotto has also worked at Strato/Infusaid Inc. and Lau Technologies. Mr. Garibotto earned a Bachelor of Science from the University of Massachusetts, Lowell, and a Master of Business Administration from Northeastern University.
 
Shawna Gvazdauskas.  Ms. Gvazdauskas has served as our Vice President of Sales since 2004. From 2002 to 2004, she served as the vice president of sales at TheraSense, Inc., a blood glucose monitoring company that was acquired by Abbott Laboratories in 2004. From 2001 to 2002, she served as the national sales director for Ortho-Neutrogena, a division of Neutrogena Corporation, a Johnson & Johnson company that manufactures and sells over-the-counter and prescription skin and hair care products. From 1998 to 2001, Ms. Gvazdauskas was the director of professional sales at Neutrogena Corporation. Ms. Gvazdauskas has also held sales and sales management positions at Colgate Oral Pharmaceuticals, MediSense, Inc., Pharmacia Opthalmics, Inc. and Syntex Laboratories, Inc. Ms. Gvazdauskas earned a Bachelor of Science from Worcester State College.
 
Kevin Schmid.  Mr. Schmid has served as our Vice President of Manufacturing since 2003. From 2000 to 2002, he served at JDS Uniphase Corporation as the manager of production and advanced manufacturing. From 1995 to 2000, Mr. Schmid served as the advanced engineering manager for Bose Corporation. Mr. Schmid has also worked at American Cyanamid, BIC Corporation, New Jersey Machine and Microtech Association, in each case in positions relating to manufacturing engineering. Mr. Schmid earned a Bachelor of Science from the Clarkson University and a Master of Business Administration from Sacred Heart University.
 
Jeff Smith.  Mr. Smith has served as our Vice President of Marketing and Business Development since October 2004. He previously served as our Vice President of Sales and Marketing from June 2004 to October 2004. He was previously the vice president of sales and marketing at MediSense Products/Abbott Laboratories from 1999 to 2004. Mr. Smith earned a Bachelor of Science from Mount Allison University, Canada.
 
R. Anthony Diehl, Esq.  Mr. Diehl has served as our General Counsel since 2003. From 2001 to 2003, he was Of Counsel at Bourque & Associates, P.A. where his practice covered all areas of intellectual property law including patent, trademark and copyright prosecution, counseling and litigation. Mr. Diehl earned a Bachelor of Arts from Cornell University and a Juris Doctor degree from Villanova University School of Law.
 
Alison de Bord.  Ms. de Bord has served on our board of directors since 2004. She also serves on the board of directors for Aegerion Pharmaceuticals, Inc. and SurgRx, Inc. Ms. de Bord has been affiliated with Alta Partners, a venture capital firm in life sciences, since 2001 and is a director of Alta Partners, VIII, L.P.’s


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latest fund. Prior to joining Alta, she was a senior associate in Robertson Stephens & Company’s Life Sciences Investment Banking Group from 1999 to 2001, with primary responsibilities for the execution of corporate finance transactions including IPOs, follow-on equity and convertible preferred offerings. From 1995 to 1997, she was an associate at Robertson, Stephens & Company, where she focused on growth medical technology companies in the equity research group. She began her career in the business development group of Geron Corporation, a biotechnology company. Ms. de Bord earned a Bachelor of Arts from Colgate University and a Master of Business Administration from Columbia Business School.
 
Gary Eichhorn.  Mr. Eichhorn has served on our board of directors since 2003. Mr. Eichhorn is currently a management consultant and has served as the president of Eichhorn Group LLC, a venture consulting firm, since 2000. Mr. Eichhorn is on the board of directors of a number of privately-held technology companies, including Bluesocket, Inc., Chosen Security, Inc. and PanGo Networks, and is a member of the National Association of Corporate Directors. Previously, Mr. Eichhorn was the president, chief executive officer and a director of Open Market Inc., an Internet commerce software provider, from 1995 to 2000. From 1991 to 1995, Mr. Eichhorn worked at Hewlett-Packard Company, most recently serving as group vice president and general manager of Hewlett Packard’s Medical Systems Group. From 1975 to 1991, Mr. Eichhorn held various sales and management positions at Digital Equipment Corporation, a computer company. Mr. Eichhorn earned a Bachelor of Arts from Colgate University and attended the Advanced Management Program at Harvard Business School.
 
Ross Jaffe, M.D.  Dr. Jaffe has served on our board of directors since 2001. Dr. Jaffe is a managing director of Versant Ventures Management LLC, a healthcare-focused venture capital firm that he co-founded in 1999. In addition, he currently serves on the boards of directors of Calypso Medical Technologies, Inc., Ablation Frontiers, Inc., NDO Surgical, Inc., Acclarent, Inc. and Impedance Cardiology Systems, Inc. Dr. Jaffe has been a partner at Brentwood Venture Capital, a private venture capital firm since 1990. Dr. Jaffe is a board-certified internist, having completed his residency training in Internal Medicine/Primary Care at the University of California, San Francisco, where he remained a part-time attending physician until 1995. Before and during medical school, he was an analyst for Lewin and Associates, a healthcare consulting firm, and a research associate at Dartmouth Medical School. Dr. Jaffe earned a Bachelor of Arts from Dartmouth College, a Medical Degree from John Hopkins University and a Master of Business Administration from Stanford University.
 
Charles Liamos.  Mr. Liamos has served on our board of directors since 2005. Mr. Liamos currently serves as the executive in residence at MedVenture Associates, a position he has held since September 2006. From 2005 to 2006, Mr. Liamos served as the president and chief executive officer of FoviOptics, a medical device company that focused on blood glucose monitoring. Before joining FoviOptics, Mr. Liamos served as the chief operating officer and chief financial officer of TheraSense, Inc. from 2001 to 2004, as its vice president and chief financial officer from 1999 to 2001, and as its director of purchasing and finance from 1998 to 1999. When Abbott Laboratories acquired TheraSense in 2004, Mr. Liamos was named group vice president of business operations for Abbott Diabetes Care, Inc., and served on the committee that integrated TheraSense into its new parent company. From 1995 to 1998, Mr. Liamos was the director of worldwide sourcing at LifeScan, Inc., a division of Johnson & Johnson. Mr. Liamos earned a Bachelor of Science from the University of Vermont and is a graduate of the General Electric Financial Management Program.
 
Gordie Nye.  Mr. Nye has served on our board of directors since 2005. Mr. Nye currently serves as a general partner of Prism Venture Partners, a venture capital firm, where he is a member of the life sciences investment team. In addition, Mr. Nye currently serves on the boards of directors of Aptus Endosystems, Inc., Atritech Corp, CoAxia, Inc., Confirm Inc., iScience Surgical Inc., MedManage, Inc. and Myocor, Inc. Prior to joining Prism in 2003, Mr. Nye served as the chief executive officer of REVA Medical, Inc., the developer of a resorbable, drug-eluting stent for the interventional market. Mr. Nye was also the president, chief executive officer and a director of “A” Company, a premier brand in the orthodontic appliance market that was acquired by Sybron Dental Specialties, Inc. He has also held a variety of marketing, sales and general management roles for L.A. Gear, Olin Ski Company, Reebok, Ltd. and The Gillette Company. He earned a Bachelor of Arts and a Master of Business Administration, both from Dartmouth College.
 
Jonathan Silverstein.  Mr. Silverstein has served on our board of directors since February 2006. Mr. Silverstein currently serves as a general partner at OrbiMed Advisors LLC, a health sciences asset


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management firm, a position he has held since 1998. In addition, Mr. Silverstein currently serves on the boards of directors of Adiana, Inc., Avanir Pharmaceuticals, Cerapedics, Inc., Emphasys Medical, Inc. and superDimension, Ltd. Prior to joining OrbiMed Advisors LLC, Mr. Silverstein was a director of life sciences in the investment banking department at Sumitomo Bank. Prior to Mr. Silverstein’s tenure at Sumitomo Bank, he was an associate at Hambro Resource Development. Mr. Silverstein earned a Bachelor of Arts from Denison University, a Juris Doctor degree from the University of San Diego School of Law and a Master of Business Administration from the University of San Diego.
 
Steven Sobieski.  Mr. Sobieski has served on our board of directors since December 2006. Mr. Sobieski currently serves as chief financial officer and vice president of finance and administration of LifeCell Corporation, a position he has held since 2000. Prior to joining LifeCell Corporation, Mr. Sobieski was vice president of finance at Osteotech, Inc. From 1981 through 1991, he served in various positions with Coopers & Lybrand, a public accounting firm. Mr. Sobieski earned a Bachelor of Science from Monmouth University and a Master of Business Administration from Rutgers University. He is a Certified Public Accountant.
 
Board of Directors
 
Our amended and restated certificate of incorporation, which will be in effect upon the effectiveness of this offering, will provide for a classified board of directors consisting of three staggered classes of directors (Class I, Class II and Class III). The members of each class of our board of directors will serve for staggered three-year terms, with the terms of our Class I, Class II and Class III directors expiring upon the election and qualification of directors at the annual meetings of stockholders held in 2008, 2009 and 2010, respectively. Prior to the effectiveness of this offering we will determine which of our directors will serve in each class and which of our directors are independent directors for purposes of the corporate governance rules contained in the Marketplace Rules of the National Association of Securities Dealers, Inc., or the Nasdaq rules.
 
Currently, each of our directors serves on our board of directors pursuant to a voting agreement and provisions of our current certificate of incorporation relating to our preferred stock. The provisions of the voting agreement and our certificate of incorporation relating to the nomination and election of directors will terminate upon the closing of this offering.
 
Board Committees
 
Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee.
 
Audit Committee
 
The audit committee of our board of directors consists of Steven Sobieski (Chairman), Charles Liamos and Alison de Bord. The board of directors has determined that each member of the audit committee is “independent” as that term is defined in the rules of the SEC and the applicable Nasdaq rules. Our board of directors has determined that Messrs. Sobieski and Liamos each qualify as an “audit committee financial expert” as such term is defined in the rules of the SEC. The audit committee operates pursuant to a charter that was approved by our board of directors. The purposes of the audit committee are to, among other functions oversee our accounting and financial reporting processes and the audits of our financial statements, take, or recommend that our board of directors take, appropriate action to oversee the qualifications, independence and performance of our independent auditors, and prepare the audit committee report required to be included in our annual proxy statements.
 
Compensation Committee
 
The compensation committee of our board of directors consists of Gary Eichhorn (Chairman), Ross Jaffe and Jonathan Silverstein. The board of directors has determined that each member of the compensation committee is “independent” as that term is defined in the applicable Nasdaq rules. The compensation committee operates pursuant to a charter that was approved by our board of directors. The purposes of the compensation committee are to, among other functions, discharge our board of directors’ responsibilities


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relating to compensation of our directors and executives, oversee our overall compensation programs and prepare the compensation committee report required to be included in our annual proxy statement. See the section entitled “Executive and Director Compensation” for a more detailed description of the policies and procedures of our compensation committee.
 
Nominating and Corporate Governance Committee
 
The nominating and corporate governance committee of our board of directors consists of Ross Jaffe (Chairman), Alison de Bord and Gary Eichhorn. The board of directors has determined that each member of the nominating and corporate governance committee is “independent” as that term is defined in the applicable Nasdaq rules. The nominating and corporate governance committee operates pursuant to a charter that was approved by our board of directors. The purposes of the nominating and corporate governance committee are to, among other functions, identify individuals qualified to become board members, recommend that our board of directors select the director nominees for election at each annual meeting of stockholders and periodically review and recommend any changes to our corporate governance guidelines to our board of directors.


