Osiris Therapeutics (OSIR)

Revenue Recognition

We generate revenues from collaborative agreements, research licenses, and a government contract. Our revenue recognition policies are in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” as amended by SEC Staff Accounting Bulletin No. 104, “Revenue Recognition.”

Revenues from collaboration agreements are evaluated under Emerging Issues Task Force (“EITF”) Issue No. 07-01, “Accounting for Collaboration Agreements.” Management evaluates revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting as defined in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. To recognize a delivered item in a multiple element arrangement, EITF Issue No. 00-21 requires that the delivered items have value to the customer on a stand alone basis, that there is objective and reliable evidence of fair value of the undelivered items and that delivery or performance is probable and within our control for any delivered items that have a right of return. The determination of whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise our judgment.

Revenues from research licenses and government contracts are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performed are designated as deferred revenue. Non-refundable upfront license fees and certain other related fees are recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights is recognized as revenue as it is earned and received.

7

Revenue Recognition

        We generate revenues from collaborative agreements, research licenses, and a government contract. Our revenue recognition policies are in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition.

        Revenues from collaboration agreements are evaluated under Emerging Issues Task Force ("EITF") Issue No. 07-01, Draft Abstract, Accounting for Collaboration Agreements. Management evaluates revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting as defined in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. To recognize a delivered item in a multiple element arrangement, EITF Issue No. 00-21 requires that the delivered items have value to the customer on a stand alone basis, that there is objective and reliable evidence of fair value of the undelivered items and that delivery or performance is probable and within our control for any delivered items that have a right of return. The determination whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgments.

        Revenues from research licenses and government contracts are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performed are designated as deferred revenue. Non-refundable upfront license fees and certain other related fees are recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk, performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights is recognized as revenue as it is earned and received.

        In October 2008, we entered into a Collaboration Agreement with Genzyme Corporation for the development and commercialization of Prochymal and Chondrogen. Under the Agreement, Genzyme is obligated to pay to us non-contingent, non-refundable cash payments totaling $130.0 million, with $75.0 million paid during November 2008 and $55.0 million scheduled to be paid on July 1, 2009. The Agreement provides Genzyme with certain rights to intellectual property developed by us, and requires

57

Table of Contents

that we continue to perform certain development work related to the subject products. Management has evaluated the deliverables related to these payments under EITF 00-21, and concluded that the various deliverables represent a single unit of accounting. Accordingly, we have deferred the recognition of revenue related to the upfront payments, and are amortizing these amounts to revenue on a straight-line basis over the estimated delivery period of the required development services, which extend through the first quarter of 2012. The Agreement also provides for contingent milestone payments of up to $1.25 billion in the aggregate, as well as royalties to be paid to us on any sales by Genzyme. Consistent with our revenue recognition policies, we will recognize revenue from these contingent milestone payments for which we have no continuing performance obligations upon achievement of the related milestone. For any milestone payments for which we have a continuing performance obligation, the milestone payments will be deferred and recognized as revenue over the term of the related performance obligations.

        In 2007, we partnered with Genzyme to develop Prochymal as a medical countermeasure to nuclear terrorism and other radiological emergencies. In January 2008, we were awarded a contract from the United States Department of Defense pursuant to which we, in partnership with Genzyme, are seeking to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from acute radiation exposure. We began recognizing revenue under this contract during the first quarter of 2008. Contract revenue is recognized as the related costs are incurred, in accordance with the terms of the contract.

        In October 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation ("JDRF") to conduct a Phase II clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus. This collaborative agreement provides for JDRF to provide up to $4.0 million of contingent milestone funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus. The contingent milestone payments under the agreement are amortized to revenue on a straight line basis over the duration of our obligations under the collaborative agreement as they are earned.

        In July 2005, we launched our first commercial product, Osteocel. Revenues on Osteocel sales are recognized when legal title to the product has passed to the customer. In April 2008, we committed to a plan to sell the Osteocel product line. Concurrent with the technology assets closing on July 24, 2008, we entered into a Manufacturing Agreement under which we will continue to manufacture Osteocel for up to 18-months and thereafter sell 100% of the product to NuVasive at specified prices. Osteocel operations are accounted for as discontinued operations in the accompanying financial statements, and the prior period financial statements have been restated for comparative purposes.

