UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

Or

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

For the transition period from                      to                     .

MannKind Corporation

(Exact name of registrant as specified in its charter)

Delaware		13-3607736
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)
28903 North Avenue Paine		91355
Valencia, California		(Zip Code)
(Address of principal executive offices)

(661) 775-5300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Large accelerated filer o                 Accelerated filer þ                 Non-accelerated filer o

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

As of July 28, 2006, there were 49,701,099 shares of the registrant’s common stock, $.01 par value per share, outstanding.

 

 

MANNKIND CORPORATION
Form 10-Q
For the Quarterly Period Ended June 30, 2006

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets: June 30, 2006 and December 31, 2005

Consolidated Statements of Operations: Three and six months ended June 30, 2006 and 2005 and the period from inception (February 14, 1991) to June 30, 2006

Consolidated Statements of Cash Flows: Three and six months ended June 30, 2006 and 2005 and the period from inception (February 14, 1991) to June 30, 2006

Notes to Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

EX-10.2

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32

PART I: FINANCIAL INFORMATION

MANNKIND CORPORATION AND SUBSIDIARY
(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

(In thousands except share data)

		June 30, 2006				December 31, 2005
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	27,056			$	56,037
Marketable securities			23,800				89,597
State research and development credit exchange receivable current			1,043				1,194
Prepaid expenses and other current assets			6,952				3,044
Total current assets			58,851				149,872
Property and equipment — net			83,190				76,183
State research and development credit exchange receivable — net of current portion			2,250				2,031
Other assets			288				285
Total		$	144,579			$	228,371
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	2,586			$	3,547
Accrued expenses and other current liabilities			24,548				17,818
Total current liabilities			27,134				21,365
Other liabilities			24				29
Total liabilities			27,158				21,394
Commitments and contingencies
Stockholders’ equity:
Undesignated preferred stock, $0.01 par value — 10,000,000 shares authorized; no shares issued or outstanding at June 30, 2006 and December 31, 2005			—				—
Common stock, $0.01 par value — 90,000,000 shares authorized; 49,698,064 and 50,314,108 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively			496				503
Additional paid-in capital			772,536				763,775
Deficit accumulated during the development stage			(655,611	)			(557,301	)
Total stockholders’ equity			117,421				206,977
Total		$	144,579			$	228,371

The accompanying notes are an integral part of these consolidated financial statements.

MANNKIND CORPORATION AND SUBSIDIARY
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
(In thousands except per share data)

																		Cumulative period
																		from February 14,
																		1991 (date of
		Three months ended								Six months ended								inception) to
		June 30,								June 30,								June 30,
		2006				2005				2006				2005				2006
Revenue		$	—			$	—			$	100			$	—			$	2,958
Operating expenses:
Research and development			45,321				23,596				81,271				42,292				379,671
General and administrative			10,456				3,971				19,594				7,922				117,569
In-process research and development costs			—				—				—				—				19,726
Goodwill impairment			—				—				—				—				151,428
Total operating expenses			55,777				27,567				100,865				50,214				668,394
Loss from operations			(55,777	)			(27,567	)			(100,765	)			(50,214	)			(665,436	)
Other income (expense)			59				7				109				21				(1,783	)
Interest income			971				405				2,351				877				11,629
Loss before provision for income taxes			(54,747	)			(27,155	)			(98,305	)			(49,316	)			(655,590	)
Income taxes			(4	)			—				(5	)			(1	)			(21	)
Net loss			(54,751	)			(27,155	)			(98,310	)			(49,317	)			(655,611	)
Deemed dividend related to beneficial conversion feature of convertible preferred stock			—				—				—				—				(22,260	)
Accretion on redeemable preferred stock			—				—				—				—				(952	)
Net loss applicable to common stockholders		$	(54,751	)		$	(27,155	)		$	(98,310	)		$	(49,317	)		$	(678,823	)
Net loss per share applicable to common stockholders — basic and diluted		$	(1.10	)		$	(0.83	)		$	(1.98	)		$	(1.50	)
Shares used to compute basic and diluted net loss per share applicable to common stockholders			49,638				32,777				49,712				32,771

The accompanying notes are an integral part of these consolidated financial statements.

MANNKIND CORPORATION AND SUBSIDIARY
(A Development Stage Company)

(Unaudited)
(In thousands)

										Cumulative
										period from
										February 14,
										1991 (date of
		Six months ended								inception) to
		June 30,								June 30,
		2006				2005				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(98,310	)		$	(49,317	)		$	(655,611	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			4,115				3,639				34,752
Stock-based compensation expense (benefit)			7,497				(2,901	)			30,015
Accrued interest on investments, net of amortization of premiums			197				25				51
(Gain)/loss on sale and abandonment/disposal of property and equipment			(14	)			(24	)			3,353
In-process research and development			—				—				19,726
Discount on stockholder notes below market rate			—				—				241
Non-cash compensation expense of officer resulting from stockholder contribution			—				—				70
Accrued interest expense on notes payable to stockholders			—				—				1,538
Non-cash interest expense			—				—				3
Accrued interest on notes			—				—				(747	)
Goodwill impairment			—				—				151,428
Loss on available-for-sale securities			—				—				229
Changes in assets and liabilities:
State research and development credit exchange receivable			(68	)			1,180				(3,293	)
Prepaid expenses and other current assets			(3,908	)			808				(6,952	)
Other assets			(3	)			(142	)			(288	)
Accounts payable			(962	)			1,144				2,586
Accrued expenses and other current liabilities			6,730				3,373				24,548
Other liabilities			(5	)			(33	)			21
Payment of deferred compensation			—				(1,373	)			—
Net cash used in operating activities			(84,731	)			(43,621	)			(398,330	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities			(23,950	)			(69,550	)			(426,668	)
Sales of marketable securities			89,550				58,195				402,590
Purchase of property and equipment			(11,141	)			(5,547	)			(121,510	)
Proceeds from sale of property and equipment			32				90				214
Restricted cash			—				565				—
Net cash provided by (used in) investing activities			54,491				(16,247	)			(145,374	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and warrants for cash			1,259				433				494,510
Collection of Series C convertible preferred stock subscriptions receivable			—				—				50,000
Issuance of Series B convertible preferred stock for cash			—				—				15,000
Cash received for common stock to be issued			—				—				3,900

										Cumulative
										period from
										February 14,
										1991 (date of
		Six months ended								inception) to
		June 30,								June 30,
		2006				2005				2006
Repurchase of common stock			—				—				(1,028	)
Put shares sold to majority stockholder			—				—				623
Borrowings under lines of credit			—				—				4,220
Proceeds from notes receivables			—				—				1,742
Principal payments on notes payable			—				—				(1,667	)
Borrowings on notes payable			—				—				3,460
Net cash provided by financing activities			1,259				433				570,760
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(28,981	)			(59,435	)			27,056
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			56,037				78,987				—
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	27,056			$	19,552			$	27,056
SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Cash paid for income taxes		$	5			$	1			$	21
Interest paid in cash			—				—				80
Accretion on redeemable convertible preferred stock			—				—				(952	)
Issuance of common stock upon conversion of notes payable			—				—				3,331
Increase in additional paid-in capital resulting from merger			—				—				171,154
Issuance of common stock for notes receivable			—				—				2,758
Issuance of put option by stockholder			—				—				(2,949	)
Put option redemption by stockholder			—				—				1,921
Notes receivable by stockholder issued to officers			—				—				—
Issuance of Series C convertible preferred stock subscriptions			—				—				50,000
Issuance of Series A redeemable convertible preferred stock			—				—				4,296
Conversion of Series A redeemable convertible preferred stock			—				—				(5,248	)

In connection with the Company’s initial public offering, all shares of Series B and Series C convertible preferred stock, in the amount of $15,000,000 and $50,000,000, respectively, automatically converted into common stock in August 2004.

