**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**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                    |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

For The Quarterly Period Ended **June 30, 2007**

** **

 

Commission file number— **001-32966**

** **

 

**OSIRIS THERAPEUTICS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **71-0881115**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (IRS Employer  Identification No.) |

 

** **

**7015 Albert EinsteinDrive, Columbia, Maryland 21046**

(Address of principal executive offices) (Zip code)

 

 

**443-545-1800**

(Registrant’s telephone number, including area code)

 

 

**None**

(Former name, former address and former fiscal year,if changed since last report)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  x   No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerate filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer  o            Accelerated filer  o            Non-accelerated filer x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o   No  x

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock asof the latest practicable date.

|                                           | **Class** | ** ** | ** ** | ** ** | **Outstanding at August 8, 2007** | ** ** |
|-------------------------------------------|-----------|------------|------------|------------|---------------------------------------------|------------|
| Common Stock,  par value $0.001 per share |      | 29,229,788 |

 

 

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**OSIRIS THERAPEUTICS, INC.**

**INDEX**
|                                          | ** ** | ** **                                                                                        | ** ** | **Page**   |
|------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|------------|
| ** **                               | ** ** | ** **                                                                                        | ** ** | ** ** |
| **PART  I — FINANCIAL INFORMATION** |       |                                                                                              |
| ** **                               | ** ** | ** **                                                                                        | ** ** | ** ** |
| Item 1.                                  |       | Financial Statements — Unaudited                                                             |       | 2          |
|                                     |       | Condensed Balance Sheets — June 30, 2007 and December  31, 2006                              |       | 2          |
|                                     |       | Condensed Statements of Operations — three and six  months ended June 30, 2007 and 2006      |       | 3          |
|                                     |       | Condensed Statement of Stockholders’ Equity — three  and six months ended June 30, 2007 |       | 4          |
|                                     |       | Condensed Statements of Cash Flows — six months ended  June 30, 2007 and 2006                |       | 5          |
|                                     |       | Notes to Condensed Financial Statements                                                           |       | 6          |
|                                     |       |                                                                                              |       |       |
| Item 2.                                  |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations       |       | 10         |
|                                     |       |                                                                                              |       |       |
| Item 3.                                  |       | Quantitative and Qualitative Disclosures About Market  Risk                                       |       | 15         |
|                                     |       |                                                                                              |       |       |
| Item 4.                                  |       | Controls and Procedures                                                                           |       | 15         |
|                                     |       |                                                                                              |       |       |
| **PART  II — OTHER INFORMATION**    |       | 16                                                                                                |
|                                     |       |                                                                                              |       |       |
| Item  1.                                 |       | Legal  Proceedings                                                                                |       | 16         |
| Item 1A.                            |       | Risk Factors                                                                                      |       | 16         |
| Item 2.                                  |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                      |       | 16         |
| Item 3.                                  |       | Defaults Upon Senior Securities                                                                   |       | 17         |
| Item 4.                                  |       | Submission of Matters to a Vote of Security Holders                                               |       | 17         |
| Item  5.                                 |       | Other  Information                                                                                |       | 17         |
| Item 6.                                  |       | Exhibits                                                                                          |       | 17         |
|                                     |       |                                                                                              |       |       |
| Signature                                |       |                                                                                              |       | 18         |
|                                     |       |                                                                                              |       |       |
| Exhibit Index                            |       |                                                                                              |

 

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**PART I — FINANCIAL INFORMATION**

**Item1.****                         Financial Statements - Unaudited**

**OSIRISTHERAPEUTICS, INC.Condensed Balance SheetsAmounts in thousands**
| ** **                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                      | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                                      | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                      |       |              |       |                  |       |
| Current assets:                                                                                                 |       |              |       |                  |       |
| Cash                                                                                                            |       | $                 | 662        |                  | $          | 714 |   |
| Short-term  investments                                                                                         |       | 32,400            |       | 38,467                |       |
| Accounts  receivable                                                                                            |       | 2,082             |       | 1,596                 |       |
| Inventory and  other current assets                                                                             |       | 3,060             |       | 2,858                 |       |
| Total current  assets                                                                                           |       | 38,204            |       | 43,635                |       |
|                                                                                                            |       |              |       |                  |       |
| Property and equipment,  net                                                                                    |       | 5,391             |       | 3,942                 |       |
| Restricted cash                                                                                                 |       | 286               |       | 297                   |       |
| Deferred financing  costs, net                                                                                  |       | 447               |       | 567                   |       |
| Other assets                                                                                                    |       | 399               |       | 727                   |       |
| Total assets                                                                                                    |       | $                 | 44,727     |                  | $          | 49,168 |   |
|                                                                                                            |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                  |       |              |       |                  |       |
| Current liabilities:                                                                                            |       |              |       |                  |       |
| Accounts payable  and accrued expenses                                                                          |       | $                 | 5,809      |                  | $          | 8,339 |   |
| Note payable,  current portion                                                                                  |       | 16                |       | 49                    |       |
| Capital lease  obligations, current portion                                                                     |       | 1,183             |       | 1,129                 |       |
| Deferred  revenue, current portion                                                                              |       | 873               |       | 952                   |       |
| Total current  liabilities                                                                                      |       | 7,881             |       | 10,469                |       |
|                                                                                                            |       |              |       |                  |       |
| Note payable, net of  current portion                                                                           |       | 25,000            |       | 25,000                |       |
| Capital lease  obligations, net of current portion                                                              |       | 290               |       | 895                   |       |
| Deferred revenue, net  of current portion                                                                       |       | —            |       | 397                   |       |
| Long-term interest  payable and other liabilities                                                               |       | 1,320             |       | 1,120                 |       |
| Total  liabilities                                                                                              |       | 34,491            |       | 37, 881               |       |
|                                                                                                            |       |              |       |                  |       |
| Stockholders’ equity:                                                                                      |       |              |       |                  |       |
| Common stock,  $.001 par value, 90,000 shares authorized 29,230 and 27,321 shares  outstanding in 2007 and 2006 |       | 29                |       | 27                    |       |
| Additional  paid-in-capital                                                                                     |       | 219,669           |       | 198,763               |       |
| Accumulated  deficit                                                                                            |       | (209,462          | )          | (187,503              | )          |
| Total  stockholders’ equity                                                                                |       | 10,236            |       | 11,287                |       |
| Total liabilities and  stockholders’ equity                                                                |       | $                 | 44,727     |                  | $          | 49,168 |   |

 