        We have entered into several strategic agreements with other pharmaceutical companies focusing on the development and commercialization of its stem cell drug products. In 2003, we entered into such an agreement with Boston Scientific Corporation pertaining to our cardiac drug development and received a $5 million fee for licensing the use of our technology. We terminated the agreement with Boston Scientific Corporation in 2007 and recognized the remaining unamortized license fee. Also in 2003, we entered into a similar agreement with JCR Pharmaceuticals Co., Ltd. pertaining to our hematologic malignancies drugs for distribution in Japan, and recognize revenue upon the achievement of milestone events specified in the agreement.

        We also earn royalties on the sale of human MSCs sold for research purposes and recognize the revenue on these sales as the sales are made.

Revenue Recognition

        We generate revenues from collaborative agreements, research licenses, and a government contract. Our revenue recognition policies are
in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition.

        Revenues
from collaboration agreements are evaluated under Emerging Issues Task Force ("EITF") Issue No. 07-01, Draft Abstract, Accounting for
Collaboration Agreements. Management evaluates revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate
units of accounting as defined in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. To recognize a delivered
item in a multiple element arrangement, EITF Issue No. 00-21 requires that the delivered
items have value to the customer on a stand alone basis, that there is objective and reliable evidence of fair value of the undelivered items and that delivery or performance is probable and within
our control for any delivered items that have a right of return. The determination whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us
to exercise judgments.

        Revenues
from research licenses and government contracts are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or
the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performed are designated as deferred revenue.
Non-refundable upfront license fees and certain other related fees are recognized on a straight-line basis over the development periods of the contract deliverables. Fees
associated with substantive at risk, performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights
is recognized as revenue as it is earned and received.

        In
October 2008, we entered into a Collaboration Agreement with Genzyme Corporation for the development and commercialization of Prochymal and Chondrogen. Under the Agreement, Genzyme is
obligated to pay to us non-contingent, non-refundable cash payments totaling $130.0 million, with $75.0 million paid during November 2008 and $55.0 million
scheduled to be paid on July 1, 2009. The Agreement provides Genzyme with certain rights to intellectual property developed by us, and requires

57

HREF="#bg14501a_main_toc">Table of Contents

that
we continue to perform certain development work related to the subject products. Management has evaluated the deliverables related to these payments under EITF 00-21, and
concluded that the various deliverables represent a single unit of accounting. Accordingly, we have deferred the recognition of revenue related to the upfront payments, and are amortizing these
amounts to revenue on a straight-line basis over the estimated delivery period of the required development services, which extend through the first quarter of 2012. The Agreement also
provides for contingent milestone payments of up to $1.25 billion in the aggregate, as well as royalties to be paid to us on any sales by Genzyme. Consistent with our revenue recognition
policies, we will recognize revenue from these contingent milestone payments for which we have no continuing performance obligations upon achievement of the related milestone. For any milestone
payments for which we have a continuing performance obligation, the milestone payments will be deferred and recognized as revenue over the term of the related performance obligations.

        In
2007, we partnered with Genzyme to develop Prochymal as a medical countermeasure to nuclear terrorism and other radiological emergencies. In January 2008, we were awarded a contract
from the United States Department of Defense pursuant to which we, in partnership with Genzyme, are seeking to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from
acute radiation exposure. We began recognizing revenue under this contract during the first quarter of 2008. Contract revenue is recognized as the related costs are incurred, in accordance with the
terms of the contract.

        In
October 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation ("JDRF") to conduct a Phase II clinical trial evaluating Prochymal as a
treatment for type 1 diabetes mellitus. This collaborative agreement provides for JDRF to provide up to $4.0 million of contingent milestone funding to support the development of
Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus. The contingent milestone payments under the agreement are amortized to revenue on
a straight line basis over the duration of our obligations under the collaborative agreement as they are earned.

