##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549
 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2004 or [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from            to
Commission file number 000-50674 ANIMAS CORPORATION  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    23-2860912
(I.R.S. Employer
Identification No.)200 LAWRENCE DRIVE, WEST CHESTER, PA
(Address of principal executive offices)
    
    19380
(Zip Code)
 Registrants telephone number, including area code: (610) 644-8990 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.


Yes [  ] No [ X ]. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).


Yes [  ] No [X ]. Common stock outstanding at July 30, 2004: 19,206,426 shares




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ANIMAS CORPORATION AND SUBSIDIARIES
FORM 10-Q INDEX PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003Consolidated Statements of Stockholders Equity for the six months ended June 30, 2004Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPART II. OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 3.
    
    Defaults Upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 6.
    
    Exhibits and Reports on Form 8-KSIGNATURESCERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)CERTIFICATION PURSUANT TO SECTION 906




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PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Balance Sheets
(unaudited)
 June 30, 2004
    
    December 31, 2003(in thousands except share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    55,749
    
    
    $
    384Accounts receivable, net of allowance for doubtful accounts
of $1,447 in 2004 and $1,285 in 2003
    
    
    17,319
    
    
    
    13,178Inventories
    
    
    5,228
    
    
    
    3,335Cost associated with deferred revenue
    
    
    1,264
    
    
    
    1,025Prepaid expenses and other current assets
    
    
    978
    
    
    
    575Total current assets
    
    
    80,538
    
    
    
    18,497Property and equipment, net
    
    
    5,272
    
    
    
    3,899Deposits and other assets
    
    
    103
    
    
    
    297Restricted cash
    
    
    
    
    
    
    550Total assets
    
    $
    85,913
    
    
    $
    23,243Liabilities and Stockholders EquityCurrent liabilities:Line of credit
    
    $
    
    
    
    $
    2,657Current portion of long-term debt
    
    
    507
    
    
    
    462Accounts payable
    
    
    5,389
    
    
    
    2,752Accrued expenses
    
    
    3,846
    
    
    
    3,283Deferred revenue
    
    
    5,973
    
    
    
    5,179Total current liabilities
    
    
    15,715
    
    
    
    14,333Other liabilities
    
    
    1,080
    
    
    
    1,140Long-term debt
    
    
    428
    
    
    
    467Total liabilities
    
    
    17,223
    
    
    
    15,940Commitments and contingenciesStockholders equity:Series A, B, and C Preferred stock, $0.01 par value; authorized 8,353,200
shares; none issued and outstanding in 2004 and 7,097,724 in 2003
    
    
    
    
    
    
    71Common stock, $0.01 par value; authorized 100,000,000 shares in 2004
and 24,000,000 shares in 2003; issued and outstanding 19,192,560
shares in 2004 and 3,987,282 in 2003
    
    
    193
    
    
    
    40Additional paid-in capital
    
    
    157,319
    
    
    
    90,544Deferred compensation
    
    
    (200
    )
    
    
    (178
    )Accumulated deficit
    
    
    (88,622
    )
    
    
    (83,174
    )Total stockholders equity
    
    
    68,690
    
    
    
    7,303Total liabilities and stockholders equity
    
    $
    85,913
    
    
    $
    23,243
 The accompanying notes are an integral part of the consolidated financial statements.




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ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Operations
(unaudited)
 Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands except
share and per share data)Net revenues
    
    $
    20,420
    
    
    $
    9,205
    
    
    $
    25,257
    
    
    $
    16,585Operating expenses:Cost of products sold
    
    
    7,446
    
    
    
    4,703
    
    
    
    10,533
    
    
    
    8,332Research and development expenses
    
    
    1,347
    
    
    
    1,216
    
    
    
    2,672
    
    
    
    2,488Selling, general and administrative expenses
    
    
    8,907
    
    
    
    7,947
    
    
    
    17,312
    
    
    
    14,860Total operating expenses
    
    
    17,700
    
    
    
    13,866
    
    
    
    30,517
    
    
    
    25,680Income (loss) from operations
    
    
    2,720
    
    
    
    (4,661
    )
    
    
    (5,260
    )
    
    
    (9,095
    )Interest income
    
    
    53
    
    
    
    14
    
    
    
    54
    
    
    
    15Interest expense
    
    
    (137
    )
    
    
    (57
    )
    
    
    (242
    )
    
    
    (94
    )Net income (loss)
    
    $
    2,636
    
    
    $
    (4,704
    )
    
    $
    (5,448
    )
    
    $
    (9,174
    )Deemed
dividend - beneficial conversion feature of
preferred stock
    
    
    
    
    
    
    (152
    )
    
    
    
    
    
    
    (5,063
    )Net income (loss) attributable to common stockholders per share
    
    $
    2,636
    
    
    $
    (4,856
    )
    
    $
    (5,448
    )
    
    $
    (14,237
    )Basic net income (loss) attributable to common stockholders per share
    
    $
    0.24
    
    
    $
    (1.25
    )
    
    $
    (0.72
    )
    
    $
    (3.68
    )Diluted net income (loss) attributable to common stockholders per share
    
    $
    0.14
    
    
    $
    (1.25
    )
    
    $
    (0.72
    )
    
    $
    (3.68
    )Weighted
average shares - basic
    
    
    11,037,815
    
    
    
    3,870,168
    
    
    
    7,530,011
    
    
    
    3,868,775Weighted
average shares - diluted
    
    
    18,291,612
    
    
    
    3,870,168
    
    
    
    7,530,011
    
    
    
    3,868,775
 The accompanying notes are an integral part of the consolidated financial statements.




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ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Stockholders Equity
Six Months Ended June 30, 2004
(unaudited)
 Preferred stock
    
    Common stock
    
    Additional
    
    
    
    
    
    
    
    
    
    Totalpaid-in
    
    Deferred
    
    Accumulated
    
    stockholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    capital
    
    compensation
    
    deficit
    
    equity(in thousands except
share and per share data)Balance, December 31, 2003
    
    
    7,097,724
    
    
    $
    71
    
    
    
    3,987,282
    
    
    $
    40
    
    
    $
    90,544
    
    
    $
    (178
    )
    
    $
    (83,174
    )
    
    $
    7,303Sale of common stock at $15.00 per share, net
of offering costs of $2,390
    
    
    
    
    
    
    
    
    
    
    4,887,500
    
    
    
    49
    
    
    
    65,741
    
    
    
    
    
    
    
    
    
    
    
    65,790Exercise of stock warrants to purchase
preferred stock
    
    
    55,084
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    
    
    
    
    
    
    
    
    407Exercise of stock options and warrants to
purchase common stock
    
    
    
    
    
    
    
    
    
    
    152,463
    
    
    
    2
    
    
    
    582
    
    
    
    
    
    
    
    
    
    
    
    584Deferred compensation
    
    
    
    
    
    
    
    
    
    
    5,333
    
    
    
    
    
    
    
    76
    
    
    
    (76
    )
    
    
    
    
    
    
    Cashless exchange of warrants
    
    
    
    
    
    
    
    
    
    
    637,378
    
    
    
    6
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    54Conversion to common stock
    
    
    (7,152,808
    )
    
    
    (72
    )
    
    
    9,522,604
    
    
    
    96
    
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,448
    )
    
    
    (5,448
    )Balance, June 30, 2004
    
    
    
    
    
    $
    
    
    
    
    19,192,560
    
    
    $
    193
    
    
    $
    157,319
    
    
    $
    (200
    )
    
    $
    (88,622
    )
    
    $
    68,690
 The accompanying notes are an integral part of the consolidated financial statements.




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ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows
(unaudited)
 Six Months Ended June 30,2004
    
    2003(in thousands)Cash flows from operating activities:Net loss
    
    $
    (5,448
    )
    
    $
    (14,237
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    1,055
    
    
    
    745Non-cash compensation and interest expense
    
    
    54
    
    
    
    484Bad debt expense
    
    
    442
    

    
    
    809Deemed dividend
    
    
    
    
    
    
    5,063Other
    
    
    12
    
    
    
    (8
    )Changes in net assets and liabilities:Accounts receivable, net
    
    
    (4,583
    )
    
    
    (2,135
    )Inventories
    
    
    (1,893
    )
    
    
    337Prepaid expenses and other current assets
    
    
    (403

    )
    
    
    (239
    )Deposits and other assets
    
    
    194
    
    
    
    9Restricted cash
    
    
    550
    
    
    
    Cost associated with deferred revenue
    
    
    (239
    )
    
    
    Accounts payable
    
    
    2,637
    
    
    
    (641
    )Accrued expenses and other liabilities
    
    
    503
    
    
    
    1,056Deferred revenue
    
    
    794
    
    
    
    Net cash used in operating activities
    
    
    (6,325
    )
    
    
    (8,757
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,163
    )
    
    
    (753
    )Net cash used in investing activities
    
    
    (2,163
    )
    
    
    (753
    )Cash flows from financing activities:Proceeds from lines of credit
    
    
    12,102
    
    
    
    1,000Repayments on lines of credit
    
    
    (14,759
    )
    
    
    (500
    )Proceeds from issuance of common stock
    
    
    66,374
    
    
    
    23Repayments on long-term debt
    
    
    (271
    )
    
    
    (245
    )Proceeds from sale of preferred stock
    
    
    407
    
    
    
    11,731Net cash provided by financing
activities
    
    
    63,853
    
    
    
    12,009Net increase
in cash and cash equivalents
    
    
    55,365
    
    
    
    2,499Cash and cash equivalents at beginning of period
    
    
    384
    
    
    
    1,134Cash and cash equivalents at end of period
    
    $
    55,749
    
    
    $
    3,633
 The accompanying notes are an integral part of the consolidated financial statements.




