UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For The Quarterly Period Ended September 30, 2004            
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the Transition Period
from                             to

Commission File Number 000-50439

NitroMed, Inc.(Exact Name of Registrant as Specified in Its Charter)

|Delaware(State or Other Jurisdiction of
Incorporation or Organization)              |  | 22-3159793(I.R.S. Employer
Identification No.)
|----------------------------------------------------------------------------------- |  | ----------------------------------------------
|125 Spring Street, Lexington, Massachusetts(Address of Principal Executive Offices) |  | 02421(Zip Code)                               
|Registrant's telephone number, including area code:(781) 266-4000                  

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 ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No ý

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As of September 30, 2004, the registrant had 26,356,630 shares of Common Stock, $0.01 par value per share, outstanding.



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NITROMED, INC.

FORM 10-Q

TABLE OF CONTENTS

|                              |         |                                                                                                      |                                                                                       |  
|----------------------------- | ------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -
|PART I. Financial Information |         |                                                                                                     
|                              | Item 1. |                                                                                                      | Financial Statements                                                                  |  
|                              |         | Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003                            |                                                                                       | 1
|                              |         | Statements of Operations for the three and nine months ended September 30, 2004 and 2003 (unaudited) |                                                                                       | 2
|                              |         | Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited)           |                                                                                       | 3
|                              |         | Notes to Unaudited Financial Statements                                                              |                                                                                       | 4
|                              | 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 2. |                                                                                                      | Unregistered Sales of Equity Securities and Use of Proceeds                           |  
|                              | Item 6. |                                                                                                      | Exhibits                                                                              |  
|SIGNATURES                    |         | 33                                                                                                  
|EXHIBIT INDEX                 |         | 34                                                                                                  

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PART I. Financial Information

Item 1. Financial Statements

NITROMED, INC.
BALANCE SHEETS
(in thousands, except par value amounts)

|                                           |                                                                                                                                                                                                                          | September 30,
2004 |        | December 31,
2003 |  
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------ | ------ | ----------------- | -
|
|Assets                                     |                                                                                                                                                                                                                          |                    |        |                   |  
|Current assets:                            |                                                                                                                                                                                                                          |                    |        |                   |  
|                                           | Cash and cash equivalents                                                                                                                                                                                                |                    | $      | 10,636            |  
|                                           | Marketable securities                                                                                                                                                                                                    |                    |        | 66,422            |  
|                                           | Accounts receivable                                                                                                                                                                                                      |                    |        | 35                |  
|                                           | Prepaid expenses and other current assets                                                                                                                                                                                |                    |        | 927               |  
|                                           |                                                                                                                                                                                                                          |                    |        |                   |  
|Total current assets                       |                                                                                                                                                                                                                          |                    | 78,020 |                   |  
|Property and equipment, net                |                                                                                                                                                                                                                          |                    | 2,600  |                   |  
|Other assets                               |                                                                                                                                                                                                                          |                    | 808    |                   |  
|                                           |                                                                                                                                                                                                                          |                    |        |                   |  
|Total assets                               |                                                                                                                                                                                                                          | $                  | 81,428 |                   | $
|                                           |                                                                                                                                                                                                                          |                    |        |                   |  
|Liabilities and Stockholders' Equity       |                                                                                                                                                                                                                          |                    |        |                   |  
|Current liabilities:                       |                                                                                                                                                                                                                          |                    |        |                   |  
|                                           | Notes payable                                                                                                                                                                                                            |                    | $      |                  |  
|                                           | Accounts payable                                                                                                                                                                                                         |                    |        | 1,961             |  
|                                           | Accrued expenses                                                                                                                                                                                                         |                    |        | 6,194             |  
|                                           | Deferred revenue                                                                                                                                                                                                         |                    |        | 7,525             |  
|                                           |                                                                                                                                                                                                                          |                    |        |                   |  
|Total current liabilities                  |                                                                                                                                                                                                                          |                    | 15,680 |                   |  
|Deferred revenue, long-term                |                                                                                                                                                                                                                          |                    | 1,731  |                   |  
|Stockholders' Equity:                      |                                                                                                                                                                                                                          |                    |        |                   |  
|                                           | Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued or outstanding at September 30, 2004 and December 31, 2003                                                                                   |                    |        |                  |  
|                                           | Common stock, $.01 par value; 65,000 shares authorized at September 30, 2004 and December 31, 2003; 26,357 shares and 25,601 shares issued and outstanding as of September 30, 2004 and December 31, 2003,
 respectively |                    |        | 264               |  
|                                           | Additional paid-in capital                                                                                                                                                                                               |                    |        | 193,185           |  
|                                           | Deferred stock compensation                                                                                                                                                                                              |                    |        | (2,334            | )
|                                           | Accumulated deficit                                                                                                                                                                                                      |                    |        | (126,903          | )
|                                           | Accumulated other comprehensive income (loss)                                                                                                                                                                            |                    |        | (195              | )
|                                           |                                                                                                                                                                                                                          |                    |        |                   |  
|Total stockholders' equity                 |                                                                                                                                                                                                                          |                    | 64,017 |                   |  
|                                           |                                                                                                                                                                                                                          |                    |        |                   |  
|Total liabilities and stockholders' equity |                                                                                                                                                                                                                          | $                  | 81,428 |                   | $
|                                           |                                                                                                                                                                                                                          |                    |        |                   |  

See
accompanying notes.

1

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NITROMED, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share amounts) (unaudited)

|                                                                                                         |                            | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |  
|-------------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------------- | ------- | ------------------------------- | -
|
|Revenues:                                                                                                |                            |                                  |         |                                 |  
|                                                                                                         | Research and development   |                                  | $       | 2,332                           |  
|Operating expenses:                                                                                      |                            |                                  |         |                                 |  
|                                                                                                         | Research and development   |                                  |         | 8,118                           |  
|                                                                                                         | General and administrative |                                  |         | 5,355                           |  
|                                                                                                         |                            |                                  |         |                                 |  
|Total operating expenses                                                                                 |                            |                                  | 13,473  |                                 |  
|                                                                                                         |                            |                                  |         |                                 |  
|Loss from operations                                                                                     |                            |                                  | (11,141 | )                               |  
|Non-operating income (expense):                                                                          |                            |                                  |         |                                 |  
|                                                                                                         | Interest expense           |                                  |         |                                |  
|                                                                                                         | Interest income            |                                  |         | 340                             |  
|                                                                                                         | Other income               |                                  |         |                                |  
|                                                                                                         |                            |                                  |         |                                 |  
|                                                                                                         |                            |                                  | 340     |                                 |  
|                                                                                                         |                            |                                  |         |                                 |  
|Net loss                                                                                                 |                            |                                  | (10,801 | )                               |  
|Deemed dividends related to beneficial conversion features of redeemable convertible preferred stock     |                            |                                  |        |                                 |  
|Dividends and accretion to redemption value of redeemable convertible preferred stock                    |                            |                                  |        |                                 |  
|                                                                                                         |                            |                                  |         |                                 |  
|Net loss attributable to common stockholders                                                             |                            | $                                | (10,801 | )                               | $
|                                                                                                         |                            |                                  |         |                                 |  
|Basic and diluted net loss attributable to common stockholders per common share                          |                            | $                                | (0.41   | )                               | $
|                                                                                                         |                            |                                  |         |                                 |  
|Shares used in computing basic and diluted net loss attributable to common stockholders per common share |                            |                                  | 26,187  |                                 |  
|                                                                                                         |                            |                                  |         |                                 |  

See
accompanying notes.

2

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NITROMED, INC.