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EXECUTIVE AND DIRECTOR COMPENSATION
 
Compensation Discussion and Analysis
 
We provide what we believe is a competitive total compensation package to our executive management team through a combination of base salary, annual cash incentive bonuses, long-term equity incentive compensation and broad-based benefits programs.
 
We place significant emphasis on pay for performance-based incentive compensation, which is designed to reward our executives based on the achievement of predetermined company and individual goals. This Compensation Discussion and Analysis explains our compensation objectives, policies and practices with respect to our Chief Executive Officer, Chief Financial Officer and the other three most highly-compensated executive officers as determined in accordance with applicable SEC rules, which are collectively referred to as the named executive officers.
 
Objectives of Our Executive Compensation Programs
 
Our compensation programs for our named executive officers are designed to achieve the following objectives:
 
  •  attract and retain talented and experienced executives in the highly competitive and dynamic medical device industry;
 
  •  motivate and reward executives whose knowledge, skills and performance are critical to our success;
 
  •  align the interests of our executives and stockholders by motivating executives to increase stockholder value and rewarding executives when stockholder value increases;
 
  •  provide a competitive compensation package which is weighted heavily towards pay for performance, and in which a significant portion of total compensation is determined by company and individual results and the creation of stockholder value;
 
  •  ensure fairness among the executive management team by recognizing the contributions each executive makes to our success;
 
  •  foster a shared commitment among executives by coordinating their company and individual goals; and
 
  •  motivate our executives to manage our business to meet our short- and long-term objectives, and reward them for meeting these objectives.
 
Our Executive Compensation Programs
 
Our executive compensation primarily consists of base salary, annual cash incentive bonuses, long-term equity incentive compensation and broad-based benefits programs. Overall, we designed our executive compensation programs to achieve the objectives described above. In particular, consistent with the significant emphasis we place on performance-based incentive compensation, long-term equity incentive compensation in the form of stock options constitutes a significant portion of our total executive compensation. We also structured our annual cash incentive bonuses to be primarily tied to the achievement of predetermined performance goals.
 
Within the context of the overall objectives of our compensation programs, we determined the specific amounts of compensation to be paid to each of our executives in 2006 based on a number of factors including:
 
  •  our understanding of the amount of compensation generally paid by similarly situated companies to their executives with similar roles and responsibilities;
 
  •  our executives’ performance during 2006 in general and as measured against predetermined performance goals;
 
  •  the roles and responsibilities of our executives;


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  •  the individual experience and skills of, and expected contributions from, our executives;
 
  •  the amounts of compensation being paid to our other executives;
 
  •  our executives’ historical compensation at our company; and
 
  •  any contractual commitments we have made to our executives regarding compensation.
 
Each of the primary elements of our executive compensation is discussed in detail below, including a description of the particular element and how it fits into our overall executive compensation and a discussion of the amounts of compensation paid to our named executive officers in 2006 under each of these elements. In the descriptions below, we highlight particular compensation objectives that we have designed specific elements of our executive compensation program to address; however, it should be noted that we have designed our compensation programs to complement each other and collectively serve all of our executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, we believe that each element of our executive compensation program to a greater or lesser extent serves each of our objectives.
 
Base Salary
 
We pay our executives a base salary, which we review and determine annually. We believe that a competitive base salary is a necessary element of any compensation program that is designed to attract and retain talented and experienced executives. We also believe that attractive base salaries can motivate and reward executives for their overall performance. Although base salaries are established in part based on the individual experience, skills and expected contributions during the coming year of our executive and our executive’s performance during the prior year, we do not view base salaries as primarily serving our objective of paying for performance.
 
In 2006, we increased the base salaries of our named executive officers as follows: Mr. DeSisto’s base salary increased from $250,000 to $300,000 per year, Mr. Malavé’s base salary increased from $231,000 to $240,000 per year, Ms. Gvazdauskas’ base salary increased from $210,000 to $216,300 per year and Mr. Smith’s base salary increased from $210,000 to $216,300 per year. Mr. DeSisto’s base salary was increased in order to remain competitive based on our review of market data and maintain a base salary structure among our executives that, in our judgment, appropriately reflects their respective roles and responsibilities. The base salaries of our other executives reflected 3% to 4% increases. We initially hired Mr. Boess in June 2006, and we established his base salary at $275,000 per year. Our executives’ base salaries reflect the initial base salaries that we negotiated with each of our executives at the time of his or her initial employment or promotion and our subsequent adjustments to these amounts to reflect market increases, the growth and stage of development of our company, our executives’ performance and increased experience, any changes in our executives’ roles and responsibilities and other factors. The initial base salaries that we negotiated with our executives were based on our understanding of base salaries for comparable positions at similarly situated companies at the time, the individual experience and skills of, and expected contribution from, each executive, the roles and responsibilities of the executive, the base salaries of our existing executives and other factors.
 
Annual Cash Incentive Bonuses
 
Consistent with our emphasis on performance incentive compensation programs, our executives are eligible to receive annual cash incentive bonuses primarily based upon their performance as measured against predetermined goals established by us, including financial measures and the achievement of strategic objectives. The primary objective of our annual cash incentive bonuses is to motivate and reward our named executive officers for meeting our short-term objectives using a performance-based compensation program with objectively determinable goals. In addition, we reserve a portion of each executive’s annual cash incentive bonus to be paid at our discretion based on the executive’s overall performance. We maintain this discretionary portion of the annual cash incentive bonuses in order to motivate our executives’ overall performance and their performance relating to matters that are not that specifically addressed in the predetermined performance goals


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that we set. We believe that every important aspect of executive performance is not capable of being specifically quantified in a predetermined objective goal. For example, events outside of our control may occur after we have established the executives’ performance goals for the year that require our executives to focus their attention on different or other strategic objectives.
 
We establish the target amount of our annual cash incentive bonuses at a level that represents a meaningful portion of our executives’ currently paid out cash compensation, and set additional threshold and maximum performance levels above and below these target levels. In establishing these levels, in addition to considering the incentives that we want to provide to our executives, we also consider the bonus levels for comparable positions at similarly situated companies, our historical practices and any contractual commitments that we have relating to executive bonuses.
 
In 2006, we established a target annual cash incentive bonus for each of our executives of between 20% and 25% of his or her base salary, depending on the executive’s role. Of this amount, for each of our executives other than Mr. Boess, 20% to 25% of the bonus was reserved to be paid at our discretion based on the executive’s overall performance. Because Mr. Boess joined our company midway through the year, his entire bonus for 2006 was discretionary and it was prorated to reflect the portion of the year that he worked for our company. The amount of the discretionary portion of the annual cash incentive bonus paid to each of our executives was based on our assessment of their overall performance during the year. The remainder of the annual cash incentive bonus for each of our other executives was based on their achievement of a number of predetermined performance goals. The goals for 2006 related to obtaining and supporting a predetermined number of customers, meeting a specific financial goal of budgeted earnings before income tax, depreciation and amortization for Mr. DeSisto and budgeted spending limits for each other executive, and, for each executive, achieving other specific individualized strategic objectives. A specified percentage of the annual cash incentive bonus is payable based on the achievement of each of the different performance goals, and generally, for each goal, the executive has the ability to earn between 50% and 125% of the target bonus amount. Overall, the targets for the performance measures were set at levels that we believed to be achievable with strong performance by our executives. Although we cannot always predict the different events that will impact our business during an upcoming year, we set our performance goals for the target amount of annual incentive cash bonuses at levels that we believe will be achieved by our executives a majority of the time. Our maximum and threshold levels for these performance goals are determined in relation to our target levels, are intended to provide for correspondingly greater or lesser incentives in the event that performance is within a specified range above or below the target level, and are correspondingly easier or harder to achieve. We set the performance goals for the maximum amount at a level that we believe will be achieved in some years, but will not be achieved a majority of the time.
 
Long-Term Equity Incentive Compensation
 
We grant long-term equity incentive awards in the form of stock options to executives as part of our total compensation package. Consistent with our emphasis on performance-based incentive compensation, these awards represent a significant portion of total executive compensation. We use long-term equity incentive awards in order to align the interests of our executives and our stockholders by providing our executives with strong incentives to increase stockholder value and a significant reward for doing so. Based on the early stage of our company’s development and the incentives we are trying to provide to our executives, we have chosen to use stock options, which derive value exclusively from increases in stockholder value, as opposed to restricted stock or other forms of equity awards. Our decisions regarding the amount and type of long-term equity incentive compensation and relative weighting of these awards among total executive compensation have also been based on our understanding of market practices of similarly situated companies and our negotiations with our executives in connection with their initial employment or promotion by our company.
 
Stock option awards provide our executive officers with the right to purchase shares of our common stock at a fixed exercise price typically for a period of up to ten years, subject to continued employment with our company. Stock options are earned on the basis of continued service to us and generally vest over four years, beginning with one-fourth vesting one year after the date of grant, then pro-rata vesting monthly thereafter. Stock option awards are made pursuant to our 2000 Stock Option and Incentive Plan. See “— Potential


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Payments Upon Termination or Change-in-Control” for a discussion of the change-in-control provisions related to stock options.
 
The exercise price of each stock option granted under our 2000 Stock Option and Incentive Plan is based on the fair market value of our common stock on the grant date. Historically, the fair market value of our common stock for purposes of determining the exercise price of stock options has been determined by our board of directors based on its analysis of a number of factors including, among others, the total company valuation implied by the most recent venture capital round of financing, the market value of similarly situated public companies, our anticipated future risks and opportunities, the rights and preferences of our preferred stock existing at the time and the discounts customarily applicable to common stock of privately-held companies. More recently, our board of directors has based its determination on independent appraisals by an outside valuation consultant. Following this offering, all stock options will continue to be granted with an exercise price equal to the fair market value of our common stock on the date of grant, but fair market value will be defined as the closing market price of a share of our common stock on the date of grant. We do not have any program, plan or practice of setting the exercise price based on a date or price other than the fair market value of our common stock on the grant date.
 
We have granted all of our stock options to executives as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, subject to the volume limitations contained in the Internal Revenue Code. Generally, for stock options that do not qualify as incentive stock options, we are entitled to a tax deduction in the year in which the stock options are exercised equal to the spread between the exercise price and the fair market value of the stock for which the stock option was exercised. The holders of the stock options are generally taxed on this same amount in the year of exercise. For stock options that qualify as incentive stock options, we do not receive a tax deduction and the holder of the stock option may receive more favorable tax treatment than he or she would for a non-qualified stock option. Historically, we have granted primarily incentive stock options in order to provide these potential tax benefits to our executives, particularly given the limited expected benefits to our company of the tax deductions as a result of our historical net losses.
 
We have made grants to our named executive officers on a periodic, but not necessarily annual, basis. In 2006, we considered a number of factors in determining what, if any, stock options to grant to our executives, including:
 
  •  the number of shares subject to, and exercise price of, outstanding options, both vested and unvested, held by our executives;
 
  •  the vesting schedule of the unvested stock options held by our executives; and
 
  •  the amount and percentage of our total equity on a diluted basis held by our executives.
 