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

2

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**OSIRISTHERAPEUTICS, INC.Condensed Statements of Operations(Unaudited)Amounts in thousands, except per share data**
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                  | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Product sales                                               |       | $                                | 3,252      |                           | $          | 1,689 |   | $ | 5,252 |   | $ | 2,794 |   |
| Cost of goods  sold                                         |       | 1,503                            |       | 762                            |       | 2,404 |   | 1,251 |   |
| Gross profit                                                |       | 1,749                            |       | 927                            |       | 2,848 |   | 1,543 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Revenue from  collaborative research licenses and royalties |       | 295                              |       | 298                            |       | 574 |   | 593 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                                        |       |                             |       |                           |       |   |   |   |   |
| Research and development                                    |       | 10,583                           |       | 10,922                         |       | 21,613 |   | 15,290 |   |
| General and administrative                                  |       | 1,501                            |       | 1,209                          |       | 3,007 |   | 2,347 |   |
| Total operating expenses                                    |       | 12,084                           |       | 12,131                         |       | 24,620 |   | 17,637 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Loss from  operations                                       |       | (10,040                          | )          | (10,906                        | )          | (21,198 | ) | (15,501 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Interest expense, net                                       |       | (418                             | )          | (699                           | )          | (761 | ) | (1,225 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Net loss                                                    |       | $                                | (10,458    | )                              | $          | (11,605 | ) | $ | (21,959 | ) | $ | (16,726 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted net loss per share                        |       | $                                | (0.37      | )                              | $          | (1.27 | ) | $ | (0.79 | ) | $ | (1.83 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Weighted average common  shares (basic and diluted)         |       | 27,914                           |       | 9,158                          |       | 27,649 |   | 9,146 |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

3

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**OSIRISTHERAPEUTICS, INC.Condensed Statement of Stockholders’ EquityFor the six months ended June 30, 2007(Unaudited)Amounts in thousands, except for share and per share data**

 
| ** **                                                                      | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **             | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                                                      | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                      | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**            | ** ** | **Equity** | ** ** |
| **Balance  at January 1, 2007**                                                 |       | 27,321,319            |       | $           | 27         |            | $          | 198,763                |       | $          | (187,503   | ) | $ | 11,287 |   |
|                                                                            |       |                  |       |        |       |            |       |                   |       |       |       |
| Issuance of  common stock through private placement ($11.38 per share)          |       | 1,757,469             |       | 2           |       | 19,998          |       | —                 |       | 20,000     |       |
|                                                                            |       |                  |       |        |       |            |       |                   |       |       |       |
| Exercise of  options to purchase common stock ($0.40 - $6.84 per share)         |       | 138,375               |       | —      |       | 59              |       | —                 |       | 59         |       |
|                                                                            |       |                  |       |        |       |            |       |                   |       |       |       |
| Issuance of  common stock for services rendered by directors ($23.62 per share) |       | 12,500                |       | —      |       | 295             |       | —                 |       | 295        |       |
|                                                                            |       |                  |       |        |       |            |       |                   |       |       |       |
| Share-based  payment — employee compensation                               |       | —                |       | —      |       | 554             |       | —                 |       | 554        |       |
|                                                                            |       |                  |       |        |       |            |       |                   |       |       |       |
| Net loss                                                                        |       | —                |       | —      |       | —          |       | (21,959                | )          | (21,959    | )          |
| ** **                                                                      | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Balance at June 30, 2007**                                               |       | 29,229,663            |       | $           | 29         |            | $          | 219,669                |       | $          | (209,462   | ) | $ | 10,236 |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

4

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**OSIRISTHERAPEUTICS, INC.Condensed Statements of Cash Flows(Unaudited)Amounts in thousands**
| ** **                                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
|                                                                   |       |                                              |       |   |   |
| **Cash  flows from operations:**                                       |       |                                              |       |   |   |
| Net loss                                                               |       | $                                                 | (21,959    | ) | $ | (16,726 | ) |
| **Adjustments to reconcile net loss to net cash  used in operations:** |       |                                              |       |   |   |
| Depreciation and amortization                                          |       | 873                                               |       | 743 |   |
| Non cash share-based payments                                          |       | 849                                               |       | 412 |   |
| Non cash interest expense                                              |       | 120                                               |       | 381 |   |
| **Changes in operating assets and liabilities:**                       |       |                                              |       |   |   |
| Accounts receivable                                                    |       | (486                                              | )          | 170 |   |
| Inventory and other current assets                                     |       | (202                                              | )          | (1,473 | ) |
| Other assets                                                           |       | 328                                               |       | 2 |   |
| Accounts payable and accrued expenses                                  |       | (2,130                                            | )          | 2,610 |   |
| Deferred revenue                                                       |       | (476                                              | )          | (476 | ) |
| Long-term interest payable and other liabilities                       |       | 200                                               |       | 895 |   |
| Net cash used in operations:                                           |       | (22,883                                           | )          | (13,462 | ) |
|                                                                   |       |                                              |       |   |   |
| **Cash  flows from investing activities:**                             |       |                                              |       |   |   |
| Purchases of property and equipment                                    |       | (2,322                                            | )          | (697 | ) |
| Proceeds from redemption of short-term investments                     |       | 24,797                                            |       | 15,009 |   |
| Purchases of short-term investments                                    |       | (18,730                                           | )          | — |   |
| Net cash provided by investing activities                              |       | 3,745                                             |       | 14,312 |   |
|                                                                   |       |                                              |       |   |   |
| **Cash  flows from financing activities:**                             |       |                                              |       |   |   |
| Principal payments on capital lease obligations and  notes payable     |       | (584                                              | )          | (534 | ) |
| Restricted cash                                                        |       | 11                                                |       | (119 | ) |
| Proceeds from the issuance of common stock                             |       | 20,059                                            |       | 20 |   |
| Payment of debt financing fees                                         |       | (400                                              | )          | — |   |
| Net cash provided by (used in) financing activities                    |       | 19,086                                            |       | (633 | ) |
|                                                                   |       |                                              |       |   |   |
| Net (decrease)  increase in cash                                       |       | (52                                               | )          | 217 |   |
| Cash at  beginning of period                                           |       | 714                                               |       | 597 |   |
|                                                                   |       |                                              |       |   |   |
| **Cash at end of period**                                              |       | $                                                 | 662        |   | $ | 814 |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

5

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**OSIRIS THERAPEUTICS, INC.   NOTES TO CONDENSED FINANCIALSTATEMENTSAmounts in thousands, except for share and per share data**

**1.            Basis of Presentation**

The accompanying unaudited condensed financialstatements of Osiris Therapeutics, Inc. (the “Company”) have been prepared inaccordance with generally accepted accounting principles in the United Statesand the rules and regulations of the Securities and Exchange Commission (the “SEC”),for interim financial information.  Accordingly, they do not include allthe information and footnotes required by generally accepted accountingprinciples for complete financial statements and should be read in conjunctionwith the Company’s Annual Report on Form 10-K for the year ended December 31,2006.  The interim financial statements are unaudited, but in the opinionof management all adjustments, consisting only of normal recurring accruals,considered necessary for a fair statement of the results of these interimperiods have been included.  The results of the Company’s operations forany interim period are not necessarily indicative of the results that may beexpected for any other interim period or for a full fiscal year.