STATEMENTS OF CASH FLOWS

(in thousands) (unaudited)

|                                                                                          |                                              | Nine Months Ended
September 30, |        
|----------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------- | -------
|
|Operating activities                                                                      |                                              |                                 |        
|Net loss                                                                                  |                                              | $                               | (20,057
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                              |                                 |        
|                                                                                          | Depreciation and amortization                |                                 |        
|                                                                                          | Stock-based compensation expense             |                                 |        
|                                                                                          | Changes in operating assets and liabilities: |                                 |        
|                                                                                          | Accounts receivable                          |                                 |        
|                                                                                          | Prepaid expenses and other current assets    |                                 |        
|                                                                                          | Deferred revenue                             |                                 |        
|                                                                                          | Accounts payable and accrued expenses        |                                 |        
|                                                                                          |                                              |                                 |        
|Net cash provided by (used in) operating activities                                       |                                              |                                 | (17,597
|Investing activities                                                                      |                                              |                                 |        
|Purchases of property and equipment                                                       |                                              |                                 | (2,179 
|Purchases of marketable securities                                                        |                                              |                                 | (72,241
|Sales of marketable securities                                                            |                                              |                                 | 35,073 
|Other assets                                                                              |                                              |                                 | (708   
|                                                                                          |                                              |                                 |        
|Net cash used in investing activities                                                     |                                              |                                 | (40,055
|Financing activities                                                                      |                                              |                                 |        
|Proceeds from stock plans                                                                 |                                              |                                 | 696    
|Principal payments on notes payable                                                       |                                              |                                 | (22    
|Net proceeds from sale of redeemable convertible preferred stock                          |                                              |                                 |       
|                                                                                          |                                              |                                 |        
|Net cash provided by financing activities                                                 |                                              |                                 | 674    
|                                                                                          |                                              |                                 |        
|Net increase (decrease) in cash and cash equivalents                                      |                                              |                                 | (56,978
|Cash and cash equivalents at beginning of period                                          |                                              |                                 | 67,614 
|                                                                                          |                                              |                                 |        
|Cash and cash equivalents at end of period                                                |                                              | $                               | 10,636 
|                                                                                          |                                              |                                 |        

See
accompanying notes.

3

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NITROMED, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(1)   Basis of Presentation

The accompanying unaudited financial statements of NitroMed, Inc. (NitroMed or the Company) have been prepared in accordance with accounting principles
generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for the fair presentation of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Interim results are not necessarily indicative of results to be expected for the entire fiscal year
ending December 31, 2004. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes thereto included in the Company's latest
audited annual financial statements. Those audited financial statements are included in the Company's annual report on Form 10-K, as amended, for the fiscal year ended December 31, 2003,
which has been filed with the Securities and Exchange Commission (SEC).

(2)   Stock-Based Compensation

The Company has elected to account for its stock-based compensation plans under the intrinsic value method pursuant to Accounting Principles Board Opinion
No. 25,Accounting for Stock Issued to Employees, and related interpretations, rather than the alternative fair value accounting provided under
Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation(SFAS 123). In accordance with
Emerging Issues Task Force (EITF) 96-18,Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in Connection with Selling Goods or Services, the Company records compensation expense equal to the fair
value of the options granted to non-employees over the vesting period, which is generally the period of service.

For
the years ended December 31, 2003 and December 31, 2002, the Company granted 413,250 and 241,000 options, respectively, to employees at exercise prices below the fair
value of the Company's common stock. The Company recorded deferred stock compensation expense related to these grants of $3,317,000 and $566,000 in 2003 and 2002, respectively. These amounts are being
recognized ratably over the vesting period of four years. Deferred stock compensation expense is adjusted in the event of employee termination prior to vesting or due to modifications to the awards.
Included in the results of operations for the three month periods ended September 30, 2004 and 2003 is compensation expense of $290,000 and $239,000, respectively, related to the below market
option grants. Included in the results of operations for the nine month periods ended September 30, 2004 and 2003 is compensation expense of $762,000 and $358,000, respectively.

For
purposes of pro forma disclosures, the estimated fair value of the option is amortized over the option's vesting period. Had compensation expense for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent

4

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with
the method of SFAS 123, the Company's net loss and net loss per share would have been as follows:

|                                                                                           |  | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |  
|------------------------------------------------------------------------------------------ |  | -------------------------------- | ------- | ------------------------------- | -
|
|
|Net loss attributable to common stockholders as reported                                   |  | $                                | (10,801 | )                               | $
|Add: Stock-based employee compensation expense included in reported net loss               |  |                                  | 691     |                                 |  
|Deduct: Stock-based employee compensation expense determined under fair value based method |  |                                  | (690    | )                               |  
|                                                                                           |  |                                  |         |                                 |  
|Pro forma net loss                                                                         |  | $                                | (10,800 | )                               | $
|                                                                                           |  |                                  |         |                                 |  
|Basic and diluted net loss per share                                                       |  |                                  |         |                                 |  
|As reported                                                                                |  | $                                | (0.41   | )                               | $
|Pro forma                                                                                  |  | $                                | (0.41   | )                               | $

(3)   Comprehensive Income (Loss)

Components of comprehensive income (loss) include net income (loss) and certain transactions that have generally been reported in the statement of stockholders'
equity. Comprehensive loss for the three months ended September 30, 2004 and 2003 was $10,632,000 and $12,748,000, respectively. Comprehensive loss for the nine months ended
September 30, 2004 and 2003 was $20,277,000 and $20,434,000, respectively.

(4)   Net Loss Per Share

Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding
during the period. Diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock and the dilutive potential
common stock equivalents then outstanding. Potential common stock equivalents consist of stock options, warrants and redeemable
convertible preferred stock. Since the Company has a net loss for all periods presented, the effect of all potentially dilutive securities is antidilutive. Accordingly, basic and diluted net loss per
share is the same.

5

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The
following table sets forth the computation of basic and diluted net loss per share for the respective periods.

|                                                                                                     |  | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |  
|---------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | -
|
|
|Basic and Diluted:                                                                                   |  |                                  |         |                                 |  
|Net loss                                                                                             |  | $                                | (10,801 | )                               | $
|Deemed dividends related to beneficial conversion features of redeemable convertible preferred stock |  |                                  |        |                                 |  
|Dividends and accretion to redemption value of redeemable convertible preferred stock                |  |                                  |        |                                 |  
|                                                                                                     |  |                                  |         |                                 |  
|Net loss attributable to common stockholders                                                         |  | $                                | (10,801 | )                               | $
|                                                                                                     |  |                                  |         |                                 |  
|Weighted average common shares used to compute net loss per share                                    |  |                                  | 26,187  |                                 |  
|                                                                                                     |  |                                  |         |                                 |  
|Basic and diluted net loss per share                                                                 |  | $                                | (0.41   | )                               | $
|                                                                                                     |  |                                  |         |                                 |  

(5)   Commitments and Contingencies

In connection with its pursuit of obtaining FDA approval of BiDil, the Company contracted with a consulting firm for services related to the development approval
process of BiDil. The agreement provides for payment of legal consulting fees if and when the Company receives written FDA approval of BiDil. In addition, the agreement requires the Company to pay
royalties on sales of BiDil product. The royalty term ends six months from the date of market introduction of an FDA approved generic version of the BiDil product. During the nine-month
period ending September 30, 2004 the Company recorded charges of approximately $1.6 million relative to this agreement. The Company estimates that approximately $2.0 million will
be paid out under this arrangement at the time of FDA approval. In addition, under a collaboration and license agreement with a third party, we are required to make milestone payments to such party
upon FDA approval, if any, and upon the first commercial sale of BiDil. During the nine-month period ended September 30, 2004, the Company recorded charges of $1 million related to this
agreement.

An
academic institution has asserted that patents and patent applications which relate to the nitric oxide stent program may require a license from such institution. It is the opinion of
the Company's management and legal counsel that the disputed intellectual property has been validly licensed to, or is validly owned by, the Company. Accordingly, the accompanying financial statements
do not include any provision related to this claim.

(6)   Merck Agreement

On September 30, 2004, Merck voluntarily withdrew its COX-2 inhibitor Vioxx from worldwide markets and halted the phase II trial of our lead candidate in
nitric oxide-enhancing COX-2 inhibitors. As a result, the Company agreed with Merck to terminate this collaboration agreement in November 2004. The Company retain all rights to the application of its
technology in the field of nitric oxide-enhancing COX-2 inhibitors. Merck will pay the Company a lump sum of $1.8 million, representing the full
amount of the research funding owed to the Company for 2005. The Company will not receive any commercialization milestones or royalty payments from Merck. As a result of the termination of this
agreement, the Company will accelerate the recognition of deferred license revenue of $5.3 million in the fourth quarter of 2004, and will recognize the lump sum payment of $1.8 million
in the fourth quarter of 2004.

6

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

Overview

We are an emerging pharmaceutical company that discovers, develops and seeks to commercialize proprietary pharmaceuticals. We have devoted substantially all of
our efforts towards the research and development of our product candidates. Since our inception, we have had no revenue from product sales and have funded our operations through the sale of equity
securities, debt financings, license fees, research and development funding and milestone payments from our collaborative partners. We have never been profitable and have incurred an accumulated
deficit of $126.9 million as of September 30, 2004.