We determined not to make any new stock option grants to our executives in 2006, other than to Mr. Boess who joined our company in June 2006. The size of Mr. Boess’ stock option grant was based on a number of factors, including our negotiations with Mr. Boess, our understanding of options granted for comparable positions of similarly situated companies, Mr. Boess’ individual experience and skills, the expected contributions from, and role and responsibilities of, Mr. Boess as our Chief Financial Officer and the initial stock option grants made to, and the number of stock options held by, our other executives.
 
Broad-Based Benefits Programs
 
All full-time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance, and our 401(k) plan.
 
Our Executive Compensation Process
 
The compensation committee of our board of directors is primarily responsible for determining the compensation for our executives. The board of directors has determined that each member of the compensation committee is “independent” as that term is defined in the applicable Nasdaq rules. In determining executive


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compensation, our compensation committee annually reviews the performance of our executives with our Chief Executive Officer, and our Chief Executive Officer makes recommendations to our compensation committee with respect to the appropriate base salary, annual cash incentive bonus payments and performance measures and grants of long-term equity incentive awards for each of our executives. Historically, our compensation committee has then made recommendations to our board of directors, and our board of directors has approved our executive compensation.
 
Prior to the completion of this offering, we were a privately-held company and most of our directors and compensation committee members were appointed by and affiliated with our largest stockholders. As a result, the total amount of compensation that we paid to our executives, the types of executive compensation programs we maintained and the amount of compensation paid to our executives under each program had been determined by our compensation committee and board of directors based on their understanding of executive compensation for comparable positions at similarly situated companies, experience in making these types of decisions and judgment regarding the appropriate amounts and types of executive compensation to pay. Additionally, the number of shares available to be granted under our 2000 Stock Option and Incentive Plan has been limited by agreements entered into with our stockholders. In connection with this offering, our compensation committee has engaged an independent compensation consultant, Watson Wyatt Worldwide, to assist us in reviewing our executive compensation programs and appropriately adjusting these programs following this offering. As a public company, we expect to rely more heavily on independent compensation consultants and other more formal market data regarding comparable companies executive compensation programs and amounts in determining executive compensation than we have in the past.
 
Summary of Executive Compensation
 
The following table sets forth certain information with respect to compensation for the year ended December 31, 2006 earned by or paid to our Chief Executive Officer, Chief Financial Officer and our three other most highly-compensated executive officers, as determined in accordance with applicable SEC rules, which are collectively referred to as the named executive officers.
 
SUMMARY COMPENSATION TABLE
 
                                                         
                            Non-Equity
             
Name and Principal
                    Option
    Incentive Plan
    All Other
       
Position
  Year     Salary     Bonus     Awards(1)     Compensation     Compensation(2)     Total  
 
Duane DeSisto
    2006     $ 283,846     $ 13,125     $ 74,502     $ 36,563     $ 3,513     $ 411,549  
President and Chief
                                                       
Executive Officer
                                                       
Carsten Boess
    2006       155,480       31,900       417,633                   605,013  
Chief Financial Officer(3)
                                                       
Luis Malavé
    2006       238,818       12,012       16,880       27,628       2,964       298,302  
Chief Operating Officer(4)
                                                       
Shawna Gvazdauskas
    2006       215,330       8,652       11,640       27,038       2,441       265,101  
Vice President of Sales
                                                       
Jeff Smith
    2006       215,330       8,652       13,968       24,875       2,528       265,353  
Vice President of
                                                       
Marketing and Business
                                                       
Development
                                                       
 
 
(1) Based on the dollar amount recognized for financial statement reporting purposes with respect to the year ended December 31, 2006 in accordance with SFAS 123R, excluding the impact of forfeitures, and assuming that we used the modified prospective transition method for reporting awards granted prior to 2006. The assumptions we used for calculating the grant date fair values are set forth in notes 2 and 10 to our consolidated financial statements included in this prospectus.


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(2) Represents 401(k) matching contributions that we made.
 
(3) Mr. Boess joined our company in June 2006, and his annual base salary for 2006 was $275,000.
 
(4) Mr. Malavé served as our Senior Vice President of Research, Development and Engineering, until December 31, 2006. On January 2, 2007, he was named our Chief Operating Officer.
 
Grants of Plan-Based Awards
 
The following table sets forth certain information with respect to grants of plan-based awards for the year ended December 31, 2006 to the named executive officers.
 
2006 GRANTS OF PLAN-BASED AWARDS
 
                                                         
                            All Other Option
    Exercise or
       
          Estimated Possible Payouts
    Awards: Number
    Base Price
       
          Under Non-Equity
    of Securities
    of Option
       
          Incentive Plan Awards     Underlying
    Awards
    Grant Date
 
Name
  Grant Date     Threshold     Target     Maximum     Options(#)     ($/Sh)(1)     Fair Value(2)  
 
Duane DeSisto
        $ 33,750     $ 60,000     $ 73,125                    
Carsten Boess
    6/1/2006                         549,910     $ 2.46     $ 1,213,266  
Luis Malavé
          22,823       36,036       42,643                    
Shawna Gvazdauskas
          17,304       34,608       43,260                    
Jeff Smith
          21,533       32,445       40,556                    
 
 
(1) The exercise price of the option grant to Mr. Boess was the price determined, at the time, to be the fair market value of our common stock on the grant date by our board of directors. Our board of directors’ determination was based on a number of factors including, among others, the total company valuation implied by the most recent prior venture capital round of financing, the market value of similarly situated public companies, our anticipated future risks and opportunities, the rights and preferences of our preferred stock existing at the time and the discounts customarily applicable to common stock of privately-held companies. In connection with the preparation of the financial statement for this offering, we performed a retrospective determination of fair value of our common stock since January 1, 2006. For these purposes, we determined the fair value of our common stock to be $3.06 on June 1, 2006, the date of Mr. Boess’ grant.
 
(2) Based on the aggregate grant date fair value computed in accordance with SFAS 123R. The assumptions we used for calculating the grant date fair values are set forth in notes 2 and 10 to our consolidated financial statements included in this prospectus.
 
Discussion of Summary Compensation and Grants of Plan-Based Awards Tables
 
Our executive compensation policies and practices, pursuant to which the compensation set forth in the Summary Compensation Table and the Grants of Plan Based Awards Table was paid or awarded, are described above under “— Compensation Discussion and Analysis.” A summary of certain material terms of our compensation plans and arrangements is set forth below.
 
Employment Agreements
 
We have employment agreements with Duane DeSisto, our President and Chief Executive Officer; Carsten Boess, our Chief Financial Officer; and Jeff Smith, our Vice President of Marketing and Business Development. We do not have currently effective employment agreements with Luis Malavé, our Chief Operating Officer (formerly our Senior Vice President of Research, Development and Engineering); or Shawna Gvazdauskas, our Vice President of Sales. We did enter into employment agreements with Mr. Malavé and Ms. Gvazdauskas when we initially hired them, but these agreements have since expired. The following is a description of the material terms of our employment agreements with Messrs. DeSisto, Boess and Smith.
 
Mr. DeSisto.  We entered into an employment agreement with Mr. DeSisto effective as of March 1, 2005, which provides for a two-year initial term of employment that is automatically extended for additional one-year periods unless either party notifies the other of non-extension at least 45 days prior to the end of a term. The current term of the agreement is schedule to expire on February 29, 2008. Under the agreement, we agreed to pay Mr. DeSisto an annual base salary determined by our board of directors that may not be less than $250,000. Additionally, in the event that Mr. DeSisto’s employment agreement is terminated by us


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without cause, as defined in the employment agreement, and Mr. DeSisto signs a release acceptable to us, we will be obligated to continue to pay Mr. DeSisto his base salary for a period of twelve months following termination. Our obligation to make these severance payments is subject to Mr. DeSisto’s continued compliance with his confidentiality, non-compete and non-solicitation obligations under his non-competition and non-solicitation agreement and employee nondisclosure and developments agreement with us.
 
Mr. Boess.  We entered into an employment agreement with Mr. Boess effective as of June 1, 2006, which provides for a two-year term of employment from June 1, 2006. Under the agreement, Mr. Boess’ initial base salary was established at $275,000, subject to annual review by our Chief Executive Officer. We also agreed to grant Mr. Boess a stock option to purchase 549,910 shares of our common stock at an exercise price equal to fair market value on the date of grant. In the event that Mr. Boess’ employment agreement is terminated by us without cause, as defined in the employment agreement, and Mr. Boess signs a release acceptable to us, we will be obligated to continue to pay Mr. Boess his base salary for a period of six months following termination. Our obligation to make these severance payments is also subject to Mr. Boess’ continued compliance with his confidentiality, non-compete and non-solicitation obligations under his non-competition and non-solicitation agreement and employee non-disclosure and developments agreement with us.
 
Mr. Smith.  We entered into an employment agreement with Mr. Smith effective as of June 14, 2004, which provides for a three-year term of employment from June 14, 2004. Under the agreement, Mr. Smith’s initial base salary was established at $200,000, subject to annual review by our Chief Executive Officer. In the event that Mr. Smith’s employment agreement is terminated by us without cause, as defined in the employment agreement, and Mr. Smith signs a release acceptable to us, we will be obligated to continue to pay Mr. Smith his base salary for a period of six months following termination. Our obligation to make these severance payments is also subject to Mr. Smith’s continued compliance with his confidentiality, non-compete and non-solicitation obligations under his non-competition and non-solicitation agreement and employee non-disclosure and developments agreement with us.
 
In addition to these employment agreements, each of our named executive officers has entered into a non-competition and non-solicitation agreement and an employee non-disclosure and developments agreement with us, which provide for protection or our confidential information, assignment to us of intellectual property developed by our executives and non-compete and non-solicitation obligations that are effective while the executive is employed by us and for a period of 12 months thereafter.
 
Annual Cash Incentive Bonuses
 
In 2006, we established target annual cash incentive bonuses for each of our named executive officers as a percentage of that executive’s base salary, as follows: Mr. DeSisto — 25%; Mr. Boess — 20%; Mr. Malavé — 20%; Ms. Gvazdauskas — 20%; and Mr. Smith — 20%. The following percentages of these total target annual cash incentive bonuses were reserved to be paid at our discretion based on the executive’s overall performance: Mr. DeSisto — 25%; Mr. Boess — 100%; Mr. Malavé — 25%; Ms. Gvazdauskas — 20%; and Mr. Smith — 20%. The discretionary bonus amounts paid are reported as “Bonus” in the Summary Compensation Table. Mr. Boess’ bonus for 2006 was prorated to reflect the fact that he joined our company in June 2006. The remainder of the bonuses were paid based on the executives’ achievement of a number of predetermined performance goals, as described above under “— Our Executive Compensation Programs — Annual Cash Incentive Bonuses.” Generally, for each goal, the executive had the ability to earn between 50% and 125% of the target bonus amount based on the level of achievement of that goal. The bonuses paid upon the achievement of these predetermined performance goals are reported as “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table. Additionally, in the 2006 Grants of Plan-Based Awards table, the “Estimated Possible Payouts under Non-Equity Incentive Plan Awards” column for each of the executives, other than Mr. Boess, relates to the portion of our annual cash incentive bonuses that was payable upon the achievement of these predetermined performance goals. The threshold payouts represent the payout that would have been received if each performance goal was met at the minimum level, the target represents the payout that would have been received if each performance goal was met at the target level and the maximum represents the payout that would have been received if each performance goal was met at the maximum level.


