Periodontal disease is the second most prevalent disease in the US after heart disease. It is estimated that greater than 50 million people are affected with periodontal disease at the moderate to severe level. Of these, only 15 to 20% receive treatment, with an estimated $6 billion spent annually in the US to treat the disease. As a result of findings implicating periodontal disease with multiple significant healthcare problems, the US Surgeon General issued a report in 2000 highlighting periodontal disease as a major healthcare issue.

The musculoskeletal business sector as a whole—including all treatment, services, devices, pharmaceuticals and biologics used to treat the skeleton and associated tissues, including bones, muscles, ligaments, tendons and joints that move the body and maintain its form—represents a market of approximately $350 billion. Each year, approximately 23 million fractures are treated by physicians in the US. Osteoporosis is identified as a contributing factor in an estimated 1.5 million of these fractures and complications resulting from the prolonged rehabilitation often required for osteoporotic fractures is considered a leading cause of injury related deaths among elderly women. In addition, there were an estimated 22 million patients treated for cartilage, ligament and tendon injuries in 2003.

Growth in the orthopedic and sports injury market is being driven by aging baby boomers, the desire for active lifestyles well into retirement and the growth in the incidence of osteoporosis, osteoarthritis, obesity, diabetes and other diseases that cause injury to orthopedic tissues and/or impair the ability of the body to heal injuries.

The Company’s product and product candidates use rhPDGF, one of the principal wound healing stimulators in the body.

The Company has a pipeline of drug-device combination product candidates called GEM OS that it is developing for a broad range of orthopedic clinical indications. The Company’s GEM OS family of product candidates, which also incorporate rhPDGF in combination with a bone matrix, is targeted to be used in the open (surgical) treatment of fractures (GEM OS1), the closed (non-surgical) treatment of fractures (GEM OS2), and the stimulation of bone formation at sites of risk for fracture, such as the spine in individuals with osteoporosis (GEM OS2).

The Company’s GEM OS1 product candidate is in pilot clinical trials for fracture repair and bone fusions. These initial clinical trials in orthopedic applications are in fractures in the forearm and in foot and ankle fusions where bones of the foot and ankle are pinned or fused together. In pre-clinical studies in osteoporotic animals, local application of GEM OS2 to fractures in the leg stimulated faster fracture repair than treatment with a scaffold alone. Further, additional animal studies have demonstrated that rhPDGF is able to stimulate increased bone growth throughout much of the skeleton, suggesting that it may have broad therapeutic utility in fracture repair.

Cost of sales was $0.1 million for the three months ended March 31, 2006.

Research and development expenses increased $1.6 million to $2.5 million for the three months ended March 31, 2006 from $0.9 million for the three months ended March 31, 2005.

General and administrative expenses increased $0.6 million to $1.1 million for the three months ended March 31, 2006 from $0.5 million for the three months ended March 31, 2005.