The accompanying notes are an integral part of these consolidated financial statements.

MANNKIND CORPORATION AND SUBSIDIARY
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of business and basis of presentation

The accompanying unaudited consolidated financial statements of MannKind Corporation (the “Company”), have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest audited annual financial statements. The audited statements for the year ended December 31, 2005 are included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2005 filed with the SEC on March 16, 2006 (the “Annual Report”).

In the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the six and three months ended June 30, 2006 may not be indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates or assumptions. The more significant estimates reflected in these financial statements involve accrued expenses, the valuation of stock-based compensation and the determination of the provision for income taxes and corresponding deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.

Business — MannKind Corporation is a biopharmaceutical company focused on the development and commercialization of therapeutic products for diseases such as diabetes and cancer. The Company’s lead investigational product candidate, the Technosphere Insulin System, is currently in Phase 3 clinical trials in the U.S. and Europe to study its safety and efficacy in the treatment of diabetes. The Technosphere Insulin System consists of the Company’s proprietary dry-powder Technosphere formulation of insulin that is inhaled deep into the lung using the Company’s MedTone inhaler.

Basis of Presentation — The Company is considered to be in the development stage as its primary activities since incorporation have been establishing its facilities, recruiting personnel, conducting research and development, business development, business and financial planning, and raising capital. Since its inception through June 30, 2006 the Company has reported accumulated net losses of $655.6 million, which include a goodwill impairment charge of $151.4 million, and negative cash flow from operations of $398.3 million. It is costly to develop therapeutic products and conduct clinical trials for these products. On August 2, 2006, the Company entered into a loan arrangement with its principal stockholder to borrow up to a total of $150.0 million in one or more advances at any time through August 2, 2007 that the Company’s cash balance falls below its projected cash requirements for the subsequent three months, provided that each advance be no less than $50.0 million. The Company borrowed $50.0 million under the loan arrangement on August 2, 2006. See Note 10 – Subsequent Event.

The Company believes that this loan arrangement with its principal stockholder will enable the Company to continue funding operations through the second quarter of 2007. However, the Company cannot provide assurances that its plans will not change or that changed circumstances will not result in the depletion of its capital resources more rapidly than it currently anticipates. Accordingly, the Company expects that it will need to raise additional capital, either through the sale of equity and/or debt securities, a strategic business collaboration with a pharmaceutical company or the establishment of other funding facilities, in order to continue the development and commercialization of its Technosphere Insulin System and other product candidates and to support its other ongoing activities. If planned operating results are not achieved or the Company is not successful in raising additional capital, management believes that planned expenditures could be reduced or eliminated in a relatively short period to continue activities, on a reduced basis.

Reclassifications — Certain reclassifications have been made to the prior years’ financial statements to conform to the 2006 presentation.

Segment Information — In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information, operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as one segment operating entirely in the United States of America.

2. Investment in securities

The following is a summary of the available-for-sale securities classified as current assets:

		As of								As of
		June 30, 2006								December 31, 2005
(in thousands)		Cost basis				Fair value				Cost basis				Fair value
Auction rate municipal bonds		$	23,800			$	23,800			$	89,597			$	89,597

The Company’s policy is to maintain a highly liquid short-term investment portfolio. The contractual maturities for auction rate municipal bonds at June 30, 2006 are between 22 and 40 years. Despite the long-term nature of their stated contractual maturities, the Company has the ability to quickly liquidate these securities. Proceeds from the sale and maturities of available-for-sale securities amounted to approximately $89.6 million and $58.2 million for the six months ended June 30, 2006 and 2005, respectively, and $40.6 million and $24.7 million for the three months ended June 30, 2006 and 2005, respectively. Gross realized gains and losses for available-for-sale securities were insignificant for the three and six months ended June 30, 2006 and 2005. Gross realized gains and losses for available-for-sale securities are recorded as other income (expense). The cost of securities sold is based on the specific identification method. Unrealized gains and losses for available-for-sale securities as of the periods presented in the table above were not material.

3. Accounting for stock-based compensation

On January 1, 2006, the Company adopted the provisions of SFAS No. 123R (“SFAS No. 123R”), Share-based Payment: an Amendment of FASB Statements No. 123 and 95, which is a revision of SFAS No. 123 (“SFAS No. 123”), Accounting for Stock-Based Compensation. Prior to January 1, 2006, the Company accounted for employee stock options and the employee stock purchase plan using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25 (“APB No. 25”), Accounting for Stock Issued to Employees, and adopted the disclosure only alternative of SFAS No. 123. SFAS No. 123R eliminated the intrinsic value method of accounting for stock options which the Company followed until December 31, 2005. Further, SFAS No. 123R requires all share-based payments to employees, including grants of stock options and the compensatory elements of employee stock purchase plans, to be recognized in the income statement based upon the fair value of the awards at the grant date.

Upon adoption of SFAS No. 123R, the Company selected the modified prospective transition method whereby unvested awards at the date of adoption as well as awards that are granted, modified, or settled after the date of adoption will be measured and accounted for in accordance with SFAS No. 123R. Measurement and attribution of compensation cost for awards unvested as of January 1, 2006 is based on the same estimate of the grant-date or modification-date fair value and the same attribution method (straight-line) used previously under SFAS No. 123.

In the three and six months ended June 30, 2006, the Company recorded stock-based compensation expense of $3.8 million and $7.5 million, respectively, which caused loss before provision for income taxes to increase by $3.8 million and $7.5 million, respectively, and basic and diluted net loss per share applicable to common stockholders to increase by $0.08 and $0.15 per share, respectively. The following table presents stock-based compensation expense included in operating expenses for the three and six months ended June 30, 2006 and the pro forma stock-based compensation amounts that would have been included in the statements of operations for three and six months ended June 30, 2005 had stock-based compensation expense been determined in accordance with the fair value method prescribed by SFAS No. 123:

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands, except per share data)		2006				2005				2006				2005
Stock-based employee compensation expense determined under the fair value based method for all awards		$	3,578			$	3,873			$	7,051			$	7,143
Fair value of discount on employee stock purchase plan			114				106				212				176
Total stock-based employee compensation expense		$	3,692			$	3,979			$	7,263			$	7,319
Net loss — as reported						$	(27,155	)						$	(49,317	)
Add: Stock-based employee compensation expense (benefit) included in reported net loss							(2,460	)							(3,180	)
Deduct: Stock-based compensation expense determined under fair value method							(3,979	)							(7,319	)
Net loss — pro forma						$	(33,594	)						$	(59,816	)
Net loss per common share (basic and diluted):
As reported						$	(0.83	)						$	(1.50	)
Pro forma						$	(1.03	)						$	(1.83	)

The fair value of each option is estimated on the grant date or modification date, if any, using the Black-Scholes option valuation model. The variables used by the Company for the three and six months ended June 30, 2006 and 2005 are disclosed in the following table. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The stock price volatility used is based on the historical volatility of the stock of several of the Company’s peers. The weighted average expected life is calculated using the “simplified” method, which is defined in Staff Accounting Bulletin No. 107, Topic 14: Share-based Payment, and is equal to one-half of the sum of the weighted average time to vest and the option’s contractual term.

