The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes and the other financial information appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the heading "Risk Factors."

Restatement of Previously Issued Financial Statements

Financial data when presented throughout the MD&A includes the effect of the restatement, as described in Notes 2, 3, 16, 17 and 18 to our consolidated financial statements, of our results for the three and six months ended June 30, 2011, the nine months ended September 30, 2011 and the year ended December 31, 2011. The following tables summarize the effect of the restatement by major financial statement line item for the three and six months ended June 30, 2011, the nine months ended September 30, 2011 and the year ended December 31, 2011 (in thousands). The restatement resulted in an increase in current deferred tax assets (which are presented as a component of prepaid expenses and other current assets) of $1.2 million at June 30, 2011 and September 30, 2011 and an increase of $0.9 million at December 31, 2011, an increase in goodwill of $11.3 million at June 30, 2011 and September 30, 2011 and $10.9 million at December 31, 2011, and an increase to non-current deferred tax liabilities (which are presented as a component of other long-term liabilities) of $1.2 million at June 30, 2011 and September 30, 2011 and $0.4 million at December 31, 2011. The restatement resulted in an increase in tax benefit of $11.3 million in the three and six months ended June 30, 2011, the nine months ended September 30, 2011 and the year ended December 31, 2011. The restatement had no effect on any amounts reported in periods prior to the quarter ended June 30, 2011.

Consolidated Balance Sheet



                                           June 30, 2011                              September 30, 2011                             December 31, 2011
                                As Previously                                 As Previously                                 As Previously
                                  Reported              As Restated             Reported              As Restated             Reported              As Restated
                                            (unaudited)                                   (unaudited)
Prepaid expenses and
other current assets           $         4,770         $       5,991         $         3,653         $       4,874         $         2,802         $       3,652
Total current assets                   147,834               149,055                 137,857               139,078                 131,785               132,635
Goodwill                                26,727                38,066                  26,164                37,503                  26,647                37,536
Total assets                           226,190               238,750                 215,780               228,340                 209,583               221,322
Other long-term
liabilities                              1,303                 2,524                   1,260                 2,481                   1,652                 2,052
Total liabilities                      132,091               133,312                 132,340               133,561                 138,187               138,587
Accumulated deficit                   (413,122 )            (401,783 )              (426,684 )            (415,345 )              (441,023 )            (429,684 )
Total stockholders'
equity                                  94,099               105,438                  83,440                94,779                  71,396                82,735
Total liabilities and
stockholders' equity                   226,190               238,750                 215,780               228,340                 209,583               221,322

Consolidated Statement of Operations



                                                   Three Months Ended                             Six Months Ended                            Nine Months Ended                            Year Ended
                                                      June 30, 2011                                 June 30, 2011                            September 30, 2011                         December 31, 2011
                                           As Previously                                 As Previously                                 As Previously             As              As Previously             As
                                             Reported              As Restated             Reported              As Restated             Reported             Restated             Reported             Restated
                                                       (unaudited)                                   (unaudited)                                 (unaudited)
Income tax benefit (expense)              $             -         $      11,339         $             -         $      11,339         $             -         $  11,339         $          (127 )       $  11,212
Net loss                                          (19,423 )              (8,084 )               (29,269 )             (17,930 )               (42,831 )         (31,492 )               (57,170 )         (45,831 )
Net loss per share basic and diluted                (0.42 )               (0.17 )                 (0.64 )               (0.39 )                 (0.92 )           (0.68 )                 (1.22 )           (0.98 )

Consolidated Statement of Cash Flows



                                            Six Months Ended                          Nine Months Ended                            Year Ended
                                              June 30, 2011                          September 30, 2011                         December 31, 2011
                                    As Previously                             As Previously                             As Previously
                                      Reported            As Restated           Reported            As Restated           Reported            As Restated
                                               (unaudited)                               (unaudited)
Net loss                           $       (29,269 )     $     (17,930 )     $       (42,831 )     $     (31,492 )     $       (57,170 )     $     (45,831 )
Deferred tax provision                           -             (11,339 )                   -             (11,339 )                   -             (11,289 )
Changes in operating assets and
liabilities:
Prepaid expenses and other
current assets                                (434 )            (1,655 )                 851                (370 )               1,703                 853
Other long-term liabilities                   (316 )               905                  (359 )               862                  (417 )               383

The restatement had no effect on the previously reported amounts of operating, investing, and financing cash flows in our consolidated statement of cash flows for the six months ended June 30, 2011, the nine months ended September 30, 2011, and the year ended December 31, 2011.