**2.            Significant Accounting Policies and Recent Accounting Pronouncements**

***Use of estimates***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Due to the inherentuncertainty involved in making those assumptions, actual results could differfrom those estimates. We believe that the most significant estimates thataffect our financial statements are those that relate to revenue recognition,deferred tax assets, and share-based compensation.

***Revenue recognition***

Our revenue recognition policies are in accordancewith the SEC’s Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements*,as amended by SEC Staff Accounting Bulletin No. 104, *Revenue Recognition*.

In July 2005, we launched Osteocel, our firstcommercial product. We recognize revenue on Osteocel sales when legal title tothe product has passed to the customer, which is generally when the product isshipped from our Baltimore, MD facilities. We have agreements with ourcustomers that specify the terms of sale, including price.

***Cost of Goods Sold***

Costs of goods sold consist primarily of the costs toobtain the tissue and other chemicals and supplies, plus labor and allocatedoverhead costs and the costs of operating the clean-room facilities related tothe production of Osteocel.

***Loss per CommonShare***

Basic loss per common share is calculated by dividingnet loss by the weighted average number of common shares outstanding during theperiod. Diluted loss per common share adjusts basic loss per share for thepotentially dilutive effects of shares issuable under our stock option plan,using the treasury stock method. Common equivalent shares from the conversionof convertible debt and the exercise of stock options and warrants are excludedfrom the computation of diluted loss per share as their effect is antidilutive.

***Stock-BasedCompensation Plans***

In 1994, the Company adopted the Amended and Restated1994 Stock Incentive Plan (the 1994 Plan) under which 875,000 shares of commonstock have been reserved for issuance upon the exercise of options or otherequity grants that we issue from time to time.  In 2006, we adopted the2006 Omnibus Plan, under which we reserved 850,000 shares of common stockfor issuance upon the exercise of stock options or other equity grants. We stopped granting options under the 1994 Plan upon the completion of ourinitial public offering in August 2006.

6

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A summary of the combined activity under both of ourstock-based compensation plans as of June 30, 2007 and changes during thesix months then ended is presented below.
| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price at  Grant Date** | ** ** | **Weighted Average  Remaining Term  (in Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------|------------|----------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  December 31, 2006 |       | 695,915                    |       | $                                                                       | 2.05       |                                                            | 8.3        |                                | $          | 16,149 |   |
| Granted                                |       | 317,000                    |       | 21.76                                                                   |       |                                                            |       |                                |       |
| Exercised                              |       | (138,375                   | )          | 0.42                                                                    |       |                                                            |       | 2,143                               |       |
| Forfeited or expired                   |       | (22,129                    | )          | 3.39                                                                    |       |                                                            |       |                                |       |
| Outstanding at  June 30, 2007     |       | 852,411                    |       | 9.61                                                                    |       | 8.4                                                             |       | 3,331                               |       |
|                                   |       |                       |       |                                                                    |       |                                                            |       |                                |       |
| Exercisable at  June 30, 2007     |       | 304,928                    |       | 0.80                                                                    |       | 7.6                                                             |       | 3,875                               |       |
|                                   |       |                       |       |                                                                    |       |                                                            |       |                                |       |
|                                        |            |                            |            |                                                                         |            |                                                                 |            |                                     |            |  |  |

 

The weighted averagegrant date fair value of options granted during the six months endedJune 30, 2007 was $12.76 per share. We received a total of $59 incash from the exercise of options during the six months ended June 30,2007.  Also during the six months ended June 30, 2007, we granted 12,500unrestricted shares of common stock to members of our Board of Directors underour 2006 Omnibus Plan and recognized $295 in share-based expense.  As ofJune 30, 2007, 458,260 shares of common stock remain available for futuregrants under our 2006 Omnibus Plan.

Share-based compensation included in the statements ofoperations for the three and six months ended June 30, 2007 and 2006 was: 

|                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                  | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Biologic drug  candidates   |       | $                                | 186        |                           | $          | 126 |   | $ | 330 |   | $ | 213 |   |
| Biologic tissue  product    |       | 37                               |       | —                         |       | 46 |   | — |   |
| General and  administrative |       | 97                               |       | 113                            |       | 178 |   | 198 |   |
| Total                       |       | $                                | 320        |                           | $          | 239 |   | $ | 554 |   | $ | 411 |   |

As of June 30, 2007, there was approximately $4.6million of total unrecognized share-based compensation cost related to optionsgranted under our plans that will be recognized over a weighted-average periodof approximately 3-years.

***Supplemental CashFlow Information***

|                                                                            | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                 | ** ** | **June 30,**              | ** ** |
| ** **                                                                 | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| ** Supplemental disclosure of cash flows  information:**              |       |                           |       |   |   |
| Cash paid for  interest                                                    |       | $                              | 1,190      |   | $ | 562 |   |
| Cash paid for  taxes                                                       |       | —                         |       | — |   |
|                                                                       |       |                           |       |   |   |
| **Supplemental  schedule of non-cash investing and financing activities:** | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Common stock issued to  directors for services rendered                    |       | 295                            |       | 86 |   |
|                                                                            |            |                                |            |  |  |  |  |

***Significant NewAccounting Pronouncements***

In September 2006, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No.157”). This statement provides a single definition of fair value, a framework formeasuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in variousaccounting pronouncements creating inconsistencies in measurement anddisclosures.  SFAS No. 157 applies under those previously issuedpronouncements that prescribe fair value as the relevant measure of value,except SFAS No. 123(R) and related interpretations and pronouncements thatrequire or permit measurement similar to fair value but are not intended tomeasure fair value.  This pronouncement is effective for fiscal yearsbeginning after November 15, 2007.  The Company is evaluating the impactof this new standard, but currently believes that the adoption of SFAS No. 157will not have a material impact on its financial position, results ofoperations, or cash flows.

7

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InFebruary 2007, the FASB issued Statement No. 159, “ *The Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115”*(SFAS159). SFAS 159 provides companies with an option to report selected financialassets and liabilities at fair value. SFAS 159’s objectives are to reduce bothcomplexity in accounting for financial instruments and the volatility inearnings caused by measuring related assets and liabilities differently. SFAS159 is effective as of the beginning of an entity’s first fiscal year beginningafter November 15, 2007. The Company is currently evaluating the potentialimpact, if any, that the adoption of SFAS159 will have on its condensedconsolidated financial statements.