		Three months ended				Six months ended
		June 30,				June 30,
		2006		2005		2006		2005
Risk-free interest rate		4.96%		3.66%		4.59%-4.96%%		3.43%-3.89%
Dividend yield		0%		0%		0%		0%
Volatility factor		63%		100%		63%		100%
Weighted average expected life		6.08 years		4.00 years		6.08 years		4.00 years

Total stock-based compensation expense (benefit) recognized in the accompanying statements of operations is as follows (in thousands):

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
Employee-related		$	3,692			$	(2,460	)		$	7,263			$	(3,180	)
Non-Employee-related			94				118				234				153
Total		$	3,786			$	(2,342	)		$	7,497			$	(3,027	)

Equity Incentive Plan

The Company’s 2004 Equity Incentive Plan (the “Plan”) provides for the granting of stock awards including stock options and restricted stock units, to employees, directors and consultants.

The Company’s board of directors determines eligibility, vesting schedules and exercise prices for stock awards granted under the Plan. Options and other stock awards under the Plan expire not more than ten years from the date of the grant and are exercisable upon vesting. Stock options generally vest over four years. Current stock option grants vest and become exercisable at the rate of 25% after one year and ratably on a monthly basis over a period of 36 months thereafter. Restricted stock units generally vest over four years with consideration satisfied by service to the Company. The Plan provides for full acceleration of vesting if an employee is terminated within thirteen months of a change in control, as defined.

On February 16, 2006, the Company granted new hire stock options to purchase 153,480 shares of common stock at an exercise price of $16.13 per share and granted 247,554 restricted stock units. The options were valued at $10.03 per option share and restricted stock units were valued at $16.13 per share, which was the fair market value of the common stock on the grant date. The compensation cost of the awards of approximately $5.1 million is being expensed over the requisite service periods of the awards.

On May 25, 2006, the Company’s board of directors approved new hire and promotion stock option grants to purchase 221,330 shares of common stock at an exercise price of $17.00 per share. The Company’s board of directors also granted 177,703 restricted stock units. The options were valued at $10.65 per option share and restricted stock units were valued at $17.00 per share, which was the fair market value of the common stock on the grant date. The compensation cost of the awards of approximately $5.4 million is being expensed over the requisite service periods of the awards.

In May 2006, the Company’s stockholders approved an increase of 4.0 million shares in the number of shares reserved under the Plan for future issuance. As of June 30, 2006, 4,291,127 options and 578,449 restricted stock units were outstanding under the Plan and an additional 3,805,176 shares of common stock were available for issuance under the Plan.

During 2004, the Company’s board of directors and stockholders approved the 2004 Non-Employee Directors’ Stock Option Plan. The plan provides for the automatic, non-discretionary grant of options to the Company’s non-employee directors. Options to purchase 70,000 shares of common stock were automatically granted on May 25, 2006, the day of the annual stockholders meeting, to non-employee directors pursuant to the 2004 Non-Employee Directors’ Stock Option Plan. The corresponding compensation cost of the awards approximated $0.7 million, which is being expensed over the requisite service periods of the awards. As of June 30, 2006, 337,500 options were outstanding under the plan and an additional 462,500 shares of common stock were available for issuance under the plan.

The Company has two other stock award plans: the 1991 Stock Option Plan (the “1991 Plan”) and the 1999 Stock Plan (the “1999 Plan”). Both of these plans provide for the granting of stock options to directors, employees and consultants. As of June 30, 2006, 73,084 options were outstanding under the 1991 Plan and 170,695 options were outstanding under the 1999 Plan. There were no additional shares available for issuance under the 1991 Plan or the 1999 Plan at June 30, 2006.

Prior to the merger of CTL and AlleCure into the Company, CTL had granted options to purchase shares of its common stock under its 2000 Stock Option and Stock Plan (the “CTL Plan”). Similarly, AlleCure had granted options to purchase shares of its common stock under its 2000 Stock Option and Stock Plan (the “AlleCure Plan”). Pursuant to the plans of reorganization and agreements of merger between the Company and each of CTL and AlleCure, the Company has assumed the obligation to issue shares of the Company’s common stock, at the exchange ratio agreed to in the merger agreement, upon the exercise of options granted under the CTL Plan and the AlleCure Plan. After the merger date, no further options were granted under either the CTL Plan or AlleCure Plan. As of June 30, 2006 there were an aggregate of 45,801 options outstanding under these plans.

During the year ended December 31, 2002, the Company’s board of directors granted 240,972 options at an exercise price of $25.23 per share to an employee who is the principal stockholder. The options vest annually over four years. These options, which were not under any plan, were outstanding at June 30, 2006 and are included in the tables below.

A summary of option activity as of March 31, 2006 and June 30, 2006, and changes during each of the three months ended March 31, 2006 and June 30, 2006, is presented below:

						Weighted				Weighted
						Average				Average
		Number				Exercise				Remaining				Aggregate
		of				Price Per				Contractual				Intrinsic
		Shares				Share				Term (Years)				Value ($000)
Outstanding at January 1, 2006			4,985,831			$	12.40
Granted			153,480				16.13
Exercised			(59,878	)			9.41
Forfeited			(93,120	)			12.79
Expired			(37,903	)			19.97
Outstanding at March 31, 2006			4,948,410				12.48				7.3			$	39,389
Granted			291,330				17.00
Exercised			(17,685	)			10.74
Forfeited			(53,412	)			14.84
Expired			(9,461	)			11.09
Outstanding at June 30, 2006			5,159,182				12.72				7.2			$	44,321
Exercisable at June 30, 2006			2,180,972				11.81

A summary of restricted stock units activity as of March 31, 2006 and June 30, 2006, and changes during each of the three months ended March 31, 2006 and June 30, 2006, is presented below:

						Weighted				Weighted
						Average				Average
		Number				Grant Date				Remaining				Aggregate
		of				Fair Value				Contractual				Intrinsic
		Shares				Per Share				Term (Years)				Value ($000)
Outstanding at January 1, 2006			164,901			$	11.00
Granted			247,554				16.13
Forfeited			(6,719	)			11.41
Outstanding at March 31, 2006			405,736			$	14.12				9.6			$	8,293
Granted			177,703				17.00
Forfeited			(4,990	)			13.06
Outstanding at June 30, 2006			578,449				15.02				9.5			$	12,327
Exercisable at June 30, 2006			—				—				—				—

The weighted-average grant-date fair value per share of options granted during the three months ended June 30, 2005 and 2006 was $8.83 and $10.65, respectively. The total intrinsic value of options exercised during the three months ended June 30, 2005 and 2006 was approximately $0.1 million and $0.2 million, respectively. The total fair value of options vested during the three months ended June 30, 2006 and 2005 was $2.3 million and $2.3 million, respectively. Cash received from the exercise of options during the three months ended June 30, 2006 and 2005 was approximately $0.2 million and $0.1 million, respectively.

A summary of the status of the Company’s nonvested shares, excluding restricted stock units, as of March 31, 2006 and June 30, 2006, and changes during each of the three months ended March 31, 2006 and June 30, 2006, is presented below:

						Weighted
						Average
		Number				Grant Date
		of				Fair Value
		Shares				Per Share
Nonvested at January 1, 2006			3,048,631			$	13.06
Granted			153,480				10.03
Vested			(151,504	)			12.86
Forfeited			(93,120	)			12.79
Nonvested at March 31, 2006			2,957,487				12.74
Granted			291,330				10.65
Vested			(217,194	)			13.99
Forfeited			(53,413	)			14.84
Nonvested at June 30, 2006			2,978,210				13.09

A summary of the status of the Company’s restricted stock units, as of March 31, 2006 and June 30, 2006, and changes during each of the three months ended March 31, 2006 and June 30, 2006, is presented below:

						Weighted
						Average
		Number				Grant Date
		of				Fair Value
		Shares				Per Share
Nonvested at January 1, 2006			164,901			$	11.00
Granted			247,554				16.13
Forfeited			(6,719	)			11.41
Nonvested at March 31, 2006			405,736				14.12
Granted			177,703				17.00
Forfeited			(4,990	)			13.06
Nonvested at June 30, 2006			578,449				15.02

As of June 30, 2006, there was $21.1 million and $6.9 million of unrecognized compensation cost related to options and restricted stock units, respectively, which is expected to be recognized over the weighted average vesting period of 2.7 years.