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ANIMAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited) (1) Organization and Description of Business Animas Corporation (the Company) manufactures and distributes insulin pumps
as well as ancillary pump supplies required for the use of the pump. The
Company, a Delaware corporation founded in 1996, is located in West Chester,
Pennsylvania. It received clearance from the Food and Drug Administration (the
FDA) for its first insulin pump in February 2000 and began shipping this
product in July 2000. The Company received clearance for its third-generation
pump, the IR 1200, in October 2003 and began shipping it in April 2004. In the
United States, the Company generally markets its products through both a direct
sales force and distributors. All of the Companys operations are located in
the United States. Although most of the Companys sales of product to patients
occur in the United States, it has contracted with independent distributors to
sell products in Austria, Canada, the Czech Republic, France, Greece, Ireland,
Israel, Italy, Spain, Sweden and the United Kingdom. The Company is also
developing an implantable glucose sensor for people with insulin-requiring
diabetes. In May 2004, the Company completed its initial public offering (IPO) in which
it sold of 4,887,500 shares of its common stock at $15 per share. Net proceeds
to the Company were approximately $65.8 million. As of the closing date of the
offering, all of the convertible preferred stock outstanding was converted into
9,522,604 shares of common stock. As of June 30, 2004, the Company had cash and cash equivalents of $55.7
million. The Company expects to have negative cash flows from operations for
most of 2004. The Company expects increased selling and administrative expenses
relating to the promotion of the IR 1200 as well as increased spending for
personnel and infrastructure improvement. The Company believes that its current
cash, lines of credit, and cash generated from operations, will be sufficient
to meet anticipated cash needs for working capital and capital expenditures
into 2005 and the foreseeable future. (2) Summary of Significant Accounting Policies Unaudited Interim Results.The accompanying financial statements for the three
and six months ended June 30, 2004 and 2003 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position and the results of operations and cash flows for the three and six
months ended June 30, 2004 and 2003 have been made. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or eliminated. The results for the three and six months
ended June 30, 2004 are not necessarily indicative of the results to be
expected for the year ending December 31, 2004 or for any other interim period. Principles of Consolidation.The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents.The Company considers all highly liquid debt
instruments with an original maturity of three months or less when purchased to
be a cash equivalent. Accounts ReceivableAllowance for Doubtful Accounts.Accounts receivable
consist of amounts due from third party payors (non-governmental and
governmental), distributors, and patients. In estimating the collectability of
our accounts receivable, the Company analyzes historical bad debts, payor and
patient concentrations, payor and patient credit-worthiness, and current
economic trends. These allowances are recorded in the period when the revenue
is recorded. Allowances are adjusted currently for any changes in estimated
collections. Accounts receivable are net of allowances for doubtful accounts of $1,447 and
$1,285 at June 30, 2004 and December 31, 2003, respectively. Bad debt expense
was $234 and $442 for the three and six months ended June 30, 2004 and $224 and
$809 for the three and six months ended June 30, 2003, respectively. The
related write-offs of accounts receivable were $191, $280, $58 and $58 for
these periods, respectively. Product Warranties.The Company provides a four-year warranty on its insulin
pumps. For proper matching of warranty costs with related revenues, an
estimated warranty expense is determined based on historical experience,
expected future claims and the estimated cost to settle




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##### Table of Contents



the claims. Such costs are recorded at the time of
shipment. At June 30, 2004 and December 31, 2003, accrued product warranties
totaled $1,737 and $1,734, respectively, and are classified as a current
liability in accrued expenses ($660 and $608, respectively) and are
classified as a long-term liability in other liabilities ($1,077 and $1,126,
respectively) in the accompanying consolidated balance sheets. A tabular
reconciliation of the changes in the Companys product warranty liability is as
follows: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Balance at beginning of period
    
    $
    1,743
    
    
    $
    1,410
    
    
    $
    1,734
    
    
    $
    1,775Warranty expense
    
    
    209
    
    
    
    340
    
    
    
    805
    
    
    
    164Warranty claims settled
    
    
    (215
    )
    
    
    (221
    )
    
    
    (802
    )
    
    
    (410
    )Balance at end of period
    
    $
    1,737
    
    
    $
    1,529
    
    
    $
    1,737
    
    
    $
    1,529
 Given the four-year warranty period of the Companys insulin pumps, the portion
of the warranty accrual classified as long-term represents the Companys
estimate of costs to settle warranty claims to be incurred in excess of one
year from the balance sheet date. Other Comprehensive Income (Loss).Comprehensive income (loss) represents all
changes in stockholders equity except those resulting from investments or
contributions by stockholders. No separate statement of comprehensive income
(loss) has been presented because comprehensive income (loss) was equal to net
income (loss) in the three and six months ended June 30, 2004 and 2003. Revenue Recognition.Revenues are generated primarily from the sale of insulin
pumps and ancillary supplies. Customers do not have any right of return or any
right to cancel or terminate the sale once the pumps or ancillary supplies are
shipped. Pump and ancillary supplies net revenues are recognized upon shipment
in accordance with Staff Accounting Bulletin No. 104 (SAB 104). In accordance
with EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables, (EITF 00-21) in instances where the Company provides pump
operation training, the Company defers the fair value of the training until it
has been delivered. The Company bases the fair value of the training on the
historical amount the Company has paid to independent service providers for
training patients on the operation of the pump. Though the insulin pump has
standalone value, there is no objective evidence as to the pumps fair value
since the Company is reimbursed the same amount with or without training. As a
result, the residual method under EITF 00-21 is utilized. The Company defers
revenues associated with training until it has been delivered. During the six months ended June 30, 2004, approximately 82% of the Companys
products were sold directly to patients. The Company bills directly the
healthcare payors on behalf of the patient. Levels of payments from third party
payors vary depending upon the specific benefits provided under each patients
coverage. At the time of sale, the Company records revenue net of a contractual
allowance which represents the difference between the established selling price
and third party payor payments. As noted above, in October 2003, the Company received FDA clearance for its IR
1200 pump. The Company began shipping the IR 1200 in April 2004. During the
period of November 1, 2003 to March 31, 2004, the Company initiated an upgrade
program in which the Company offered to each new patient purchasing an IR 1000
pump the option to upgrade to the IR 1200 pump at no additional charge. As
required by SAB 104, the Company deferred the recognition of net revenues on
all pump shipments with an upgrade obligation. As of June 30, 2004, the Company
had deferred revenues associated with the pump upgrade program of approximately
$5.5 million and related costs associated with deferred revenue of
approximately $1.3 million. This deferred revenue will be recognized when the
Company ships the IR 1200 pump to the patient or when the patient declines to
be part of the upgrade program. The deferred cost represents the estimated
recoverable inventory costs of the IR 1000 pumps when the pumps are returned to
the Company. When the Company ships an IR 1200 as a replacement pump, the
Company will record the cost of the IR 1200 pump as cost of products sold at
that time. It is anticipated that the upgrade of pumps under this program will
be completed during the third quarter of 2004. As a result of this program, the
Companys net revenues for the second quarter of 2004 were and we expect the
third quarter of 2004 will be increased by the recognition of revenues deferred
from previous quarters, as the Company ships upgraded pumps or patients decline
the upgrade. A delay or acceleration of the Companys obligations under this
upgrade program in the third quarter will cause a corresponding postponement of
net revenues to future periods. Revenues from products sold directly to domestic and international distributors
are recognized upon shipment, and are approximately 18% of Company net revenues
during the six months ended June 30, 2004. Distributors have no right of
return. The Company has no post-shipment obligations to its distributors.