Overview

We are a medical device company that develops, manufactures and markets an insulin infusion system for people with insulin-dependent diabetes. Our proprietary OmniPod Insulin Management System ("the OmniPod System") consists of our OmniPod disposable insulin infusion device and our handheld, wireless Personal Diabetes Manager ("PDM"). The US Food and Drug Administration ("FDA"), approved the OmniPod System in January 2005. In October 2005, we shipped our first commercial OmniPod System.

We have progressively expanded our marketing efforts from an initial focus in the Eastern United States to having availability of the OmniPod System in the entire United States. In January 2010, we entered into a five-year exclusive distribution agreement with Ypsomed Distribution AG ("Ypsomed"), which intends to distribute and sell our OmniPod System in eleven countries, subject to approved reimbursement. Through our partnership with Ypsomed, the OmniPod System is now available in Germany, the United Kingdom, the Netherlands, and Switzerland. In February 2011, we entered into a distribution agreement with GlaxoSmithKline Inc. ("GSK") pursuant to which GSK became the exclusive distributor of the OmniPod System in Canada. GSK began distributing the OmniPod System in the third quarter of 2011.

On June 1, 2011, we completed the acquisition of Neighborhood Holdings, Inc. and its wholly-owned subsidiaries (collectively, "Neighborhood Diabetes"), a leading durable medical equipment distributor, specializing in direct to consumer sales of diabetes supplies. Neighborhood Diabetes is based in Woburn, Massachusetts with additional facilities in Brooklyn, New York and Orlando, Florida. Neighborhood Diabetes serves more than 60,000 customers with Type 1 and Type 2 diabetes primarily in the northeast and southeast regions of the United States. Neighborhood Diabetes supplies these customers with blood glucose testing supplies, insulin pumps, pump supplies, pharmaceuticals, and other products for the management and treatment of diabetes.

We focus our sales efforts towards key diabetes practitioners, academic centers and clinics specializing in the treatment of diabetes patients, as well as individual diabetes patients. Our total revenue was $152.3 million, $97.0 million and $66.0 million for the years ended December 31, 2011, 2010 and 2009, respectively.

We currently produce the OmniPod System on a partially automated manufacturing line at a facility in China operated by a subsidiary of Flextronics International Ltd. ("Flextronics"). We purchase complete OmniPods pursuant to our agreement with Flextronics. Under the agreement, Flextronics has agreed to supply us, as a non-exclusive supplier, with OmniPods at agreed upon prices per unit pursuant to a rolling 12-month forecast that we provide. The agreement may be terminated at any time by either party upon prior written notice given no less than a specified number of days prior to the date of termination. The specified number of days is intended to provide the parties with sufficient time to make alternative arrangements in the event of termination. By purchasing OmniPods manufactured by Flextronics in China, we have been able to substantially increase production volumes for the OmniPod and reduce our per unit production cost.

To achieve profitability, we continue to seek to increase manufacturing volume and reduce the per unit production cost for the OmniPod. By increasing production volumes of the OmniPod, we have been able to reduce our per-unit raw material costs and improve absorption of manufacturing overhead costs. This, as well as the introduction of our next generation OmniPod, are important as we strive to achieve profitability. We believe our current manufacturing capacity is sufficient to meet our expected 2012 demand for OmniPods.