In June 2007,the FASB ratified a consensus opinion reached by the Emerging Issues Task Force(EITF) on EITF Issue 07-3, “*Accounting forNonrefundable Advance Payments for Goods or Services Received for Use in FutureResearch and Development Activities*.” The guidance in EITF Issue07-3 requires the Company to defer and capitalize nonrefundable advancepayments made for goods or services to be used in research and developmentactivities until the goods have been delivered or the related services havebeen performed. If the goods are no longer expected to be delivered nor theservices expected to be performed, the Company would be required to expense therelated capitalized advance payments. The consensus in EITF Issue 07-3 iseffective for fiscal years, and interim periods within those fiscal years,beginning after December 15, 2007 and is to be applied prospectively tonew contracts entered into on or after December 15, 2007. Early adoptionis not permitted. Retrospective application of EITF Issue 07-3 is also notpermitted. The Company intends to adopt EITF Issue 07-3 effectiveJanuary 1, 2008. The impact of applying this consensus will depend on theterms of the Company’s future research and development contractual arrangementsentered into on or after December 15, 2007.

**3.            Segment Reporting**

In 2007, we began to manage our business in tworeportable operating segments: the Biologic Drug Candidates segment and theBiologic Tissue Product segment.  Our Biologic Drug Candidates segmentfocuses on developing and marketing products to treat medical conditions in theinflammatory, orthopedic and cardiovascular areas.  Its operations havefocused on clinical trials.  Our Biologic Drug Candidates segment does notpresently have any products approved for sale and its revenues consist oflicense fees and royalties from collaborative research agreements.

Our Biologic Tissue Product segment includes themanufacture and sale of Osteocel, which we launched in July 2005 and iscurrently being used by orthopedic surgeons for focal bone repair.

We evaluate the performance of our Biologic TissueProduct segment based upon gross margin and operating income before netinterest expense, depreciation, and corporate general and administrativeexpenses, which we refer to as segment profit or loss.  We have presentedestimated 2006 segment results through the gross profit result to compare toour 2007 presentation in the table below.  However, because our BiologicTissue Product segment was not managed as a separate segment during 2006 we areunable to determine the other operating expenses that may have beenattributable to this segment in 2006.

In general, our total assets, including long-livedassets such as property and equipment, and our capital expenditures are notspecifically allocated to any particular segment.  Accordingly, capitalexpenditures and total asset information by reportable segment is notpresented.  The reportable segments use the same accounting policies asthose used by the Company.  There are no significant inter-segment salesor transfers.

Substantially all of our revenues and assets areattributed to and are received from entities located in the UnitedStates.  During the three and six months ended June 30, 2007 and 2006, wesold product produced in our Biologic Tissue Product segment primarily to twocustomers, both of which represent greater than ten percent of our revenues.

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The table below sets forth the revenues, gross marginand segment profit (loss) for the three and six months ended June 30, 2007, andthe revenues and gross margin for the three and six months ended June 30, 2006.
| ** **                            | ** ** | **Biologic  Drug** | ** ** | **Biologic  Tissue** | ** ** | ** **    | ** ** | ** ** | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------------|------------|---------------|------------|------------|------------|
| ** **                            | ** ** | **Candidates**     | ** ** | **Product**          | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
| **Three  Months Ended June 30, 2007** | ** ** | ** **         | ** ** | ** **           | ** ** | ** **    | ** ** | ** ** | ** ** |
| Revenues                              |       | $                  | 295        |                 | $          | 3,252         |       | $          | —     |   | $ | 3,547 |   |
| Gross margin                          |       | —             |       | 1,749                |       |          |       | 1,749      |       |
| Segment profit (loss)                 |       | (10,042            | )          | 1,503                |       | (1,501        | )          | (10,040    | )          |
|                                  |       |               |       |                 |       |          |       |       |       |
| **Six  Months Ended June 30, 2007**   | ** ** | ** **         | ** ** | ** **           | ** ** | ** **    | ** ** | ** ** | ** ** |
| Revenues                              |       | $                  | 574        |                 | $          | 5,252         |       | $          | —     |   | $ | 5,826 |   |
| Gross margin                          |       | —             |       | 2,848                |       |          |       | 2,848      |       |
| Segment profit (loss)                 |       | (18,360            | )          | 169                  |       | (3,007        | )          | (21,198    | )          |
|                                  |       |               |       |                 |       |          |       |       |       |
| **Three  Months Ended June 30, 2006** | ** ** | ** **         | ** ** | ** **           | ** ** | ** **    | ** ** | ** ** | ** ** |
| Revenues                              |       | $                  | 298        |                 | $          | 1,689         |       | $          | —     |   | $ | 1,987 |   |
| Gross margin                          |       | —             |       | 927                  |       |          |       | 927        |       |
|                                  |       |               |       |                 |       |          |       |       |       |
| **Six  Months Ended June 30, 2006**   | ** ** | ** **         | ** ** | ** **           | ** ** | ** **    | ** ** | ** ** | ** ** |
| Revenues                              |       | $                  | 593        |                 | $          | 2,794         |       | $          | —     |   | $ | 3,387 |   |
| Gross margin                          |       | —             |       | 1,543                |       |          |       | 1,543      |       |
|                                  |       |               |       |                 |       |          |       |       |       |

We reported a loss in our Biologic Tissue Productsegment for the quarter ending March 31, 2007 which was primarily attributableto costs associated with the expansion of our Osteocel manufacturing facility,as we experienced failed production qualification runs while expanding ourcapacity. The production issues were subsequently resolved in late March 2007,and the expanded facility is currently producing product in line withexpectations..

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**Item2.****   Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Forward-LookingInformation**

Thisreport includes “forward-looking statements” within the meaning ofSection 21E of the Securities Exchange Act of 1934, or the Exchange Act.Forward-looking statements include statements concerning our plans, objectives,goals, strategies, future events, future revenues or performance, capitalexpenditures, compensation arrangements, financing needs, plans or intentionsrelating to acquisitions, business trends and other information that is nothistorical information and, in particular, may appear under the headings “RiskFactors” in our Annual Report 10-K under Part I—Item 1A, “Part II—Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and the other documents we file with the Securities and ExchangeCommission, or SEC, including, among others, our quarterly reports onForm 10-Q and amendments thereto. When used in this Quarterly Report, thewords *estimates, expects, anticipates,projects, plans, intends, believes, forecasts* and variations of suchwords or similar expressions are intended to identify forward-lookingstatements. Examples of forward-looking statements include, but are not limitedto, statements regarding the following: our product development efforts; ourclinical trials and anticipated regulatory requirements; the success of ourproduct candidates in development; status of the regulatory process for ourbiologic drug candidates; implementation of our corporate strategy; ourfinancial performance; our product research and development activities andprojected expenditures, including our anticipated timeline and clinicalstrategy for MSCs and biologic drug candidates; our cash needs; patents andproprietary rights; ability of our potential products to treat disease; ourplans for sales and marketing; our plans regarding facilities; types ofregulatory frameworks we expect will be applicable to our potential products;and results of our scientific research. All forward-looking statements,including, without limitation, management’s examination of historical operatingtrends, are based upon our current expectations and various assumptions. Ourexpectations, beliefs and projections are expressed in good faith and webelieve there is a reasonable basis for them. However, there can be noassurance that management’s expectations, beliefs and projections will resultor be achieved.