In March 2004, the Company’s board of directors approved the 2004 Employee Stock Purchase Plan. The aggregate number of shares that may be sold under the plan is 2,000,000 shares of common stock. On January 1 of each year, for a period of ten years beginning

January 1, 2005, the share reserve automatically increases by the lesser of: 700,000 shares, 1% of the total number of shares of common stock outstanding on that date, or an amount as may be determined by the board of directors. However, under no event can the annual increase cause the total number of shares reserved under the purchase plan to exceed 10% of the total number of shares of capital stock outstanding on December 31 of the prior year. On January 1, 2005 and 2006, the purchase plan share reserve was increased by 327,562 and 503,141 shares, respectively. For the six months ended June 30, 2005 and 2006, the Company sold 28,878 and 50,894, respectively, of its common stock to employees participating in the plan.

4. Net loss per common share

Basic net loss per share excludes dilution for potentially dilutive securities and is computed by dividing loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted net loss per share for all of the periods presented in the accompanying statements of operations because the reported net loss in each of these periods results in their inclusion being antidilutive. Antidilutive securities, which consist of stock options, restricted stock units and warrants, that are not included in the diluted net loss per share calculation consisted of an aggregate of 5,750,067 shares and 4,497,904 shares as of June 30, 2006 and 2005, respectively.

5. State research and development credit exchange receivable

The State of Connecticut provides certain companies with the opportunity to exchange eligible research and development income tax credit carryforwards for cash in exchange for forgoing the carryforward of the research and development income tax credits. The program provides for an exchange of research and development income tax credits for cash equal to 65% of the value of corporation tax credit available for exchange. Estimated amounts receivable under the program are recorded as a reduction of research and development expenses. At June 30, 2006, the estimated amount receivable under the program was $3.6 million.

6. Property and equipment

Property and equipment consist of the following (dollar amounts in thousands):

		Estimated
		Useful
		Life
		(years)				June 30, 2006				December 31, 2005
Land			—			$	5,273			$	5,273
Buildings			39-40				9,566				9,566
Building improvements			5-40				43,480				39,543
Machinery and equipment			3-10				25,901				23,087
Furniture, fixtures and office equipment			5-10				2,930				2,573
Computer equipment and software			3				5,382				4,808
Leasehold improvements							36				5
Construction in progress							13,560				10,298
Deposits on equipment							6,528				6,411
							112,656				101,564
Less accumulated depreciation and amortization							(29,466	)			(25,381	)
Property and equipment — net						$	83,190			$	76,183

7 Common and preferred stock

The Company is authorized to issue 90,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.01 per share, issuable in one or more series designated by the Company’s board of directors. No other class of capital stock is authorized. As of June 30, 2006 and December 31, 2005, 49,698,064 and 50,314,108 shares of common stock, respectively, were issued and outstanding. No shares of preferred stock were issued and outstanding at June 30, 2006 and December 31, 2005.

Registration rights — The holders of 17,132,000 shares of common stock together with warrants to purchase up to 3,426,000 shares of common stock, all of which were issued in the August 2005 private placement, have rights that require the Company to keep the

registration of the shares of common stock purchased in the private placement or underlying warrants continuously effective until at least August 2007.

As of June 30, 2006 the holders of 916,715 shares of the Company’s common stock and the holders of warrants to purchase 12,436 shares of the Company’s common stock have rights, subject to some conditions, to require the Company to file registration statements covering their shares or to include their shares in registration statements that the Company may file for itself or other stockholders.

8. Warrants

During 1995 and 1996, the Company issued warrants to purchase shares of common stock. The warrants range in exercise price from $12.53 to $12.70 per share and expire at various dates through 2007. The warrants contain provisions for the adjustment of the exercise price and the number of shares issuable upon the exercise of the warrant in the event the Company declares any stock dividends or effects any stock split, reclassification or consolidation of its common stock. The warrants also contain a provision that provides for an adjustment to the exercise price and the number of shares issuable in the event that the Company issues securities for a per share price less than a specified price. As of June 30, 2006, warrants to purchase 12,436 shares of common stock at a weighted average exercise price of $12.66 per share are outstanding and exercisable.

In connection with the sale of common stock in the private placement which closed on August 5, 2005, the Company concurrently issued warrants to purchase up to 3,426,000 shares of common stock at an exercise price of $12.228 per share. These warrants became exercisable on February 1, 2006 and expire in August 2010. In the three months ended March 31, 2006, warrants for 979 shares were exercised for approximately $12,000 and 98,441 shares were issued upon the cashless warrant exercise of 254,528 warrant shares.

9. Commitments and contingencies

Guarantees and Indemnifications — In the ordinary course of its business, the Company makes certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. The Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company believes the fair value of these indemnification agreements is minimal. The Company has not recorded any liability for these indemnities in the accompanying consolidated balance sheets. However, the Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. No such losses have been recorded to date.

Litigation — The Company is involved in various legal proceedings and other matters. In accordance with SFAS No. 5, Accounting for Contingencies, the Company would record a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

In May 2005, the Company’s former Chief Medical Officer filed a complaint against the Company in the California Superior Court, County of Los Angeles, Wayman Wendell Cheatham, M.D. v. MannKind Corporation, Case No. BC333845. The complaint alleges causes of action for wrongful termination in violation of public policy, breach of contract and retaliation, in connection with the Company’s termination of Dr. Cheatham’s employment. In the complaint, Dr. Cheatham seeks compensatory, punitive and exemplary damages in excess of $2.0 million as well as reimbursement of attorneys’ fees. In June 2005, the Company answered the complaint, generally denying each of Dr. Cheatham’s allegations and asserting various defenses. The Company believes the allegations in the complaint are without merit and is vigorously defending against them. The Company also filed a cross-complaint against Dr. Cheatham, alleging claims for libel per se, trade libel, breach of contract, breach of the implied covenant of good faith and fair dealing and breach of the duty of loyalty. The libel claims allege that Dr. Cheatham made certain false and malicious statements about the Company in a letter to the Food and Drug Administration (“FDA”) with regard to a request by the Company to hold a meeting with the FDA. The remaining causes of action in the cross-complaint arise out of the Company’s allegations that Dr. Cheatham had an undisclosed consulting relationship with a Company competitor during his employment with the Company, in violation of his agreement with the Company. In July 2005, Dr. Cheatham filed a demurrer, and a motion to strike the Company’s cross-complaint under California’s anti-SLAPP statute. In September 2005, the California Superior Court overruled Dr. Cheatham’s demurrer and denied his motion to strike the Company’s cross-complaint. Dr. Cheatham has appealed the Court’s ruling denying his motion to strike. Discovery as to Dr. Cheatham’s claims against the Company is proceeding, and this case is currently scheduled for trial to

commence in February 2007. The Company believes that the ultimate resolution of this matter will not have a material impact on the Company’s financial position or results of operations.