Neighborhood Diabetes is a distributor of blood glucose testing supplies, insulin pumps, pump supplies, pharmaceuticals and other products for the management and treatment of diabetes. Neighborhood Diabetes purchases products from manufacturers at contracted rates and supplies these products to its customers. Based on market penetration, payor plans and other factors, certain manufacturers provide rebates based on product sold. Neighborhood Diabetes records these rebates as a reduction to cost of goods sold as they are earned.

Our sales and marketing effort with respect to the OmniPod System is focused on generating demand and acceptance of the OmniPod System among healthcare professionals, people with insulin-dependent diabetes, third-party payors, government agencies, and third-party distributors. Our marketing strategy is to build awareness for the benefits of the OmniPod System through a wide range of education programs, social networking, patient demonstration programs, support materials, media advertisements and events at the national, regional and local levels. We are using third-party distributors to improve our access to managed care and government reimbursement programs, expand our commercial presence and provide access to additional potential patients.

Neighborhood Diabetes has built a strong infrastructure in the reimbursement, billing and collection areas that provide for adjudication of claims as either durable medical equipment or through pharmacy benefits. Claims

are adjudicated under private insurers, Medicaid or Medicare. Neighborhood Diabetes' business model requires collaboration with physicians, medical device manufacturers, pharmaceutical distributors, private insurers and public insurers such as The Center for Medicare & Medicaid Services, ("CMS"), who we collectively refer to as partners. Neighborhood Diabetes' net sales are primarily generated from distributing diabetes supplies and pharmaceuticals pursuant to agreements with its partners.

As a medical device company, reimbursement from third-party payors is an important element of our success. If patients are not adequately reimbursed for the costs of using the OmniPod System or our other diabetes supplies, it will be much more difficult for us to penetrate the market. We continue to negotiate contracts establishing reimbursement for the OmniPod System with national and regional third-party payors. As part of the integration of Neighborhood Diabetes, we are aligning third-party payor contracts, both ours and those of Neighborhood Diabetes, to be able to better leverage our cross-selling initiatives. As we expand our sales and marketing focus, increase our manufacturing capacity, expand to international markets and leverage the Neighborhood Diabetes model, we will need to maintain and expand available reimbursement for our product offerings.

Since our inception in 2000, we have incurred losses every quarter. In the years ended December 31, 2011, 2010 and 2009, we incurred net losses of $45.8 million, $61.2 million and $72.3 million, respectively. As of December 31, 2011, we had an accumulated deficit of $429.7 million. We have financed our operations through the private placement of debt and equity securities, public offerings of our common stock and issuances of convertible debt and borrowings under certain other debt agreements. As of December 31, 2011, we had $158.8 million of convertible debt outstanding. Of the $158.8 million of convertible debt outstanding, approximately $15.0 million matures in June 2013 and approximately $143.8 million matures in June 2016. Since our inception, we have received net proceeds of $593.5 million from the issuance of redeemable convertible preferred stock, common stock and debt.

Our long-term financial objective is to achieve and sustain profitable growth. Our efforts in the beginning of 2012 will be focused primarily on the production and regulatory approval of our next generation OmniPod System. Our efforts in the second half of 2012 will be focused on the launch of our next generation OmniPod System to our existing patient base as well as the expansion of sales by continuing to add new patients in the U.S. and internationally. We also plan to focus on increasing sales to existing patients by offering additional products and services as a result of our acquisition of Neighborhood Diabetes. Achieving these objectives is expected to require additional investments in certain personnel and initiatives to allow for us to increase our penetration in the United States and international markets. We believe that we will continue to incur net losses in the near term in order to achieve these objectives. However, we believe that the accomplishment of our near term objectives will have a positive impact on our financial condition in the future.

We believe that our cash and cash equivalents, together with the cash to be generated from expected product sales, will be sufficient to meet our projected operating and debt service requirements for the next twelve months.