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Stock-Based Compensation.In December 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) SFAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure.
This standard amends the transition and disclosure requirements of SFAS No.
123, Accounting for Stock-Based Compensation. As permitted by SFAS No. 148,
the Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations to account for its stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the
exercise price. As allowed by SFAS No. 148, the Company has elected to continue
to apply the intrinsic value-based method of accounting described above, and
has adopted only the disclosure requirements of SFAS No. 148. Had the Company determined compensation cost for options granted during the
three and six months ended June 30, 2004 and 2003, based on the fair value
method, at the grant date under SFAS No. 148, the Companys net income (loss)
and net income (loss) per share would have been reported as follows: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
attributable to
stockholders, as
reported
    
    $
    2,636
    
    
    $
    (4,856
    )
    
    $
    (5,448
    )
    
    $
    (14,237
    )Add  Non-cash
employee
compensation as
reported
    
    
    8
    
    
    
    438
    
    
    
    16
    
    
    
    464Deduct  Total
stock-based
employee
compensation
expense determined
under fair
value-based method
for pro forma net
loss
    
    
    (154
    )
    
    
    (94
    )
    
    
    (279
    )
    
    
    (191
    )Pro forma net
income (loss)
attributable to
common stockholders
    
    $
    2,490
    
    
    $
    (4,512
    )
    
    $
    (5,711
    )
    
    $
    (13,964
    )Income (loss)
attributable to
common stockholders
per share:Basic, as reported
    
    $
    0.24
    
    
    $
    (1.25
    )
    
    $
    (0.72
    )
    
    $
    (3.68
    )Basic, pro forma
    
    $
    0.23
    
    
    $
    (1.17
    )
    
    $
    (0.76
    )
    
    $
    (3.61
    )Diluted, as reported
    
    $
    0.14
    
    
    $
    (1.25
    )
    
    $
    (0.72
    )
    
    $
    (3.68
    )Diluted, pro forma
    
    $
    0.14
    
    
    $
    (1.17
    )
    
    $
    (0.76
    )
    
    $
    (3.61
    )
 Use of Estimates.The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Some of the more significant
estimates include the allowance for doubtful accounts, contractual allowances,
and the warranty accrual. Actual amounts could differ from those estimates. (3) Inventories Inventories consist of the following as of: June 30, 2004
    
    December 31, 2003Raw Material
    
    $
    1,598
    
    
    $
    1,064Work in process
    
    
    2,165
    
    
    
    423Finished goods
    
    
    1,465
    
    
    
    1,848$
    5,228
    
    
    $
    3,335
 (4) Business Segment A single management team reporting to the President and Chief Executive Officer
comprehensively manages the business operations of the Company. The Company
does not operate separate lines of business or separate business entities with
respect to any of its products. In addition, the Company does not conduct any
operations outside the United States. The Company does not prepare discrete
financial statements with respect to separate product areas. Accordingly, the
Company does not have separately reportable segments as defined by SFAS No. 131,




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##### Table of Contents



Disclosures about Segments of an Enterprise and
Related Information. International sales were less than 10% of net revenues,
and the Company has no foreign operations. (5) Income (Loss) per Share The table below sets forth the reconciliation of the numerators and the
denominators of the Companys basic and diluted income (loss) per share
computations for the three and six months ended June 30, 2004 and 2003. Three Months Ended June 30,
    
    Six Months Ended June 30,Net Income (Loss)
    
    Shares
    
    Per Share Amount
    
    Net Income (Loss)
    
    Shares
    
    Per Share Amount2004Basic
    
    $
    2,636
    
    
    
    11,037,815
    
    
    $
    0.24
    
    
    $
    (5,448
    )
    
    
    7,530,011
    
    
    $
    (0.72
    )Dilutive effect of:Stock options
    
    
    
    
    
    
    1,643,542
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    482,699
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock
    
    
    
    
    
    
    5,127,556
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    $
    2,636
    
    
    
    18,291,612
    
    
    $
    0.14
    
    
    $
    (5,448
    )
    
    
    7,530,011
    
    
    $
    (0.72
    )2003Basic
    
    $
    (4,856
    )
    
    
    3,870,168
    
    
    $
    (1.25
    )
    
    $
    (14,237
    )
    
    
    3,868,775
    
    
    $
    (3.68
    )Dilutive effect of:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    $
    (4,856
    )
    
    
    3,870,168
    
    
    $
    (1.25
    )
    
    $
    (14,237
    )
    
    
    3,868,775
    
    
    $
    (3.68
    )
 For the six months ended June 30, 2004 and the three and six months ended June
30, 2003, diluted income (loss) per share is identical to basic income (loss)
per share as the Company is in a net loss position and the common equivalent
shares are considered anti-dilutive. For the three months ended June 30, 2004,
2,334 common stock options were excluded from the diluted calculation because
the effect would be anti-dilutive. For the six months ended June 30, 2004,
2,565,105 common stock options and 153,027 common warrants were excluded from
the diluted calculation because the effect would be anti-dilutive. (6) Quarterly Financial Information Quarterly Results2002
    
    2003
    
    20041st Qtr
    
    2nd Qtr
    
    3rd Qtr
    
    4th Qtr
    
    1st Qtr
    
    2nd Qtr
    
    3rd Qtr
    
    4th Qtr
    
    1st Qtr
    
    2nd QtrNet revenues
    
    $
    3,639
    
    
    $
    4,929
    
    
    $
    6,851
    
    
    $
    8,179
    
    
    $
    7,380
    
    
    $
    9,205
    
    
    $
    11,291
    
    
    $
    6,244
    
    
    $
    4,837
    
    
    $
    20,420Gross margin
    
    
    907
    
    
    
    1,526
    
    
    
    2,803
    
    
    
    5,457
    
    
    
    3,751
    
    
    
    4,502
    
    
    
    6,689
    
    
    
    1,786
    
    
    
    1,750
    
    
    
    12,974Net income (loss)
    
    
    (5,413
    )
    
    
    (5,587
    )
    
    
    (4,964
    )
    
    
    (3,410
    )
    
    
    (4,470
    )
    
    
    (4,704
    )
    
    
    (2,212
    )
    
    
    (6,418
    )
    
    
    (8,084
    )
    
    
    2,636Deemed dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,911
    )
    
    
    (152
    )
    
    
    
    
    
    
    (2,815
    )
    
    
    
    
    
    
    Net income (loss)
attributable to common
stockholders
    
    $
    (5,413
    )
    
    $
    (5,587
    )
    
    $
    (4,964
    )
    
    $
    (3,410
    )
    
    $
    (9,381
    )
    
    $
    (4,856
    )
    
    $
    (2,212
    )
    
    $
    (9,233
    )
    
    $
    (8,084
    )
    
    $
    2,636Basic net income (loss)
attributable to common
stockholders per share
    
    $
    (1.40
    )
    
    $
    (1.45
    )
    
    $
    (1.28
    )
    
    $
    (0.88
    )
    
    $
    (2.43
    )
    
    $
    (1.25
    )
    
    $
    (0.57
    )
    
    $
    (2.39
    )
    
    $
    (2.01)
    *
    
    $
    0.24Diluted net income (loss)
attributable to common
stockholders per share
    
    $
    (1.40
    )
    
    $
    (1.45
    )
    
    $
    (1.28
    )
    
    $
    (0.88
    )
    
    $
    (2.43
    )
    
    $
    (1.25
    )
    
    $
    (0.57
    )
    
    $
    (2.39
    )
    
    $
    (2.01)
    *
    
    $
    0.14
 *Basic and diluted net loss per share has been revised from ($2.07).




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION ACT OF 1995: This report and the documents incorporated by reference herein contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. When used in this report and the documents
incorporated herein by reference, the words anticipate, believe,
estimate, may, expect, intend, and similar expressions are generally
intended to identify forward-looking statements. These forward-looking
statements include, among others, the statements in Managements Discussion and
Analysis of Financial Condition and Results of Operations about our:  
    
    estimate of the length of time that our existing cash, cash
equivalents and marketable securities, expected revenue, and interest
income will be adequate to finance our operating and capital
requirements;
    
    expected losses;
    
    expectations for future capital requirements;
    
    expectations for increases in operating expenses;
    
    expectations for increases in research and development, and
marketing, general and administrative expenses in order to develop
products, manufacture commercial quantities of reagents and products,
and commercialize our technology;
    
    expectations for the development of an improved insulin pump;
    
    expectations for generating revenue; and
    
    expectations regarding new or expanded collaborations and for the
performance of our existing collaboration partners regarding the
development and commercialization of products incorporating our
technologies. Our actual results could differ materially from the results expressed in,
or implied by, these forward-looking statements. Potential risks and
uncertainties that could affect our actual results include the following:  
    
    technical issues or the failure of the IR 1200 to gain significant market acceptance;
    
    failure to capture recurring purchases of ancillary supplies by patients using our pumps;
    
    any significant disruption with vendors;
    
    any failure to maintain profitability;
    
    the failure of our ezSet Infusion Set to be fully-developed or commercially accepted;
    
    technological breakthroughs in diabetes monitoring, treatment,
or prevention that could render our products obsolete;
    
    failure to comply with any FDA or foreign regulations;
    
    an inability to attract and retain personnel;
    
    competition;
    
    an inability to adequately protect our intellectual property;
    
    product liability lawsuits;
    
    the failure to secure or retain third party coverage or reduced
reimbursement for our products by third party payors; and,
    
    general economic conditions. These and other risks and uncertainties that could affect our actual
results are discussed in this report and in our other filings with the
Securities and Exchange Commission, particularly the section entitled Risk
Factors in our Registration Statement onForm S-1which went effective on May
19, 2004. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
events, levels of activity, performance, or achievements. We do not assume
responsibility for the accuracy and completeness of the forward-looking
statements other than as required by applicable law. We do not undertake any duty to update after the date of this report any of the
forward-looking statements in this report to conform them to actual results.