Youshould read the following management’s discussion and analysis of our financialcondition and results of operations in conjunction with our audited FinancialStatements and related notes thereto and other disclosures included as part ofour Annual Report on Form 10-K for the year ended December 31, 2006, andour unaudited Condensed Financial Statements for the three and six months endedJune 30, 2007 and other disclosures included in this Quarterly Report on Form10-Q. Our Condensed Financial Statements have been prepared in accordance withU.S. generally accepted accounting principles and are presented in U.S.dollars.

Thereare a number of risks and uncertainties that could cause our actual results todiffer materially from the forward-looking statements contained in this report.Some of the important factors that could cause our actual results to differmaterially from the forward-looking statements we make in this report are setforth in this report or in our Annual Report on Form 10-K for the fiscal yearended December 31, 2006 under Part I — Item 1A “Risk Factors.” There may beother factors that may cause our actual results to differ materially from theforward-looking statements.

Allforward-looking statements attributable to us or persons acting on our behalfapply only as of the date of this Quarterly Report and are expressly qualifiedin their entirety by the cautionary statements included herein. We undertake noobligation to publicly update or revise any forward-looking statements toreflect subsequent events or circumstances and do not intend to do so.

Whenwe use the terms “Osiris,” “we,”  “us,” and “our” we mean OsirisTherapeutics, Inc., a Delaware corporation.

**Introductionand Overview**

The following is a discussion and analysis of ourfinancial condition and results of operations for the three and six monthperiods ended June 30, 2007 and 2006.  You should read this discussiontogether with the accompanying unaudited condensed financial statements andnotes and with our Annual Report on Form 10-K for the year ended December 31,2006.  Historical results and any discussion of prospective results maynot indicate our future performance.  See “Forward Looking Information.”

We area leading stem cell therapeutic company focused on developing and marketingproducts to treat medical conditions in the inflammatory, orthopedic andcardiovascular areas.   Beginning in the first quarter of 2007, webegan to manage our business in two operating segments.  Our reportableoperating segments that are managed separately consist of our Biologic DrugCandidates segment and our Biologic Tissue Product segment.

In ourBiologic Drug Candidates segment,  we currently have five clinical trialsongoing. We are currently enrolling patients in a Phase III clinical trial forProchymal, our lead biologic drug candidate, for the treatment of steroidrefractory Graft versus Host Disease, or GvHD. We were recently given clearanceto conduct a Phase III trial using Prochymal to treat Crohn’s Disease. Inaddition, we have two other clinical stage biologic drug candidates, Chondrogenfor regenerating cartilage in the knee, and Provacel for repairing heart tissuefollowing a heart attack. We have developed stem cell capabilities in researchand development, manufacturing, marketing and distribution. We manufactureclinical batches of our biologic drug candidates.

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OurBiologic Tissue Product segment  produces and markets Osteocel, which waslaunched in  July 2005 for regenerating bone in orthopedicindications.  During the first quarter of 2007, we expanded our Osteocelmanufacturing facility and experienced failed production qualificationruns.  The production issues were subsequently resolved in late March2007, and the expanded facility is currently producing product in line with ourexpectations. We manufacture Osteocel in our Baltimore, MD clean-roomfacilities. We, together with AlloSource, distribute Osteocel in orthopedicindications and we jointly distribute Osteocel with BlackstoneMedical, Inc., a division of Orthofix International, N.V., for spinalprocedures and orthopedic indications.

Wehave incurred annual operating losses since inception and expect to incursubstantial operating losses in the future in connection with the developmentof our core products. As of June 30, 2007, we had an accumulated deficit of$209.5 million.

**FinancialOperations Overview**

*Revenue*

Osteocelis our only commercial product. Sales of Osteocel generated revenue ofapproximately $3.3 million and $5.3 million for the three and six months endedJune 30, 2007.

Otherthan Osteocel, we have no commercial products for sale. A substantial portionof our revenue in the future will be dependent on the approval and sale of ourbiologic drug candidates. Our revenue may vary substantially from quarter toquarter and from year to year. We believe that period-to-period comparisons ofour results of operations are not meaningful and should not be relied upon asindicative of our future performance.

*Cost ofGoods Sold*

Ourcost of goods sold relate to direct costs of producing Osteocel. Cost of goodssold consist primarily of the costs of obtaining tissue and other chemicals andsupplies, direct labor and allocated costs of our facilities and overhead.

*Researchand Development Costs*

Ourresearch and development costs consist of expenses incurred in identifying,developing and testing biologic drug candidates and our biologic tissueproduct. These expenses consist primarily of salaries and related expenses forpersonnel, fees paid to professional service providers for independentmonitoring and analysis of our clinical trials, costs of contract research andmanufacturing, costs of facilities, and the costs of manufacturing clinicalbatches of biologic drug candidates, quality control supplies and material toexpand biologic drug candidates.

Consistentwith our focus on the development of biologic drug candidates with potentialuses in multiple indications, many of our costs are not attributable to aspecifically identified project. We use our employee and infrastructureresources across several projects. Accordingly, we do not account for internalresearch and development costs on a project-by-project basis. As a result, wecannot state precisely the total costs incurred for each of our clinical andpreclinical projects on a project-by-project basis. From inception in December1992 through June 30, 2007, we incurred aggregate research and developmentcosts of approximately $205 million. We expect our research and developmentexpenses to increase substantially in the future, as we expand our clinicaltrial activity, as our biologic drug candidates advance through the developmentcycle and as we invest in additional product opportunities and researchprograms. Clinical trials and preclinical studies are time-consuming andexpensive. Our expenditures on current and future preclinical and clinicaldevelopment programs are subject to many uncertainties. We test our products inseveral preclinical studies, and we then conduct clinical trials for thosebiologic drug candidates that we determine to be the most promising. As weobtain results from clinical trials, we may elect to discontinue or delaytrials for some biologic drug candidates in order to focus our resources onmore promising biologic drug candidates. Completion of clinical trials may takeseveral years or more, but the length of time generally varies substantiallyaccording to the type, size of trial and intended use of a biologic drugcandidate. The cost of clinical trials may vary significantly over the life ofa project as a result of a variety of factors, including:

·       the number of patients whoparticipate in the trials;

·       the number of sitesincluded in the trials;

·       the length of time requiredto enroll trial participants;

·       the duration of patienttreatment and follow-up;

·       the costs of producingsupplies of the biologic drug candidates needed for clinical trials andregulatory submissions;

·       the efficacy and safetyprofile of the biologic drug candidate; and

·       the costs and timing of,and the ability to secure, regulatory approvals.

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As aresult of the uncertainties discussed above, we are unable to determine withany significant degree of certainty the duration and completion costs of ourresearch and development projects or when and to what extent we will generaterevenues from the commercialization and sale of any of our biologic drugcandidates.