        In
July 2005, we launched our first commercial product, Osteocel. Revenues on Osteocel sales are recognized when legal title to the product has passed to the customer. In April 2008, we
committed to a plan to sell the Osteocel product line. Concurrent with the technology assets closing on July 24, 2008, we entered into a Manufacturing Agreement under which we will continue to
manufacture Osteocel for up to 18-months and thereafter sell 100% of the product to NuVasive at specified prices. Osteocel operations are accounted for as discontinued operations in the
accompanying financial statements, and the prior period financial statements have been restated for comparative purposes.

        We
have entered into several strategic agreements with other pharmaceutical companies focusing on the development and commercialization of its stem cell drug products. In 2003, we
entered into such an agreement with Boston Scientific Corporation pertaining to our cardiac drug development and received a $5 million fee for licensing the use of our technology. We terminated
the agreement with Boston Scientific Corporation in 2007 and recognized the remaining unamortized license fee. Also in 2003, we entered into a similar agreement with JCR
Pharmaceuticals Co., Ltd. pertaining to our hematologic malignancies drugs for distribution in Japan, and recognize revenue upon the achievement of milestone events specified in the
agreement.

        We
also earn royalties on the sale of human MSCs sold for research purposes and recognize the revenue on these sales as the sales are made.

Revenue Recognition

        We generate revenues from collaborative agreements, research licenses, and a government contract. Our revenue recognition policies are in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition.

        Revenues from collaboration agreements are evaluated under Emerging Issues Task Force ("EITF") Issue No. 07-01, Draft Abstract, Accounting for Collaboration Agreements. Management evaluates revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting as defined in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. To recognize a delivered item in a multiple element arrangement, EITF Issue No. 00-21 requires that the delivered items have value to the customer on a stand alone basis, that there is objective and reliable evidence of fair value of the undelivered items and that delivery or performance is probable and within our control for any delivered items that have a

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Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(amounts in thousands, except for share and per share data)

1. Description of Business and Significant Accounting Policies (Continued)

right of return. The determination whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgments.

        Revenues from research licenses and government contracts are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performed are designated as deferred revenue. Non-refundable upfront license fees and certain other related fees are recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk, performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights is recognized as revenue as it is earned and received.

        In October 2008, we entered into a Collaboration Agreement with Genzyme Corporation ("Genzyme") for the development and commercialization of Prochymal and Chondrogen. Under the agreement, Genzyme is obligated to pay to us non-contingent, non-refundable cash payments totaling $130.0 million, with $75.0 million paid during November 2008 and $55.0 million to be paid on July 1, 2009. The agreement provides Genzyme with certain rights to intellectual property developed by Osiris, and requires that we continue to perform certain development work related to the subject products. Management has evaluated the deliverables related to these payments under EITF 00-21, and concluded that the various deliverables represent a single unit of accounting. Accordingly, we have deferred the recognition of revenue related to the upfront payments, and are amortizing these amounts to revenue on a straight-line basis over the estimated delivery period of the required development services, which extend through the first quarter of 2012. Accordingly, we recognized $6.7 million of revenue in 2008 related to the amortization of the upfront payments. The balance of these payments has been recorded as $40.0 million of current deferred revenue and $83.3 million of long term deferred revenue as of December 31, 2008. The agreement also provides for contingent milestone payments of up to $1.25 billion in the aggregate, as well as royalties to be paid to us on any sales by Genzyme. Consistent with our revenue recognition policies, we will recognize revenue from these contingent milestone payments for which we have no continuing performance obligations upon achievement of the related milestone. For any milestone payments for which we have a continuing performance obligation, the milestone payments will be deferred and recognized as revenue over the term of the related performance obligations.

        In 2007, we partnered with Genzyme to develop Prochymal as a medical countermeasure to nuclear terrorism and other radiological emergencies. In January 2008, we were awarded a contract from the United States Department of Defense ("DoD") pursuant to which we, in partnership with Genzyme, are seeking to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from acute radiation exposure. We began recognizing revenue under this contract during the first quarter of 2008. Contract revenue is recognized as the related costs are incurred, in accordance with the terms of the contract. We recognized $2.5 million in revenue from the DoD contract during 2008.