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##### Table of Contents



Overview We design, develop, manufacture, and sell external insulin pumps for people
with diabetes. We introduced our first generation pump in July 2000. We began
shipping our third generation pump, the IR 1200, in April 2004. We also provide
ancillary supplies necessary for pump therapy, including insulin cartridges,
infusion sets, batteries, and various accessories. Our approximately 50-person direct sales force promotes our pump in the United
States to healthcare professionals and patients. In addition, our approximately
65 diabetes educators, or clinical managers, train and provide clinical support
to patients in the United States. We use distributors to market, sell, and
service our products outside the United States. Financial Operations Overview Net Revenues.We generate revenues primarily from the sale of our external
insulin pumps and ancillary supplies, including insulin cartridges and infusion
sets. In the six months ended June 30, 2004, approximately 82% of our net
revenues were generated by direct sales to patients. We invoice patients either
directly or through their healthcare payors, such as insurance companies and
health maintenance organizations. Levels of reimbursement from healthcare
payors vary depending upon the specific benefits provided under each patients
coverage. Net revenues for a particular product are the difference between the
established selling price for such product and the contractual allowance given
to the healthcare payor. Pump Upgrade Program.During the period November 1, 2003 to March 31, 2004 (the
Period), we implemented a program that allowed patients in the United States,
at their option and at no additional cost, to upgrade their IR 1000 pump
purchased during the Period to the IR 1200 insulin pump when it became
available. In anticipation of the shipment of the IR 1200 in April 2004, we
stopped domestic shipments of the IR 1000 for the last three weeks of March
2004. We began shipping the IR 1200 pump in April 2004, and based on current
estimates, we expect that our obligations to ship upgraded pumps under the
upgrade program will be satisfied during the third quarter of 2004. We do not
anticipate the need for additional product upgrade programs in the foreseeable
future. In accordance with generally accepted accounting principles, we have deferred
the recognition of all net revenues for IR 1000 pumps shipped under the upgrade
program. We do not recognize the net revenue on an IR 1000 pump shipped under
this program until either the IR 1200 replacement pump is shipped to the
patient requesting an upgrade or the patient has declined the upgrade. All IR
1000 pumps shipped to new patients domestically between November 1, 2003 and
March 31, 2004 were subject to this upgrade program. We also deferred the
associated cost of products sold on shipments of pumps under the upgrade
program. Net revenues are recognized when we ship the IR 1200 pump to the
patient or when the patient declines to be part of the upgrade program. The
deferred cost represents the estimated recoverable inventory costs of the IR
1000 pumps when they are returned to us. When we ship an IR 1200 as a
replacement pump, we record the cost of the IR 1200 pump as cost of products
sold at that time. We project that our obligations under this program to upgrade IR 1000 pumps to
IR 1200 pumps will be satisfied during the third quarter of 2004. As a result
of this program, our net revenues for the second quarter of 2004 were and we
expect the third quarter of 2004 to be increased by the recognition of net
revenues deferred from previous quarters, as we ship upgraded pumps or patients
decline the upgrade. A delay of our obligations under this upgrade program in
the third quarter would cause a corresponding postponement of net revenues to
future periods. Cost of Products Sold.Cost of products sold include material costs, other
direct and indirect manufacturing costs, shipping and handling costs, and
product warranty expense. We purchase components and raw materials from third
party vendors and assemble them into insulin pumps at our manufacturing
facility in southeastern Pennsylvania. Insulin cartridges and certain other
supplies are manufactured for us in Asia and Europe, as well as in the United
States under agreements with third party suppliers. All purchases sourced from
vendors or suppliers outside the United States are invoiced in U.S. dollars. Direct and indirect manufacturing costs include material costs, labor costs,
electricity and other utilities, maintenance expenses, depreciation and other
fixed and variable costs required to operate our plant. Since the commercial
introduction of our first pump in July 2000, the average unit cost of our pump
has declined due to improved manufacturing efficiencies and increased
absorption of fixed and semi-fixed overhead costs. Like most of our competitors, we offer a four-year warranty on our pumps.
Warranty expense is recorded in the period that product shipment occurs. The
expense is based on historical experience and projected trends of warranty
claims and the estimated cost to settle the claims.




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##### Table of Contents



Research and Development Expenses.Research and development expenses include
costs associated with the design, development, and testing of new and existing
products. Such costs are expensed as incurred and include salaries and related
personnel costs, fees paid to outside consultants, and other direct and
indirect costs related to research and product development. Selling, General and Administrative Expenses.Selling, general and
administrative expenses include salaries, commissions and related personnel
expenses for employees in sales, marketing, clinical, patient service, and
administrative functions, as well as overhead costs associated with these
activities. Also included are costs associated with promotional literature and
videos, trade show participation, education and training, and the cost of
providing demo pumps and supplies. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, net revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our significant accounting
policies are more fully described in our accompanying consolidated financial
statements. The critical accounting policies described below are those which we
believe require estimates based on assumptions that are uncertain at the time
the estimates are made, and for which different accounting estimates that
management could have reasonably used would have had a material impact on
reported financial information. Revenue Recognition.Revenues are generated primarily from the sale of insulin
pumps and ancillary supplies. Customers do not have any right of return or any
right to cancel or terminate the sale once the pump or ancillary supplies are
shipped. Pump and ancillary supplies net revenues are recognized upon shipment
in accordance with Staff Accounting Bulletin No. 104 (SAB 104). In accordance
with EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables (EITF 00-21), in instances where we provide pump operation
training, we defer the fair value of the pump operation training, until the
training is delivered. We base the fair value of pump operation training on the
historical amount we have paid to independent service providers for training
patients on the operation of our pumps. Though the insulin pump has standalone
value, there is no objective evidence as to the pumps fair value since we are
reimbursed the same amount with or without pump operation training. As a
result, the residual method under EITF 00-21 is utilized. During the six months ended June 30, 2004, approximately 82% of our products
were sold directly to patients. We bill these patients directly or bill their
healthcare payors. Levels of reimbursements from third party payors vary
depending upon the specific benefits provided under each patients coverage. At
the time of sale, we record revenues net of third party contractual allowances,
which represent the difference between the established selling price and third
party payor payments. Consistent with SAB 104, net revenues for products sold directly to
distributors are recognized upon shipment. Distributors have no right of
return, and we have no post-shipment obligations. Accounts Receivable/ Allowance for Doubtful Accounts.In estimating the
collectability of our accounts receivable, we analyze historical bad debts,
payor concentrations, payor and patient credit-worthiness, current economic
trends, and changes in patient and/or payor payment terms. These allowances are
recorded in the period when the net revenues are recognized based on
anticipated future events. If there are unanticipated future events, this
allowance may need to be adjusted. 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
pumps include material, labor, and manufacturing overhead. Ancillary supplies
inventory and raw materials inventory include material costs only. We review
our inventory balances monthly for obsolete inventory. We manage the risk of
inventory obsolescence through validating product designs prior to product
introduction, as well as through planning of inventory with respect to
anticipated design changes. Once inventory is determined to be obsolete, the
inventory is charged to cost of products sold, removed from our stockroom, and
either scrapped or used for non-inventory purposes. Deferred Tax Asset Valuation Allowance.Our estimate for the valuation
allowance for deferred tax assets requires us to make significant estimates and
judgments about our future operating results. Our ability to realize the
deferred tax assets depends on our future taxable income as well as limitations
on their utilization. A deferred tax asset must be reduced by a valuation
allowance if it is more likely than not that some




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##### Table of Contents



portion or all of the deferred tax asset will
not be realized prior to its expiration. The projections of our operating
results on which the establishment of a valuation allowance is based involve
significant estimates regarding future demand for our products, competitive
conditions, product development efforts, approvals of regulatory agencies, and
product cost. If actual results differ from these projections, or if our
expectations of future results change, it may be necessary to adjust the
valuation allowance. As a result of the historic losses, the Company has
provided a full valuation allowance for the deferred tax assets. Warranty Liability.Each of our insulin pumps is sold with a four-year
warranty. Our warranty liability represents the total estimated cost for
expected future warranty claims related to all products shipped. Warranty
expense is accrued in the period that the products are shipped and is based on
historical experience, projected trends of warranty claims, and the expected
costs to settle the claims. As changes occur in expected warranty claim rates
and the estimated cost to settle claims, the warranty liability is adjusted
accordingly.