10. Subsequent Event

On August 2, 2006 the Company entered into a loan arrangement with its principal stockholder to borrow up to a total of $150.0 million in one or more advances at any time through August 2, 2007 that the Company’s cash balance falls below its projected cash requirements for the subsequent three month period, provided that each advance be no less than $50.0 million. The Company borrowed $50.0 million under the loan arrangement on August 2, 2006. Interest accrues on each outstanding advance at a rate equal to the one year LIBOR rate in effect on the day of such advance plus 3% per annum and is payable quarterly in arrears. The loan is unsecured and contains no financial covenants. There are no warrants associated with the loan nor is the loan convertible into the Company's stock. In the event of a default, all unpaid principal and interest becomes immediately due and payable and the interest rate increases to one year LIBOR calculated on the date of the initial advance or in effect on the date of default, whichever is greater, plus 5% per annum. Upon the closing of certain financing events, including equity and debt financings or strategic transactions with third parties, in which the Company receives cash proceeds of at least $100.0 million, the Company is required to repay all or a portion of the principal and accrued and unpaid interest under the note equal to the difference between the Company’s cash balance immediately following the financing event and its projected cash requirements for the six month period following the financing event.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in Part II, Item 1A Risk Factors and elsewhere in this quarterly report on Form 10-Q (this “Quarterly Report”). The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes for the year ended December 31, 2005 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed pursuant to Section 13 of the Securities Exchange Act of 1934. Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

OVERVIEW

MannKind Corporation is a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for diseases such as diabetes and cancer. Our lead investigational product candidate, the Technosphere Insulin System, is currently in Phase 3 clinical trials in the United States and Europe to study its safety and efficacy in the treatment of diabetes. This therapy consists of a proprietary dry powder formulation of insulin that is inhaled into the deep lung using our proprietary inhaler. We believe that the performance characteristics, unique kinetics, convenience and ease of use of the Technosphere Insulin System may have the potential to change the way diabetes is treated.

In particular, we have observed in our clinical trials to date that the Technosphere Insulin System produces a profile of insulin levels in the bloodstream that approximates the insulin profile normally seen in healthy individuals immediately following the beginning of a meal, but which is absent in all patients with diabetes. As a result, we believe that our Technosphere Insulin System will be beneficial not only for insulin-using diabetes patients but also for patients with type 2 diabetes who are currently using conventional therapies other than insulin. If further clinical trials support our initial observations, we believe the Technosphere Insulin System has the potential to be indicated for the treatment of type 2 diabetes after a patient has failed to respond adequately to diet and exercise. The use of insulin early in the progression of diabetes would represent a paradigm shift in the treatment of this disease.

In a Phase 2 clinical trial conducted in the United States, the use of Technosphere Insulin at mealtimes significantly lowered blood glucose levels in patients with type 2 diabetes who previously were experiencing inadequate control of their disease. Even in patients with only mildly elevated blood glucose levels, we observed in this study that the typical risks of frequent or severe hypoglycemia generally associated with insulin therapy appear not to be associated with Technosphere Insulin, suggesting that our therapy may have a potential safety advantage over other currently available insulin therapies. In a European Phase 2 dosage-tolerance study, Technosphere Insulin was observed to improve glycemic control in a dose-dependent manner as measured by decreases in HbA1c levels and by reductions in glucose excursions following a meal. In addition, there was no indication of a negative effect on pulmonary function and no weight gain at any dose of Technosphere Insulin over 12 weeks of treatment.

Currently, we are enrolling patients in four major Phase 3 clinical trials, including a two-year pulmonary safety study that will compare the pulmonary function of patients with type 1 or type 2 diabetes randomized to either Technosphere Insulin or standard diabetes care. Based on our discussions with the Food and Drug Administration (the “FDA”), we plan to accumulate two years of controlled safety data from patients with type 1 diabetes as well as patients with type 2 diabetes before we file a new drug application for the Technosphere Insulin System. We anticipate that our entire clinical trial program will involve more than 3,200 patients. Larger populations and longer durations of exposure may be necessary depending on the safety profile of our product.

Our Technosphere Insulin System utilizes our proprietary Technosphere formulation technology, which is based on a class of organic molecules that are designed to self-assemble into small particles onto which drug molecules can be loaded. We are also developing additional Technosphere-based products for the delivery of other drugs. We plan to initiate Phase 1 clinical trials of a therapeutic cancer vaccine by the end of 2006.

We are a development stage enterprise and have incurred significant losses since our inception in 1991. As of June 30, 2006, we have incurred a cumulative net loss of $655.6 million. To date, we have not generated any product revenues and have funded our operations primarily through the sale of equity securities.

We do not anticipate sales of any product prior to regulatory approval and commercialization of our Technosphere Insulin System. We currently do not have the required approvals to market any of our product candidates, and we may not receive such approvals. We may not be profitable even if we succeed in commercializing any of our product candidates. We expect to make substantial and increasing expenditures and to incur additional operating losses for at least the next several years as we:

	•		continue the clinical development and commercialization of our Technosphere Insulin System for the treatment of diabetes;
	•		expand our manufacturing operations for our Technosphere Insulin System to meet our currently anticipated commercial production needs;
	•		expand our other research, discovery and development programs;
	•		expand our proprietary Technosphere platform technology and develop additional applications for the pulmonary delivery of other drugs; and
	•		enter into sales and marketing collaborations with other companies, if available on commercially reasonable terms, or develop these capabilities ourselves.

Our business is subject to significant risks, including but not limited to the risks inherent in our ongoing clinical trials and the regulatory approval process, the results of our research and development efforts, competition from other products and technologies and uncertainties associated with obtaining and enforcing patent rights.

CLINICAL DEVELOPMENT ACTIVITIES

The Technosphere Insulin System

We are currently conducting a number of studies of the safety and efficacy of the Technosphere Insulin System, including the following trials that are underway or planned for 2006:

Study 010

This ongoing trial is a three-year evaluation of the safety and tolerability of Technosphere Insulin in patients with type 2 diabetes who have participated in study 008 or study 005. The primary objective is to evaluate pulmonary function with secondary objectives to examine changes in HbA1c levels, insulin antibodies, frequency of adverse events and quality of life.

Study 030

This is a two-year, prospective, multi-site study that incorporates two design strategies. The first component is a randomized, open-label trial comparing pulmonary function in two groups of patients with diabetes. One group of approximately 625 patients is being treated with Technosphere Insulin in combination with other antidiabetic therapy and the other group of approximately 625 patients is being treated with existing oral and/or injectable therapies. The second component is a comparison of pulmonary function in the patients with diabetes who are not treated with Technosphere Insulin to a group of 125 subjects without any abnormalities in glucose control. Enrollment for this study began in June 2005 and is expected to be completed later in 2006.

Study 014

This study compared the efficacy of mealtime use of Technosphere Insulin plus basal insulin to mealtime use of rapid-acting, subcutaneous insulin plus basal insulin in approximately 240 patients with type 2 diabetes who had a baseline HbA1c level greater than 7.0% and less than 11.5%. The primary efficacy endpoint for this study was mean change in HbA1c levels from baseline to treatment week 24. Enrollment was completed in July 2005 and the treatment period completed in February 2006. We plan to present data from Study 014 at the European Association for the Study of Diabetes in September.

Study 101

This trial compared mealtime use of Technosphere Insulin to mealtime use of rapid-acting, subcutaneous insulin in 110 patients with type 1 diabetes, who were evaluated over a 12-week period. The primary efficacy endpoint was the change in blood glucose levels

following a standard meal. In April 2006 we announced that this was the first study that demonstrated that patients with Type 1 diabetes using Technosphere Insulin can achieve comparable levels of control in HbA1c as patients treated with an injected rapid-acting insulin analog. Technosphere Insulin has a more rapid onset of action and a shorter duration of action than the injected rapid-acting insulin analog. In this study, the peak of the mean blood glucose values following a standardized meal test were lower for patients on Technosphere Insulin than those receiving injections of rapid-acting insulin analog. The study also found that patients using Technosphere Insulin did not gain weight during the study in contrast to patients using the injected rapid-acting insulin analog. Furthermore, after twelve weeks of treatment, pulmonary function did not differ between the two patient groups.

