Statements contained herein, including without limitation, "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain certain projections, estimates and other forward-looking statements. "Forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995, are not historical facts and involve a number of risks and uncertainties. Words herein such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "intends," "potential," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

Forward-looking statements include, but are not limited to: our ability to develop ARIKACE; our estimates of expenses and future revenues and profitability; our plans to develop and market new products and the timing of these development programs; the status, results and timing of results of preclinical studies and clinical trials and preclinical and clinical data described herein; the timing of responses to information and data requests from the U.S. Food and Drug Administration (the "FDA"); our clinical development of product candidates; our ability to obtain and maintain regulatory approval for our product candidates; our expectation as to the timing of regulatory review and approval; our estimates regarding our capital requirements and our needs for additional financing; our estimates of the size of the potential markets for our product candidates; our selection and licensing of product candidates; our ability to attract collaborators with acceptable development, regulatory and commercialization expertise; the benefits to be derived from corporate collaborations, license agreements and other collaborative efforts, including those relating to the development and commercialization of our product candidates; sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements and other collaborative efforts for the development and commercialization of products; our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell directly; the rate and degree of market acceptance of our product candidates; the timing and amount of reimbursement for our product candidates; the success of other competing therapies that may become available; and the manufacturing capacity for our product candidates.

Forward-looking statements are based upon our current expectations and beliefs. Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. Any forward-looking statement should be considered in light of factors discussed in Part II, Item 1A "Risk Factors", Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, as well as those discussed elsewhere in this report and in any other documents incorporated by reference. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2011.

OVERVIEW

Insmed ® Incorporated is a development-stage biopharmaceutical company with expertise in proprietary, advanced liposomal technology designed specifically for inhalation lung delivery. We develop innovative inhaled treatments for serious lung infections. Our proprietary liposomal technology is designed specifically for delivery of pharmaceuticals to the lung, and we believe it provides for potential improvements to the conventional inhalation methods of delivering drug to the pulmonary system. These potential advantages include improvements in efficacy, safety and patient convenience. Our primary focus is on orphan markets with high unmet medical needs, which we believe presents a significant opportunity, as their challenge and complexity best fit our knowledge, know-how and expertise.

Our strategy is to utilize our patented advanced liposomal technology to develop safe and effective medicines that improve upon standards of care for those orphan respiratory diseases in which patient needs are currently unmet. Our initial primary target indications are Pseudomonas aeruginosa (which we refer to as Pseudomonas ) lung infections in cystic fibrosis (CF) patients and patients with non-tuberculous mycrobacteria (NTM) lung infections.

On December 1, 2010, we completed a business combination, which we refer to as the merger, with Transave, Inc., or Transave, a privately-held, NJ-based pharmaceutical company focused on the development of differentiated and innovative inhaled pharmaceuticals for the site-specific treatment of serious lung infections. Our integration with Transave was completed in 2011, including the relocation of our corporate headquarters to Monmouth Junction, New Jersey, and cessation of operations at Richmond, Virginia, location as of December 31, 2011. On March 2, 2011, we completed a one-for-ten reverse stock split of our common stock. Unless otherwise noted, the per share amounts in this Quarterly Report on Form 10-Q give retroactive effect to the reverse stock split for all periods presented.

Pursuant to the merger agreement with Transave, we retained approximately 1.76 million shares of common stock (after giving effect to the conversion of the Series B Conditional Convertible Preferred Stock, or Series B Preferred Stock, and the one-for-ten reverse stock split of our common stock) to be delivered on June 1, 2012 to certain former Transave stockholders subject to reduction for any claims and indemnification payments that are pending in accordance with the terms of the merger agreement. We notified the former Transave stockholders in May 2012 that we are seeking indemnification in accordance with the terms of the merger agreement and that we will continue to retain the aggregate amount of the holdback shares totaling 1.76 million shares, as security for any indemnification payments due under the merger agreement.