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2006 Stock Option Grants
 
In 2006, we granted Mr. Boess a stock option under our 2000 Stock Option and Incentive Plan to purchase 549,910 shares of our common stock at an exercise price of $2.46 per share. This stock option has a term of ten years and may be exercised at any time and from time to time prior to its expiration for all or a portion of such option shares. This stock option vests over four years with 25% of the total award vesting after one year and the remainder vesting in equal monthly installments each month thereafter for 36 months. Additionally, if Mr. Boess is unable to obtain permanent resident status before the expiration of his H1-B visa, which is currently scheduled to expire on May 31, 2009, and he has cooperated with us in an effort to obtain permanent resident status and is in good standing with us at the time of expiration of his H1-B visa, the vesting of this stock option will accelerate and all unvested stock options at the time of expiration of his H1-B visa will vest. Vesting of this stock option is also subject to acceleration in connection with a change-in-control as described in “— Potential Payments Upon Termination or Change-in-Control.”
 
2000 Stock Option and Incentive Plan
 
Background.  Our board of directors adopted, and our stockholders approved, our 2000 Stock Option and Incentive Plan in October 2000.
 
Administration.  Our board of directors currently administers our 2000 Stock Option and Incentive Plan. Our compensation committee of our board of directors will be responsible for administering all of our equity compensation plans upon the closing of this offering. Under our 2000 Stock Option and Incentive Plan, the plan administrator has the power to determine the terms of the awards, including the service providers who will receive awards, the exercise price, the number of shares subject to each award, the vesting schedule and exercisability of awards and the form of consideration payable upon exercise of an option.
 
Eligibility.  All of our employees, consultants and non-employee directors are eligible to be granted awards under our 2000 Stock Option and Incentive Plan. An employee, consultant or non-employee director granted an award is a participant under our 2000 Stock Option and Incentive Plan.
 
Number of Shares Available for Issuance.  The maximum number of shares of our common stock that are authorized for issuance under our 2000 Stock Option and Incentive Plan currently is 8,107,060. Shares issued under the 2000 Stock Option and Incentive Plan may be treasury shares or authorized but unissued shares. In the event the number of shares to be delivered upon the exercise or payment of any award granted under the 2000 Stock Option and Incentive Plan is reduced for any reason or in the event that any award (or portion thereof) can no longer be exercised or paid, the number of shares no longer subject to such award shall be released from such award and shall thereafter be available under the 2000 Stock Option and Incentive Plan for the grant of additional awards. Upon the occurrence of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares or the like, the plan administrator may ratably adjust the aggregate number and affected class of securities available under the 2000 Stock Option and Incentive Plan.
 
Types of Awards.  The plan administrator may grant the following types of awards under our 2000 Stock Option and Incentive Plan: stock options; restricted stock; or other stock based awards. Stock options awarded under our 2000 Stock Option and Incentive Plan may be nonqualified stock options or incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. With the exception of incentive stock options, the plan administrator may grant, from time to time, any of the types of awards under our 2000 Stock Option and Incentive Plan to our employees, consultants and non-employee directors. Incentive stock options may only be granted to our employees.
 
Stock Options.  A stock option is the right to acquire shares of our common stock at a fixed price for a fixed period of time and generally is subject to a vesting requirement. To date, as a matter of practice, options have generally been subject to a four-year vesting period, with 25% of the total award vesting after one year and the remainder vesting in equal monthly installments each month thereafter for 36 months. A stock option will be in the form of a nonqualified stock option or an incentive stock option. The exercise price is set by the plan administrator but cannot be less than 100% of the fair market value of our common stock on the date of


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grant, or, in the case of incentive stock options granted to an employee who owns 10% or more of total combined voting power of our common stock, or a 10% owner, the exercise price cannot be less than 110% of the fair market value of our common stock on the date grant. The term of a stock option may not exceed ten years or five years in the case of incentive stock options granted to a 10% owner. Our 2000 Stock Option and Incentive Plan also allows for the early exercise of unvested options, provided that right is permitted in the applicable stock option agreement. All outstanding unvested shares of our common stock acquired through early exercised options are subject to repurchase by us at the exercise price previously paid. After termination of an optionee, he or she may exercise his or her vested options for the period of time stated in the stock option agreement. Generally, if termination is due to death or disability, the vested option will remain exercisable for 180 days; if termination is for cause, the option may no longer be exercised; and, in all other cases, the vested options will remain exercisable for three months. However, an option may not be exercised later than its expiration date.
 
Restricted Stock.  Restricted stock awards are shares of our common stock that are subject to cancellation, restrictions and vesting conditions, as determined by the plan administrator.
 
Other Awards.  The administrator of the 2000 Stock Option and Incentive Plan also may grant other forms of awards that generally are based on the value of our common stock as determined by the plan administrator to be consistent with the purposes of our 2000 Stock Option and Incentive Plan.
 
Amendment and Discontinuance; Term.  The plan administrator may amend, suspend or terminate our 2000 Stock Option and Incentive Plan at any time, with or without prior notice to or consent of any person, except as would require the approval of our stockholders, be required by law or the requirements of the exchange on which our common stock is listed or would adversely affect a participant’s rights to outstanding awards without their consent. Unless terminated earlier, our 2000 Stock Option and Incentive Plan will expire on the tenth anniversary of its effective date.


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Outstanding Equity Awards
 
The following table sets forth certain information with respect to outstanding equity awards at December 31, 2006 with respect to the named executive officers.
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2006
 
                         
    Option Awards  
    Number of Securities
             
    Underlying
    Option
       
    Unexercised Options
    Exercise
    Option
 
Name
  Exercisable(1)(#)     Price($)     Expiration Date  
 
Duane DeSisto
    125,000 (2)     0.185       6/28/2011  
      300,400       0.450       10/9/2012  
      100,000       0.450       7/22/2013  
      210,183       0.950       2/23/2014  
      105,057       0.950       2/23/2014  
      772,232       1.370       2/9/2015  
Carsten Boess
    549,910 (3)     2.460       6/1/2016  
Luis Malavé
    100,000 (4)     0.185       6/5/2012  
      25,000 (4)     0.185       7/17/2012  
      169,050       0.450       10/9/2012  
      25,000 (4)     0.450       6/30/2013  
      179,997       0.950       2/23/2014  
      11,433       0.950       2/23/2014  
      94,347       1.370       5/4/2015  
Shawna Gvazdauskas
    300,000 (5)     0.950       7/8/2014  
Jeff Smith
    360,000 (6)     0.950       7/8/2014  
 
 
(1) All options may be exercised at any time, whether vested or not, but, upon termination of employment, we may repurchase any unvested shares at the exercise price paid for the shares. Unless otherwise noted:
 
• each option is subject to a four-year vesting period, with 25% of the total award vesting one year after the grant date and the remainder vesting in equal monthly installments each month thereafter for 36 months, subject to continued employment; and
 
• the expiration date for each option is the date that is ten years after the grant date.
 
See “— Potential Payments Upon Termination or Change-in-Control” for a description of the acceleration provisions upon termination or change-in-control.
 
(2) This option vested 25% on July 9, 2001 with the remainder vesting in equal monthly installments each month for 36 months following July 9, 2002.
 
(3) If Mr. Boess is unable to obtain permanent resident status before the expiration of his H1-B visa, which is currently scheduled to expire on May 31, 2009, and he has cooperated with us in an effort to obtain permanent resident status and is in good standing with us at the time of expiration of his H1-B visa, the vesting of this stock option will accelerate and all unvested stock options at the time of expiration of his H1-B visa will vest.
 
(4) This option vested 25% on February 1, 2003 with the remainder vesting in equal monthly installments each month thereafter for 36 months.
 
(5) This option vested 25% on July 1, 2005 with the remainder vesting in equal monthly installments each month thereafter for 36 months.
 
(6) This option vested 25% on June 14, 2005 with the remainder vesting in equal monthly installments each month thereafter for 36 months.


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Potential Payments Upon Termination or Change-in-Control
 
In the event that any of Mr. DeSisto’s, Mr. Boess’ or Mr. Smith’s employment agreement is terminated by us without “cause” and he signs a release acceptable to us, he will be entitled to continue to be paid his base salary for a period of six months, in the case of Mr. Boess and Mr. Smith, or twelve months, in the case of Mr. DeSisto, as applicable, following termination. Additionally, these named executive officers will be entitled to payment for any accrued unused vacation time. Notwithstanding the foregoing, our obligation to make these severance payments to any of these named executive officers is subject to that executive’s continued compliance with his confidentiality, non-compete and non-solicitation obligations under his non-competition and non-solicitation agreement and employee non-disclosure and developments agreement with us. We agreed to provide severance payments to these executives in these circumstances based on our negotiations with each of our executives at the time they joined our company and in order to provide a total compensation package that we believed to be competitive.
 
“Cause” means any of the following: the failure or refusal of the named executive officer to render services to us in accordance with his obligations under the employment agreement or a determination by us that the named executive officer has failed to perform the duties of his employment; disloyalty, gross negligence, dishonesty, breach of fiduciary duty or breach of the terms of the employment agreement or the other agreements executed in connection therewith; the commission by the named executive officer of an act of fraud, embezzlement or disregard of our rules or policies or the commission by the named executive officer of any other action which injures us; acts which, in the judgment of our board of directors, would tend to generate adverse publicity toward us; the commission, or plea of nolo contendere, by the named executive officer of a felony; the commission of an act which constitutes unfair competition with us or which induces any of our customers to breach a contract with us; or a breach by the named executive officer of the terms of the non-competition and non-solicitation agreement or the employee non-disclosure and developments agreement between us and the named executive officer.
 
If Mr. DeSisto, Mr. Boess or Mr. Smith had been terminated without cause on December 31, 2006, the approximate value of the severance benefits, assuming three weeks of accrued unused vacation time, under the employment agreement for each such named executive officer would have been as follows: Mr. DeSisto $317,308, Mr. Boess $153,365, and Mr. Smith $120,629. Also, any remaining unvested options granted to such named executive officer under the 2000 Stock Option and Incentive Plan would have ceased vesting on that date.
 
If Mr. DeSisto, Mr. Boess or Mr. Smith had been terminated for cause or if such named executive officer had terminated his employment for any reason, the approximate value of the severance benefits, assuming three weeks of accrued unused vacation time, under the employment agreement for each such named executive officer would have been as follows: Mr. DeSisto $17,308, Mr. Boess $15,865, and Mr. Smith $12,479. Also, any remaining unvested options granted to such named executive officer under the 2000 Stock Option and Incentive Plan would have ceased vesting on that date.
 
Upon a “change-in-control,” a named executive officer will be entitled to accelerated vesting for 50% of any remaining unvested options granted under the 2000 Stock Option and Incentive Plan. Further, in the event that, within twelve months following a change-in-control, a named executive officer’s employment is terminated without cause, he or she experiences a material negative change in his or her compensation or responsibilities or he or she is required to be based at a location more than 50 miles from his or her current work location, any remaining unvested options granted under the 2000 Stock Option and Incentive Plan will become fully vested. “Change-in-control” means any of the following: a sale or other disposition of all or substantially all of our assets; or a merger or consolidation after which our voting securities outstanding immediately before the transaction cease to represent at least a majority of the combined voting power of the successor entity’s outstanding voting securities immediately after the transaction. We agreed to provide payments to these executives in these circumstances in order to provide a total compensation package that we believed to be competitive. Additionally, the primary purpose of our equity-based incentive awards is to align the interests of our executives and our stockholders and provide our executives with strong incentives to increase stockholder value over time. As change-in-control transactions typically represent events where our


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stockholders are realizing the value of their equity interests in our company, we believe it is appropriate for our executives to share in this realization of stockholder value, particularly where their employment is terminated in connection with the change-in-control transaction. We believe that this acceleration of vesting will also help to better align the interests of our executives with our stockholders in pursuing and engaging in these transactions.
 
