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.

Frost & Sullivan estimated that in 2006, there were 4.9 million people with insulin-dependent diabetes in the United States.

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. The has 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, 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 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.

Cost of revenues for the nine months ended September 30, 2006 was $11.7 million. The Company did not have any cost of revenues for the nine months ended September 30, 2005.

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.

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.

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.