        In October 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation ("JDRF") to conduct a Phase II clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus. This collaborative agreement provides for JDRF to provide up to $4.0 million

76

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(amounts in thousands, except for share and per share data)

1. Description of Business and Significant Accounting Policies (Continued)

of contingent milestone funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus. The contingent milestone payments under the agreement are amortized to revenue on a straight line basis over the duration of our obligations under the collaborative agreement as they are earned. We received $2.0 million of the contingent milestones during 2008 and expect to receive the remaining $2.0 million in 2009. We began amortizing the $2.0 million of funding received, resulting in $0.6 million of revenue during 2008 under the agreement with JDRF. The remainder of the payments received under this agreement has been recorded as $0.5 million of current deferred revenue and $0.9 million of long term deferred revenue as of December 31, 2008.

        We have entered into several strategic agreements with other pharmaceutical companies focusing on the development and commercialization of its stem cell drug products. In 2003, we entered into such an agreement with Boston Scientific Corporation pertaining to our cardiac drug development and received a $5 million fee for licensing the use of our technology. We terminated the agreement with Boston Scientific Corporation in 2007 and recognized the remaining unamortized license fee of $1.3 million. Also in 2003, we entered into a similar agreement with JCR Pharmaceuticals Co., Ltd. ("JCR") pertaining to our hematologic malignancies drugs for distribution in Japan, and have recognized $500 of revenue in 2007 from JCR upon the achievement of milestone events specified in the agreement.

        We also earn royalties on the sale of human mesenchymal stem cells sold for research purposes and recognize the revenue on these sales as the sales are made. Revenues in 2008 include $244 and $197 of royalty revenue during 2008 and 2007, respectively.

Revenue Recognition

        We generate revenues from collaborative agreements, research licenses, and a government contract. Our revenue recognition policies are
in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition.

        Revenues
from collaboration agreements are evaluated under Emerging Issues Task Force ("EITF") Issue No. 07-01, Draft Abstract, Accounting for
Collaboration Agreements. Management evaluates revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate
units of accounting as defined in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. To recognize a delivered
item in a multiple element arrangement, EITF Issue No. 00-21 requires that the delivered items have value to the customer on a stand alone basis, that there is objective and
reliable evidence of fair value of the undelivered items and that delivery or performance is probable and within our control for any delivered items that have a

75

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OSIRIS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(amounts in thousands, except for share and per share data)

1. Description of Business and Significant Accounting Policies (Continued)

right
of return. The determination whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgments.

        Revenues
from research licenses and government contracts are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or
the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performed are designated as deferred revenue.
Non-refundable upfront license fees and certain other related fees are recognized on a straight-line basis over the development periods of the contract deliverables. Fees
associated with substantive at risk, performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights
is recognized as revenue as it is earned and received.

        In
October 2008, we entered into a Collaboration Agreement with Genzyme Corporation ("Genzyme") for the development and commercialization of Prochymal and Chondrogen. Under the
agreement, Genzyme is obligated to pay to us non-contingent, non-refundable cash payments totaling $130.0 million, with $75.0 million paid during November 2008
and $55.0 million to be
paid on July 1, 2009. The agreement provides Genzyme with certain rights to intellectual property developed by Osiris, and requires that we continue to perform certain development work related
to the subject products. Management has evaluated the deliverables related to these payments under EITF 00-21, and concluded that the various deliverables represent a single unit of
accounting. Accordingly, we have deferred the recognition of revenue related to the upfront payments, and are amortizing these amounts to revenue on a straight-line basis over the
estimated delivery period of the required development services, which extend through the first quarter of 2012. Accordingly, we recognized $6.7 million of revenue in 2008 related to the
amortization of the upfront payments. The balance of these payments has been recorded as $40.0 million of current deferred revenue and $83.3 million of long term deferred revenue as of
December 31, 2008. The agreement also provides for contingent milestone payments of up to $1.25 billion in the aggregate, as well as royalties to be paid to us on any sales by Genzyme.
Consistent with our revenue recognition policies, we will recognize revenue from these contingent milestone payments for which we have no continuing performance obligations upon achievement of the
related milestone. For any milestone payments for which we have a continuing performance obligation, the milestone payments will be deferred and recognized as revenue over the term of the related
performance obligations.