If a change-in-control had occurred on December 31, 2006, the value of 50% of any remaining unvested options granted under the 2000 Stock Option and Incentive Plan for each named executive officer, assuming that the fair market value of our stock on that date was          , the midpoint of the range of offering prices set forth on the cover of this prospectus, would have been as follows: Mr. DeSisto $     , Mr. Boess $     , Mr. Smith $     , Mr. Malavé $      and Ms. Gvazdauskas $     .
 
If a change-in-control had occurred on December 31, 2006 and on that date each named executive officer had been terminated without cause, experienced a material negative change in his or her compensation or responsibilities or was required to be based at a location more than 50 miles from his or her current work location, the value of any remaining unvested options granted under the 2000 Stock Option and Incentive Plan for each named executive officer, assuming that the fair market value of our stock on that date was          , the midpoint of the range of offering prices set forth on the cover of this prospectus, would have been as follows: Mr. DeSisto $     , Mr. Boess $     , Mr. Smith $     , Mr. Malavé $      and Ms. Gvazdauskas $     .
 
Director Compensation
 
We do not pay any compensation for serving on our board of directors to our employee directors (Duane DeSisto, President and Chief Executive Officer) and our non-employee directors that are representatives of the venture capital funds who hold shares of our capital stock (currently, Alison de Bord, Ross Jaffe, Gordie Nye, and Jonathan Silverstein). During 2006, our director compensation policy was to pay our non-employee directors that are not representatives of the venture capital funds who hold shares of our capital stock (Charles Liamos, Gary Eichhorn and Steven Sobieski) the following compensation:
 
  •  an annual retainer of $25,000; and
 
  •  upon initial election to our board of directors and every three years thereafter, a grant of options to purchase 50,000 shares of our common stock that are subject to a three-year vesting period, with 50% of the total award vesting on the first anniversary of the grant date and an additional 25% vesting on each of the next two anniversaries of the grant date, subject to continued service as a director.
 
Beginning in 2007, we increased the compensation for these non-employee directors to include an additional $10,000 annual retainer for any of these directors who serves as chairman of the audit committee of our board of directors and an audit committee meeting fee for each of these directors serving on the audit committee of $1,750 per audit committee meeting attended by that director.
 
Mr. Sobieski joined our board of directors on December 20, 2006 and, accordingly, was granted an option to purchase 50,000 shares of our common stock on that date; however, Mr. Sobieski will not receive any amount as an annual retainer for 2006. Mr. Liamos and Mr. Eichhorn have both been directors since prior to 2006.


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The following table sets forth certain information with respect to our director compensation during the year ended December 31, 2006.
 
2006 DIRECTOR COMPENSATION TABLE
 
                         
    Fees Earned or
             
Name
  Paid in Cash     Option Awards(1)     Total  
 
Gary Eichhorn
  $ 25,000     $ 12,101     $ 37,101  
Charles Liamos
    25,000       14,723       39,723  
Steve Sobieski
          3,316       3,316  
Other Non-Employee Directors
                 
 
 
(1) Based on the dollar amount recognized for financial statement reporting purposes with respect to the year ended December 31, 2006 in accordance with SFAS 123R, excluding the impact of forfeitures, and assuming that we used the modified prospective transition method for reporting awards granted prior to 2006. The assumptions we used for calculating the grant date fair values are set forth in notes 2 and 10 to our consolidated financial statements included in this prospectus. During 2006, we granted Mr. Sobieski a stock option to purchase 50,000 shares of our common stock, which had an aggregate grant date fair value computed in accordance with SFAS 123R of $142,790. No other stock option grants were made to directors during 2006. As of December 31, 2006, our non-employee directors held options that had been granted by us as director compensation to purchase the following number of shares of our common stock: Mr. Eichhorn — 138,304 shares; Mr. Liamos — 50,000 shares; and Mr. Sobieski — 50,000 shares.
 
In addition to the compensation described above, we also reimburse all non-employee directors for their reasonable out-of-pocket expenses incurred in attending meetings of our board of directors or any committees thereof.
 
Compensation Committee Interlocks and Insider Participation
 
Upon the effectiveness of this offering, none of our executive officers will serve as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or compensation committee. None of the persons who will be members of our compensation committee upon the effectiveness of this offering will have ever been employed by us.


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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
Issuances of Preferred Stock
 
Since January 2004, we have engaged in transactions regarding sales of our preferred stock to certain of our stockholders that beneficially own at least 5% of our voting securities and are affiliated with certain of our directors. In February 2004, we sold an aggregate of 14,669,421 shares of our Series D Preferred Stock at a purchase price of $2.42 per share. In February 2006, we sold an aggregate of 13,738,661 shares of our Series E Preferred Stock at a purchase price of $3.64 per share.
 
The following table summarizes the shares of our preferred stock purchased in these transactions by our 5% stockholders and entities affiliated with our directors. Each share of Series D Preferred Stock and Series E Preferred Stock listed below will convert at the closing of this offering into one share of our common stock. In connection with the sale of our preferred stock in each of these transactions, we entered into agreements with the purchasers of our preferred stock that provided for, among other things, registration rights, participation rights, rights of first refusal, co-sale rights, agreements regarding the number and election of our directors and various reporting obligations. Upon the completion of this offering, our ongoing obligations under these agreements, except for our obligations regarding registration rights, which are described in the section entitled “Description of Capital Stock — Registration Rights,” will terminate.
 
                 
    Series D
    Series E
 
    Preferred
    Preferred
 
Investor
  Stock     Stock  
 
Alta BioPharma Partners III GmbH & Co. Beteiligungs KG(1)
    203,345       71,896  
Alta BioPharma Partners III, L.P.(1)
    3,027,821       1,070,538  
Alta Embarcadero BioPharma Partners III, LLC(1)
    74,619       26,383  
Caduceus Private Investments II, LP(2)
          2,750,230  
Caduceus Private Investments (QP) II, LP(2)
          1,029,742  
UBS Juniper Crossover Fund, L.L.C.(2)
          340,907  
International Life Sciences Fund III (LP1), L.P.(3)
    1,526,298       1,107,333  
International Life Sciences Fund III (LP2), L.P.(3)
    61,155       44,368  
International Life Sciences Fund III Strategic Partners, L.P.(3)
    15,165       11,002  
International Life Sciences Fund III Co-investment, L.P.(3)
    18,836       13,666  
MedVen Affiliates IV, L.P.(4)
    32,851       13,104  
MedVenture Associates IV, L.P.(4)
    1,206,818       481,401  
Pequot Offshore Private Equity Partners III, L.P.(5)
    203,728       135,914  
Pequot Private Equity Fund III, L.P.(5)
    1,445,210       964,149  
Prism Venture Partners III, L.P.(6)
    2,031,399       1,600,220  
Prism Venture Partners III-A, L.P.(6)
    61,101       48,132  
Versant Venture Capital I, L.P.(7)
    1,272,337       252,748  
Versant Side Fund I, L.P.(7)
    24,894       4,945  
Versant Affiliates Fund I-A, L.P.(7)
    27,660       5,495  
Versant Affiliates Fund I-B, L.P.(7)
    58,085       11,538  
Federated Kaufmann Fund, a Portfolio of Federated Equity Funds
          2,747,253  
 
 
(1) Alta BioPharma Management III, LLC is the general partner of Alta BioPharma Partners III, L.P. and the managing limited partner of Alta BioPharma Partners III GmbH & Co. Beteiligungs KG, which are beneficial owners of more than 5% of our voting securities. Ms. de Bord, one of our directors, is a member of Alta BioPharma Management III, LLC and affiliated with Alta Embarcadero BioPharma Partners III, LLC.
 
(2) OrbiMed Capital II GP LLC, which is the beneficial owner of more than 5% of our voting securities, is the general partner of each of Caduceus Private Investments II, LP and Caduceus Private Investments (QP) II, LP. Mr. Silverstein, one of our directors, is a partner of OrbiMed Capital II GP LLC and OrbiMed Advisors LLC, which is the investment advisor to, and a member of the managing member of UBS Juniper Crossover Fund, L.L.C.


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(3) ILSF III, LLC is the general partner of International Life Sciences Fund III (GP), L.P., which is the general partner of each of International Life Sciences Fund III (LP1), L.P., International Life Sciences Fund III (LP2), L.P., International Life Sciences Fund III Strategic Partners, L.P. and International Life Sciences Fund III Co-investment, L.P. ILSF III, LLC and International Life Sciences Fund III (GP), L.P. may be deemed to be beneficial owners of more than 5% of our voting securities.
 
(4) Mr. Liamos, one of our directors, is affiliated with MedVenture Associates Management IV Co., LLC, which is the general partner of each of MedVen Affiliates IV, L.P. and MedVenture Associates IV, L.P.
 
(5) Pequot Capital Management, Inc. is the investment manager/advisor of, and exercises sole investment discretion over, Pequot Private Equity Fund III, L.P. and Pequot Offshore Private Equity Partners III, L.P., and as such, has voting and dispositive power over these shares. Arthur J. Samberg is the executive officer, director and controlling shareholder of Pequot Capital Management, Inc. Juliet Tammenoms Bakker, one of our former directors, currently serves as a consultant to Pequot Capital Management, Inc. Ms. Tammenoms Bakker was a Managing Director of Pequot Capital Management, Inc. prior to serving as a consultant to Pequot Capital Management, Inc.
 
(6) Prism Venture Partners III, LLC is the general partner of Prism Investment Partners III, L.P., which is the general partner of each of Prism Venture Partners III, L.P. and Prism Venture Partners III-A, L.P. Prism Venture Partners III, LLC and Prism Investment Partners III, L.P. are beneficial owners of more than 5% of our voting securities. Mr. Nye, one of our directors, is affiliated with Prism Venture Partners III, LLC.
 
(7) Versant Ventures I, L.L.C., which is the beneficial owner of more than 5% of our voting securities, is the general partner of each of Versant Venture Capital I, L.P., Versant Side Fund I, L.P., Versant Affiliates Fund I-A, L.P. and Versant Affiliates Fund I-B, L.P. Dr. Jaffe, one of our directors, is a managing director of Versant Ventures I, L.L.C.


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PRINCIPAL STOCKHOLDERS
 
The following table sets forth certain information concerning beneficial ownership as of December 31, 2006 of shares of our common stock by:
 
  •  each person known by us to beneficially own 5% or more of our common stock;
 
  •  each of our directors;
 
  •  each of our named executive officers; and
 
  •  all of our directors and executive officers as a group.
 