Study 009

This study will evaluate Technosphere Insulin to prandial insulin analog both used in combination with basal insulin in approximately 500 patients with type 1 diabetes for a 12-month period. Efficacy will be evaluated on the basis of changes in HbA1c levels as well as changes in blood glucose levels after a standardized mixed meal. We began enrolling patients in this study in the first quarter of 2006.

Study 102

This study will compare the efficacy of mealtime use of Technosphere Insulin together with basal insulin to the twice-daily use of premixed insulin, a mixture of intermediate acting insulin and a rapid-acting insulin analog, in a population of approximately 500 patients with type 2 diabetes. Efficacy will be evaluated on the basis of changes in HbA1c levels as well as changes in blood glucose levels after a standardized mixed meal. We began enrolling patients in this study in the first quarter of 2006.

Study 103

This study will evaluate the efficacy of Technosphere Insulin alone and in combination with metformin, an oral medication, in approximately 500 patients with type 2 diabetes who are not achieving desired glucose control with a combination of metformin and sulphonylurea, another oral medication. Efficacy will be evaluated on the basis of changes in HbA1c levels after 26 weeks of treatment as well as changes in blood glucose levels after a standardized mixed meal. We began enrolling patients in this study in the second quarter of 2006.

Special population studies

We have two ongoing special population studies: one examining the impact of asthma and the other examining the impact of chronic smoking on the pharmacokinetics associated with Technosphere Insulin. We plan to use the results of these studies to conduct safety studies in patients with asthma and in chronic smokers that also have diabetes. We also plan to conduct a safety study in patients with both diabetes and chronic obstructive pulmonary disease. Other special population studies include a trial that will examine the elimination of Technosphere Insulin in patients with kidney disease and a trial that will examine the effect of Technosphere Insulin in patients with liver disease.

Cancer immunotherapy program

We are also developing therapies for the treatment of solid tumor cancers. The lead product candidate in this program, MKC1106, is intended for the treatment of several solid-tumor cancers, including ovarian, colorectal, pancreatic, renal, breast and prostate carcinomas. We plan to commence clinical trials for MKC1106 late in the fourth quarter of 2006.

Our cancer therapy program utilizes the body’s immune system to help eradicate tumor cells. The immune system is a network of cells and organs that defends the body against infection and abnormal cells, such as cancer. A key element of the immune system is its ability to distinguish between healthy cells and foreign or diseased cells that do not belong in the body. The immune system accomplishes this task by recognizing distinctive molecules called epitopes found on the surface of each cell as either normal or abnormal, and responding to them appropriately. Any substance capable of triggering an immune response is known as an antigen. An antigen can be all or part of a pathogenic organism or it can be a by-product of diseased cells. Certain specialized cells of the immune system sample antigens present in the body and present the epitopes associated with foreign antigens to other cells of the immune system whose function is to destroy any cell that expresses the same epitope; this is known as cell-mediated immunity. In this way, the immune system can launch a very specific response to infection or disease.

Our approach uses DNA- and peptide-based compounds that correspond to tumor-associated antigens that are expressed in a range of solid-tumor cancers. A patient is first “primed” by DNA-based compounds, or plasmids, that are injected directly into the patient’s lymph nodes. This is designed to sensitize the immune system to the tumor-associated antigens encoded by the plasmids. After a

period of time, the patient’s lymph nodes are then injected with synthetic peptides that are designed to “boost” or greatly amplify the immune response to the target antigens. This prime-boost regimen is designed to provoke a potent cell-mediated immune response that destroys cancer cells along with the underlying blood supply to a tumor.

We believe that our therapeutic approach addresses several deficiencies inherent in earlier approaches to cancer immunotherapy, including:

	•		Specificity. We target cancer epitopes to which the immune system has not developed a tolerance, instead of targeting the dominant epitopes expressed by cancerous cells, many of which are tolerated by the immune system. We have developed technology designed to identify the non-tolerated epitopes on the cancer cell surface, and we have developed a method of modifying these epitopes that is designed to activate an immune response. Through this process, we believe that the body’s tolerance of the cancer cells can be broken, leading to the destruction of the cancer by the immune system.
	•		Administration. In contrast to the conventional subcutaneous or intramuscular route of administration, our compounds are delivered directly into the patient’s lymph nodes, where studies have shown they will have the greatest impact. We believe that the direct delivery of our compounds will bring local high concentrations of the active components of our compounds into contact with high concentrations of the cells needed to generate a potent cell-mediated immune response.
	•		Selectivity, potency and duration of response. We deliver our therapeutic compounds in a manner that we believe primes the immune system to respond to cancer cells expressing specific epitopes, in much the same way that a chronic infection evokes a progressively increased immune response to invading bacteria. Our administrative regimen is designed to boost the immune response over the course of a treatment cycle so that it becomes increasingly potent and long acting.

RESEARCH AND DEVELOPMENT EXPENSES

Our research and development expenses consist mainly of costs associated with the clinical trials of our product candidates which have not yet received regulatory approval for marketing and for which no alternative future use has been identified. This includes the salaries, benefits and stock-based compensation of research and development personnel, laboratory supplies and materials, facility costs, costs for consultants and related contract research, licensing fees, and depreciation of laboratory equipment. We track research and development costs by the type of cost incurred. We partially offset research and development expenses with the recognition of estimated amounts receivable from the State of Connecticut pursuant to a program under which we can exchange qualified research and development income tax credits for cash.

Our research and development staff conducts our internal research and development activities, which include research, product development, clinical development, manufacturing and related activities. This staff is located in our facilities in Valencia, California; Paramus, New Jersey; and Danbury, Connecticut. We expense research and development costs as we incur them.

Clinical development timelines, likelihood of success and total costs vary widely. We are focused primarily on advancing the Technosphere Insulin System through Phase 3 clinical trials and regulatory filings. We plan to commercialize our lead product as a treatment for diabetes. Based on the results of preclinical studies, we plan to develop additional applications of our Technosphere technology. Additionally, we anticipate that we will continue to determine which research and development projects to pursue, and how much funding to direct to each project, on an ongoing basis, in response to the scientific and clinical success of each product candidate. We cannot be certain when any revenues from the commercialization of our products will commence.

At this time, due to the risks inherent in the clinical trial process and given the early stage of development of our product candidates other than the Technosphere Insulin System, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for commercialization. The costs required to complete the development of our Technosphere Insulin System will be largely dependent on the scope of our clinical trials, the cost and efficiency of our manufacturing process and discussions with the FDA on its requirements. We anticipate that our research and development expenses, particularly for the Technosphere Insulin System, will increase significantly with the continuation of existing clinical trials, the initiation of new trials, the resulting manufacturing costs associated with producing clinical trial materials, and the expansion, qualification and validation of our commercial manufacturing processes and facilities. Additionally, we expect non-cash stock-based compensation expense resulting from the adoption of SFAS No. 123R, Share-based Payment: an Amendment of FASB Statement 123 and 95 (“SFAS No. 123R”), effective as of January 1, 2006, to be higher in future periods as compared to periods prior to January 1, 2006. See Critical Accounting Policies below and Note 3 — Accounting for Stock-Based Compensation in the notes to our financial statements.

GENERAL AND ADMINISTRATIVE EXPENSES

Our general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for administrative, finance, business development, human resources, legal and information systems support personnel. In addition, general and administrative expenses include business insurance and professional services costs.

We expect general and administrative expenses other than non-cash stock-based compensation expense to increase slightly in the future as a result of increased headcount, public company compliance and establishment of investor relations and marketing programs. We expect overall general and administrative expenses to be higher in future periods as compared to periods prior to the adoption of SFAS No. 123R. See Critical Accounting Policies below and Note 3 — Accounting for Stock-Based Compensation in the notes to our financial statements.

CRITICAL ACCOUNTING POLICIES

Other than the adoption of SFAS No. 123R, there have been no material changes to our critical accounting policies as described in Item 7 to our Annual Report.