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##### Table of Contents



Three Months Ended June 30, 2004 and 2003 Results of Operations.The following tables set forth, for the quarters
indicated, certain operational information. A percentage breakdown of net
revenues is presented for certain operational items. The breakdown of cost of
products sold and gross margin is presented as a percentage of these respective
items. Three Months Ended June 30,2004
    
    2003
    
    Change, 2004/2003$
    
    %
    
    $
    
    %
    
    $
    
    %(in thousands)Consolidated Statements of OperationsNet revenues
    
    $
    20,420
    
    
    
    100.0
    %
    
    $
    9,205
    
    
    
    100.0
    %
    
    $
    11,215
    
    
    
    121.8
    %Operating expenses:Cost of products sold
    
    
    7,446
    
    
    
    36.5
    
    
    
    4,703
    
    
    
    51.1
    
    
    
    2,743
    
    
    
    58.3Research and development expenses
    
    
    1,347
    
    
    
    6.6
    
    
    
    1,216
    
    
    
    13.2
    
    
    
    131
    
    
    
    10.8Selling, general and administrative expenses
    
    
    8,907
    
    
    
    43.6
    
    
    
    7,947
    
    
    
    86.3
    
    
    
    960
    
    
    
    12.1Total operating expenses
    
    
    17,700
    
    
    
    86.7
    
    
    
    13,866
    
    
    
    150.6
    
    
    
    3,834
    
    
    
    27.7Income (loss) from operations
    
    
    2,720
    
    
    
    13.3
    
    
    
    (4,661
    )
    
    
    (50.6
    )
    
    
    7,381
    
    
    
    158.4Interest income
    
    
    53
    
    
    
    0.3
    
    
    
    14
    
    
    
    0.1
    
    
    
    39
    
    
    
    278.6Interest expense
    
    
    (137
    )
    
    
    (0.7
    )
    
    
    (57
    )
    
    
    (0.6
    )
    
    
    (80
    )
    
    
    140.4Net income (loss)
    
    
    2,636
    
    
    
    12.9
    
    
    
    (4,704
    )
    
    
    (51.1
    )
    
    
    7,340
    
    
    
    156.0Deemed dividend
    
    
    
    
    
    
    
    
    
    
    (152
    )
    
    
    (1.7
    )
    
    
    152
    
    
    
    100.0Net income (loss) attributable to common stockholders
    
    $
    2,636
    
    
    
    12.9
    %
    
    $
    (4,856
    )
    
    
    (52.8
    )%
    
    $
    7,492
    
    
    NMNet Revenues, Cost of Products Sold and Gross MarginNet RevenuesInsulin pumps
    
    $
    15,798
    
    
    
    77.4
    %
    
    $
    5,946
    
    
    
    64.6
    %
    
    $
    9,852
    
    
    
    165.7
    %Ancillary supplies
    
    
    4,622
    
    
    
    22.6
    
    
    
    3,259
    
    
    
    35.4
    
    
    
    1,363
    
    
    
    41.8Total
    
    $
    20,420
    
    
    
    100.0
    %
    
    $
    9,205
    
    
    
    100.0
    %
    
    $
    11,215
    
    
    
    121.8
    %Cost of Products SoldInsulin pumps
    
    $
    4,750
    
    
    
    63.8
    %
    
    $
    2,510
    
    
    
    53.4
    %
    
    $
    2,240
    
    
    
    89.2
    %Ancillary supplies
    
    
    2,696
    
    
    
    36.2
    
    
    
    2,193
    
    
    
    46.6
    
    
    
    503
    
    
    
    22.9Total
    
    $
    7,446
    
    
    
    100.0
    %
    
    $
    4,703
    
    
    
    100.0
    %
    
    $
    2,743
    
    
    
    58.3
    %Gross MarginInsulin pumps
    
    $
    11,048
    
    
    
    85.2
    %
    
    $
    3,436
    
    
    
    76.3
    %
    
    $
    7,612
    
    
    
    221.5
    %Ancillary supplies
    
    
    1,926
    
    
    
    14.8
    
    
    
    1,066
    
    
    
    23.7
    
    
    
    860
    
    
    
    80.7Total
    
    $
    12,974
    
    
    
    100.0
    %
    
    $
    4,502
    
    
    
    100.0
    %
    
    $
    8,472
    
    
    
    188.2
    %Gross Margin %Insulin pumps
    
    
    
    
    
    
    69.9
    %
    
    
    
    
    
    
    57.8
    %Ancillary supplies
    
    
    
    
    
    
    41.7
    %
    
    
    
    
    
    
    32.7
    %Total
    
    
    
    
    
    
    63.5
    %
    
    
    
    
    
    
    48.9
    %
 Net Revenues.In the three months ended June 30, 2004, net revenues increased
by $11.2 million, or 121.8%, to $20.4 million from $9.2 million from the
comparable period in 2003. The increase in net revenues was a result of the
shipment of the $2.3 million of unfulfilled orders for the IR 1200 pump from
the first quarter of 2004, the recognition of $3.7 million of revenue deferred
from prior periods under the pump upgrade program, $3.8 million in increased
demand primarily for the IR 1200 and $1.4 million in increased shipments of
ancillary supplies. Net revenues from domestic and foreign sales were $19.5
million and $0.9 million, respectively, in the three months ended June 30, 2004
and $8.7 million and $0.5 million, respectively, in the comparable period in
2003. Our average selling price of pumps remained relatively stable over this
period.




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##### Table of Contents



Net revenues from ancillary supplies, consisting of infusion sets, pump
cartridges, and other ancillary supplies increased by $1.4 million, or 41.8%,
in the three months ended June 30, 2004 versus the same period in 2003. The
increase in net revenues for ancillary supplies was due to increased unit
sales, while prices remained near prior period levels. The growth in net
revenues from sales of ancillary supplies reflected our growth in the number of
patients using our pumps in the comparable three month periods of 2004 and 2003
and our retention of patients from prior years. We expect that our obligations under the pump upgrade program will be satisfied
during the third quarter of 2004. As a result, our net revenues in the third
quarter of 2004 will benefit from the end of the upgrade program and the
recognition of net revenues upon shipment of the product or when the patient
declines to be part of the upgrade program. As of June 30, 2004 we had deferred
revenues associated with the pump upgrade program of approximately $5.5
million. Cost of Products Sold.Cost of products sold increased $2.7 million or 58.3%,
to $7.4 million in the three months ended June 30, 2004 from $4.7 million in
the comparable period of 2003. This increase reflected the increase in net
revenues in the three months ended June 30, 2004 from the comparable period of
2003. However, as a percentage of net revenues, cost of products sold decreased
to 36.5% in 2004 from 51.1% in 2003. Primary factors that contributed to the
decrease included better absorption of manufacturing overhead costs associated
with increased production volumes, improved purchasing efficiencies for
supplies and pump materials, better manufacturing yields of our pumps, and
improvement in labor and manufacturing efficiency. Cost of insulin pumps sold
increased by $2.2 million, or 89.2% in the three months ended June 30, 2004 as
compared to the comparable period of 2003. Costs associated with the
additional pumps shipped under the pump upgrade program and the unfulfilled
orders shipped from the first quarter were $1.7 million in the quarter. Gross Margin.Gross margin increased to 63.5% in the three months ended June
30, 2004 from 48.9% in the comparable period of 2003. Gross margin for pumps
increased to 69.9% in 2004 due to increases in sales volume, better absorption
of overhead, improved yields, and lower cost of raw materials. The pump upgrade
program and the shipment in the second quarter of the unfulfilled orders from
the first quarter contributed to the improvement of the gross margin through
the better absorption of overhead. The effect of the shipment of pumps under
the pump upgrade program and the unfulfilled orders contributed 3.7% to the
improvement of the gross margin for pumps. Ancillary supplies gross margin
increased to 41.7% in the three months ended June 30, 2004 from 32.7% in the
comparable period of 2003. Gross margin improvement for ancillary supplies was
due to lower cost sources of supply. It is anticipated that the gross margin and gross margin percentage for the
third quarter will remain consistent with the second quarter of 2004 as the
results for the third quarter will continue to benefit from the additional
units produced as part of the pump upgrade program during the prior quarter.
Gross margin will then decline slightly for the fourth quarter due to the
fulfillment of all pumps associated with the pump upgrade program.
Additionally, it is anticipated that the combination of the expected increase
in net revenues from sales of ancillary supplies, as the patient base expands,
and the expected decrease in the costs of ancillary supplies will favorably
impact the anticipated gross margin and gross margin percentage for the
remainder of 2004. Research and Development.Research and development expenses increased $131,000,
or 10.8%, to $1.3 million for the three months ended June 30, 2004 from $1.2
million in the comparable period of 2003 reflecting increased spending on
activities to improve existing products and develop new products. As a
percentage of net revenues, research and development expenses decreased to 6.6%
for the three months ended June 30, 2004 from 13.2% in the comparable period of
2003. The percentage decrease in research and development expenses resulted
primarily from the growth of our net revenues. In future quarters, we expect
research and development expenditures as a percentage of net revenues to
decline due to the end of the pump upgrade program and the growth of our net
revenues. Selling General and Administrative Expenses.Selling, general and
administrative (SG&A) expenses increased by $960,000, or 12.1%, to $8.9 million
in the three months ended June 30, 2004 from $7.9 million in the comparable
period of 2003. Of this increase, $544,000 was primarily related to higher
costs principally associated with increased headcount in the sales, clinical,
and marketing functions supporting increased selling activity for existing
pumps and ancillary supplies, as well as the launch of the IR 1200. In
addition, higher administrative personnel costs of $97,000 and professional
fees of $56,000 contributed to higher SG&A costs in the three months ended June
30, 2004. We expect SG&A expenses to continue to increase for the remainder of 2004 as
compared to 2003 in absolute dollars as we expand our sales, clinical, and
marketing efforts to support the anticipated growth of our business. Also, we
expect to incur additional costs as we operate as a public company. However, we
expect that SG&A expenses should continue to decline as a percentage of net
revenues as we continue to leverage our SG&A infrastructure.