Research,
development and commercialization expenses relating to our product candidates and to enhancing our core technologies will continue to increase in the near term and may vary
significantly from our current estimates. In particular, we expect to incur increased costs during the fourth quarter of 2004 as we seek regulatory approval for BiDil, our lead product in development
for the treatment of African Americans diagnosed with heart failure. BiDil is an orally administered nitric oxide-enhancing medicine, which combines isosorbide dinitrate and hydralazine. We recently
concluded a phase III confirmatory clinical trial of BiDil which was designed to evaluate the efficacy of BiDil, when taken daily in addition to current therapies. The trial demonstrated that African
American patients with heart failure experienced a 43% improvement in survival after taking BiDil in addition to standard heart failure therapy, as compared to patients in a placebo group who received
only standard heart failure therapy. In July 2004, following the recommendation of the independent Data and Safety Monitoring Board and the trial's steering committee, we halted this trial
because of the significant survival benefit seen in the preliminary trial results for patients taking the drug. We submitted the clinical dataset from the final data for the trial to the FDA on
November 1, 2004, and we expect to file the entire amended NDA with the FDA by the end of 2004.

General
and administrative costs will increase as we prepare for the planned commercialization of BiDil in 2005. As a result of our decision to halt the BiDil trial and submit an amended
NDA to the FDA earlier than initially planned, we expect to incur operating expenses in excess of our previous estimates for the fiscal year ended December 31, 2004, primarily relating to the
development of our
sales and marketing capabilities, pre-launch related expenses and manufacturing costs in connection with the procurement of commercial supplies of BiDil. In addition, we currently estimate
that our existing cash and marketable securities, as well as cash we expect to receive under our collaborations with Boston Scientific and Merck, will be sufficient to support our operating plan,
including increased operating expenses in preparation for the planned launch of BiDil, for at least the next nine months, but not including the proceeds of a public offering which we are undertaking.

We
will need to generate significant revenues to achieve profitability. At the present time we are unable to estimate the level of revenues, if any, that we will realize from the
commercialization of our product candidates, including BiDil. We are therefore unable to estimate when we will achieve profitability, if at all.

On
July 20, 2004, the Market Regulation Department of the National Association of Securities Dealers, Inc. advised us that it is conducting a review of trading activity in
our common stock surrounding our July 19, 2004 announcement that we had halted our phase III confirmatory clinical trial of BiDil due to the significant survival benefit seen with BiDil. The
NASD is reviewing, among other things, information on relationships between our officers, directors and service providers and individuals and institutions who may have traded in our common stock prior
to the July 19, 2004 announcement. We are cooperating with this review and have identified certain persons on the list provided to us by the NASD as having a relationship with our chief
executive officer and others at NitroMed. We have established a special committee of our board of directors to oversee our response to this review. The NASD may refer this matter to the SEC once it
completes its review.

7

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Financial operations overview

Revenue.We have not generated any revenue from product sales since our inception and do not expect to generate any revenue from the sale
of products until at least 2005. All of our revenue to date has been derived from license fees, research and development payments and milestone payments that we have received from our corporate
collaborators. We expect to recognize revenue from our corporate collaborators in a range of approximately $15.0 million to $17.0 million for the fiscal year ending December 31,
2004. In future years, we will seek to generate revenue from a combination of product sales, up-front fees and milestone payments in connection with collaborative or strategic
relationships, and royalties resulting from the license of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount
of research and development, milestone and other payments received under our collaborative or strategic relationships and related continuing obligations, and the amount and timing of payments we
receive upon the sale of our products, to the extent any are successfully commercialized.

Research and Development.Research and development expense consists of expenses incurred in identifying, developing and testing product
candidates. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers for independent monitoring and analysis of our clinical trials,
costs of contract research and manufacturing, costs of facilities and the legal costs of pursuing patent protection of our intellectual property. We expense research and development costs, including
patent-related costs, as incurred.

The
following summarizes our primary research and development programs. We have not provided program costs since inception because prior to 2000 we did not track and accumulate cost
information by research program.



8

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General and Administrative.General and administrative expense consists primarily of salaries and other related costs for personnel in
executive, finance, accounting, business development and human resource functions. Other costs include facility costs not otherwise included in research and development expense and professional fees
for legal and accounting services.

As
a result of the consummation of our initial public offering on November 10, 2003, we have incurred, and will continue to incur, increased general and administrative expense for
investor relations and other activities associated with operating as a publicly-traded company. These increases will include the hiring of additional personnel. We intend to continue to incur
increased internal and external business development costs to support our various product development efforts, which can vary from period to period. During the fourth quarter of 2004 and in 2005, we
also anticipate incurring significant increased expenses in connection with the expected commercial introduction of BiDil in 2005.

Non Operating Income (Expense).Other income includes interest earned on our cash, cash equivalents and marketable securities, as well as
rental income from a sublease of a portion of our facilities in 2003. Other income is net of interest expense.

Boston Scientific Collaboration.In November 2001, we entered into a development and license agreement with Boston Scientific to
develop stents coated with nitric oxide-releasing compounds. We have granted Boston Scientific an exclusive worldwide license to develop and commercialize products for restenosis incorporating two
nitric oxide-releasing compounds. In consideration of this license, Boston Scientific made an upfront non-refundable license payment of $1.5 million, which is being

9

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recognized
over the estimated time period of our contractual obligation to provide research and development services. In the event that specified research, development and commercialization milestones
are achieved, Boston Scientific is obligated to make milestone payments to us. Boston Scientific is also obligated to pay royalties to us on the sale of any products resulting from the collaboration.
In December 2003, we agreed to extend the agreement to continue the research and development collaboration through December 2005, and we received an additional $3.0 million, which
is being recognized ratably over the research and development collaboration term. Boston Scientific made a $3.5 million equity investment in our stock in 2001 and made an additional $500,000
equity investment in our stock in August 2003.

Merck Collaboration.In December 2002, we entered into an exclusive, worldwide research, collaboration and licensing agreement that
granted Merck marketing and sales rights for nitric oxide-enhancing COX-2 inhibitors. The research portion of the agreement is for three years and can be extended by mutual agreement. In
2003, we received an upfront non-refundable license payment of $10.0 million and two payments, each of $5.0 million, for achieving the first two milestones. The license fee
revenue and the revenue from the first $5.0 million milestone payment are being recognized over the contractual term of the research and development program, which ends December 31,
2005. The revenue from the second $5.0 million payment was recognized in the fourth quarter of 2003, the period in which Merck achieved the milestone. We recognized revenue of
$1.8 million in research and development fees from Merck during the nine months ended September 30, 2004. On September 30, 2004, Merck halted the phase II trial of our lead
candidate in nitric oxide-enhancing COX-2 inhibitors. This lead nitric oxide candidate is composed of a derivative of rofecoxib. Rofecoxib is the active ingredient in Vioxx, a
COX-2 inhibitor which Merck voluntarily withdrew from worldwide markets on September 30, 2004. In November 2004, we agreed with Merck to terminate the collaboration agreement. Merck
will pay us a lump sum of $1.8 million, representing the full amount of the research funding owed to us for 2005. However, we will not receive any commercialization milestones or royalty
payments from Merck. As a result of the termination of this agreement, we will accelerate the recognition of deferred license revenue of $5.3 million in the fourth quarter of 2004, and we will
recognize the lump sum payment of $1.8 million as revenue in the fourth quarter of 2004.

Results of Operations

Three Months Ended September 30, 2004 and 2003

Revenue.Total revenue for the three months ended September 30, 2004 was $2.3 million compared to
$2.2 million for the three months ended September 30, 2003. Revenue for the three months ended September 30, 2004 and September 30, 2003 was comprised of research and
development payments made to us by Boston Scientific and Merck.

Research and Development.Research and development expense for the three months ended September 30, 2004 was
$8.1 million compared to $5.0 million for the three months ended September 30, 2003. The $3.1 million, or 61% increase in research and development expense was primarily due
to additional clinical related costs of $1.3 million associated with the BiDil trial, an accrual of $1.0 million pertaining to milestone payments under a collaboration and license
agreement for BiDil, and a $0.9 million increase in stock-based compensation expense. The following table

10

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summarizes
the primary components of our research and development expense for our principal research and development programs for the three months ended September 30, 2004 and 2003.

|                                        |  | Three Months Ended
September 30,
|--------------------------------------- |  | --------------------------------
|
|
|Research and Development Program        |  |                                 
|BiDil                                   |  | $                               
|Nitric oxide-enhancing COX-2 inhibitors |  |                                 
|Nitric oxide stents                     |  |                                 
|Other discovery research                |  |                                 
|                                        |  |                                 
|Total research and development expense  |  | $                               

General and Administrative.General and administrative expense for the three months ended September 30, 2004 was
$5.4 million compared to $0.7 million for the three months ended September 30, 2003. The $4.7 million, or 722% increase in general and administrative expense was primarily
attributable to increased costs of approximately $1.6 million associated with the accrual of business development and milestone payment expenses pertaining to the approval process for BiDil;
$2.2 million for the preparation of the possible launch of BiDil; and $0.9 million related to operating as a public company and related infrastructure growth, including moving to a new
facility.