Stock-based Compensation

Prior to January 1, 2006, we accounted for employee stock options and the employee stock purchase plan using the intrinsic value method in accordance with APB No. 25 and adopted the disclosure only alternative of SFAS No. 123. Upon adoption of SFAS No. 123R, we selected the modified prospective transition method whereby we recognized share-based employee costs from the beginning of 2006 as if the fair value accounting method had been used to account for all employee awards granted, modified, or settled after January 1, 2006 and to any awards that were not fully vested as of January 1, 2006. The measurement and attribution of compensation cost for awards that are unvested as of January 1, 2006 are based on the same estimate of the grant-date and the same attribution method used previously under SFAS No. 123. Including the effects of adoption of SFAS No. 123R, we recognized stock-based compensation expense of $7.5 million for the six months ended June 30, 2006. We expect expensing of stock-based compensation will continue to have an impact on our statement of operations. As of June 30, 2006, there was $21.1 million and $6.9 million of unrecognized compensation cost related to options and restricted stock units, respectively, granted by the Company which is expected to be recognized over the weighted average vesting period of 2.7 years.

RESULTS OF OPERATIONS

The discussion and analysis of our financial condition and results of operations for the three months ended June 30, 2006 and 2005 are based upon our consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and as a result, actual condition or results may differ from our estimates under different assumptions or conditions.

Revenues

During the six months ended June 30, 2006, we recognized $0.1 million in revenue under a license agreement. There were no revenues recorded for the six months ended June 30, 2005. We do not anticipate sales of any product prior to regulatory approval and commercialization of our Technosphere Insulin System.

Research and Development Expense

The following table provides a comparison of the research and development expense categories for the three and six months ended June 30, 2006 and 2005 (dollars in thousands):

		Three months ended
		June 30,
		2006				2005				$ Change				% Change
Clinical		$	28,092			$	12,768			$	15,324				120	%
Manufacturing			8,906				6,021				2,885				48	%
Research			6,708				5,350				1,358				25	%
Stock-based compensation expense			1,615				(543	)			2,158				397	%
Research and development expenses		$	45,321			$	23,596			$	21,725				92	%

		Six months ended
		June 30,
		2006				2005				$ Change				% Change
Clinical		$	46,762			$	21,596			$	25,166				117	%
Manufacturing			18,129				11,269				6,860				61	%
Research			13,126				9,937				3,189				32	%
Stock-based compensation expense			3,254				(510	)			3,764				738	%
Research and development expenses		$	81,271			$	42,292			$	38,979				92	%

The increase in research and development expenses for the three and six months ended June 30, 2006, as compared to the same periods in the prior year was primarily due to ongoing expenses related to the clinical development of our Technosphere Insulin System. The expansion of our Phase 3 clinical trial program for our Technosphere Insulin System and the continuation of other preclinical studies increased our clinical research expenditures in 2006 as compared to the same period in 2005. This also resulted in increased Technosphere Insulin manufacturing costs to supply clinical trial materials. We also continue to expand our qualification and validation of our manufacturing system. Additionally, research activities related to toxicology studies for our Technosphere Insulin System, expanding our proprietary Technosphere platform technology, developing additional applications for the pulmonary delivery of other drugs and the discovery and development of programs primarily focused on cancer therapies resulted in increased research expenditures. We anticipate that our research and development expenses associated with our Technosphere Insulin System, expanding our Technosphere platform technology and the pursuit of cancer therapies will continue to increase in 2006. Specifically, we anticipate increased expenses related to the continuation of existing and initiation of new clinical trials, and the resulting manufacturing costs associated with producing clinical trial materials.

The increase in stock-based compensation expense for the three and six months ended June 30, 2006 compared to the same periods in the prior year primarily resulted from the adoption of SFAS No. 123R which requires all share-based payments to employees, including grants of stock options and the compensatory elements of employee stock purchase plans, to be recognized in the income statement based upon the fair value of the awards at the grant date. As described in the Critical Accounting Policies above, we have adopted SFAS No. 123R as of the effective date of January 1, 2006. As a result of our adoption of SFAS No. 123R, we expect non-cash stock-based compensation expense to be higher in future periods as compared to periods prior to January 1, 2006. See Note 3 — Accounting for Stock-Based Compensation in the footnotes to our financial statements.

General and Administrative Expense

The following table provides a comparison of the general and administrative expense categories for the three and six months ended June 30, 2006 and 2005 (dollars in thousands):

		Three months ended
		June 30,
		2006				2005				$ Change				% Change
Salaries, employee related and other general expenses		$	8,285			$	5,644			$	2,641				47	%
Stock-based compensation expense			2,171				(1,673	)			3,844				230	%
General and administrative expenses		$	10,456			$	3,971			$	6,485				163	%

		Six months ended
		June 30,
		2006				2005				$ Change				% Change
Salaries, employee related and other general expenses		$	15,351			$	10,312			$	5,039				49	%
Stock-based compensation expense			4,243				(2,391	)			6,635				277	%
General and administrative expenses		$	19,594			$	7,921			$	11,673				147	%

General and administrative expenses for the three and six months ended June 30, 2006 increased as compared to the same period in the prior year. Increased administrative services resulted in increased headcount, compensation adjustments and other employee

related expenses. Additionally, litigation, public company compliance (including the Sarbanes-Oxley Act) and our establishment of a marketing function in late 2005 increased both professional fees and consulting expenses. Stock-based compensation expense also increased for the three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005 upon the adoption of SFAS No. 123R. We expect general and administrative expenses other than non-cash stock-based compensation expense to increase slightly in the future as a result of increased headcount, public company compliance and establishment of investor relations and marketing programs. We expect non-cash stock-based compensation expense to be higher in future periods as compared to periods prior to January 1, 2006 as a result of the adoption of SFAS No. 123R. See Critical Accounting Policies above and Note 3 — Accounting for Stock-Based Compensation in the footnotes to our financial statements.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations primarily through the sale of equity securities. We do not anticipate sales of any product prior to regulatory approval and commercialization of our Technosphere Insulin System. We currently rely on cash resources to maintain adequate working capital levels. At June 30, 2006, we had $50.9 million in cash, cash equivalents and marketable securities, which we believed was sufficient to fund our anticipated cash requirements into the third quarter of 2006.

To help us meet future funding needs, on August 2, 2006 we entered into a loan arrangement with our principal stockholder, Alfred Mann, pursuant to which we are able to borrow up to a total of $150.0 million in one or more advances at any time over the next year should our cash balance fall below our projected cash requirements for the subsequent three month period, provided that each advance be no less than $50.0 million. We borrowed $50.0 million under the loan arrangement on August 2, 2006. Interest accrues on each outstanding advance at a rate equal to the one year LIBOR rate in effect on the day of such advance plus 3% per annum and is payable quarterly in arrears. The loan is unsecured and contains no financial covenants. There are no warrants associated with the loan nor is the loan convertible into our stock. In the event of a default, all unpaid principal and interest becomes immediately due and payable and the interest rate increases to one year LIBOR calculated on the date of the initial advance or in effect on the date of default, whichever is greater, plus 5% per annum. Upon the closing of certain financing events, including equity and debt financings or strategic transactions with third parties, in which we receive cash proceeds of at least $100.0 million, we are required to repay all or a portion of the principal and accrued and unpaid interest under the note equal to the difference between our cash balance immediately following the financing event and our projected cash requirements for the six month period following the financing event. We believe that this loan arrangement with Mr. Mann will enable us to continue funding our operations through the second quarter of 2007.

Notwithstanding our loan arrangement with Mr. Mann, we will require significant additional financing in the future to fund our operations. If adequate funds are not available, we may be required to delay, reduce or eliminate expenditures for certain of our programs, including our Technosphere Insulin System development activities.