        In
2007, we partnered with Genzyme to develop Prochymal as a medical countermeasure to nuclear terrorism and other radiological emergencies. In January 2008, we were awarded a contract
from the United States Department of Defense ("DoD") pursuant to which we, in partnership with Genzyme, are seeking to develop and stockpile Prochymal for the repair of gastrointestinal injury
resulting from acute radiation exposure. We began recognizing revenue under this contract during the first quarter of 2008. Contract revenue is recognized as the related costs are incurred, in
accordance with the terms of the contract. We recognized $2.5 million in revenue from the DoD contract during 2008.

        In
October 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation ("JDRF") to conduct a Phase II clinical trial evaluating Prochymal as a
treatment for type 1 diabetes mellitus. This collaborative agreement provides for JDRF to provide up to $4.0 million

76

HREF="#bg14501a_main_toc">Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(amounts in thousands, except for share and per share data)

1. Description of Business and Significant Accounting Policies (Continued)

of
contingent milestone funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus. The contingent
milestone payments under the agreement are amortized to revenue on a straight line basis over the duration of our obligations under the collaborative agreement as they are earned. We received
$2.0 million of the contingent milestones during 2008 and expect to receive the remaining $2.0 million in 2009. We began amortizing the $2.0 million of funding received, resulting
in $0.6 million of revenue during 2008 under the agreement with JDRF. The remainder of the payments received under this agreement has been recorded as $0.5 million of current deferred
revenue and $0.9 million of long term deferred revenue as of December 31, 2008.

        We
have entered into several strategic agreements with other pharmaceutical companies focusing on the development and commercialization of its stem cell drug products. In 2003, we
entered into such an agreement with Boston Scientific Corporation pertaining to our cardiac drug development and received a $5 million fee for licensing the use of our technology. We terminated
the agreement with Boston Scientific Corporation in 2007 and recognized the remaining unamortized license fee of $1.3 million.
Also in 2003, we entered into a similar agreement with JCR Pharmaceuticals Co., Ltd. ("JCR") pertaining to our hematologic malignancies drugs for distribution in Japan, and have
recognized $500 of revenue in 2007 from JCR upon the achievement of milestone events specified in the agreement.

        We
also earn royalties on the sale of human mesenchymal stem cells sold for research purposes and recognize the revenue on these sales as the sales are made. Revenues in 2008 include
$244 and $197 of royalty revenue during 2008 and 2007, respectively.

Revenue Recognition

Our revenue recognition policies are in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition.

In October 2008, we entered into a Collaboration Agreement with Genzyme Corp. (“Genzyme”) for the development and commercialization of Prochymal® and Chondrogen®, as further discussed in Note 3 to these condensed financial statements.  Under this agreement, Genzyme is obligated to pay to us non-contingent, non-refundable cash payment of $130.0 million, with $75.0 million to be paid during November 2008 and $55.0 million to be paid on July 1, 2009.

This Collaboration Agreement has multiple deliverables, and we are currently evaluating the accounting for the non contingent, non refundable cash payment and the other elements of the agreement.

In 2007, we partnered with Genzyme to develop Prochymal as a medical countermeasure to nuclear terrorism and other radiological emergencies.  In January 2008, we were awarded a contract from the United States Department of Defense (“DoD”) pursuant to which we, in partnership with Genzyme, are seeking to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from acute radiation exposure.  We began recognizing revenue under this contract during the first quarter of 2008.  Contract revenue is recognized as the related costs are incurred, in accordance with the terms of the contract.  During the nine months ended September 30, 2008, we recognized $1.7 million in revenue from the DoD contract.

In October 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation (“JDRF”) to conduct a Phase II clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus.  This collaborative agreement provides for JDRF to provide up to $4.0 million in funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus.  During the nine months ended September 30, 2008, we recognized $2.0 million in revenue upon the achievement of certain milestones delineated in our agreement with JDRF.