Recent Developments

In the third quarter of 2011, the FDA placed a clinical hold on our phase 3 U.S. clinical trials for ARIKACE in CF patients with Pseudomonas lung infections and for patients with NTM lung infections. The FDA informed us that the clinical hold was based on an initial review of the results of a long-term rat inhalation carcinogenicity study with ARIKACE.

In January 2012, the FDA lifted the clinical hold on ARIKACE in patients with NTM lung infections. In February 2012, we announced that we would be initiating the ARIKACE NTM trial as a phase 2 trial, as well as the previously planned phase 3 trial for ARIKACE in the CF indication in Europe. In April 2012, the Company announced the first patient dosed in the European phase 3 clinical study which is called Clinical Evaluation of ARikace™ (CLEAR - 108). The Company also is conducting CLEAR - 108 in Canada. We also initiated a nine-month dog inhalation toxicity study in April 2012. In June 2012, we began enrolling patients in the phase 2 clinical trial for Treatment with ARIKACE to Realize Greater Efficacy Trial (TARGET-NTM).

In May 2012, the FDA lifted the clinical hold on ARIKACE in the U.S. for the treatment of CF patients with Pseudomonas lung infections. We reached agreement with the FDA on a revised CF clinical trial population consisting of adult patients who have chronic Pseudomonas lung infections and FEV-1 % predicted between 25% and 75%. We announced in late May that we will defer plans to initiate a phase 3 study of ARIKACE in the U.S. for CF patients until we have an opportunity to review top-line results from CLEAR-108.

KEY COMPONENTS OF OUR STATEMENT OF OPERATIONS

Revenues

Our revenue in 2011 consisted of secondary revenue streams for IPLEX ® Expanded Access Program (EAP) in Europe for the treatment of Amyotrophic Lateral Sclerosis (ALS), and royalty revenue for the licensing of patent technology for CISPLATIN Lipid Complex. We no longer manufacture IPLEX and the cost recovery revenues from our IPLEX EAP in Europe ceased in December 2011, when our IPLEX inventory was fully depleted.

Research and Development Expenses

Research and development expenses consist primarily of salaries and related expenses, cost to develop and manufacture drug candidates, patent protection costs, amounts paid to contract research organizations, hospitals and laboratories for the provision of services and materials for drug development and clinical trials. Our expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with third-party organizations that conduct and manage clinical trials on our behalf. These contracts set forth the scope of work to be completed at a fixed fee or amount per patient enrolled. Payments under these contracts primarily depend mainly on performance criteria such as the successful enrollment of patients or the completion of clinical trial milestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity according to the clinical trial protocol.

Since we began operations in late 1999, we have devoted substantially all of our resources to the research and development of a number of product candidates. Until the sale of our Follow on Biologics (FOB) platform to Merck & Co., Inc., or Merck, on March 31, 2009, our research and development efforts were principally focused on pursuing a dual path strategy involving entry into the FOB arena and advancing our proprietary protein platform into niche markets with unmet needs. Following the merger, our focus is now principally on our proprietary, advanced liposomal technology designed specifically for inhalation lung delivery. Our initial priority was to conduct phase 3 studies for ARIKACE® in treating CF patients with Pseudomonas lung infections and patients with NTM lung infections.

Historically, prior to the merger with Transave, all of our research and development expenditures related to our proprietary protein platform were interrelated as they are all associated with drugs that modulate IGF-1 activity in the human body. All of these products also share a substantial amount of our common fixed costs such as salaries, facility costs, utilities and maintenance. Given the small portion of research and development expenses that are historically related to products other than IPLEX, we have determined that very limited benefits would be obtained from implementing cost tracking systems that would be necessary to allow for cost information on a product-by-product basis.

At present, we expect ARIKACE in the CF and NTM indications to represent our main development effort for the remainder of 2012 and the foreseeable future.