Non Operating Income (Expense).Other income, net for the three months ended September 30, 2004 was
$0.3 million compared to $0.1 million for the three months ended September 30, 2003. The $0.3 million, or 291% increase was due to higher fund balances available for
investment.

Nine Months Ended September 30, 2004 and 2003

Revenue.Total revenue for the nine months ended September 30, 2004 was $7.0 million compared to $5.6 million for the
nine months ended September 30, 2003. The $1.4 million, or 25% increase in revenue in the 2004 period is attributable to milestone revenue recognized under our agreement with Merck,
which is being recognized ratably over the term of the collaboration arrangement, offset partially by lower research and development funding revenues from Merck. Also, in 2004 there are additional
license fees from Boston Scientific, which are being recognized ratably over the contract service period. Revenue for the nine months ended September 30, 2004 was comprised of research and
development payments made to us by Boston Scientific and Merck.

Research and Development.Research and development expense for the nine months ended September 30, 2004 was $18.8 million
compared to $13.7 million for the nine months ended September 30, 2003. The $5.1 million, or 37% increase in research and development expense was primarily due to additional
clinical related costs of $3.2 million associated with the BiDil trial, an accrual of $1.0 million pertaining to milestone payments under a collaboration and license agreement for BiDil,
and a $0.8 million increase in stock-based compensation expense.

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The
following table summarizes the primary components of our research and development expense for our principal research and development programs for the nine months ended
September 30, 2004 and 2003.

|                                        |  | Nine months ended
September 30,
|--------------------------------------- |  | -------------------------------
|
|
|BiDil                                   |  | $                              
|Nitric oxide-enhancing COX-2 inhibitors |  |                                
|Nitric oxide stents                     |  |                                
|Other discovery research                |  |                                
|                                        |  |                                
|Total research and development expense  |  | $                              
|                                        |  |                                

General and Administrative.General and administrative expense for the nine months ended September 30, 2004 was $9.2 million
compared to $1.9 million for the nine months ended September 30, 2003. The $7.2 million, or 381% increase in general and administrative expense was attributable to increased costs
of approximately $1.6 million associated with the accrual of business development and milestone payment expenses pertaining to the approval process for BiDil; $2.3 million for the
preparation of the possible launch of BiDil; and $3.4 million related to operating as a public company and related infrastructure growth, including moving to a new facility.

Non Operating Income (Expense).Other income, net for the nine months ended September 30, 2004 was $0.9 million compared to
$0.3 million for the nine months ended September 30, 2003. The $0.6 million, or 220% increase was due to higher fund balances available for investment, net of lower rental income
due to our sublease rental agreement which ended in May 2003.

Liquidity and Capital Resources

We have financed our operations since inception through the sale of equity, debt and payments from collaborative partners for licenses, research and development
and achievement of milestones. As of September 30, 2004, we have received net proceeds of $159.9 million from the issuance of equity securities, primarily as the result of the sale of
$99.1 million of our redeemable convertible preferred stock and net proceeds of $60.1 million from our initial public offering in November 2003. At September 30, 2004, we
had $77.1 million in cash, cash equivalents and marketable securities.

During
the nine months ended September 30, 2004, operating activities used cash of $17.6 million, driven by a net loss of $20.1 million, a net decrease in accounts
receivable, prepaid and other assets of $0.3 million, and a net increase in payables, deferred revenue and other liabilities of $0.1 million, with adjustments for non-cash
charges for stock-based compensation and depreciation and amortization aggregating $2.1 million.

During
the nine months ended September 30, 2004, investing activities used cash of $40.1 million due to the net purchase of marketable securities of $37.2 million,
purchases of computer and lab equipment and expenditures related to our new facility in Lexington, Massachusetts of $2.2 million, and the net impact of security deposits of $0.7 million.

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The
following table summarizes our contractual obligations at September 30, 2004 and the effects such obligations are expected to have on our liquidity and cash flows in future
periods.

|                                   |  | Payments due by period
|---------------------------------- |  | ----------------------
|
|Operating lease obligations        |  | $                     
|                                   |  |                       
|Total contractual cash obligations |  | $                     
|                                   |  |                       

On
November 4, 2004, we entered into an agreement with Publicis, a contract sales organization, pursuant to which Publicis will build and train a specialized sales force focused
on cardiologists and primary care physicans located in those geographic areas that we believe constitute approximately 90% of the African American heart failure market in the United States. We are
targeting this sales force to be in place by the end of the first quarter of 2005. If Publicis establishes a sales force of 200 representatives, we estimate that we will be required to make payments
to Publicis under this agreement up to a maximum of $31.6 million in the first year of the contract and up to a maximum of $33.1 million in the second year of the contract.

We
have an agreement with a consulting firm for services related to the development approval process for BiDil. The agreement requires us to pay certain deferred legal and consulting
fees within 45 days after the date on which we receive written FDA approval, if any, for BiDil. In addition, under a collaboration and license agreement with a third party, we have agreed to
make milestone payments to such party upon FDA approval, if any, and upon the first sale of BiDil. At September 30, 2004, we have recorded charges of $2.6 million related to these
arrangements. Assuming that BiDil receives FDA
approval and is commercially launched, we estimate that on or about such time we will be required to make payments aggregating approximately $3.0 million to these third parties.

We
expect to recognize research and development revenue of $15.0 to $17.0 million for the year ended December 31, 2004. We believe that our existing cash, cash equivalents
and marketable securities, and cash we expect to receive under our collaborations with Boston Scientific and Merck, but not including the proceeds of a public offering which we are undertaking, will
be sufficient to fund our planned operations, including increases in spending for our BiDil clinical program, for at least the next nine months. However, we may require significant additional funds
earlier than we currently expect to conduct the clinical trial and to obtain regulatory approvals necessary to launch BiDil and to develop our other product candidates.

On
November 8, 2004, we filed a registration statement on Form S-1 with the Securities and Exchange Commission covering the sale of up to $75 million of shares of our
common stock. We plan to offer all of the shares proposed to be registered in an underwritten public offering. The registration statement has not yet been declared effective by the Securities and
Exchange Commission.

In
July 2004, we entered into a letter of intent to negotiate the terms of an agreement to lease approximately $3.0 million of capital equipment in 2004, principally related to
laboratory and manufacturing equipment. We cannot ensure that we will enter into the capital equipment lease on favorable terms, if at all.

We
may seek additional funding through collaborative arrangements and public or private financings. Additional funding may not be available to us on acceptable terms, or at all. In
addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities, further dilution to
our existing stockholders may result. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also
could be required to seek funds

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through
arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates, or products which we would otherwise pursue on our own.

Even
if we are able to raise additional funds in a timely manner, our future capital requirements may vary from what we expect and will depend on many factors, including the following:



Off-balance sheet arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special
purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Critical accounting policies and estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an
on-going basis, we evaluate our estimates and judgments, including those related to revenue, accrued expenses and the fair value assigned to our common stock and stock awards. We base our
estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.

We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue.We record revenue on an accrual basis as it is earned and when amounts are considered collectible. Revenues received in advance
of performance obligations, or in cases where we have a continuing obligation to perform services, are deferred and recognized over the contractual or estimated performance period. Revenues from
milestone payments that represent the culmination of a separate earnings process are recorded when the milestone is achieved. Contract revenues are recorded as the services are performed. When we are
required to defer revenue, the period over which such

14

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revenue
should be recognized is subject to estimates made by management and may change over the course of the collaborative agreement.

Accrued Expenses.As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process
involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in
our financial statements. Examples of estimated expenses we accrue include contract service fees such as amounts paid to clinical monitors, data management organizations and investigators in
conjunction with clinical trials, as well as fees paid to contract manufacturers in conjunction with the production of clinical materials and professional service fees, such as lawyers and
accountants. In connection with such service fees, our estimates are most affected by our understanding
of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for
services performed. In the event that we do not identify certain costs that have begun to be incurred, or we under- or over-estimate the level of services performed or the costs of such
services, our reported expenses for such period would be too low or too high. The date on which certain services commence, the level of services performed on or before a given date and the cost of
such services are often determined based on subjective judgments. We make these judgments based upon the facts and circumstances known to us in accordance with generally accepted accounting
principles.