7

Revenue Recognition

Our revenue recognition policies are in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition.

In January 2008, we were awarded a contract from the United States Department of Defense (“DoD”) pursuant to which we are seeking to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from radiation exposure.  We began recognizing revenue under this contract during the first quarter of fiscal year 2008.  Contract revenue is recognized as the related costs are incurred, in accordance with the terms of the contract.  During the three months ended June 30, 2008, we recognized $0.5 million in revenue from the DoD contract.

In October 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation (“JDRF”) to conduct a Phase II clinical trial evaluating Prochymal as a treatment for type 1 diabetes.  This collaborative agreement provides for JDRF to provide up to $4.0 million in funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus.  During the three months ended June 30, 2008, we recognized $2.0 million in revenue upon the achievement of certain milestones delineated in our agreement with JDRF.

Revenue Recognition

Our revenue recognition policies are in accordance with 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 January 2008, we were awarded a contract from the United States Department of Defense (“DoD”) to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from radiation exposure, and began recognizing contract revenue during the first quarter of 2008.  Contract revenue is recognized as the related costs are incurred, in accordance with the terms of the government contract.

Revenue Recognition

        Our revenue recognition policies are in accordance with the Securities and Exchange Commission's (SEC) 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 our first commercial product, Osteocel. We recognize revenue on Osteocel sales when legal title to the product has passed to the customer, which is generally when the product is shipped from our Baltimore, Maryland facilities. We have agreements with our customers that specify the terms of sale, including price. During 2007 and 2006, sales of our Osteocel product were primarily to two customers. We have entered into several strategic agreements with other pharmaceutical companies focusing on the development and commercialization of our stem cell drug products. In 2003, we entered into such an agreement with Boston Scientific Corporation pertaining to our cardiac drug development and we received a $5 million fee for licensing the use of our technology. We terminated the agreement with Boston Scientific Corporation in 2007 and recognized the remaining unamortized license fee of $1.3 million. We recognized $952 of license fee revenue in 2006 and 2005. Also in 2003, we entered into a similar agreement with JCR Pharmaceuticals Co., Ltd. ("JCR") pertaining to our hematologic malignancies drugs for distribution in Japan. We recognized $500 of revenue in 2007 and $500 in 2005 from JCR upon the achievement of milestone events specified in the agreement.

        Revenues from collaborative research licenses and grants are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the collaborative agreement. Payments received in advance of research performed are designated as deferred revenue. We recognize non-refundable upfront license fees and certain other related fees on a straight-line basis over the development period. Fees associated with substantive at risk, performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights is recognized as revenue as earned and was received from an unrelated third party.

        Historically, we have also recognized revenue from governmental grants for research products and in 2005 we recorded $1.4 million in grant revenue as we completed work on three separate grants. Revenue from research grants is recognized as the related research expenditures are incurred. We no longer solicit governmental grants, and did not recognize any revenue from grants during 2007 or 2006.

76

OSIRIS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(amounts in thousands, except for share and per share data)

1. Description of Business and Significant Accounting Policies (Continued)

Revenue Recognition

        Our revenue recognition policies are in accordance with the Securities and Exchange Commission's (SEC) 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 our first commercial product, Osteocel. We recognize revenue on Osteocel sales when legal title to the product has passed to the customer, which is generally
when the product is shipped from our Baltimore, Maryland facilities. We have agreements with our customers that specify the terms of sale, including price. During 2007 and 2006, sales of our Osteocel
product were primarily to two customers. We have entered into several strategic agreements with other pharmaceutical companies focusing on the development and commercialization of our stem cell drug
products. In 2003, we entered into such an agreement with Boston Scientific Corporation pertaining to our cardiac drug development and we received a $5 million fee for licensing the use of our
technology. We terminated the agreement with Boston Scientific Corporation in 2007 and recognized the remaining unamortized license fee of $1.3 million. We recognized $952 of license fee
revenue in 2006 and 2005. Also in 2003, we entered into a similar agreement with JCR Pharmaceuticals Co., Ltd. ("JCR") pertaining to our hematologic malignancies drugs for distribution
in Japan. We recognized $500 of revenue in 2007 and $500 in 2005 from JCR upon the achievement of milestone events specified in the agreement.