*Generaland Administrative Expenses*

Generaland administrative expenses consist primarily of the costs associated with ourgeneral management, including salaries, allocations of facilities and relatedcosts, and professional fees such as legal and accounting expenses. Inanticipation of and since the closing of our initial public offering inAugust 2006, we began to incur increases in our general and administrativeexpense for legal and accounting compliance costs, investor relations and otheractivities associated with operating as a publicly traded company. Continuedincreases will also likely result from the additional hiring of operational,financial, accounting, facilities engineering and information systems personnel.

*Interest Expense Net*

Interestincome consists of interest earned on our cash and short-term investments.Interest expense consists of interest incurred on convertible debt, capitalleases and other debt financings. We pay interest on our bank loan, capitalleases and our convertible long-term debt.

*IncomeTaxes*

Wehave not recognized any deferred tax assets or liabilities in our financialstatements since we cannot assure their future realization. Because realizationof deferred tax assets is dependent upon future earnings, a full valuationallowance has been recorded on the net deferred tax assets, which relateprimarily to net operating loss and research and development carry-forwards. Inthe event that we become profitable within the next several years, we have netdeferred tax assets of approximately $75 million that may be utilized prior tous having to recognize any income tax expense or make payments to the taxingauthorities. Utilization of our net operating loss carry-forwards in any oneyear may be limited under IRC Section 382, and we could be subject to thealternative minimum tax.

**Critical Accounting Policies**

Therehave been no material changes in our critical accounting policies, estimatesand judgments during the three and six months ended June 30, 2007 compared tothe disclosures in Part II, Item 7 of our Annual Report on Form 10-K forthe year ended December 31, 2006, other than as disclosed herein.

**Resultsof Operations**

***Comparison ofQuarters ended June 30, 2007 and 2006***

*Revenue*

Totalrevenues increased 80% to $3.6 million for the three months ended June 30,2007, compared to $2.0 million in the corresponding period in 2006. Ourrevenues in 2007 resulted primarily from $3.3 million generated from thesale of Osteocel and the recognition of $0.3 million in licensing fees androyalties. In the three months ended June 30, 2006, we recognized $1.7 millionfrom the sale of Osteocel and $0.3 million in license fees androyalties.  The increase in Osteocelsales resulted primarily from higher sales volumes, and to a lesser extent,increases in prices.

*Cost ofGoods Sold*

Costof goods sold were $1.5 million for the three months ended June 30, 2007compared to $0.8 million in the corresponding period in fiscal 2006. The costof goods sold associated with sales of Osteocel is comprised of payments totissue banks, direct labor costs and the costs of processing, testing andpreserving Osteocel, plus allocated costs of our facilities and overhead. Thegross profit on Osteocel sales for the three months ended June 30, 2007 was54%, compared with 55% for the comparable period in 2006.

*Researchand Development Expenses*

Researchand development expenses were approximately $10.6 million for the threemonths ended June 30, 2007 compared to $10.9 million in the prior year.

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*Generaland Administrative Expenses*

Generaland administrative expenses were $1.5 million for the three months endedJune 30, 2007 compared to $1.2 million in the corresponding period infiscal 2006.. The increase in 2007 over the prior year was attributable toadditional personnel and related costs to support the company’s growth andcosts incurred in connection with becoming a public company.

*InterestExpense, Net*

Interestexpense, net was $0.4 million for the three months ended June 30, 2007compared to $0.7 million in the corresponding period in fiscal 2006..

***Comparison ofthe Six Months ended June 30, 2007 and 2006***

*Revenue*

Totalrevenues increased 71% to $5.8 million for the six months ended June 30,2007, compared to $3.4 million in the corresponding period in 2006. Ourrevenues for the first six months of fiscal 2007 resulted primarily from$5.3 million generated from the sale of Osteocel and the recognition of$0.6 million in licensing fees and royalties. In the six months ended June30, 2006, we recognized $2.8 million from the sale of Osteocel and$0.6 million in license fees and royalties.

*Cost ofGoods Sold*

Costof goods sold were $2.4 million for the six months ended June 30, 2007 comparedto $1.3 million in the corresponding period in fiscal 2006. The cost of goodssold associated with sales of Osteocel is comprised of payments to tissuebanks, direct labor costs and the costs of processing, testing and preservingOsteocel, plus allocated costs of our facilities and overhead. The gross profiton Osteocel sales for the six months ended June 30, 2007 was 54%, compared with55% for the comparable period in 2006.

*Researchand Development Expenses*

Researchand development expenses were approximately $21.6 million for the sixmonths ended June 30, 2007 compared to $15.3 million in the prioryear.  The increase in research anddevelopment expenses in the first six months of fiscal 2007 when compared tothe same period in 2006 is primarily driven by the advancement of our clinicalprograms  and the costs of the productionqualification runs associated with the expansion of our Osteocel manufacturingfacilities, which were approximately $2.4 million.

*Generaland Administrative Expenses*

Generaland administrative expenses were $3.0 million for the six months endedJune 30, 2007 compared to $2.3 million in the prior year. The increase in2007 over the corresponding period in fiscal 2006 was attributable toadditional personnel and related costs to support the company’s growth andcosts incurred in connection with becoming a public company.

*InterestExpense, Net*

Interestexpense, net was $0.8 million for the six months ended June 30, 2007compared to $1.2 million in the corresponding period in fiscal 2006.

**Liquidityand Capital Resources**

***Liquidity***

AtJune 30, 2007, we had $0.7 million in cash and $32.4 million in short-terminvestments. In addition to the cash and short-term investments, at June 30,2007, we had drawn only $5.0 million of the $50.0 million line ofcredit available for the development of Provacel under a loan agreement witha  large pharmaceutical company. This $5.0 million draw occurred inMarch 2004. In connection with this line of credit, we have granted thepharmaceutical company a security interest in the intellectual property, equipmentand books and records involved in the development, manufacture and distributionof Provacel. The pharmaceutical company is also obligated to make additionalinvestments in our Company and pay licensing fees up to $45.0 million tous upon completion of certain milestones.

Inaddition to the $5.0 million balance on the line of credit, at June 30,2007, our debt included approximately $20.0 million of convertiblepromissory notes due in 2009.

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***Cash Flows***

Netcash used in operating activities was $14.3 million for the three months endedJune 30, 2007 primarily reflecting our net lost of $10.5 million and netunfavorable changes in our working capital of $4.6 million, partially offset by$0.8 million in non-cash expenses. During the second quarter of 2007, we built up our inventory andaccounts receivable associated with Osteocel in connection with our expandedmanufacturing facilities and the resulting increase in sales.  We also paid cash interest of $1.0 million duringthis quarter, which reduced our current liabilities. Net cash used in operatingactivities for the second quarter of 2006 was $9.5 million, primarily reflectinga net loss of $11.6 million, which was partially offset by $1.7 million infavorable working capital changes and $0.7 million in non-cash interest expenseand depreciation and amortization.