Stock-Based Compensation.We have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," or APB 25, and related interpretations in accounting for our stock-based compensation plans, rather than the alternative fair value method provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," or SFAS 123. In 2003 and 2002, certain stock options were granted at exercise prices less than the fair value of
our common stock and, as a result, we recorded deferred stock compensation expense. In the notes to our financial statements, we provide pro forma disclosures in accordance with SFAS 123. We
account for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of such services received or of the equity instruments
issued, whichever is more reliably measured, in accordance with SFAS 123 and Emerging Issues Task Force Issue 96-18, "Accounting for Equity Instruments that Are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services," or EITF 96-18.

Accounting
for equity instruments granted or sold by us under APB 25, SFAS 123 and EITF 96-18 requires fair value estimates of the equity instrument granted or sold.
If our estimates of the fair value of these equity instruments are too high or too low, our expenses may be over- or under-stated. For equity instruments granted or sold in exchange for
the receipt of goods or services, we estimate the fair value of the equity instruments based upon consideration of factors that we deem to be relevant at that time. Because shares of our common stock
were not publicly traded prior to the commencement of our public offering on November 5, 2003, market factors historically considered in valuing stock and stock option grants included
comparative values of public companies discounted for the risk and limited liquidity provided for in the shares we were issuing, pricing of private sales of our redeemable convertible preferred stock,
prior valuations of stock grants and the effect of events that had occurred between the time of such grants, economic trends, and the comparative rights and preferences of the security granted
compared to the rights and preferences of our other outstanding equity.

Prior
to our initial public offering, the fair value of our common stock was determined by our board of directors contemporaneously with the grant. In the absence of a public trading
market for our common stock, our board of directors considered numerous objective and subjective factors in determining the fair value of our common stock. At the time of option grants and other stock
issuances, our board of directors considered the liquidation preferences, dividend rights, voting control and anti-dilution protection attributable to our then-outstanding
redeemable convertible preferred stock, the status of private and public financial markets, valuations of comparable private and public

15

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companies,
the likelihood of achieving a liquidity event such as an initial public offering, our existing financial resources, our anticipated continuing operating losses and increased spending levels
required to complete our clinical trials, dilution to common stockholders from anticipated future financings and a general assessment of future business risks.

Forward-Looking Statements

This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, which we refer to as the Exchange Act. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs,
prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may,"
"plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot
guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements. There are a number of important factors that could cause actual results or
events to differ materially from those disclosed in the forward-looking statements we make. These important factors include our "critical accounting estimates" and the risk factors set forth below
under the caption "Factors That May Affect Future Results." Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our
estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report.

Factors That May Affect Future Results

Risks relating to our business

Because we have a history of losses and our future profitability is uncertain, our common stock is a highly speculative investment.

We have experienced significant operating losses since our inception in 1992. For the nine-month period ended September 30, 2004, we had a net loss of
$20.1 million. As of September 30, 2004, we had an accumulated deficit of approximately $126.9 million. We expect that we will continue to incur substantial losses and that our
cumulative losses will increase as our commercialization, research and development efforts expand. We expect that the losses that we incur will fluctuate from quarter to quarter and that these
fluctuations may be substantial. To date, we have not recorded any revenue from the sale of products, and we will not be able to do so unless and until one of our products completes clinical trials
and receives regulatory approval. BiDil is our only product candidate that has advanced into late-stage clinical trials, and we do not anticipate receiving revenues from BiDil until at least 2005, if
ever. All of our other product candidates are in research or pre-clinical development, will require significant additional testing prior to submission of any regulatory applications and, as such, are
not expected to be commercially available for many years, if at all.

A
large portion of our expenses is fixed, including expenses related to facilities, equipment and personnel. In addition, we expect to spend significant amounts to fund
commercialization, research and development of our product candidates and to enhance our core technologies. As a result, we expect that our operating expenses will continue to increase significantly
in the near term and, consequently, we will need to generate significant revenue to achieve profitability. At the present time we are unable to estimate the level of revenues, if any, that we will
realize from the commercialization of our product candidates, including BiDil. We are therefore unable to estimate when we will achieve profitability, if at all. Even if we do achieve profitability,
we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable could depress the market price

16

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of
our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations.

We are heavily dependent on obtaining regulatory approval for and successfully commercializing BiDil, our most advanced drug candidate.

Our financial, operational and management resources are primarily dedicated to our most advanced drug candidate, BiDil, which has not been approved by the FDA. In
July 2004, we halted our phase III confirmatory clinical trial of BiDil on the recommendation of the independent Data and Safety Monitoring Board and the trial's steering committee due to a
significant survival benefit seen in African American patients taking the drug. We submitted the clinical dataset from the trial to the FDA on November 1, 2004 and expect to file an amendment
to our NDA with the FDA by the end of 2004. We will need to receive FDA approval of our amended NDA before we can market and sell BiDil in the United States. We cannot predict whether or when we may
receive FDA approval of BiDil. In particular, while we expect to have available by the end of first quarter of 2005 the sales force and quantities of finished product required to support the launch of
BiDil, we do not expect that the FDA will act on our application by that time. Even if we obtain FDA approval, we may not be able to launch BiDil prior to the end of 2005, if at all.

Our
BiDil clinical trial was performed exclusively on subjects who are self-identified as African American. To our knowledge, the FDA has never approved a drug product for use in a
particular ethnic population. The FDA's receptiveness to drugs that are approved and marketed on the basis of different ethnicity-based therapeutic outcomes is untested and may be adversely affected
by contrary scientific or public health evidence or political or legal factors. For example, scientific evidence could emerge that suggests that there is no physiological basis to support
pharmaceutical development of drugs based upon ethnicity. Moreover, others may express the view that ethnicity is only a sociological concept and, accordingly, there is not a valid basis for the
commercialization of medicines based on ethnicity. These factors or others may significantly delay FDA approval of our BiDil application beyond the time normally required for the FDA to act and could
prevent us from obtaining FDA approval of BiDil.

If
we fail to achieve regulatory approval or market acceptance of BiDil, our near-term ability to generate product revenue, our reputation and our ability to raise additional capital
will be materially impaired, and the value of an investment in our stock will decline.

We will require substantial additional funds and, if additional capital is not available, we may need to limit, scale back or cease our operations.

We have used and will continue to require substantial funds to conduct research and development, including pre-clinical testing and clinical trials of our product
candidates, and to market and manufacture any products that are approved for commercial sale. For example, we estimate that we will incur significant expenses in the last quarter of 2004 and during
2005 as we develop sales and marketing capabilities and prepare for the anticipated 2005 launch of BiDil, assuming FDA approval. Moreover, we may incur significant additional expenditures to conduct
pre-clinical testing of our nitric-oxide stents, nitric oxide-enhancing COX-2 inhibitors, and other early-stage development programs. Because the successful development of these programs is uncertain,
we are unable to estimate the actual funds we will require to complete research and development of our product candidates and commercialization of our products. We believe that our existing cash and
marketable securities, but not including the proceeds of a public offering which we are undertaking, and cash we expect to receive under our collaborations with Boston Scientific and Merck, will be
sufficient to support our current operating plan for at least the next nine months.

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However,
our future capital requirements, and the period in which we expect our current cash to support our operations, may vary from what we expect due to a number of factors, including
the following:



We
may be required to seek additional funding in the future and may do so through collaborative arrangements and public or private financings. Additional financing may not be available
to us on acceptable terms, or at all. In addition, the terms of the financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing
equity securities, further dilution to our then-existing stockholders will result. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our
research or development programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies,
product candidates or products which we would otherwise pursue on our own.

If we do not successfully market and sell BiDil or our other product candidates, either directly or through third parties, our future revenue will be
limited.

We currently have limited sales, marketing and distribution experience. If BiDil is approved, we intend to launch and market BiDil in North America ourselves,
using a contract sales force, and, in the future, we may also seek to market other products ourselves which are not already subject to marketing agreements where we believe the target physician market
can be effectively reached by the sales force we intend to establish directly or by contract. In order to develop or contract for sales and marketing capabilities, we will have to invest significant
amounts of money and management resources. Because
we minimized these expenditures prior to obtaining the results of our BiDil clinical trial, we may have insufficient time to build our sales and marketing capabilities in advance of BiDil's expected
launch. Moreover, if the approval of BiDil is delayed substantially, or BiDil is not approved, we will have incurred significant unrecoverable expenses.