Acquisition of Neighborhood Diabetes

On June 1, 2011, we acquired all of the outstanding shares of Neighborhood Diabetes, a durable medical equipment distributor specializing in direct to consumer sales of diabetes supplies, including pharmaceuticals, and support services. Neighborhood Diabetes serves more than 60,000 customers with Type 1 and Type 2 diabetes primarily in the northeast and southeast regions of the United States with blood glucose testing supplies, insulin pumps, pump supplies, pharmaceuticals, as well as other products for the management and treatment of diabetes. Neighborhood Diabetes is based in Woburn, Massachusetts, with additional offices in Brooklyn, New York and Orlando, Florida. At the time of the acquisition, Neighborhood Diabetes employed approximately 200 people across its three locations. The acquisition of Neighborhood Diabetes provides us with full suite diabetes management product offerings, accelerates our sales force expansion, strengthens our back office support capabilities, expands our access to insulin dependent patients, and provides pharmacy adjudication capabilities to

drive incremental sales higher. The aggregate purchase price of approximately $62.4 million consisted of approximately $37.9 million in cash paid at closing, 1,197,631 shares of our common stock valued at approximately $24.4 million, or $20.40 per share based on the closing price of our common stock on the acquisition date, and contingent consideration with a fair value of approximately $0.1 million. Of the $37.9 million of cash, $6.6 million is being held in an escrow account to reimburse us and our affiliates for certain claims for which we are entitled to be indemnified pursuant to the terms of the agreement and plan of merger with Neighborhood Diabetes.

We have accounted for the acquisition of Neighborhood Diabetes as a business combination. Under business combination accounting, the assets and liabilities of Neighborhood Diabetes were recorded as of the acquisition date, at their respective fair values, and consolidated with our results. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill. The operating results of Neighborhood Diabetes have been included in the consolidated financial statements since June 1, 2011, the date the acquisition was completed. For the year ended December 31, 2011, we included approximately $35.3 million of revenue related to pharmacy, testing supplies, insulin pumps and pump supplies serviced by Neighborhood Diabetes. If the acquisition had occurred as of January 1, 2010, consolidated revenue would have been approximately $177.3 million and $156.7 million for the years ended December 31, 2011 and 2010, respectively, and consolidated net loss would have been approximately $47.0 million and $59.0 million for the years ended December 31, 2011 and 2010, respectively. The purchase price allocation, including an independent appraisal for intangible assets, has been prepared based on the information that was available to management at the time the consolidated financial statements were prepared. The purchase price (restated) has been allocated as follows (in thousands):

Calculation of allocable purchase price:

               Cash                                        $ 37,855
               Common stock                                  24,432
               Contingent consideration obligations              61

               Total allocable purchase price              $ 62,348

               Allocation of purchase price:
               Accounts receivable                         $  5,387
               Inventories                                    2,336
               Prepaid expenses and other current assets        242
               Property and equipment                           391
               Customer relationships                        30,100
               Tradenames                                     2,800
               Goodwill                                      38,066
               Other assets                                     233
               Accounts payable                               4,109
               Accrued expenses                               1,700
               Deferred tax liabilities                      11,339
               Other long-term liabilities                       59

                                                           $ 62,348

For the year ended December 31, 2011 we recorded certain adjustments to the initial purchase price accounting. The adjustments to goodwill are as follows (in thousands):

                                                    Purchase accounting
                                              adjustments offset to goodwill
    Collection of fully reserved receivable   $                          (510 )
    Other                                                                 (20 )

    Total                                     $                          (530 )

In connection with the acquisition of Neighborhood Diabetes, we incurred transaction costs of approximately $3.2 million, which consisted primarily of banking, legal, accounting and other administrative fees. These costs have been recorded as general and administrative expense in the year ended December 31, 2011.