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##### Table of Contents



Interest Expense.Interest expense increased to $137,000 in the three months
ended June 30, 2004 from $57,000 in the comparable period of 2003. This
reflects a higher outstanding debt balance than in the prior year quarter. The
increase in average debt was primarily the result of higher borrowing under our
credit lines for the period. These costs should decline in future periods as
the proceeds raised in the initial public offering in May 2004 were used to
paydown the lines of credit in June 2004. Deemed Dividend Beneficial Conversion Feature of Preferred StockIn connection
with issuances of preferred stock in the three months ended June 30, 2003, we
recorded a non-cash charge of $152,000 that represented the deemed dividend
relating to the intrinsic value of the beneficial conversion feature of the
preferred stock. There was no similar item in the three months ended June 30,
2004.




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##### Table of Contents



Six Months Ended June 30, 2004 and 2003 Results of Operations.The following tables set forth, for the quarters
indicated, certain operational information. A percentage breakdown of net
revenues is presented for certain operational items. The breakdown of cost of
products sold and gross margin is presented as a percentage of these respective
items. Six Months Ended June 30,2004
    
    2003
    
    Change, 2004/2003$
    
    %
    
    $
    
    %
    
    $
    
    %(in thousands)Consolidated Statements of OperationsNet revenues
    
    $
    25,257
    
    
    
    100.0
    %
    
    $
    16,585
    
    
    
    100.0
    %
    
    $
    8,672
    
    
    
    52.3
    %Operating expenses:Cost of products sold
    
    
    10,533
    
    
    
    41.7
    
    
    
    8,332
    
    
    
    50.2
    
    
    
    2,201
    
    
    
    26.4Research and development expenses
    
    
    2,672
    
    
    
    10.6
    
    
    
    2,488
    
    
    
    15.0
    
    
    
    184
    
    
    
    7.4Selling, general and administrative expenses
    
    
    17,312
    
    
    
    68.5
    
    
    
    14,860
    
    
    
    89.6
    
    
    
    2,452
    
    
    
    16.5Total operating expenses
    
    
    30,517
    
    
    
    120.8
    
    
    
    25,680
    
    
    
    154.8
    
    
    
    4,837
    
    
    
    18.8Loss from operations
    
    
    (5,260
    )
    
    
    (20.8
    )
    
    
    (9,095
    )
    
    
    (54.8
    )
    
    
    3,835
    
    
    
    42.2Interest income
    
    
    54
    
    
    
    0.2
    
    
    
    15
    
    
    
    0.1
    
    
    
    39
    
    
    
    260.0Interest expense
    
    
    (242
    )
    
    
    (1.0
    )
    
    
    (94
    )
    
    
    (0.6
    )
    
    
    (148
    )
    
    
    (157.4
    )Net loss
    
    
    (5,448
    )
    
    
    (21.6
    )
    
    
    (9,174
    )
    
    
    (55.3
    )
    
    
    3,726
    
    
    
    40.6Deemed dividend
    
    
    
    
    
    
    
    
    
    
    (5,063
    )
    
    
    (30.5
    )
    
    
    5,063
    
    
    
    100.0Net loss attributable to common stockholders
    
    $
    (5,448
    )
    
    
    (21.6
    )%
    
    $
    (14,237
    )
    
    
    (85.8
    )%
    
    $
    8,789
    
    
    
    61.7
    %Net Revenues, Cost of Products Sold and Gross MarginNet RevenuesInsulin pumps
    
    $
    16,969
    
    
    
    67.2
    %
    
    
    10,908
    
    
    
    65.8
    %
    
    
    6,061
    
    
    
    55.6
    %Ancillary supplies
    
    
    8,288
    
    
    
    32.8
    
    
    
    5,677
    
    
    
    34.2
    
    
    
    2,611
    
    
    
    46.0Total
    
    $
    25,257
    
    
    
    100.0
    %
    
    
    16,585
    
    
    
    100.0
    %
    
    
    8,672
    
    
    
    52.3
    %Cost of Products SoldInsulin pumps
    
    $
    5,735
    
    
    
    54.4
    %
    
    
    4,367
    
    
    
    52.4
    %
    
    
    1,368
    
    
    
    31.3
    %Ancillary supplies
    
    
    4,798
    
    
    
    45.6
    
    
    
    3,965
    
    
    
    47.6
    
    
    
    833
    
    
    
    21.0Total
    
    $
    10,533
    
    
    
    100.0
    %
    
    
    8,332
    
    
    
    100.0
    %
    
    
    2,201
    
    
    
    26.4
    %Gross MarginInsulin pumps
    
    $
    11,234
    
    
    
    76.3
    %
    
    
    6,541
    
    
    
    79.3
    %
    
    
    4,693
    
    
    
    71.7
    %Ancillary supplies
    
    
    3,490
    
    
    
    23.7
    
    
    
    1,712
    
    
    
    20.7
    
    
    
    1,778
    
    
    
    103.9Total
    
    $
    14,724
    
    
    
    100.0
    %
    
    
    8,253
    
    
    
    100.0
    %
    
    
    6,471
    
    
    
    78.4
    %Gross Margin %Insulin pumps
    
    
    
    
    
    
    66.2
    %
    
    
    
    
    
    
    60.0
    %Ancillary supplies
    
    
    
    
    
    
    42.1
    %
    
    
    
    
    
    
    30.2
    %Total
    
    
    
    
    
    
    58.3
    %
    
    
    
    
    
    
    49.8
    %
 Net Revenues.In the six months ended June 30, 2004, net revenues increased by
$8.7 million, or 52.3%, to $25.3 million from $16.6 million from the comparable
period in 2003. The increase in net revenues was a result of the recognition of
$3.7 of revenue deferred during the year ended December 31, 2003 associated
with the pump upgrade program, increased demand for the IR 1200 and increased
shipments of ancillary supplies caused by the increases in customer base on a
comparative basis. Net revenues from domestic and foreign sales were $23.5
million and $1.8 million, respectively, in the six months ended June 30, 2004
and $15.4 million and $1.2 million, respectively, in the comparable period in
2003. Pump net revenues increased by $6.1 million due to an increase in
unit shipments. Our average selling price of pumps remained relatively stable
over this period.




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##### Table of Contents



Net revenues from ancillary supplies, consisting of infusion sets, pump
cartridges, and other ancillary supplies increased by 46.0% in the six months
ended June 30, 2004 versus the comparable period of 2003. The increase was due
to increased unit sales, while prices remained near prior period levels. The
growth also reflected our growth in the number of patients using our pumps in
the comparable six month period of 2004 and 2003 and our retention of patients
from prior years. Cost of Products Sold.Cost of products sold increased by $2.2 million or
26.4%, to $10.5 million in the six months ended June 30, 2004 from $8.3 million
in the comparable period of 2003 reflecting the increase in net revenues in the
six months ended June 30, 2004 from the comparable period of 2003. However, as
a percentage of net revenues, cost of products sold decreased to 41.7% in 2004
from 50.2% in 2003. Primary factors that contributed to the decrease included
better absorption of manufacturing overhead costs associated with increased
production volumes, improved purchasing efficiencies for supplies and pump
materials, better manufacturing yields of our pumps, and improvement in labor
and manufacturing efficiency. Cost of insulin pumps sold increased by $1.4
million, or 31.3% in the six months ended June 30, 2004 as compared to the
comparable period of 2003. The rate of this increase was lower than the rate
of increase of pump sales due to the economies and efficiencies described
above. Costs associated with the additional pumps shipped under the pump
upgrade program and the unfulfilled orders shipped from the first quarter were
$1.7 million in the six month period. Gross Margin.Gross margin increased to 58.3% in the six months ended June 30,
2004 from 49.8% in the comparable period of 2003. Gross margin for pumps
increased to 66.2% in 2004 due to increases in sales volume, better absorption
of overhead, improved yields and lower cost of raw materials. The pump upgrade
program and the shipment of the unfulfilled orders from the first quarter
contributed to the improvement of the gross margin through the better
absorption of overhead. The effect of the shipment of pumps under the pump
upgrade program and the unfulfilled orders contributed 3.7% to the improvement
of the gross margin for pumps. Ancillary supplies gross margin increased to
42.1% in the six months ended June 30, 2004 from 30.2% in the comparable period
of 2003. Gross margin improvement for ancillary supplies was due to lower cost
sources of supply. Research and Development.Research and development expenses increased $184,000,
or 7.4%, to $2.7 million for the six months ended June 30, 2004 from $2.5
million in the comparable period of 2003 reflecting increased spending on
activities to improve existing products and develop new products. As a
percentage of net revenues, research and development expenses decreased to
10.6% for the six months ended June 30, 2004 from 15.0% in the comparable
period of 2003. The percentage decrease in research and development expenses
resulted primarily from the growth in our net revenues. In future periods, we
expect research and development expenditures as a percentage of net revenues to
decline due to the growth of our net revenues. Selling General and Administrative Expenses.SG&A expenses increased by $2.5
million, or 16.5%, to $17.3 million in the six months ended June 30, 2004 from
$14.9 million in the comparable period of 2003. Of this increase, $1.2 million
was primarily related to higher costs principally associated with increased
headcount in the sales, clinical, and marketing functions supporting increased
selling activity for existing pumps and ancillary supplies, as well as the
launch of the IR 1200. In addition, higher administrative personnel costs of
$237,000 and professional fees of $80,000 contributed to higher SG&A costs in
the six months ended June 30, 2004. Interest Expense.Interest expense increased to $242,000 in the six months
ended June 30, 2004 from $94,000 in the comparable period of 2003. This
reflects a higher outstanding debt balance than in the comparable period. The
increase in average debt was primarily the result of higher borrowing under our
credit lines. These costs should decline in future periods as the proceeds
raised in the initial public offering in May 2004 were used to paydown the
lines of credit in June 2004. Deemed Dividend Beneficial Conversion Feature of Preferred Stock.In
connection with issuances of preferred stock in the six months ended June 30,
2003, we recorded a non-cash charge of $5.1 million that represented the deemed
dividend relating to the intrinsic value of the beneficial conversion feature
of the preferred stock. There was no similar item in the six months ended June
30, 2004.