        Revenues
from collaborative research licenses and grants are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or
the completion of certain development milestones as defined within the terms of the collaborative agreement. Payments received in advance of research performed are designated as deferred revenue. We
recognize non-refundable upfront license fees and certain other related fees on a straight-line basis over the development period. Fees associated with substantive at risk,
performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights is recognized as revenue as earned and
was received from an unrelated third party.

        Historically,
we have also recognized revenue from governmental grants for research products and in 2005 we recorded $1.4 million in grant revenue as we completed work on three
separate grants. Revenue from research grants is recognized as the related research expenditures are incurred. We no longer solicit governmental grants, and did not recognize any revenue from grants
during 2007 or 2006.

76

OSIRIS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(amounts in thousands, except for share and per share data)

1. Description of Business and Significant Accounting Policies (Continued)

Revenue Recognition

Our revenue recognition policies are in accordance with 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 first commercial product. We recognize revenue on Osteocel sales when legal title to the product has passed to the customer, which is generally when the product is shipped from our Baltimore, MD facilities. We have agreements with our customers that specify the terms of sale, including price.

Revenue recognition

Our revenue recognition policies are in accordance with 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 first commercial product. We recognize revenue on Osteocel sales when legal title to the product has passed to the customer, which is generally when the product is shipped from our Baltimore, MD facilities. We have agreements with our customers that specify the terms of sale, including price.

Revenue recognition

Our revenue recognition policies are in accordance with 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 first commercial product. We recognize revenue on Osteocel sales when legal title to the product has passed to the customer, which is generally when the product is shipped from our Baltimore, MD facilities. We have agreements with our customers that specify the terms of sale, including price.

Revenue recognition

Our revenue recognition policies are in accordance with the Securities and Exchange Commission’s (SEC) 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 our first commercial product, Osteocel. We recognize revenue on Osteocel sales when legal title to the product has passed to the customer, which is generally when the product is shipped from our Baltimore, MD facilities. We have agreements with our customers that specify the terms of sale, including price. During 2006 and 2005, sales of our Osteocel product were primarily to two customers. We have entered into several strategic agreements with other pharmaceutical companies focusing on the development and commercialization of our stem cell drug products. In 2003, we entered into such an agreement with Boston Scientific Corporation pertaining to our cardiac drug development and we received a $5 million fee for licensing the use of our technology. This fee is being recognized as revenue over a 63-month period, $952 of which was recognized in each of 2006, 2005 and 2004. Also in 2003, we entered into a similar agreement with JCR Pharmaceuticals Co., Ltd. (“JCR”) pertaining to our hematologic malignancies drugs for distribution in Japan. We recognized $500 of revenue in 2005 and $2 million in 2004 from the JCR agreement.

Revenues from collaborative research licenses and grants are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the collaborative agreement. Payments received in advance of research performed are designated as deferred revenue. We recognize non-refundable upfront license fees and certain other related fees on a straight-line basis over the development period. Fees associated with substantive at risk, performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights is recognized as revenue as earned and was received from an unrelated third party.

Historically, we have also recognized revenue from governmental grants for research products and in 2005 we recorded $1.4 million in grant revenue as we completed work on three separate grants. In 2004, we earned $844 from governmental research grants. Revenue from research grants is recognized as the related

71

research expenditures are incurred. The Company no longer solicits governmental grants, and did not recognize any revenue from grants during 2006.

Revenue recognition

Our revenue recognition policies are in accordance with 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 first commercial product. We recognize revenue on Osteocel sales when legal title to the product has passed to the customer, which is generally when the product is shipped from our Baltimore, MD facilities. We have agreements with our customers that specify the terms of sale, including price.

8

Revenue recognition

Our revenue recognition policies are in accordance with 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 first commercial product. We recognize revenue on Osteocel sales when legal title to the product has passed to the customer, which is generally when the product is shipped from our Baltimore, MD facilities. We have agreements with our customers that specify the terms of sale, including price.

8