Financial Operations Overview

Revenue. Prior to the acquisition of Neighborhood Diabetes, we derived nearly all of our revenue from the sale of the OmniPod System to customers and third-party distributors who resell the product to customers. The OmniPod System is comprised of two devices: the OmniPod, a disposable insulin infusion device that the patient wears for up to three days and then replaces; and the PDM, a handheld device much like a personal digital assistant that wirelessly programs the OmniPod with insulin delivery instructions, assists the patient with diabetes management and incorporates a blood glucose meter. We received FDA approval for the OmniPod System in January 2005 and began commercial sale in the U.S. in October 2005. We are currently selling our OmniPod System through our partnership with Ypsomed in Germany, the United Kingdom, the Netherlands, and Switzerland. In February 2011, we entered into a distribution agreement with GSK to become the exclusive distributor of the OmniPod System in Canada. GSK began distributing the OmniPod System in the third quarter of 2011. Neighborhood Diabetes is a durable medical equipment distributor that sells other diabetes related products including blood glucose testing supplies, insulin pumps, pump supplies and pharmaceuticals to customers. In connection with our June 1, 2011 acquisition of Neighborhood Diabetes, we also provide more than 60,000 Type 1 and Type 2 diabetes patients with blood glucose testing supplies, insulin pumps, pump supplies and pharmaceuticals.

In March 2008, we received a cash payment from Abbott Diabetes Care, Inc. ("Abbott") for an agreement fee in connection with execution of the first amendment to the development and license agreement with Abbott. We are recognizing the payment as revenue over the five year term of the agreement. In addition, Abbott agreed to pay us certain amounts for services performed in connection with each sale of a PDM that includes an Abbott Discrete Blood Glucose Monitor to customers in certain territories. We recognize the revenue related to this portion of the Abbott agreement at the time we meet the criteria for revenue recognition, typically at the time of the sale of the PDM to a new patient.

In June 2011, we entered into a development agreement with a U.S. based pharmaceutical company (the "Development Agreement"). Under the Development Agreement, we are required to perform design, development, regulatory, and other services to support the pharmaceutical company as it works to obtain regulatory approval to use our drug delivery technology as a delivery method for its pharmaceutical. Over the estimated two year term of the Development Agreement, we have and expect to continue to invoice amounts as we meet certain defined deliverable milestones. Revenue on the Development Agreement is recognized using a proportional performance methodology based on efforts incurred and total payments under the agreement.

As of December 31, 2011 and 2010, we had deferred revenue of $2.7 million and $4.8 million, respectively. These amounts include product-related revenue, unrecognized amounts related to the Development Agreement, as well as the unrecognized portion of the agreement fee related to the Abbott agreement. For the year ending December 31, 2012, we expect our revenue to continue to increase as we leverage our Neighborhood Diabetes business, gain new customers in the United States and continue expansion in Europe, Canada, and certain other international markets. Increased revenue will be dependent upon the success of our sales efforts, our ability to produce OmniPods in sufficient volumes, the successful introduction of our next generation OmniPod System, and other risks and uncertainties.

Cost of revenue. Cost of revenue consists primarily of raw material, labor, warranty and overhead costs such as freight, depreciation, and packing costs, related to the OmniPod System and the cost for which we acquire our other products from third party suppliers distributed through our Neighborhood Diabetes business, and costs incurred related to the Development Agreement. Cost of revenue related to the Neighborhood Diabetes

business is expected to reduce our overall gross margin as we resell other diabetes supplies to our combined customers. We have received CE Mark approval and filed for 510(K) clearance from the FDA on our next generation OmniPod.

Research and development. Research and development expenses consist primarily of personnel costs within our product development, regulatory and clinical functions, and the costs of market studies and product development projects. We expense all research and development costs as incurred. For the year ending December 31, 2012, we expect overall research and development spending to decrease slightly from 2011 levels as we finalize the validation of our next generation product manufacturing line with Flextronics and complete our work with the regulatory agencies on obtaining approval of the next generation product.

General and administrative. General and administrative expenses consist primarily of salaries and other related costs for personnel serving the executive, finance, information technology and human resource functions, as well as legal fees, accounting fees, insurance costs, bad debt expenses, shipping, handling and facilities-related costs. We expect general and administrative expenses to increase in the year ending December 31, 2012 as compared to 2011 as a result of a full year of related Neighborhood Diabetes expenses.

. . .