For
BiDil and any other product candidates for which we decide to perform for sales, marketing and distribution functions ourselves or through a third party, we could face a number of
additional risks, including:



18

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For products with larger target physician markets, we plan to rely significantly on sales, marketing and distribution arrangements with third parties. For example, we plan to rely on our
existing collaboration for the commercialization of stents coated with nitric oxide-releasing compounds if development is successful and such products are approved by the FDA. We may have to enter
into additional marketing arrangements in the future. We may not be able to successfully enter into sales, marketing and/or distribution agreements with any other third parties in the future, on terms
which are favorable to us, if at all. In addition, we may have limited or no control over the sales, marketing and distribution activities of these third parties. Our future revenues for any products
for which we rely on third-party sales, marketing and distribution support will depend heavily on the success of the efforts of these third parties.

If our third-party contract sales organization does not devote sufficient resources to our BiDil project, our ability to achieve near-term revenue could
be harmed.

We recently executed a definitive agreement with Publicis Selling Solutions, Inc., or Publicis, a contract sales organization, pursuant to which, on our behalf,
Publicis will recruit, hire, train and employ a specialty sales force of 175 to 200 sales representatives to sell BiDil to our target prescriber markets. If BiDil is approved, our near-term revenue
for BiDil will depend heavily upon the success and efforts of Publicis. If Publicis does not devote the resources, time and training required to establish an effective and qualified sales force, our
ability to achieve revenue from sales of BiDil will be harmed.

Physicians, payors and patients may not be receptive to BiDil or our other product candidiates, if approved, which could prevent us from achieving and
maintaining profitability.

BiDil and the other product candidates that we are developing are based upon technologies or therapeutic approaches that are not currently in the marketplace.
Assuming we receive FDA approval, we plan to market BiDil only in the United States. Key participants in the U.S. pharmaceutical marketplace, such as physicians, payors and patients, may not accept a
product intended to improve therapeutic results based on ethnicity. As a result, it may be more difficult for us to convince the medical community and third-party payors and patients to accept and use
our products. Our business is substantially dependent on market acceptance of BiDil. If we are unable to launch and commercialize BiDil, we will not generate revenue, and our stock price may decline.

Other
factors that we believe will materially affect market acceptance of BiDil and our other product candidates under development include:



The application of our nitric oxide technology is unproven in humans and, as a result, we may not be able to successfully develop and commercialize any
products based upon this technology.

A component of our strategy is to seek to improve existing medicines with our proprietary nitric oxide technology. Our product candidates include nitric oxide
enhancements of existing drugs. Thus, we are modifying compounds whose chemical and pharmacological profiles are well-documented and understood. However, many of our potential product candidates are
new molecules with chemical and pharmacological profiles that differ from that of the existing drugs. These compounds may not demonstrate in patients the chemical and pharmacological properties
ascribed to them in laboratory

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studies,
and they may interact with human biological systems in unforeseen, ineffective or harmful ways. In addition, it is possible that existing drugs or newly-discovered drugs may not benefit from
the application of our nitric oxide technology. If we are not able to successfully develop and commercialize drugs based upon our technological approaches, we will not generate revenue based on these
drugs, and the value of our stock will decline.

If our clinical trials for any product candidates we advance into clinical testing are not successful, we may not be able to successfully develop and
commercialize our products.

In order to obtain regulatory approvals for the commercial sale of our product candidates, we or our collaborators will be required to complete extensive clinical
trials in humans to demonstrate the safety and efficacy of our product candidates. We may not be able to obtain authority from the FDA or other regulatory agencies to commence or complete these
clinical trials. If permitted, such clinical testing may not prove that our drug candidates are safe and effective to the extent necessary to permit us to obtain marketing approvals from regulatory
authorities. Moreover, positive results demonstrated in pre-clinical studies and clinical trials that we complete may not be indicative of results obtained in future clinical trials. Furthermore, we,
one of our collaborators, institutional review boards or regulatory agencies may suspend clinical trials at any time if it is believed that the subjects or patients participating in such trials are
being exposed to unacceptable health risks. Adverse or inconclusive clinical trial results concerning any of our drug candidates could require us to conduct additional clinical trials, result in
increased costs and significantly delay the filing for marketing approval for those drug candidates with the FDA or result in a filing for a narrower indication than was originally sought or result in
a decision to discontinue development of those drug candidates.

The
successful completion of our clinical trials will depend on, among other things, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size
of the patient population, the nature of the clinical protocol, the availability of alternative treatments, the proximity of patients to clinical sites and the eligibility criteria for the study. We
may be unable to enroll the number of patients we need to complete a trial on a timely basis. Moreover, delays in planned patient enrollment for clinical trials may cause us to incur increased costs
and delay commercialization.

We
have relied on academic institutions or clinical research organizations to supervise or monitor some or all aspects of our BiDil trial, and we expect to rely on academic institutions
and clinical research organizations for other product candidates we advance into clinical testing. Accordingly, we have less control over the timing and other aspects of these clinical trials than if
we conducted them entirely on our own.

As
a result of these factors, we or third parties on whom we rely may not successfully begin or complete our clinical trials in the time periods we have forecasted, if at all. Moreover,
if we incur costs and delays in our programs or if we do not successfully develop and commercialize our products, our stock price could decline.

If we and our partners do not obtain and maintain the regulatory approvals required to market and sell BiDil and our other product candidates, then our
business will be unsuccessful, and the market price of our stock will substantially decline.

We and our partners will not be able to market any of our products in the United States, Europe or in any other country without marketing approval from the FDA or
equivalent foreign regulatory agency. The regulatory process to obtain market approval for a new drug or medical device takes many years and requires expenditures of substantial resources. We have had
only limited experience in preparing applications and obtaining regulatory approvals.

20

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If
we do not receive required regulatory approval or clearance to market BiDil or any of our other product candidates, we will not be able to develop and commercialize these products,
which will affect our ability to achieve profitability and cause the value of our common stock to substantially decline.

If we, our third-party manufacturers or our service providers fail to comply with applicable laws and regulations, we or they could be subject to
enforcement actions, which could affect our ability to market and sell our products and harm our reputation.

If we or our third-party manufacturers or service providers fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to
enforcement actions which could affect our ability to develop, market and sell our products successfully and could harm our reputation and lead to less acceptance of our products by the market. These
enforcement actions include:



Assuming BiDil is approved for commercial sale, if the third-party manufacturer of BiDil encounters delays or difficulties in production, we may not be
able to meet demand for the product, and we may lose potential revenue.

We do not manufacture BiDil and have no plans to do so. We engaged Schwarz Pharma Manufacturing, Inc., or Schwarz Pharma, for the manufacture of batches of
BiDil for clinical trials and are negotiating a definitive agreement for the manufacture and supply of commercial quantities of BiDil, assuming it receives FDA approval. Although we are currently
negotiating the terms of a definitive commercial manufacture and supply agreement for BiDil with Schwarz Pharma, to date we have not secured a long-term commercial supply arrangement for BiDil. We
cannot assure you that we
will be able to enter into a commercial manufacturing and supply agreement with Schwarz Pharma or any other contract manufacturer for BiDil on a timely basis or on terms that are favorable to us. If
we are unable to establish or maintain a commercially reasonable manufacturing agreement for the production of BiDil, if approved, we may not be able to successfully develop and commercialize BiDil
and our stock price will decline.

Furthermore,
Schwarz Pharma, if engaged, may encounter difficulties in production. These problems may include:



21

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Schwarz
Pharma may not perform as agreed or may terminate its engagement with us, which would adversely impact our ability to produce and sell BiDil.

The
number of third-party manufacturers with the manufacturing and regulatory expertise and facilities necessary to manufacture finished drug products for us on a commercial scale is
limited, and it would take a significant amount of time to arrange, qualify, and receive necessary regulatory approval for alternative arrangements. We may not be able to contract for manufacturing on
acceptable terms, if at all.

Any
of these factors could increase our costs and result in our being unable to effectively commercialize BiDil. Furthermore, if Schwarz Pharma or any other third-party manufacturer of
BiDil fails to deliver the required commercial quantities of finished product on a timely basis and at commercially reasonable prices, we may be unable to meet the demand for our product, and we may
lose potential revenues.

The development and commercialization of our product candidates may be terminated or delayed, and the cost of development and commercialization may
increase, if third parties on whom we rely to manufacture our products do not fulfill their obligations.

We do not manufacture any of our other product candidates and have no current plan to develop any capacity to do so in the future. In order to continue to develop
products, apply for regulatory approvals and commercialize our products, we plan to rely on third parties for the production of clinical and commercial quantities of our product candidates. We will
depend upon these third parties to perform their obligations in a timely manner and in accordance with applicable laws and regulations. To the extent that third-party manufacturers with whom we
contract fail to perform their obligations in accordance with applicable laws and regulations, we may be adversely affected in a number of ways, including:



We rely on a single source supplier for one of the two active ingredients in BiDil, and the loss of this supplier could prevent us from selling BiDil,
which would materially harm our business.