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##### Table of Contents



Seasonality and Quarterly Results Our business is affected by the reimbursement practices of third party payors.
Many patients defer purchasing discretionary durable medical equipment, such as
our insulin pumps, until they have satisfied their insurance deductibles which
typically occur in the latter half of the calendar year. As a result, despite
our annual growth in net revenues, our net revenues in the first quarter of
2003 were lower than the fourth quarter of 2002. Quarterly
Results2002
    
    2003
    
    20041st Qtr
    
    2nd Qtr
    
    3rd Qtr
    
    4th Qtr
    
    1st Qtr
    
    2nd Qtr
    
    3rd Qtr
    
    4th Qtr
    
    1st Qtr
    
    2nd Qtr(in thousands, except
per share data)Net revenues
    
    $
    3,639
    
    
    $
    4,929
    
    
    $
    6,851
    
    
    $
    8,179
    
    
    $
    7,380
    
    
    $
    9,205
    
    
    $
    11,291
    
    
    $
    6,244
    
    
    $
    4,837
    
    
    $
    20,420Gross margin
    
    
    907
    
    
    
    1,526
    
    
    
    2,803
    
    
    
    5,457
    
    
    
    3,751
    
    
    
    4,502
    
    
    
    6,689
    
    
    
    1,786
    
    
    
    1,750
    
    
    
    12,974Net income (loss)
    
    
    (5,413
    )
    
    
    (5,587
    )
    
    
    (4,964
    )
    
    
    (3,410
    )
    
    
    (4,470
    )
    
    
    (4,704
    )
    
    
    (2,212
    )
    
    
    (6,418
    )
    
    
    (8,084
    )
    
    
    2,636Deemed dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,911
    )
    
    
    (152
    )
    
    
    
    
    
    
    (2,815
    )
    
    
    
    
    
    
    Net income (loss)
attributable to
common stockholders
    
    $
    (5,413
    )
    
    $
    (5,587
    )
    
    $
    (4,964
    )
    
    $
    (3,410
    )
    
    $
    (9,381
    )
    
    $
    (4,856
    )
    
    $
    (2,212
    )
    
    $
    (9,233
    )
    
    $
    (8,084
    )
    
    $
    2,636Basic net income
(loss) attributable
to common
stockholders per
share
    
    $
    (1.40
    )
    
    $
    (1.45
    )
    
    $
    (1.28
    )
    
    $
    (0.88
    )
    
    $
    (2.43
    )
    
    $
    (1.25
    )
    
    $
    (0.57
    )
    
    $
    (2.39
    )
    
    $
    (2.01)
    *
    
    $
    0.24Diluted net income
(loss) attributable
to common
stockholders per
share
    
    $
    (1.40
    )
    
    $
    (1.45
    )
    
    $
    (1.28
    )
    
    $
    (0.88
    )
    
    $
    (2.43
    )
    
    $
    (1.25
    )
    
    $
    (0.57
    )
    
    $
    (2.39
    )
    
    $
    (2.01)
    *
    
    $
    0.14
 * Basic and diluted net loss per share has been revised from ($2.07). Net revenues increased from $7.4 million in the first quarter of 2003 to $11.3
million in the third quarter of 2003. In the fourth quarter of 2003 and the
first quarter of 2004, our net revenues decreased due to our deferral of $5.2
million and $4.5 million of net revenues, respectively, resulting from the pump
upgrade program initiated in November 2003. Additionally, our net revenues, in
the first quarter of 2004, were impacted by our decision to stop shipment of
pumps for the last three weeks in March 2004 in anticipation of the launch of
the IR 1200 in April 2004. Revenue for the second quarter of 2004 benefited
from the shipment of $2.3 million in revenue delayed at the end of the first
quarter and an additional $3.7 million of deferred revenue as a result of the
pump upgrade program. Gross margin improved from 50.8% in the first quarter of 2003 to 59.2% in the
third quarter of 2003. The gross margin for the fourth quarter of 2003 and the
first quarter of 2004 dropped to 28.6% and 36.2%, respectively, due to the
deferral of net revenues and associated costs due to the upgrade program and
the decision to stop shipments of pumps for the last three weeks of March 2004.
The gross margin in the second quarter of 2004 increased to 63.5% as a result
of the increased absorption of overhead due to the increased volume of pumps
from the pump upgrade program, the shipment in the second quarter of the
unfulfilled orders from the first quarter and the increased demand and
improvements in the cost of the ancillary supplies. Net loss before deemed dividend declined from $9.4 million in the first quarter
of 2003 to $2.2 million in the third quarter of 2003. Net loss increased in the
fourth quarter of 2003 and the first quarter of 2004 to $6.4 million and $8.1
million, respectively, due to the pump upgrade program and the resulting
deferral of net revenues and associated costs. Additionally, the net loss was
increased due to our decision to stop the shipment of pumps for the last three
weeks of March 2004. In the second quarter of 2004, net income increased to
$2.6 million. This was the result of additional revenue associated with the
shipment of additional pumps due to the pump upgrade program, the shipment in
the second quarter of the unfulfilled orders from the first quarter and the
increased demand. The deemed dividend was caused by the sale of preferred stock and warrants from
January through April and in November 2003. The deemed dividend in 2003
increased the net loss attributable to common stockholders for the year ended
December 31, 2003. Additional losses due to deemed dividends in 2004 are not
anticipated. Liquidity and Capital Resources Historically, we have funded our operations primarily through the sale of
equity securities yielding net proceeds of $79.9 million through the quarter
ended March 31, 2004. On May 25, 2004, we closed our IPO of 4,250,000 shares
of our common stock at $15 per share. Additionally, the underwriters exercised
the over-allotment option for the purchase of 637,500 additional shares of our
common stock at the offering price of $15. Net proceeds, including the exercise
of the over-allotment option, were approximately
$65.8 million.




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##### Table of Contents



In addition, we have funded our operations through lines of credit and
long-term debt and lease financing. We have two lines of credit with banks,
totaling $6.3 million, of which no amounts were outstanding at June 30, 2004.
We also have an equipment lease financing loan of $429,000 outstanding at June
30, 2004. Cash Used in Operating Activities.Cash used in operating activities was $6.3
million and $8.8 million in the six months ended June 30, 2004 and 2003,
respectively. The major use of cash was to fund the losses of $5.4 million and
$14.2 million for the six months ended June 30, 2004 and 2003, respectively.
Our accounts receivable increased by $4.6 million and $2.1 million during the
six months ended June 30, 2004 and 2003, respectively. This increase in
accounts receivable resulted from the growth of our business in general.
Specific reasons are due to increased sales to Medicare and Medicaid patients,
which are traditionally slow payment payors, and to the deferred net revenues
generated in the last two months of 2003 ($5.2 million). Additionally, there
were proportional increases in other current assets, although these were offset
by increases in accounts payable and accrued expense and other liabilities. During the three months ended March 31, 2004, the pump upgrade program did not
have a negative effect on liquidity as we billed upon the shipment of all pumps
subject to the upgrade program. However, as we shipped the IR 1200 replacement
pumps during the second quarter of 2004, we did not generate any additional
cash due to these upgrade shipments. We anticipate the same to occur in the
third quarter of 2004. As a result, in 2004, we believe our cash flows from
operating activities will be negatively affected by the replacement activity. Cash Used in Investing Activities.Cash used in investing activities consisted
of the purchase of approximately $2.2 million and $753,000 of capital
expenditures for the six months ended June 30, 2004 and 2003, respectively. The
capital expenditures were primarily for manufacturing equipment and computer
equipment to support the significant growth in our business during that period
and to position us for expected growth in 2004 and beyond. Cash Provided by Financing Activities.Net cash provided by financing
activities was $63.9 million and $12.0 million for the six months ended June
30, 2004 and 2003, respectively. The net cash provided by financing activities
during the six months ended June 30, 2004 was primarily due to our IPO which
raised net proceeds of $65.8 million. These amounts were partially offset by
the repayment of debt. The net cash provided by financing activities during the
six months ended June 30, 2003 was primarily due to proceeds of $11.7 million
from the sale of preferred stock. Bank Credit Facilities.We have a line of credit with a bank under which we can
borrow a maximum of $6.0 million at an interest rate of 1.75% above the banks
prime rate. This line of credit contains a debt covenant that requires that we
maintain a certain net worth throughout the term of this line of credit.
Borrowings under this facility are limited to 75% of our eligible accounts
receivable, which generally consist of our accounts receivable that are less
than 120 days old. Borrowings are secured by a pledge of substantially all of
our assets. As of June 30, 2004, there was no amount outstanding on this line
of credit. We also have a $250,000 line of credit with another bank, which is
secured by our accounts at such bank. The interest rate on borrowings under
this line of credit is at 1.5% above the banks prime rate. As of June 30,
2004, there was no amount outstanding on this line of credit. Equipment Financing.In November 2002, we entered into an equipment lease loan
with a bank for $1.0 million. This loan bears interest at a rate of 1.5% above
the prime rate and matures on November 4, 2005. The principal is paid in
monthly installments of $28,000. As of June 30, 2004, the principal amount
outstanding was $429,000. Operating Leases.At June 30, 2004, commitments related to future lease
payments under operating leases, including the lease for our new facility, are
$565,000 in 2004, $1.1 million in 2005, $1.2 million in 2006, $1.2 million in
2007, $1.2 million in 2008, and $6.9 million beyond 2008. There were no
material commitments related to future capital expenditures on approved
projects at June 30, 2004. At June 30, 2004, we had $550,000 outstanding on a
letter of credit for a security deposit on the lease for our new facility. As of June 30, 2004, we had cash and cash equivalents of $55.7 million. We
expect to have negative cash flows from operations for most of 2004. We expect
increased selling and administrative expenses relating to the promotion of the
IR 1200 as well as increased spending for personnel and infrastructure
improvement. We believe that our current cash, lines of credit, and cash
generated from our operations, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures into 2005 and the
foreseeable future. If existing cash and cash generated from operations are
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities or obtain an additional credit facility.
The sale of additional equity or debt securities could result in dilution to
our stockholders. If additional funds are raised through the issuance of debt
securities, these securities could have rights senior to those associated with
our common stock and could contain covenants that would restrict our
operations. Any additional financing may not be available in amounts or on terms acceptable to
us, or at all. If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned product development and sales and
marketing efforts.