Our clinical trials with our product candidates are subject to numerous risks and uncertainties that are outside of our control, including that necessary regulatory approvals may not be obtained. In addition, the duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial, including, among others, the following:

· the number of patients that ultimately participate in the trial;

· the duration of patient follow-up that is determined to be appropriate in view of results;

· the number of clinical sites included in the trials;

· the length of time required to enroll suitable patient subjects; and

· the efficacy and safety profile of the product candidate.

Our clinical trials may also be subject to delays or rejections based on our inability to enroll patients at the rate that we expect or our inability to produce clinical trial material in sufficient quantities and of sufficient quality to meet the schedule for our proposed clinical trials.

Moreover, all of our product candidates and particularly those that are in the preclinical or early clinical trial stage must overcome significant regulatory, technological, manufacturing, reimbursement and marketing challenges before they can be successfully commercialized. Some of these product candidates may never reach the clinical trial stage of research and development.

As preclinical studies and clinical trials progress, we may determine that collaborative relationships will be necessary to help us further develop or to commercialize our product candidates, but such relationships may be difficult or impossible to arrange. Our projects or intended projects may also be subject to change from time to time as we evaluate our research and development priorities and available resources.

Any significant delays that occur or additional expenses that we incur may have a material adverse effect on our financial position and may require us to raise additional capital sooner or in larger amounts than is presently expected. In addition, as a result of the risks and uncertainties related to the development and approval of our product candidates and the additional uncertainties related to our ability to market and sell these products once approved for commercial sale, we are unable to provide a meaningful prediction regarding the period in which material net cash inflows from any of these projects is expected to become available, if at all.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our executive, finance, accounting, legal, market research and human resource functions, and professional fees for legal, including patent-related expenses, consulting, tax and accounting services. Our general and administrative expenses also include facility and related costs not included in research and development expenses, insurance, depreciation and general corporate expenses. We expect that our general and administrative expenses will increase with the continued development and commercialization of our product candidates.

Investment Income and Interest Expense

Investment income consists of interest and dividend income earned on our cash, cash equivalents and short-term investments. Short-term investments are available for sale and consist primarily of short-term municipal bonds, U.S. treasuries and mutual funds. Interest expense consists primarily of interest costs related to capital leases.

RESULTS OF OPERATIONS

Three months ended June 30, 2012 compared to three months ended June 30, 2011

Net loss attributable to common stockholders for the three months ended June 30, 2012 was $9.7 million, (or $0.39 per common share - basic and diluted), compared to net loss of $10.0 million, (or $0.40 per common share - basic and diluted), for the three months ended June 30, 2011. The $0.3 million improvement in the net loss was due to a $1.5 million reduction in operating expenses, which was partially offset by a $1.0 million decline in IPLEX revenue and a $0.2 million reduction in investment income.

Revenue

Revenues for the three months ended June 30, 2012 were zero, as compared to $1.0 million for the three months ended June 30, 2011. The $1.0 million decrease was due to the elimination of IPLEX EAP revenues following the depletion of IPLEX inventory in December 2011.

Research and Development Expenses

Research and development expenses for the three months ended June 30, 2012 and
2011 were comprised of the following:


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  Index

                                     Three Months Ended
                                          June 30,               Increase (Decrease)
                                      2012          2011            $               %
                                                (in thousands)
Clinical development               $    1,434      $ 3,149     $     (1,715 )       -54 %
Clinical manufacturing                  3,750        1,886            1,864          99 %
Regulatory and quality assurance          825        1,995           (1,170 )       -59 %
Compensation and related                1,518        1,676             (158 )        -9 %
                                   $    7,527      $ 8,706     $     (1,179 )       -14 %

Research and development expenses decreased to $7.5 million in the three months ended June 30, 2012 from $8.7 million for the three months ended June 30, 2011. The decrease of $1.2 million in 2012 is primarily attributable to a reduction of $2.9 million in clinical development costs and regulatory and quality assurance costs as an additional trial was underway in 2011 targeting ARIKACE in a U.S. CF patient population. This decrease was partially offset by an increase of $1.9 million in manufacturing costs primarily associated with initiating the nine-month dog inhalation toxicity study and the building of clinical supply for the ongoing ARIKACE studies in CF and NTM. The Company has initiated two clinical trials consisting of a European phase 3 CF trial and a U.S. phase 2 NTM trial.