We rely on Sumitomo for our supply of hydralazine, one of the two active ingredients in BiDil. Sumitomo is currently the only supplier of hydralazine worldwide.
We do not have any agreement with Sumitomo regarding the supply of hydralazine. If Sumitomo stops manufacturing or is unable to manufacture hydralazine, or if we are unable to procure hydralazine from
Sumitomo on commercially favorable terms, we may be unable to continue to sell BiDil on commercially viable terms, if at all. Furthermore, because Sumitomo is currently the sole supplier of
hydralazine, Sumitomo has unilateral control over the price of hydralazine. Any increase in the price for hydralazine may reduce our gross margins.

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The termination of our collaboration agreement with Merck, resulting from Merck's recent decision to withdraw its COX-2 inhibitor, Vioxx, from
worldwide markets, will result in the loss of anticipated milestone and royalty based revenue from the collaboration and may indicate that the development of nitric oxide-enhancing COX-2 inhibitors is
not viable.

In December 2002, we entered into an exclusive, worldwide research, collaboration and licensing agreement with Merck pursuant to which we granted Merck
marketing and sales rights to our technology for nitric oxide-enhancing COX-2 inhibitors. On September 30, 2004, Merck halted the phase II trial of our lead candidate in nitric oxide-enhancing
COX-2 inhibitors. This lead nitric oxide candidate is composed of a derivative of rofecoxib. Rofecoxib is the active ingredient in Vioxx, a COX-2 inhibitor which Merck voluntarily withdrew from
worldwide markets on September 30, 2004. We have agreed with Merck to terminate our collaboration agreement, which will result in the loss of any potential milestone or royalty revenue from the
sale of products that may have resulted from the collaboration as well as any research and development funding that we may have received beyond the end of the initial research term in
December 2005. If the FDA imposes additional regulatory burdens for the approval of new COX-2 inhibitors, if COX-2 inhibitors continue to pose safety concerns, or if the market for COX-2
inhibitors contracts, then we may lose any investment made in the development of, and any potential revenue that may have resulted from, the development, sale or licensing of nitric oxide-enhancing
COX-2 inhibitors.

We currently depend on collaborative partners for a significant portion of our revenues and to develop, conduct clinical trials with, obtain regulatory
approvals for, and manufacture, market and sell some of our product candidates, and these collaborations may not be successful.

We are relying on Boston Scientific to fund the development of and to commercialize nitric oxide-enhancing stents using our technology to prevent the re-closure
of arteries, or restenosis, following balloon angioplasty, a treatment to widen blocked arteries. In addition, Merck has funded the development of products based upon our nitric oxide-enhancing COX-2
inhibitor technologies. All of our $12.8 million of revenues for 2003 and our $7.0 million of revenues for the nine months ended September 30, 2004 were derived from licensing,
research and development and milestone payments paid to us by Boston Scientific and Merck. We have agreed with Merck to terminate our collaboration on nitric oxide-enhancing COX-2 inhibitor
technologies. Please see "Risk FactorsThe termination of our collaboration agreement with Merck, stemming from Merck's recent decision to withdraw its COX-2 inhibitor, Vioxx, from
worldwide markets, will result in the loss of anticipated milestone and royalty based revenue from the collaboration and may indicate that the development of nitric oxide-enhancing COX-2 inhibitors is
not viable." for additional risks relating to our agreement with Merck.

Our
agreement with Boston Scientific provides us research and development funding for our nitric oxide-enhancing stent program, and additional payments due to us under the collaboration
agreement are generally based on the achievement of specific development and commercialization milestones that may not be met. The agreement with Boston Scientific can be terminated at any time upon
30 days' prior written notice. We are also entitled to royalty payments that are based on the sales of products developed and marketed through the collaboration. These future royalty payments
may not materialize or may be less than expected if the related product candidates are not successfully developed or marketed, or if we or our collaborator is forced to license intellectual property
from third parties. Accordingly, we cannot predict with certainty whether this collaboration will continue to generate revenues for us and if so, for how long. The loss of the Boston Scientific
collaboration could decrease our revenues. We intend to enter into collaborative agreements with other parties in the future relating to other product candidates, and we are likely to have similar
risks with regard to any such future collaborations.

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In
addition, our existing collaboration and any future collaborative arrangements that we seek to enter into with third parties may not be scientifically or commercially successful.
Factors that may affect the success of our collaborations include the following:



Our failure to successfully acquire, develop and market additional drug candidates or approved drugs would impair our ability to grow.

As part of our strategy, we intend to acquire, develop and market additional drugs and drug candidates to treat African Americans with cardiovascular, metabolic
and other diseases that affect this population. The success of this strategy depends upon our ability to identify, select and acquire appropriate pharmaceutical drug candidates and drugs.

Any
drug candidate we license or acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable
foreign regulatory authorities. All drug candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that the drug candidate will not be
shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot assure you that any drugs that we develop or acquire that are approved will be manufactured
or produced economically, successfully commercialized or widely accepted in the marketplace.

Proposing,
negotiating and implementing an economically viable acquisition of a drug or drug candidate is a lengthy and complex process. Other companies, including those with
substantially greater financial, marketing and sales resources, may compete with us for the acquisition of product candidates and approved products. We may not be able to acquire the rights to
additional drug candidates and approved drugs on terms that we find acceptable, if at all.

Risks relating to our intellectual property rights

Our patent protection for BiDil, which is a combination of two generic drugs, is limited, and we may be subject to generic substitution or competition
and resulting pricing pressure.

We have no composition of matter patent covering our lead product candidate, BiDil, which we intend to market for the treatment of heart failure in African
Americans. BiDil is a fixed-dose combination of two generic drugs, isosorbide dinitrate and hydralazine, which are approved and separately marketed, in dosages similar to those we include in BiDil,
for indications other than heart failure, at prices below the prices we expect to charge for BiDil. We have three issued method-of-use patents, one of which covers the use of the combination of
isosorbide dinitrate and hydralazine to reduce the incidence of mortality associated with chronic congestive heart failure, expiring in 2007, and the others covering the treatment of heart failure in
black patients, expiring in 2020. As a practical

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matter,
we may not be able to enforce these method-of-use patents to prevent physicians from prescribing isosorbide dinitrate and hydralazine separately for the treatment of heart failure in African
Americans, even though neither drug is approved for such use.

Other
factors may also adversely affect our patent protection for BiDil. The combination therapy of isosorbide dinitrate and hydralazine for use in heart failure was developed through
lengthy, publicly-sponsored clinical trials conducted during the 1980s, prior to the filing of the patent application that resulted in the 2007 patent. The U.S. Patent and Trademark Office, or U.S.
patent office, considered published reports on these clinical trials and concluded that they did not constitute prior art that would prevent the issuance of the 2007 patent. The U.S. patent office
also considered the question of whether the 2007 patent constituted prior art with respect to the 2020 patents, but determined that the claims of the 2020 patents were non-obvious and patentable. A
court considering the validity of the 2007 or 2020 patents with respect to questions of prior art might be presented with other alleged prior art or might reach conclusions different from those
reached by the U.S. patent office. If the 2007 or 2020 patents were to be invalidated or if physicians were to prescribe isosorbide dinitrate and hydralazine separately for heart failure in African
Americans, our BiDil revenue could be significantly reduced, we could fail to recover the cost of developing BiDil and BiDil might not be a viable product.

If we are not able to obtain and enforce patent protection for our discoveries, our ability to develop and commercialize our product candidates will be
harmed, and we may not be able to operate our business profitably.

Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the patent and other intellectual property laws
of the United States and other countries, in order to prevent others from using our inventions and proprietary information. Because certain United States patent applications are confidential until
patents issue, such as applications filed prior to November 29, 2000 or applications filed after such date which will not be filed in foreign countries, third parties may have filed patent
applications for technology covered by our pending patent applications without our being aware of those applications, and our patent applications may not have priority over any patent applications of
others.

Our
strategy depends on our ability to rapidly identify and seek patent protection for our discoveries. This process is expensive and time consuming, and we may not be able to file and
prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain
and use information that we regard as proprietary. The mere issuance of a patent does not guarantee that it is valid or enforceable, so even if we obtain patents, they may not be valid or enforceable
against third parties.