The number of common shares “beneficially owned” by each stockholder is determined under rules issued by the SEC regarding the beneficial ownership of securities. This information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership of common stock includes (1) any shares as to which the person or entity has sole or shared voting power or investment power and (2) any shares as to which the person or entity has the right to acquire beneficial ownership within 60 days after December 31, 2006, including any shares that could be purchased by the exercise of options or warrants at or within 60 days after December 31, 2006. All of the stock options that we granted to our executive officers and directors under our 2000 Stock Option and Incentive Plan prior to December 20, 2006 may be exercised for all of the shares issuable thereunder, whether or not they are vested; provided that any shares issued upon exercise of an unvested stock option will remain subject to the same vesting restrictions as the stock option that was exercised. Accordingly, all of the shares subject to these stock options are considered beneficially owned by our executive officers and directors as of December 31, 2006. Each stockholder’s percentage ownership before this offering is based on 47,030,895 shares of our common stock outstanding as of December 31, 2006 (as adjusted to reflect at that date the conversion into common stock of all shares of our preferred stock outstanding) plus the number of shares of our common stock that may be acquired by such stockholder upon exercise of options that are exercisable at or within 60 days after December 31, 2006. Each stockholder’s percentage ownership after this offering is based on           shares of our common stock to be outstanding immediately after the completion of this offering plus the number of shares of our common stock that may be acquired by such stockholder upon exercise of options that are exercisable at or within 60 days after December 31, 2006. We have granted the underwriters an option to purchase up to           additional shares of our common stock to cover overallotments, if any, and the table below assumes no exercise of that option.


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Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of our common stock, except to the extent authority is shared by spouses under community property laws.
 
                         
                Percentage of
 
          Percentage of Shares
    Shares Beneficially
 
    Number of Shares
    Beneficially Owned
    Owned After
 
Name and Address (1)
  Beneficially Owned     Before Offering     Offering  
 
Directors and Executive Officers
                       
Duane DeSisto(2)
    1,612,872       3.4 %     %
Carsten Boess(3)
    549,910       1.2          
Luis Malavé(4)
    604,827       1.3          
Jeff Smith(5)
    360,000       *          
Shawna Gvazdauskas(6)
    300,000       *          
Alison de Bord(7)
    0       *          
Gary Eichhorn(8)
    138,304       *          
Ross Jaffe, M.D.(9)
    5,589,491       11.9          
Charles Liamos(10)
    50,000       *          
Gordie Nye(11)
    0       *          
Jonathan Silverstein(12)
    4,120,879       8.8          
Steven Sobieski(13)
    50,000       *          
All Directors and Executive Officers as a group (16 persons)(14)
    14,551,882       30.9          
More Than 5% Holders
                       
Alta BioPharma Management III, LLC (15)
    4,373,600       9.3 %     %
Alta BioPharma Partners III, L.P.(16)
    4,098,359       8.7          
Samuel D. Isaly(17)
    3,779,972       8.0          
OrbiMed Capital IILLC(17)
    3,779,972       8.0          
Caduceus Private Investments II, LP(18)
    2,750,230       5.8          
ILSF III, LLC(19)
    2,797,823       5.9          
International Life Sciences Fund III (GP), L.P.(19)
    2,797,823       5.9          
International Life Sciences Fund III (LP1), L.P.(20)
    2,633,631       5.6          
Schroder Ventures Managers Inc.(21)
    3,581,796       7.6          
Pequot Capital Management, Inc.(22)
    5,606,144       11.9          
Prism Venture Partners III, LLC(23)
    9,689,887       20.6          
Prism Investment Partners III, L.P.(23)
    9,689,887       20.6          
Prism Venture Partners III, L.P.(24)
    9,407,062       20.0          
Versant Ventures I, L.L.C.(25)
    5,589,491       11.9          
Versant Venture Capital I, L.P.(26)
    5,142,331       10.9          
Federated Kaufmann Fund, a Portfolio of
                       
Federated Equity Funds(27)
    2,747,253       5.8          
 
 
Represents less than 1% of the outstanding shares of our common stock
 
(1) Unless otherwise indicated, the address of each stockholder is c/o Insulet Corporation, 9 Oak Park Drive, Bedford, Massachusetts 01730.
 
(2) Includes 1,612,872 shares of our common stock (of which 1,136,954 are or will be vested) issuable upon the exercise of options exercisable on or within 60 days after December 31, 2006.


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(3) Includes 549,910 shares of our common stock (none which are or will be vested) issuable upon the exercise of options exercisable on or within 60 days after December 31, 2006.
 
(4) Includes 604,827 shares of our common stock (of which 503,724 are or will be vested) issuable upon the exercise of options exercisable on or within 60 days after December 31, 2006.
 
(5) Includes 360,000 shares of our common stock (of which 239,760 are or will be vested) issuable upon the exercise of options exercisable on or within 60 days after December 31, 2006.
 
(6) Includes 300,000 shares of our common stock (of which 191,561 are or will be vested) issuable upon the exercise of options exercisable on or within 60 days after December 31, 2006.
 
(7) Ms. de Bord is a member of Alta BioPharma Management III, LLC, which is the general partner of Alta BioPharma Partners III, L.P. and the managing limited partner of Alta BioPharma Partners III GmbH & Co. Beteiligungs KG. Ms. de Bord is also affiliated with Alta Embarcadero BioPharma Partners III, LLC. Alta BioPharma Partners III GmbH & Co. Beteiligungs KG beneficially owns 275,241 shares of common stock, Alta BioPharma Partners III, L.P. beneficially owns 4,098,359 shares of our common stock and Alta Embarcadero BioPharma Partners III, LLC beneficially owns 101,002 shares of our common stock, all of which shares are issuable upon conversion of outstanding shares of our preferred stock held by these entities. Ms. de Bord does not possess voting and/or investment power over the shares held by these entities and disclaims beneficial ownership of the shares held by these entities, except to the extent of her pecuniary interests.
 
(8) Includes 138,304 shares of our common stock (of which 112,849 are or will be vested) issuable upon the exercise of options exercisable on or within 60 days after December 31, 2006.
 
(9) Includes 5,142,331 shares of our common stock beneficially owned by Versant Venture Capital I, L.P., 100,611 shares of our common stock beneficially owned by Versant Side Fund I, L.P., 111,791 shares of our common stock beneficially owned by Versant Affiliates Fund I-A, L.P. and 234,758 shares of our common stock beneficially owned by Versant Affiliates Fund I-B, L.P., all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. Dr. Jaffe is a managing director of Versant Ventures I, L.L.C., which is the general partner of each of Versant Venture Capital I, L.P., Versant Side Fund I, L.P., Versant Affiliates Fund I-A, L.P. and Versant Affiliates Fund I-B, L.P. Dr. Jaffe disclaims beneficial ownership of the shares held by Versant Venture Capital I, L.P., Versant Side Fund I, L.P., Versant Affiliates Fund I-A, L.P. and Versant Affiliates Fund I-B, L.P., except to the extent of his pecuniary interests.
 
(10) Includes 50,000 shares of our common stock (of which 25,000 are or will be vested) issuable upon the exercise of options exercisable on or within 60 days after December 31, 2006. Mr. Liamos is affiliated with MedVenture Associates Management IV Co., LLC, which is the general partner of each of MedVen Affiliates IV, L.P. and MedVenture Associates IV, L.P. MedVen Affiliates IV, L.P. beneficially owns 45,955 shares of our common stock and MedVenture Associates IV, L.P. beneficially owns 1,688,219 shares of our common stock, all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. Mr. Liamos does not possess voting and/or investment power over the shares held by these entities and disclaims beneficial ownership of the shares held by these entities, except to the extent of his pecuniary interests.
 
(11) Mr. Nye is affiliated with Prism Venture Partners III, LLC, which is the general partner of Prism Investment Partners III, L.P., which is the general partner of each of Prism Venture Partners III, L.P. and Prism Venture Partners III-A, L.P. Prism Venture Partners III, L.P. beneficially owns 9,407,062 shares of our common stock and Prism Venture Partners III-A, L.P. beneficially owns 282,825 shares of our common stock beneficially owned by Prism Venture Partners III-A, L.P., all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. Mr. Nye does not possess voting and/or investment power over the shares held by these entities and disclaims beneficial ownership of the shares held by these entities, except to the extent of his pecuniary interests.
 
(12) Includes 2,750,230 shares of our common stock beneficially owned by Caduceus Private Investments II, LP, 1,029,742 shares of our common stock beneficially owned by Caduceus Private Investments (QP) II, LP and 340,907 shares of our common stock beneficially owned by UBS Juniper Crossover Fund, L.L.C., all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. Mr. Silverstein is a partner of OrbiMed Capital GP II LLC, which is the general partner of each of Caduceus Private Investments II, LP and Caduceus Private Investments (QP) II, LP. Mr. Silverstein is also a partner of OrbiMed Advisors LLC, which is the investment advisor to, and a member of the managing member of UBS Juniper Crossover Fund, L.L.C. Mr. Silverstein disclaims beneficial ownership of the shares held by Caduceus Private Investments II, LP, Caduceus Private Investments (QP) II, LP and UBS Juniper Crossover Fund, L.L.C., except to the extent of his pecuniary interests.
 
(13) Includes 50,000 shares of our common stock (none which are or will be vested) issuable upon the exercise of options exercisable on or within 60 days after December 31, 2006.
 
(14) Includes an aggregate of 4,841,512 shares of our common stock (of which 2,958,966 are or will be vested) issuable upon the exercise of options exercisable on or within 60 days after December 31, 2006. See also notes (2) — (13) above.
 
(15) Includes 275,241 shares of our common stock beneficially owned by Alta BioPharma Partners III GmbH & Co. Beteiligungs KG and 4,098,359 shares of our common stock beneficially owned by Alta BioPharma Partners III, L.P., all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. Alta BioPharma Management III, LLC is the general partner of Alta BioPharma Partners III, L.P. and the managing limited partner of Alta BioPharma Partners III GmbH & Co. Beteiligungs KG. Jean Deleage, Alix Marduel, Farah Champsi and Edward Hurwitz (collectively known as the “principals”) are directors of Alta BioPharma Management III, LLC. The principals may be deemed to share voting and investment powers over the shares held by the funds. The principals disclaim beneficial ownership of all such shares held by the funds, except to the extent of their proportionate


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pecuniary interest therein. The address of Alta BioPharma Management III, LLC is One Embarcadero Center, 37th Floor, San Francisco, California 94118.
 
(16) Represents shares of our common stock issuable upon conversion of outstanding shares of our preferred stock held by Alta BioPharma Partners III, L.P. The address of Alta BioPharma Partners III, L.P. is One Embarcadero Center, 37th Floor, San Francisco, California 94118.
 
(17) Includes 2,750,230 shares of our common stock beneficially owned by Caduceus Private Investments II, LP and 1,029,742 shares of our common stock beneficially owned by Caduceus Private Investments (QP) II, LP, all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. OrbiMed Capital II LLC is the general partner of each of Caduceus Private Investments II, LP and Caduceus Private Investments (QP) II, LP. The address of OrbiMed Capital II LLC is 767 Third Avenue, 30th Floor, New York, NY 10017. Samuel D. Isaly, a natural person (“Isaly”), owns a controlling interest in the outstanding limited liability company interests of OrbiMed Capital II LLC pursuant to the terms of the limited liability company agreement of such entity. As a result, Isaly and OrbiMed Capital II LLC share power to direct the vote and to direct the disposition of such shares. The address of OrbiMed Capital II LLC is 767 Third Avenue, 30th Floor, New York, New York 10017.
 
(18) Represents shares of our common stock issuable upon conversion of outstanding shares of our preferred stock held by Caduceus Private Investments II, LP. The address of Caduceus Private Investments II, LP is c/o OrbiMed Capital II LLC, 767 Third Avenue, 30th Floor, New York, New York 10017.
 