General and Administrative Expenses

General and administrative expenses decreased to $2.5 million in the three months ended June 30, 2012 from $2.7 million for the three months ended June 30, 2011. The $0.2 million decrease was largely due to lower finance, legal and consulting fees related to post Transave merger matters.

Investment Income and Interest Expense

Investment income decreased by $0.2 million to $0.3 million in the three months ended June 30, 2012 from $0.5 million in the three months ended June 30, 2011 due to the reduction in our cash available for investment. from June 30, 2011 to June 30, 2012.

Six months ended June 30, 2012 compared to six months ended June 30, 2011

Net loss attributable to common stockholders for the six months ended June 30, 2012 was $16.5 million, (or $0.67 per common share - basic and diluted), compared to net loss of $26.1 million, (or $1.19 per common share - basic and diluted), for the six months ended June 30, 2011. The $9.6 million reduction in the net loss from 2011 to 2012 was primarily due to the $9.2 million non-cash charge for the beneficial conversion feature of the Series B Preferred Stock incurred in the first quarter of 2011, which increased net loss attributable to holders of shares of our common stock and, in turn, reduced our loss per common stock on a basic and diluted basis by $0.48. The charge represents the $1.00 difference between the conversion price of the Series B Preferred Stock of $7.10 per share and its carrying value of $6.10 per share. The carrying value of the Series B Preferred Stock was based on its fair value at issuance, which was estimated using the common stock price reduced for a lack of marketability between the issuance date and the anticipated date of conversion. Additionally, a reduction in operating expenses of $3.2 million was partially offset by revenue reduction of $2.6 million and a decline in investment income of $0.3 million.

Revenue

Revenues for the six months ended June 30, 2012 were zero, as compared to $2.6 million for the six months ended June 30, 2011. The $2.6 million decrease was due to the elimination of $2.3 million of IPLEX EAP revenues following the depletion of IPLEX inventory in December 2011 and the receipt of $0.3 million in license fees for our CISPLATIN lipid complex in 2011, as compared to zero in the current year.

Research and Development Expenses

Research and development expenses for the six months ended June 30, 2012 and
2011 were comprised of the following:

                                         Six Months Ended
                                             June 30,                 Increase (Decrease)
                                     2012            2011                $               %
                                                (in thousands)
Clinical development               $  3,959     $         6,188     $     (2,229 )       -36 %
Clinical manufacturing                4,063               2,962            1,101          37 %
Regulatory and quality assurance        918               2,173           (1,255 )       -58 %
Compensation and related              3,074               3,144              (70 )        -2 %
                                   $ 12,014     $        14,467     $     (2,453 )       -17 %

Research and development expenses decreased to $12.0 million in the six months ended June 30, 2012 from $14.5 million for the six months ended June 30, 2011. The decrease of $2.5 million in 2012 is primarily attributable to a reduction of $3.5 million in clinical development costs and regulatory and quality assurance costs as an additional trial was underway in 2011targeting ARIKACE in a U.S. CF patient population. This decrease was partially offset by an increase of $1.1 million in manufacturing costs associated with initiating the nine-month dog inhalation toxicity study and building clinical supply for our ongoing CF and NTM trials. The Company has initiated two clinical trials consisting of a European phase 3 CF trial and a U.S. phase 2 NTM trial.

General and Administrative Expenses

General and administrative expenses decreased to $5.2 million in the six months ended June 30, 2012 from $6.0 million for the six months ended June 30, 2011. The $0.8 million decrease was due largely to lower finance, legal and consulting fees related to post Transave merger matters and the reverse stock split transaction on March 2, 2011.