Netcash used in operating activities was $22.9 million for the six months endedJune 30, 2007, compared to $13.5 million for the six month period ended June30, 2006.

Netcash used in investing activities was $6.2 million for the three months endedJune 30, 2007, including $1.5 million of capital expenditures spent primarilyon our MSC manufacturing facilities in Columbia, Maryland and the net increasein short-term investments. During the quarter ended June 30, 2007, we investedthe majority of the $20.0 million raised in the private placement of our commonstock in short-term investments.  Netcash provided  in investing activity for the three months ended June 30,2006 was $9.8 million. In the second quarter of 2006 we sold $10.3 million ofshort-term investments and had purchases of property and equipment of $0.5 million.

Netcash provided by investing activities for the six months ended June 30, 2007was $3.7 million, which included $2.3 million of capital expenditures and thenet sale of $6.1 million in short-term investments.  Net cash provided by investing activities forthe first half of 2006 was $14.3 million, including the sale of $15.0 millionof short-term investments.

Netcash provided by financing activities was $19.3 million for the three monthsended June 30, 2007. This includes $20.0 million raised in the privateplacement of our common stock through Friedli Corporate Finance, Inc.. Net cashused in financing activities was $0.5 million for the three months ended June30, 2006.

Netcash provided by financing activities for the six months ended June 30, 2007was $19.1 million, which is primarily the result of the $20.0 million privateplacement of our common stock through the efforts of Friedli CorporateFinance.  Net cash used in financingactivities for the first half of 2006 was $0.6 million.

***Capital Resources.***

Our future capital requirements will depend on manyfactors, including, but not limited to:

·             the level of cashflows from Osteocel sales;

·             the scope and resultsof our research and preclinical development programs;

·             the scope and resultsof our clinical trials, particularly regarding the number of patients requiredfor our Phase III trials for Prochymal;

·             the timing of and thecosts involved in obtaining regulatory approvals for our biologic drugcandidates, which could be more lengthy or complex than obtaining approval fora new conventional drug, given the FDA’s limited experience with late-stageclinical trials and marketing approval for stem cell therapeutics;

·             the costs of buildingand operating our manufacturing facilities, both in the near term to supportOsteocel sales and our clinical activities and also in anticipation ofexpanding our commercialization activities;

·             the costs ofmaintaining, expanding and protecting our intellectual property portfolio,including litigation costs and liabilities;

·             the costs of repayingour debt; and

·             the costs ofenlarging our work force consistent with expanding our business and operationsand status as a public company, and as necessary to enhance and train our salesnetwork in anticipation of the approval of our biologic drug candidates forcommercial sale.

As aresult of these and other factors, we will likely need or choose to seekadditional funding prior to our becoming cash flow positive on an operationalbasis. We would likely seek such funding through public or private financingsor some combination of them. Although not our current focus, we might also seekfunding through collaborative arrangements if determined to be necessary orappropriate. We are also pursuing government contracts to help offset theremaining development costs and reduce adoption risks by securing advancedpurchase commitments for Prochymal. Additional funding may not be available tous on acceptable terms, or at all. If we obtain capital through collaborativearrangements, these arrangements could require us to relinquish rights to ourtechnologies or biologic drug candidates. If we raise capital through the saleof equity, or securities convertible into equity, dilution to our then existingstockholders would result. If we raise additional capital through theincurrence of debt, we would likely become subject to covenants restricting ourbusiness activities, and holders of debt instruments would have rights andprivileges senior to those of our equity investors. In addition, servicing theinterest and repayment obligations under these borrowings would divert fundsthat would otherwise be available to support research and development, clinicalor commercialization activities.

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Weexpect that our available cash and interest income, including the availabilityunder our line-of-credit, will be sufficient to finance currently plannedactivities through mid 2008. These estimates are based on certain assumptions,which could be negatively impacted by the matters discussed under “Risk Factors”in our Annual Report on Form 10-K, among other things.

Ifadequate funds are not available, we may be required to delay, reduce the scopeof, or eliminate one or more of our research and development programs, whichmay have a material adverse affect on our business, financial condition andresults of operations. See “Risk Factors” in our Annual Report on Form 10-K.

**Off-BalanceSheet Arrangements.**

Wehave no off-balance sheet financing arrangements and we have not entered intoany transactions involving unconsolidated subsidiaries or special purposeentities.

**Item3.****               Quantitative and Qualitative Disclosures About Market Risk**

Due tothe short duration of our investment portfolio and the high quality of ourinvestments, an immediate 10% change in interest rates would not have amaterial effect on the fair market value of our portfolio. Therefore, we wouldnot expect our operating results or cash flows to be affected to anysignificant degree by the effect of a sudden change in market interest rates onour securities portfolio.

Webelieve that the interest rate risk related to our accounts receivable is notsignificant. We manage the risk associated with these accounts through periodicreviews of the carrying value for non-collectability and establishment ofappropriate allowances in connection with our internal controls and policies.

We donot enter into hedging or derivative instrument arrangements.

**Item4.****               Controls and Procedures**

***Evaluation of Disclosure Controls and Procedures.***An evaluation of the effectiveness of the design and operation of our “disclosurecontrols and procedures” (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended), as of the end of the period covered by thisQuarterly Report on Form 10-Q was made under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer. Based upon this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures (a) are effective to ensure that information required to bedisclosed by us in reports filed or submitted under the Securities Exchange Actof 1934 is timely recorded, processed, summarized and reported and(b) include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in reports filed orsubmitted under the Securities Exchange Act of 1934 is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

***Changes in Internal Control over FinancialReporting.*** There have not been any changes in ourinternal control over financial reporting that occurred during the quarterended June 30, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PARTII — OTHER INFORMATION**

**Item1.****               Legal Proceedings**

From time to time, we receive threats or may besubject to routine litigation matters related to our business. However, we arenot currently a party to any material pending legal proceedings.

**Item1A.****            Risk Factors**

There have not been any material changes in the riskfactors previously disclosed under the heading “Risk Factors” in Part I — Item1A of our Annual Report on Form 10-K, filed with the Securities and ExchangeCommission on March 26, 2007.

**Item2.****               Unregistered Sales of Equity Securities and Use of Proceeds**

**Private Placement**

On June 8, 2007, we sold 1,757,469 shares of ourcommon stock in a private placement at $11.38 per share, through the efforts ofFriedli Corporate Finance, Inc., raising $20.0 million. The shares were soldunder Regulation S of the Securities Act of 1933 to institutional andaccredited investors primarily based in Switzerland.  There were no commissions paid on theproceeds raised.  The proceeds from theprivate placement are intended to be used to fund further development of theCompany’s adult stem cell products. We deposited the proceeds in two highlyrated financial institutions in the United States.