(19) Includes 2,633,631 shares of our common stock beneficially owned by International Life Sciences Fund III (LP1), L.P. (“ILSF III LP1”), 105,523 shares of our common stock beneficially owned by International Life Sciences Fund III (LP2), L.P. (“ILSF III LP2”), 26,167 shares of our common stock beneficially owned by International Life Sciences Fund III Strategic Partners, L.P. (“ILSF III Strategic Partners”), and 32,502 shares of our common stock beneficially owned by International Life Sciences Fund III Co-investment, L.P. (“ILSF III Co-Invest”), all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. International Life Sciences Fund III (GP), L.P. (the “GP”), the general partner of each of ILSF III LP1, ILSF III LP2, ILSF III Co-Invest and ILSF III Strategic Partners, and ILSF III, LLC, the general partner of the GP, may be deemed to share voting and dispositive power over the shares held by ILSF III LP1, ILSF III LP2, ILSF III Co-Invest and ILSF III Strategic Partners. ILSF III LP1, ILSF III LP2, ILSF III Co-Invest and ILSF III Strategic Partners (each a “Fund”, or collectively the “Funds”) may be deemed to beneficially own the shares held by each other Fund because of certain contractual relationships among the Funds and their affiliates. The address of ILSF III, LLC is c/o SV Life Sciences Advisers Inc., 60 State Street, Suite 3650, Boston, MA 02109.
 
(20) Represents shares of our common stock issuable upon conversion of outstanding shares of our preferred stock held by International Life Sciences Fund III (LP1), L.P. The address of International Life Sciences Fund III (LP1), L.P. is c/o Schroder Venture Managers Limited, 60 State Street, Suite 3650, Boston, Massachusetts 02109.
 
(21) Includes 2,303,670 shares of our common stock beneficially owned by Schroder Ventures International Life Sciences Fund II L.P.1 (“ILSF LP1”), 981,123 shares of our common stock beneficially owned by Schroder Ventures International Life Sciences Fund II L.P.2 (“ILSF LP2”), 261,464 shares of our common stock beneficially owned by Schroder Ventures International Life Sciences Fund II L.P.3 (“ILSF LP3”) and 35,539 sharers of common stock beneficially owned by SITCO Nominees Ltd. — VC 01903 as Nominee for Schroder Ventures International Life Sciences Fund II Strategic Partners L.P. (“Strategic Partners”), all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. Schroder Venture Managers Inc. (“SVMI”), the general partner of each of ILSF LP1, ILSF LP2, ILSF LP3 and Strategic Partners, and Schroder Venture Managers Limited (“SVML”), investment manager to SVMI, may be deemed to share voting and dispositive power over the shares held by ILSF LP 1, ILSF LP2, ILSF LP3 and Strategic Partners. ILSF LP1, ILSF LP2, ILSF LP3 and Strategic Partners (each a “Fund”, or collectively the “Funds”) may be deemed to beneficially own the shares held by each other Fund because of certain contractual relationships among the Funds and their affiliates. The address of Schroder Ventures Managers Inc. is c/o Schroder Venture Managers Limited, 22 Church Street, Hamilton HM 11, Bermuda.
 
(22) Includes 692,645 shares of our common stock beneficially owned by Pequot Offshore Private Equity Partners III, L.P. and 4,913,499 shares of our common stock beneficially owned by Pequot Private Equity Fund III, L.P., all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. Pequot Capital Management, Inc. is the investment manager/advisor of, and exercises sole investment discretion over, Pequot Private Equity Fund III, L.P. and Pequot Offshore Private Equity Partners III, L.P., and as such, has voting and dispositive power over these shares. Arthur J. Samberg is the executive officer, director and controlling shareholder of Pequot Capital Management, Inc. The address of Pequot Capital Management, Inc. is c/o Pequot Capital Management, Inc., 500 Nyala Farm Road, Westport, Connecticut 06880.
 
(23) Includes 9,407,062 shares of our common stock beneficially owned by Prism Venture Partners III, L.P. and 282,825 shares of our common stock beneficially owned by Prism Venture Partners III-A, L.P., all of which are issuable upon conversion of outstanding shares of our preferred stock held by these entities. Prism Venture Partners III, LLC is the general partner of Prism Investment Partners III, L.P., which is the general partner of each of Prism Venture Partners III, L.P. and Prism Venture Partners III-A, L.P. The address of Prism Venture Partners III, LLC and Prism Investment Partners III, L.P. is 100 Lowder Brook Drive, Suite 2500, Westwood, Massachusetts 02090.
 
(24) Represents shares of our common stock issuable upon conversion of outstanding shares of our preferred stock held by Prism Venture Partners III, L.P. The address of Prism Venture Partners III, L.P. is 100 Lowder Brook Drive, Suite 2500, Westwood, Massachusetts 02090.
 
(25) Includes 5,142,331 shares of our common stock beneficially owned by Versant Venture Capital I, L.P., 100,611 shares of our common stock beneficially owned by Versant Side Fund I, L.P., 111,791 shares of our common stock beneficially owned by Versant Affiliates Fund I-A, L.P. and 234,758 shares of our common stock beneficially owned by Versant Affiliates Fund I-B, L.P., all of which are


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issuable upon conversion of outstanding shares of our preferred stock held by these entities. Versant Ventures I, L.L.C. is the general partner of each of Versant Venture Capital I, L.P., Versant Side Fund I, L.P., Versant Affiliates Fund I-A, L.P. and Versant Affiliates Fund I-B, L.P. The address of Versant Ventures I, L.L.C. is 3000 Sand Hill Road, Bldg. 4, Suite 210, Menlo Park, California 94025.
 
(26) Represents shares of our common stock issuable upon conversion of outstanding shares of our preferred stock held by Versant Venture Capital I, L.P. The address of Versant Venture Capital I, L.P. is 3000 Sand Hill Road, Bldg. 4, Suite 210, Menlo Park, California 94025.
 
(27) Represents shares of our common stock issuable upon conversion of outstanding shares of our preferred stock held by Federated Kaufmann Fund, a Portfolio of Federated Equity Funds. The address of Federated Kaufmann Fund, a Portfolio of Federated Equity Funds is 140 E. 43rd Street, New York, New York 10017.


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DESCRIPTION OF CAPITAL STOCK
 
Immediately following the closing of this offering, our authorized capital stock will consist of           shares of our common stock, $0.001 par value per share, and           shares of undesignated preferred stock, $0.001 par value per share. The following description of our capital stock, upon the closing of this offering, does not purport to be complete and is subject to, and qualified in its entirety by, our Ninth Amended and Restated Certificate of Incorporation and our Amended and Restated By-Laws, which are exhibits to the registration statement of which this prospectus forms a part, and by applicable law. We refer in this section to our Ninth Amended and Restated Certificate of Incorporation as our certificate of incorporation, and we refer to our Amended and Restated By-Laws as our by-laws. Our Ninth Amended and Restated Certificate of Incorporation will become effective immediately following the closing of this offering.
 
Common Stock
 
As of December 31, 2006, there were 1,200,676 shares of our common stock and 45,830,219 shares of our preferred stock outstanding, which are held by 66 stockholders of record. Upon the closing of this offering and the conversion on a one-for-one basis of all outstanding shares of our preferred stock, there will be 47,030,895 shares of our common stock outstanding. In addition, as of December 31, 2006, 6,089,765 shares of our common stock were issuable by us upon the exercise of outstanding options. Upon the closing of this offering, shares of our common stock will be outstanding (assuming no exercise of the underwriters’ overallotment option). Holders of our common stock will be entitled to one vote per share on matters to be voted on by stockholders and also will be entitled to receive such dividends, if any, as may be declared from time to time by our board of directors in its discretion out of funds legally available therefor. Subject to the rights of the holders of preferred stock then outstanding, holders of our common stock will have exclusive voting rights for the election of our directors and all other matters requiring stockholder action, except with respect to amendments to our certificate of incorporation that alter or change the powers, preferences, rights or other terms of any outstanding preferred stock if the holders of such affected series of preferred stock are entitled to vote on such an amendment. Upon our liquidation or dissolution, the holders of our common stock will be entitled to receive pro rata all assets remaining available for distribution to stockholders after payment of all liabilities and provision for the liquidation of any shares of preferred stock at the time outstanding. Our common stock will have no preemptive or other subscription rights, and there will be no conversion rights or redemption or sinking fund provisions with respect to such stock. The payment of dividends on our common stock will be subject to the prior payment of dividends on any outstanding preferred stock.
 
Preferred Stock
 
Upon the closing of this offering, all previously outstanding shares of our preferred stock will be converted into our common stock and no preferred stock will be outstanding. Our certificate of incorporation will provide that shares of preferred stock may be issued from time to time in one or more series. Our board of directors will be authorized to fix the voting rights, if any, designations, powers, preferences, the relative participating, optional or other special rights and any qualifications, limitations and restrictions thereof, applicable to the shares of each series. Our board of directors will be able to, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the common stock and could have anti-takeover effects. We have no present plans to issue any shares of preferred stock after the closing of this offering. The ability of our board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control of us or the removal of existing management.
 
Warrants
 
In connection with term loan financing transactions that we entered into in June 2005 and December 2006, we issued warrants to the lenders in these transactions. In connection with the June 2005 financing transaction, we issued a seven-year warrant, expiring June 2, 2012, to purchase 330,579 shares of our Series D preferred stock at an exercise price of $2.42 per share. In connection with the December 2006 financing transaction, we issued seven-year warrants, expiring December 27, 2013, to purchase 247,252 shares of our


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Series E preferred stock at an exercise price of $3.64 per share. The warrants may be exercised at the option of the holder either by delivery of the exercise price in cash or by a cashless exercise. If, in connection with a firm commitment underwritten public offering, all outstanding shares of our preferred stock are converted into shares of our common stock prior to the exercise in full of the warrants, then, effective upon such conversion, the warrants will automatically become warrants for the purchase of shares of our common stock. The holders of the warrants will thereafter have the right to purchase the number of shares of our common stock that the holders would have received upon the conversion of shares of our preferred stock into shares of our common stock if they had exercised the warrants for preferred stock immediately prior to the conversion. Upon the closing of this offering, the warrant expiring June 2, 2012 will be exercisable for 330,579 shares of our common stock at an exercise price of $2.42 per share and the warrants expiring December 27, 2013 will be exercisable for 247,252 shares of our common stock at an exercise price of $3.64 per share.
 
Registration Rights
 
Beginning six months after the closing of this offering, the holders of 46,030,219 shares of our common stock, which consists primarily of shares issued upon conversion of our preferred stock, and the holders of warrants to purchase 577,831 shares of our common stock will be entitled to cause us to register the resale of these shares under the Securities Act. These rights are provided under the terms of an investor rights agreement between us and the holders of our preferred stock and warrants between us and the holders of the warrants. Under these registration rights, holders of at least 40% of all of the then outstanding registrable shares, or 40% of the then outstanding registrable shares issued upon conversion of the Series E preferred stock, may require that we register registrable shares for public resale on two occasions. However, we are only required to register registrable shares pursuant to such a request if either:
 
  •  the shares to be registered have a value of at least $10 million and the anticipated sale price in the offering results in an implied equity valuation of our company immediately prior to the registration of over $200 million; or
 
  •  the shares to be registered represent at least 25% of all of the then outstanding registrable shares or 25% of the then outstanding registrable shares issued upon conversion of the Series E preferred stock.
 