Investment Income and Interest Expense

Investment income decreased by $0.3 million to $0.7 million in the six months ended June 30, 2012 from $1.0 million in the six months ended June 30, 2011. The decrease is a result of the reduction in our cash available for investment from June 30, 2011 to June 30, 2012.

LIQUIDITY AND CAPITAL RESOURCES

Overview

There is considerable time and cost associated with developing a potential drug or pharmaceutical product to the point where FDA approval for sales is received. We have generally sought to raise the funds necessary for such development primarily through the issuance of equity securities in private and public placement transactions. However, we may pursue additional financing options, including entering into agreements with collaborative partners in order to provide milestone payments, license fees and equity investments.

We have funded our operations to date through public and private placements of debt and equity securities and the proceeds from the sale of our FOB platform to Merck. We will continue to incur losses to the extent we expand our research and development and we do not expect material revenues for at least the next several years. Furthermore, revenues from our EAP in Italy associated with cost recovery were eliminated by the end of the fourth quarter of 2011, when our current IPLEX inventory, which had been fully expensed, was depleted. As of June 30, 2012, we had total cash, cash equivalents, short-term investments, and certificate of deposits on hand of $75.2 million, consisting of $73.1 million in cash and short-term investments, including the net $9.8 million funding from HTGC, and $2.1 million in a certificate of deposit, as compared to $78.4 million of cash on hand as of December 31, 2011. The $3.2 million decrease in total cash was due primarily to the $12.9 million funding of operations which consists mainly of research and development activities, partially offset by the net $9.8 million of borrowing from HTGC in June 2012.

Even though we believe we currently have sufficient funds to meet our financial needs for at least the next 12 months, our business strategy in the future may require us to raise additional capital either through licensing, debt or equity sales.

In the future, we may require additional funds for the continued development of our potential product candidates or to pursue the license of complementary technologies. There can be no assurance that adequate funds will be available when we need them or on favorable terms. If at any time we are unable to obtain sufficient additional funds, we will be required to delay, restrict or eliminate some or all of our research or development programs, dispose of assets or technology or cease operations.

Cash Flows

Net cash used in operations for the six months ended June 30, 2012 was $12.9 million. This was comprised of the net loss for the six months ended June 30, 2012 of $16.5 million, reduced by depreciation and non-cash stock expense totaling $1.3 million and the change in other operating assets and liabilities of $2.3 million, which primarily consisted of the change in accounts receivable, accounts payable and accrued expenses. Net cash used in operations for the six months ended June 30, 2011 was $16.1 million due to the net loss of $16.9 million reduced by depreciation and non-cash stock compensation expense totaling $0.8 million.

Net cash provided by investing activities was $17.0 million for the six months ended June 30, 2012 compared with $15.2 million provided by investing activities for the six months ended June 30, 2011. Net cash provided by investing activities in 2012 and 2011 is primarily a result of the sale of short-term marketable security investments.

Net cash provided by financing activities was $9.7 million for the six months ended June 30, 2012 resulting from $9.7 million of debt proceeds from the Loan and Security Agreement entered into with HTGC in June 2012. Zero cash was used in or provided by financing activities for the six months ended June 30, 2011.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

On June 29, 2012, the Company and its domestic subsidiaries, as co-borrowers, entered into loan and security agreement (the "Loan and Security Agreement") with Hercules Technology Growth Capital, Inc ("HTGC"). The Loan and Security Agreement bears interest at a rate per annum equal to the greater of (i) 9.25% or (ii) 9.25% plus the sum of the prevailing prime rate minus 4.50%. The first $10 million of the Loan and Security Agreement was funded at closing, with proceeds of $9.7 million received, net of $0.3 million issuance costs. As of June 30, 2012 debt issuance and deferred financing costs, net of accumulated amortization are $0.2 million and $0.1 million, respectively. The Company had no debt issuance or deferred financing costs as of December 31, 2011. The issuance . . .