The private placement was led by Peter Friedli, ourChairman of the Board of Directors and our largest stockholder.  Mr. Friedli is also the President and soleowner of Friedli Corporate Finance, Inc. Included among the purchasers of the common stock was Peter Friedli,individually, who invested $14.0 million and New Venturetec, Inc., a Swisspublicly traded company approximately 3% owned by Mr. Friedli who serves as itsPresident, that invested $3.0 million. Our Board of Directors, including allthe independent directions, but with Mr. Friedli abstaining, unanimouslyapproved the offer and sale of the common stock, including the sale of aportion of the offering to Mr. Friedli and New Venturetec, Inc., and thearrangements with Friedli Corporate Finance, Inc.

The securities sold in the private placement have notbeen registered under the United States Securities Act of 1933, as amended (the“U.S. Securities Act”) or any state securities laws and may not be offered orsold within the United States or to U.S. Persons unless registered under theU.S. Securities Act and applicable state securities laws or unless an exemptionfrom such registration is available. Pursuant to the terms of the private placement, the holders are provideddemand registration rights for the shares of common stock, but only after suchtime as the Company becomes eligible to effect such registration pursuant to aregistration statement on Form S-3 or another “short form” registrationstatement.

**Initial Public Offering**

On August 4, 2006, we sold 3,500,000 shares of ourcommon stock in our initial public offering at the price to the public of$11.00 per share.  The offer and sale of all of the shares in the offeringwere registered under the Securities Act of 1933, as amended, pursuant to aregistration statement on Form S-1 (File No. 333-13407), which was declaredeffective by the Securities and Exchange Commission on August 3, 2006. The underwriters of the offering were Jefferies & Company, Inc., LazardCapital Markets, LLC and Leerink Swann & Co., Inc.  There were noselling stockholders in the offering.

We registered 3,500,000 shares of our common stock inconnection with the initial public offering and the aggregate offering amountwas $38.5 million.  We paid approximately $2.7 million in underwritingdiscounts and commissions to the underwriter.  We also incurred otherexpenses in connection with the offering of approximately $1.4 million,including registration fees, accounting and legal, printing and engraving andother expenses.

None of the underwriting discounts and commissions oroffering expenses were incurred or paid to directors or officers of ours ortheir associates, to persons owning 10 percent or more of our common stock orto any affiliates of ours.  After deducting the underwriting discounts andcommissions and these other estimated offering expenses, our net proceeds fromthe offering were approximately $34.4 million.  We deposited the netproceeds in two highly rated financial institutions in the United States.

There has been no material change in our planned useof proceeds from our initial public offering as described in our finalprospectus filed with the Securities and Exchange Commission pursuant to Rule424(b).    Between August 4, 2006 and June 30, 2007, we usedapproximately $21.3 million of the net proceeds to fund our operatingactivities, including activities relating to the development of our biologicdrug candidates and for working capital, capital expenditures, repayment ofdebt and other general corporate purposes.  During this period, ourresearch and development expenses comprised approximately 90% of our operatingexpenses.  The remaining approximately $13.1 million in net proceedsremains on deposit in two highly rated financial institutions in the UnitedStates.  At June 30, 2007, we had $33.1 million in cash and short-terminvestments.

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**Item3.****               Defaults Upon Senior Securities**

None

**Item4.****               Submission of Matters to a Vote of Security Holders**

We held our annual meeting of shareholders on May 31,2007.  Of the 27,467,632 share of commonstock outstanding as of the record date of the annual meeting, 21,962,027shares, or 79.8%, of the total shares eligible to vote at the annual meeting,were represented in person or by proxy. Two proposals were submitted to our shareholders and approved at theannual meeting, as follows:

1.                                       *Election of Directors.* Jay M. Moyes and Gregory H. Barnhillwere elected to serve as members of the board of directors for a term expiring atthe Company’s Annual Meeting of Shareholders to be held in 2010 and until theirsuccessors are duly elected and qualify. The number of votes cast for or withheld from each nominee, both inperson and by proxy, was as follows:

| Jay M. Moyes         |   | 21,922,317 FOR |   | 3,710 WITHHOLD  |
|----------------------|--------|----------------|--------|-----------------|
| Gregory H.  Barnhill |   | 21,914,607 FOR |   | 11,420 WITHHOLD |

 

The term of officeof each of Peter Friedli, Felix Gutzwiller and C. Randal Mills continued beyondthe meeting.

2.                                       *Ratify Independent Registered Public Accountants.*Theappointment of Stegman & Company, independent registered publicaccountants, to act as the Company’s independent auditors for the fiscal yearending December 31, 2007 was ratified, as follows:

| For     |   | 21,916,924 |
|---------|--------|------------|
| Against |   | 8,103      |
| Abstain |   | 1,000      |

**Item5.****               Other Information**

None

**Item6.****               Exhibits**
| Exhibit  Number | ** ** | **Description of Exhibit**                                                                                                                                                                               |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                     |
| *10.1           |       | Letter Agreement dated June 6, 2007 between Friedli  Corporate Finance, Inc. and Osiris Therapeutics, Inc. establishing the terms  of the private placement of $20.0 million of unregistered securities. |
|            |       |                                                                                                                                                                                                     |
| *10.2           |       | Form of Subscription Agreement, dated June 6, 2007,  by and between the Registrant and Private Placement Investor.                                                                                       |
|            |       |                                                                                                                                                                                                     |
| 31.1            |       | Certification of Principal Executive Officer  pursuant to Rule 13a-14(a) and 15D-14(a) under the Securities Exchange Act of  1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).           |
|            |       |                                                                                                                                                                                                     |
| 31.2            |       | Certification of Principal Financial Officer pursuant  to Rule 13a-14(a) and 15D-14(a) under the Securities Exchange Act of 1934, as  amended (Section 302 of the Sarbanes-Oxley Act of 2002).           |
|            |       |                                                                                                                                                                                                     |
| 32              |       | Certification of Principal Executive Officer and  Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                 |
|            |       |                                                                                                                                                                                                     |
| *               |       | Incorporated herein by reference to Current Report  on Form 8-K filed by the Registrant with the United States Securities and  Exchange Commission on June 7, 2007.                                      |

 

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The certification attached as Exhibit 32 thataccompanies this Quarterly Report on Form 10-Q is not deemed filed with theSecurities and Exchange Commission and is not to be incorporated by referenceinto any filing of Osiris Therapeutics, Inc. under the Securities Act of 1933,as amended, or the Securities Exchange Act of 1934, as amended, whether madebefore or after the date of this Quarterly Report on Form 10-Q, irrespective ofany general incorporation language contained in such filing.

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                        | ** ** | **Osiris Therapeutics, Inc.** |
|------------------------|------------|-------------------------------|
|                   |       |                          |
| Date: August 10,  2007 |       | /s/ Cary J. Claiborne         |
|                   |       | Cary J. Claiborne             |
|                   |       | Chief Financial Officer       |

 

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