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Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risks related to our operations result primarily from changes in the
prime rate of our lenders as the interest rate on our credit facilities is
based off the prime rate of our lenders. As of June 30, 2004, we had no amounts
outstanding under our credit facilities. Although approximately 4% and 7% of our net revenues for the three and six
months ended June 30, 2004, respectively were derived from sales outside of the
United States and certain of our product components are sourced from suppliers
outside of the United States, all of our transactions are invoiced in U.S.
dollars. Accordingly, we have no direct exposure to currency exchange risk.
However, future fluctuations in the value of the U.S. dollar may affect demand
for our products sold in foreign countries and the cost of our foreign-sourced
components. As of June 30, 2004, we were not engaged in any foreign currency
hedging activities. 
 Item 4. Controls and Procedures  (a)
    
    Evaluation of disclosure controls and procedures.Our chief executive
officer and chief financial officer evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the period covered
by this report were designed and functioning effectively to provide
reasonable assurance that the information required to be disclosed by us
in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms.(b)
    
    Changes in internal controls.There were no changes in our internal
control over financial reporting identified in connection with the
evaluation of such internal control over financial reporting that
occurred during the fiscal quarter ended June 30, 2004 which materially
affected, or are reasonable likely to materially affect, our internal
control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings None. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities  (a)
    
    None.(b)
    
    None.(c)
    
    Set forth below is information regarding shares of common stock and
preferred stock that we issued during the fiscal quarter ended June 30,
2004. Also included is the consideration, if any, received by us for
those shares, and information relating to the section of the Securities
Act of 1933, or rule of the Securities and Exchange Commission, under
which exemption from registration was claimed.  i.
    
    Preferred Stock Issuances  1.
    
    During May of 2004, warrants to
purchase 43,320 shares of our Series C Preferred Stock
were exercised at an exercise price of $9.38 per share.
In addition, warrants to purchase 5,000 shares of our
Series C Preferred Stock were converted at the closing
of our IPO into warrants to purchase 6,666 shares of our
common stock. Warrants to purchase 587,254 shares of
our Series C Preferred Stock were exercised by cashless
exercise immediately prior to the closing of our IPO
resulting in the issuance of an aggregate of 630,574
shares of our Series C Preferred Stock.2.
    
    Upon the closing of our IPO, each
outstanding share of our preferred stock converted into
1.333 shares of our common stock.  ii.
    
    Common Stock Issuances  1.
    
    In May and June of 2004, our
stockholders exercised warrants to acquire 43,561 shares
of common stock at a weighted average exercise price of
$4.78 per share2.
    
    In May of 2004, warrants to purchase
72,914 shares of our common stock were exercised by
cashless exercise resulting in the issuance of an
aggregate of 50,124 shares of our common stock.




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As used above, the term cashless exercise refers to the surrender of a
portion of a warrant as payment for the exercise price of the portion of
the warrant exercised. No underwriters were involved in the foregoing
sales of securities. We issued these securities in reliance upon the
exemption from the registration requirements of the Securities Act, as set
forth in Section 4(2) under the Securities Act and Rule 506 of Regulation
D promulgated thereunder relative to sales by an issuer not involving any
public offering, to the extent an exemption from such registration was
required. All purchasers described above represented to us in connection
with their purchase that they were accredited investors and were acquiring
the shares for investment and not distribution, that they could bear the
risks of the investment and that they could hold the securities for an
indefinite period of time. The purchasers received written disclosures
that the securities had not been registered under the Securities Act and
that any resale must be made pursuant to a registration or an available
exemption from such registration.All of the foregoing securities are deemed restricted securities for
purposes of the Securities Act. All certificates representing the issued
shares of common stock described above included appropriate legends
setting forth that the securities had not been registered and the
applicable restrictions on transfer.(d)
    
    On May 19, 2004, the Companys Registration Statement on Form S-1
covering the offering of 4,250,000 shares of the Companys common stock,
Commission file number 333-113008 was declared effective. The offering
closed on May 25, 2004 and did not terminate before any securities were
sold. As of the date of the filing of this report, the offering has
terminated. The offering was managed by Piper Jaffray & Co., J.P. Morgan
Securities Inc. and Thomas Weisel Partners LLC as representatives of the
several underwriters named in the Registration Statement (the
Underwriters).The Underwriters exercised an over-allotment option to purchase an
additional 637,500 shares of the Companys common stock. The total price
to the public for the shares offered and sold by the Company, including
the over-allotment, was $73,312,500.The amount of expenses incurred for the Companys account in connection
with the offering is as follows: Underwriting discounts and commissions
    
    $
    5,131,875Finders fees
    
    
    Expenses paid to or for the Underwriters
    
    
    Other expenses
    
    
    2,390,394Total expenses
    
    $
    7,522,269
  All of the foregoing expenses were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons
owning ten percent (10%) or more of the Companys common stock; or (iii)
affiliates of the CompanyThe net proceeds of the offering, including the exercise of the
over-allotment option, to the Company (after deducting the foregoing
expenses) were $65,790,231. From the effective date of the Registration
Statement, the net proceeds have been used for the following purposes: Purchases of real estate
    
    
    Acquisition of other businesses
    
    
    Repayment of indebtedness
    
    
    4,767,234Working capital
    
    
    6,009,306Cash equivalents
    
    
    55,013,691$
    65,790,231
  All of the foregoing payments were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons
owning ten percent (10%) or more of the Companys common stock; or (iii)
affiliates of the CompanyThere has been no material change in the planned use of proceeds from our
initial public offering as described in our final prospectus filed with
the SEC pursuant to Rule 424(b).(e)
    
    None.




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Item 3. Defaults Upon Senior Securities (a) None. (b) None. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the three
months ended June 30, 2004. 
 Item 5. Other Information None. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits  (31.1)
    
    Certification Pursuant to Rule 13a-14(a)/15d-14(a).(31.2)
    
    Certification Pursuant to Rule 13a-14(a)/15d-14(a).(32.1)
    
    Certification Furnished Pursuant to 18 U.S.C. Section 1350 As Adopted
Pursuant to Section 906 Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K As of the date of filing of this Form 10-Q, the Company did not file any
Current Reports on Form 8-K during or after the second quarter of fiscal
2004. The Company did not furnish any Current Reports on Form 8-K during the
second quarter of fiscal 2004 but has furnished the following Current Report
on Form 8-K since the second quarter and prior to the filing of this Form
10-Q: The Company furnished a Current Report on Form 8-K on July 30, 2004, under
Item 7 (Financial Statements and Exhibits) and Item 12 (Results of Operations
and Financial Condition), announcing that it had issued a press release and
held a broadly accessible conference call to discuss its financial results
for its fiscal quarter ended June 30, 2004.




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. /s/ Richard BaronDATE: August 9, 2004
    
    Richard Baron
Vice President  Finance and Chief Financial Officer
Animas Corporation
(Registrant)