In addition, holders of at least ten percent of the registrable shares may require that we register their shares for public resale on Form S-3 on one or more occasions, if we are eligible to use Form S-3 or any successor thereto and the value of the securities to be registered is at least $5 million. All holders of registrable shares are entitled to include their registrable shares in any registration requested under these registration rights. Additionally, if we elect to register any of our equity securities for any public offering, other than on a Form S-4, Form S-8 or an equivalent form, all holders of at least 2% of the then outstanding registrable shares are entitled to include their registrable shares in the registration. However, we may reduce the number of the shares of these holders included in our registration if, in the opinion of the managing underwriter, the inclusion of these shares would adversely affect the marketing of the shares we are selling in the registration; provided that we may not reduce the number of these shares to less than 30% of the total number registered. We generally will pay all expenses in connection with any registration, other than underwriting discounts and commissions.
 
Certain Anti-Takeover Provisions of Delaware Law and our Certificate of Incorporation and By-Laws
 
Upon the closing of this offering, we will elect to be governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally will have an anti-takeover effect for transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for the shares of our common stock held by stockholders. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that such stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and


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associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:
 
  •  before the stockholder became interested, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; or
 
  •  upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by:
 
  •  persons who are directors and also officers, and
 
  •  employee stock plans, in some instances; or
 
  •  at or after the time the stockholder became interested, the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.
 
Staggered Board of Directors
 
Our certificate of incorporation and by-laws will provide that our board of directors will be classified into three classes of directors of approximately equal size. As a result, in most circumstances, a person can gain control of our board only by successfully engaging in a proxy contest at two or more annual meetings.
 
Stockholder Action; Special Meeting of Stockholders
 
Our certificate of incorporation will provide that our stockholders may not take any action by written consent, but only may take action at duly called annual or special meetings of stockholders. Our by-laws will further provide that special meetings of our stockholders may be only called by our board of directors with a majority vote of our board of directors.
 
Advance Notice Requirements for Stockholder Proposals and Director Nominations
 
Our by-laws will provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders, must provide timely notice of their intent in writing. To be timely, a stockholder’s notice will need to be delivered to our principal executive offices not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting of stockholders. For the first annual meeting of stockholders after the closing of this offering, a stockholder’s notice shall be timely if delivered to our principal executive offices not later than the 90th day prior to the scheduled date of the annual meeting of stockholders or the 10th day following the day on which public announcement of the date of our annual meeting of stockholders is first made or sent by us. Our by-laws will also specify certain requirements as to the form and content of a stockholders’ meeting. These provisions may preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders.
 
Authorized But Unissued Shares
 
Our authorized but unissued shares of common stock and preferred stock will be available for future issuances without stockholder approval and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital, corporate acquisitions, employee benefit plans and stockholder rights plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.


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Removal of Directors
 
Our certificate of incorporation will provide that a director on our board of directors may be removed from office only with cause and only by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of our directors.
 
Limitation on Liability and Indemnification of Directors and Officers
 
Our by-laws will provide that our directors and officers will be indemnified by us to the fullest extent authorized by Delaware law as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with their service for or on our behalf. In addition, our certificate of incorporation will provide that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to us or our stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized unlawful payments of dividends, unlawful stock purchases or unlawful redemptions or derived an improper personal benefit from their actions as directors.
 
We have also entered into agreements with our directors to provide contractual indemnification in addition to the indemnification that will be provided in our certificate of incorporation and by-laws. Our by-laws will also permit us to secure insurance on behalf of any officer, director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit indemnification. We intend to obtain insurance which insures our directors and officers against certain losses and insures us against our obligations to indemnify the directors and officers. We believe that these provisions and agreements are necessary to attract qualified directors.
 
These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced directors and officers.
 
At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification by us would be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.
 
Transfer Agent and Registrar
 
The transfer agent and registrar for our common stock is     .
 
Listing
 
We have applied for the listing of our common stock on the Nasdaq Global Market under the symbol “PODD.”


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SHARES ELIGIBLE FOR FUTURE SALE
 
We cannot predict what effect, if any, market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock. Nevertheless, sales of substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, in the public market, or the perception that these sales could occur, could materially and adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity or equity-related securities at a time and price that we deem appropriate.
 
Prior to this offering, there has been no public market for our common stock. Although we have applied to list our common stock on the Nasdaq Global Market, we cannot assure you that there will be an active public market for our common stock. Immediately after this offering, we will have      shares of our common stock outstanding, including           shares of our common stock sold by us in this offering, but not including:
 
  •            shares of our common stock issuable by us upon exercise of the underwriters’ overallotment option;
 
  •  577,831 shares of our common stock issuable upon the exercise of warrants outstanding as of December 31, 2006;
 
  •  6,089,765 shares of our common stock issuable upon the exercise of outstanding stock options as of December 31, 2006; and
 
  •  1,539,799 shares of our common stock reserved for future issuance under our 2000 Stock Option and Incentive Plan as of December 31, 2006.
 
Of the number of shares of our common stock outstanding after this offering, all of the shares of our common stock to be sold in this offering (           shares, or           shares if the underwriters’ overallotment option is exercised in full) will be freely tradable without restriction or further registration under the Securities Act of 1933, except for any shares purchased by “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933.
 
All of the remaining shares of our common stock held by existing stockholders (47,030,895 shares, as of December 31, 2006, assuming the conversion of all of our outstanding preferred stock into 45,830,219 shares of our common stock) are “restricted securities” as that term is defined in Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration, including an exemption under Rule 144 or 701 under the Securities Act, which rules are summarized below.
 
Subject to the lock-up agreements described below, the 47,030,895 shares of our common stock that were outstanding as of December 31, 2006 will become eligible for sale without registration pursuant to Rule 144 or Rule 701 under the Securities Act are as follows:
 
  •            shares of our common stock will be immediately eligible for sale in the public market without restriction pursuant to Rule 144(k); and
 
  •            shares of our common stock will be eligible for sale in the public market under Rule 144 or Rule 701 beginning 90 days after the effective date of the registration statement for this offering, subject to volume, manner of sale, and other limitations under those rules.
 
The information above assumes that the only persons who will be deemed affiliates or ours for purposes of Rule 144 are our directors, executive officers and stockholders who will beneficially own 10% or more of our total outstanding common stock after this offering, calculated in the manner described in the section entitled “Principal Stockholders.”


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Rule 144
 
In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated), including an affiliate, who has beneficially owned shares of our common stock for at least one year is entitled to sell in any three-month period a number of shares that does not exceed the greater of:
 
  •  1% of then-outstanding shares of common stock, which will equal approximately           shares immediately after the closing of this offering (approximately shares if the underwriters exercise their overallotment option in full); or
 
  •  the average weekly trading volume in the common stock on the Nasdaq Global Market during the four calendar weeks preceding the date on which notice of sale is filed, subject to restrictions.
 
Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.
 
Rule 144(k)
 
In addition, a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, would be entitled to sell those shares under Rule 144(k) without regard to the manner of sale, public information, volume limitation or notice requirements of Rule 144. To the extent that our affiliates sell their shares, other than pursuant to Rule 144 or a registration statement, the purchaser’s holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate.
 
Rule 701
 
In general, under Rule 701 under the Securities Act as currently in effect, any of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock plan or other written agreement are eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the public information, volume limitation, notice and holding period provisions, contained in Rule 144.
 
No Sale of Similar Securities
 
We, our executive officers, our directors and certain holders of our outstanding common stock and common stock equivalents have agreed, with limited exceptions, that we and they will not offer or sell any shares of our common stock for a period of 180 days after the date of this prospectus without the prior written consent of J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. For more information, see the section entitled “Underwriting.”
 
Stock Options
 
Following the closing of this offering, we intend to file a registration statement on Form S-8 with the SEC covering shares of our common stock reserved for issuance under our 2000 Stock Option and Incentive Plan. This registration statement is expected to become effective upon filing. Shares covered by this registration statement will then be eligible for sale in the public markets, subject to any applicable lock-up agreements and to Rule 144 limitations applicable to affiliates.
 
Registration Rights
 
As described in the section entitled “Description of Capital Stock — Registration Rights,” upon completion of this offering, the holders of 46,030,219 shares of our common stock, including shares issued upon conversion of our preferred stock, and the holders of warrants to purchase 577,831 shares of our common stock will have rights, subject to various conditions and limitations, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders, subject to the 180 day lock-up arrangement described above. By exercising their registration rights and causing a large number of shares to be registered and sold in the public market, these holders could cause the price of our common stock to fall. In addition, any demand to include such shares in our registration statements could have a material adverse effect on our ability to raise needed capital.


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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
 
General
 
The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of common stock that may be relevant to you if you are a non-U.S. Holder. In general, a “non-U.S. Holder” is any person or entity that is, for U.S. federal income tax purposes, a foreign corporation, a nonresident alien individual or a foreign estate or trust. The test for whether an individual is a resident of the United States for U.S. federal estate tax purposes differs from the test used for U.S. federal income tax purposes. Some individuals, therefore, may be non-U.S. Holders for purposes of the federal income tax discussion, but not for purposes of the federal estate tax discussion, and vice versa. This discussion is based on current law, which is subject to change, possibly with retroactive effect, or different interpretations that could affect the tax consequences described herein. This discussion is limited to non-U.S. Holders who hold their shares of common stock as capital assets. Moreover, this discussion is for general information only and does not address all the tax consequences that may be relevant to you in light of your personal circumstances, nor does it discuss special tax provisions that may apply to you if you relinquished U.S. citizenship or residence.
 
If you are an individual, you may, in many cases, be deemed to be a resident alien, as opposed to a nonresident alien, by virtue of being present in the United States for at least 31 days in the current calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. For the aggregate days test, all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year are counted. Resident aliens generally are subject to U.S. federal income tax in the same manner as U.S. citizens.
 
If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds common stock, the U.S. federal income tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding common stock, you should consult your own tax advisor regarding the U.S. federal income tax consequences to you of the purchase, ownership and disposition of common stock.
 
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE AS A RESULT OF YOUR PARTICULAR SITUATION OR UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY, FOREIGN OR OTHER TAXING JURISDICTION.
 
Dividends
 
If dividends are paid on the common stock, as a non-U.S. Holder, you generally will be subject to withholding of U.S. federal income tax at a 30% rate or at a lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with a U.S. trade or business as discussed below. To claim the benefit of a lower rate under an income tax treaty, you must properly file with the payer an Internal Revenue Service Form W-8BEN, or successor form, claiming an exemption from or reduction in withholding under the applicable tax treaty.
 
If dividends are considered effectively connected with the conduct of a trade or business by you within the United States and, where a tax treaty applies, are attributable to a U.S. permanent establishment of yours, those dividends generally will not be subject to withholding tax, but instead will be subject to U.S. federal income tax on a net basis at applicable graduated individual or corporate rates, provided you file an Internal Revenue Service Form W-8ECI, or successor form, with the payer. If you are a foreign corporation, any effectively connected dividends may, under certain circumstances, be subject to an additional “branch profits tax” at a rate of 30% or at a lower rate as may be specified by an applicable income tax treaty.
 
You must comply with either the certification procedures described above, or, in the case of payments made outside the United States with respect to an offshore account, certain documentary evidence procedures,


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directly or under certain circumstances through an intermediary, to obtain the benefits of a reduced rate under an income tax treaty with respect to dividends paid with respect to your common stock. In addition, if you are required to provide an Internal Revenue Service Form W-8ECI or successor form, as discussed above, you must also provide your tax identification number.
 
If you are eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty but do not provide the payer with an Internal Revenue Service Form W-8BEN, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service.
 
Gain on Disposition of Common Stock
 
As a non-U.S. Holder,