During the six months ended June 30, 2006, we used $84.7 million of cash for our operations. We had a net loss of $98.3 million for the six months ended June 30, 2006, of which $11.6 million consisted of non-cash charges such as depreciation and amortization and stock-based compensation. We expect our negative operating cash flow to continue at least until we obtain regulatory approval and achieve commercialization of our Technosphere Insulin System.

Investing activities provided $54.5 million of cash during the six months ended June 30, 2006. Cash provided by investing activities was from net sales of marketable securities of $65.6 million offset by $11.1 million used to purchase machinery and equipment to expand our manufacturing operations and quality systems in support of our expansion of clinical trials for Technosphere Insulin System. We expect to make significant purchases of equipment in the foreseeable future.

Our financing activities provided cash of $1.3 million for the six months ended June 30, 2006. Cash from financing activities was primarily from the exercise of stock options and warrants.

We intend to use our capital resources to continue the development of our Technosphere Insulin System and to develop additional applications for our proprietary Technosphere platform technology. In addition, portions of our capital resources will be devoted to expanding our other product development programs for the treatment of solid-tumor cancers. We anticipate that we will expend a portion of our capital to scale up our manufacturing capabilities in our Danbury facilities. We also intend to use our capital resources for general corporate purposes, which may include in-licensing or acquiring additional technologies.

We have held discussions with a number of pharmaceutical companies concerning a potential strategic business collaboration for our Technosphere Insulin System. We have narrowed the list of potential collaborative partners but are not disclosing the number of potential partners or their identities. To date, we have neither concluded these discussions nor reached an agreement concerning such a collaboration. There can be no assurance that any strategic collaboration will be available to us on a timely basis or on acceptable

terms, if at all. If we enter into a strategic business collaboration with a pharmaceutical or biotechnology company, we would expect, as part of the transaction, to receive additional capital and reimbursements for a portion of the costs associated with the development, manufacture and commercialization of our Technosphere Insulin System. In addition, we expect to pursue the sale of equity and/or debt securities, or the establishment of other funding facilities. Issuances of debt or additional equity could impact the rights of our existing stockholders, dilute the ownership percentages of our existing stockholders and may impose restrictions on our operations. These restrictions could include limitations on additional borrowing, specific restrictions on the use of our assets as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments. We also may seek to raise additional capital by pursuing opportunities for the licensing, sale or divestiture of certain intellectual property and other assets, including our Technosphere technology platform. There can be no assurance, however, that any strategic collaboration, sale of securities or sale or license of assets will be available to us on a timely basis or on acceptable terms, if at all. If we are unable to raise additional capital, we may be required to enter into agreements with third parties to develop or commercialize products or technologies that we otherwise would have sought to develop independently, and any such agreements may not be on terms as commercially favorable to us.

However, we cannot provide assurances that our plans will not change or that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate. If planned operating results are not achieved or we are not successful in raising additional equity financing or entering a business collaboration, we may be required to reduce expenses through the delay, reduction or curtailment of our projects, including our Technosphere Insulin System development activities, or further reduction of costs for facilities and administration.

Off-Balance Sheet Arrangements

As of June 30, 2006, we did not have any off-balance sheet arrangements.

Contractual Obligations

There have been no material changes to our contractual obligations disclosed in Item 7 to our Annual Report other than those in the ordinary course of our business, such as contracts related to the continuation of existing clinical trials, the initiation of new trials and the expansion, qualification and validation of our commercial manufacturing processes and facilities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not used derivative financial instruments. However, we are exposed to market risk related to changes in interest rates. Our current policy is to maintain a highly liquid short-term investment portfolio consisting mainly of U.S. money market funds and investment-grade corporate, government and municipal debt. Our cash is deposited in and invested through highly rated financial institutions in North America. Our short-term investments are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by ten percent from levels at June 30, 2006, we estimate that the fair value of our investment portfolio would decline by an immaterial amount.

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, or Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our chief executive officer and chief financial officer performed an evaluation under the supervision and with the participation of our management, of our disclosure controls and procedures (as defined in Rule 13a-15(b) of the Securities Exchange Act) as of June 30, 2006. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal control over financial reporting during the fiscal quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As previously disclosed in our Annual Report, in May 2005, our former Chief Medical Officer, Wayman Wendell Cheatham, M.D., filed a complaint against us in the California Superior Court, County of Los Angeles in the case styled, Wayman Wendell Cheatham, M.D. v. MannKind Corporation, Case No. BC333845. The complaint alleges causes of action for wrongful termination in violation of public policy, breach of contract and retaliation, in connection with our termination of Dr. Cheatham’s employment. In the complaint, Dr. Cheatham seeks compensatory, punitive and exemplary damages in excess of $2.0 million, as well as reimbursement of attorneys’ fees. In June 2005, we answered the complaint, generally denying each of Dr. Cheatham’s allegations and asserting various defenses. We believe the allegations in the complaint are without merit and intend to vigorously defend against them. We also filed a cross-complaint against Dr. Cheatham, alleging claims for libel per se, trade libel, breach of contract, breach of the implied covenant of good faith and fair dealing and breach of the duty of loyalty. The libel claims allege that Dr. Cheatham made certain false and malicious statements about us in a letter to the FDA with regard to a request by us to hold a meeting with the FDA. The remaining causes of action in the cross-complaint arise out of our allegations that Dr. Cheatham had an undisclosed consulting relationship with a competitor during his employment with us, in violation of our agreement. In July 2005, Dr. Cheatham filed a demurrer and motion to strike our cross-complaint under California’s anti-SLAPP statute. On September 28, 2005, the California Superior Court overruled Dr. Cheatham’s demurrer and denied his motion to strike our cross-complaint. On November 4, 2005, Dr. Cheatham filed a notice of appeal of the Court’s ruling denying his motion to strike. Discovery as to Dr. Cheatham’s claims against us is proceeding, and this case is currently scheduled for trial to commence in February 2007. We believe that the ultimate resolution of this matter will not have a material impact on our financial position or results of operations.

ITEM 1A. RISK FACTORS

You should consider carefully the following information about the risks described below, together with the other information contained in this Quarterly Report before you decide to buy or maintain an investment in our common stock. We believe the risks described below are the risks that are material to us as of the date of this Quarterly Report. Additional risks and uncertainties that we are unaware of may also become important factors that affect us. The risk factors set forth below with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business as previously disclosed in Item 1A to our annual report on Form 10-K for the year ended December 31, 2005. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

RISKS RELATED TO OUR BUSINESS

We have a history of operating losses, we expect to continue to incur losses, and we may never become profitable.*

We are a development stage company with no commercial products. All of our product candidates are still being developed, and all but our Technosphere Insulin System are still in early stages of development. Our product candidates will require significant additional development, clinical trials, regulatory clearances and additional investment before they can be commercialized. We anticipate that our Technosphere Insulin System will not be commercially available for several years, if at all.

We have never been profitable, and, as of June 30, 2006, we had an accumulated deficit of $655.6 million. The accumulated deficit has resulted principally from costs incurred in our research and development programs, the write-off of goodwill and general operating expenses. We expect to make substantial expenditures and to incur increasing operating losses in the future in order to further develop and commercialize our product candidates, including costs and expenses to complete clinical trials, seek regulatory approvals and market our product candidates. This accumulated deficit may increase significantly as we expand development and clinical trial efforts.

Our losses have had, and are expected to continue to have, an adverse impact on our working capital, total assets and stockholders’ equity. Our ability to achieve and sustain profitability depends upon obtaining regulatory approvals for and successfully commercializing our Technosphere Insulin System, either alone or with third parties. We do not currently have the required approvals