The
issued patents and patent applications for our product candidates and nitric oxide technology include claims with respect to both the composition of specific drugs or compounds and
specific methods of using these drugs or compounds in therapeutic areas. In some cases, like BiDil, our only patent protection is with respect to the method of using a drug or compound, and we do not
have patent claims covering the underlying composition of the drug or compound. Method-of-use patents may provide less protection for our product candidates because it may be more difficult to prove
direct infringement against a pharmaceutical manufacturer or distributor once they have gained approval for an alternative indication. In addition, if any other company gains FDA approval for an
indication separate from the one we are pursuing and markets a drug that we expect to market under the protection of a method-of-use patent, physicians will be able to prescribe that drug for use in
the indication for which we have obtained approval, even though the drug is not approved for such indication. As a practical matter, we may not be able to enforce our method-of-use patents against
physicians prescribing drugs for such off-label use. Off-label use and any resulting off-label sales could make it more difficult to obtain the price we would otherwise wish to achieve for, or to
successfully

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commercialize,
our product. In addition, in those situations where we have only method-of-use patent coverage for a product candidate, it may be more difficult to find a pharmaceutical company partner
to license or support development of our product candidate.

Our
pending patent applications may not result in issued patents. The patent position of pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves
complex legal and factual considerations. The standards which the U.S. patent office and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change.
There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. Accordingly, we do not know the degree of
future protection for our proprietary rights or the breadth of claims allowed in any patents issued to us or to others.

We
also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. If any trade secret, know-how or other technology not
protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

If we become involved in patent litigation or other proceedings to enforce our patent rights, we would incur substantial costs and expenses, substantial
liability for damages or be required to stop our product development and commercialization efforts.

A third party may sue us for infringing on its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued to us or to determine the
scope and validity of third-party proprietary rights. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be
substantial, and the litigation would divert our management's efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they
have substantially greater resources. In addition, our strategy of providing nitric oxide-enhancing versions of existing medicines could lead to more patent litigation as the markets for these
existing medicines are very large and competitive. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.

For
example, we have filed an opposition in the European Patent Office, or EPO, to revoke NicOx S.A.'s European Patent No. 904 110, which we refer to as EP '110. This patent is
directed to the use of organic compounds containing a nitrate group or inorganic compounds containing a nitric oxide group to reduce the toxicity caused by certain drugs, including non-steroidal
anti-inflammatory drugs, or NSAIDs. The basis for our opposition, in part, is that the claims in EP '110 are anticipated and therefore invalid if they are construed to cover a single compound
chemically linked to a nitrate. While we believe that the claims in EP '110 will be invalidated, or be narrowed, we cannot predict with certainty the outcome of the opposition. If the EPO finds that
there are valid claims in EP '110 that cover compounds chemically linked to nitrates, we may be adversely affected in our ability to market our product candidates for reducing gastrointestinal
toxicity without first obtaining a license from NicOx, which may not be available on favorable terms, if at all. We do not know whether NicOx has filed claims of similar scope to the EP '110 patent in
the United States.

If
any parties are able to successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages,
potentially including treble damages, if we are found to have willfully infringed on such parties' patent rights. In addition to any damages we might have to pay, a court could require us to stop the
infringing activity or obtain a license on unfavorable terms. Moreover, any legal action against us or our partners claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our partners to obtain a license in order to continue to manufacture or market the
affected products and

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processes.
Any license required under any patent may not be made available on commercially-acceptable terms, if at all. In addition, some licenses may be non-exclusive, and therefore our competitors
may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to effectively market some of our technology
and product candidates, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. In addition, a
number of our collaborations provide that royalties payable to us for licenses to our intellectual property may be offset by amounts paid by our collaboration partners to third parties who have
competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenues from products developed through collaborations.

We in-license a significant portion of our principal proprietary technologies, and if we fail to comply with our obligations under any of the related
agreements, we could lose license rights that are necessary to developing BiDil and our other product candidates.

We are a party to a number of licenses that give us rights to third-party intellectual property that is necessary for our business. In particular, we have
obtained the exclusive right to develop and commercialize BiDil pursuant to a license agreement with Dr. Jay N. Cohn, and some of our intellectual property rights relating to nitric oxide
compounds have been obtained pursuant to license agreements with the Brigham and Women's Hospital and Boston University. We expect to enter into additional licenses in the future. These licenses
impose various development, commercialization, funding, royalty, diligence, and other obligations on us. If we breach these obligations, the licensor may have the right to terminate the license or
render the license non-exclusive, which would result in us being unable to develop, manufacture and sell products that are covered by the licensed technology.

Risks relating to our industry

We face significant competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

The pharmaceutical and medical device industries are highly competitive and characterized by rapid and significant technological change. Our principal competitors
in the markets we have targeted, such as cardiovascular disease and inflammation, are large, multinational pharmaceutical and medical device companies that have substantially greater financial and
other resources than we do and are conducting extensive research and development activities on technologies and product candidates similar to or competitive with ours.

There
are a number of companies currently marketing and selling products to treat heart failure in the general population that will compete with BiDil, if it is approved. These include
GlaxoSmithKline, plc, which currently markets Coreg, Merck & Co., Inc., which currently markets Vasotec, Pfizer Inc., which currently markets Inspra, and Astra Zeneca, plc, which
currently markets Toprol XL.

We
also face competition from other pharmaceutical companies seeking to develop drugs using nitric oxide technology. For example, we are aware of at least four companies working in the
area of nitric oxide based therapeutics. These companies are GB Therapeutics, NicOx S.A., OxoN Medica, and Vasopharm BIOTECH GmbH.

Many
of our competitors are more experienced than we are in drug development and commercialization, obtaining regulatory approvals and product marketing and manufacturing. As a result,
our competitors may develop and commercialize pharmaceutical products before we do. In addition, our competitors may develop and commercialize products that render our products obsolete or
non-competitive or that block or delay approval of our products as a result of patent or non-patent exclusivity.

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We may be exposed to product liability claims and may not be able to obtain or maintain adequate product liability insurance.

Our business exposes us to the risk of product liability claims that is inherent in the manufacturing, testing, and marketing of human therapeutic products. Our
clinical trial liability insurance is subject to deductibles and coverage limitations. We do not currently have any commercial product liability insurance. We may not be able to obtain or maintain
insurance on acceptable terms, or at all.
Moreover, any insurance that we do obtain may not provide adequate protection against potential liabilities.

If third-party payors do not reimburse customers for BiDil or any of our product candidates that are approved for marketing, they might not be used or
purchased, and our revenues and profits might be adversely affected.

Our revenues and profits depend heavily upon the availability of coverage and reimbursement for the use of BiDil, and any of our product candidates that are
approved for marketing, from third-party healthcare and state and federal government payors, both in the United States and in foreign markets. Reimbursement by a third-party payor may depend upon a
number of factors, including the third-party payor's determination that use of a product is:



Since
reimbursement approval for a product is required from third-party and government payors, seeking this approval, particularly when seeking approval for a preferred form of
reimbursement over other competitive products, is a time-consuming and costly process. Third-party payors may require cost-benefit analysis data from us in order to demonstrate the cost-effectiveness
of any product we might bring to market. For any individual third-party payor, we may not be able to provide data sufficient to gain reimbursement on a similar or preferred basis to competitive
products or at all. Once reimbursement at an agreed level is approved by a third-party payor, we may lose that reimbursement entirely or we may lose the similar or better reimbursement we receive
compared to competitive products. As reimbursement is often approved for a period of time, this risk is greater at the end of the time period, if any, for which the reimbursement was approved.

Risks relating to our common stock

Our stock price is subject to fluctuation, which may cause an investment in our stock to suffer a decline in value.

The market price of our common stock may fluctuate significantly in response to factors that are beyond our control. The stock market in general has recently
experienced extreme price and volume fluctuations. The market prices of securities of pharmaceutical, biotechnology and other life sciences companies have been extremely volatile, and have experienced
fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. For example, our stock price could be adversely affected if product candidates by
others that utilize nitric oxide technology are not successful in clinical testing, fail to achieve regulatory approval or are not accepted in the marketplace, even though these failures may not be
related to our product candidates or technology. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in the value of our
common stock.

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We may incur significant costs and suffer management distraction and reputational damage from class action litigation and regulatory or government
investigations and actions due to trading in our common stock.

Our stock price has been, and is likely to continue to be, volatile. Our stock price may fluctuate for many reasons, including as a result of public announcements
regarding the progress of our development and marketing efforts, the addition or departure of key personnel, variations in our quarterly operating results and changes in market valuations of
pharmaceutical, biotechnology or other life sciences companies. When the market price of a company's stock is volatile, holders of that company's stock may bring securities class action litigation
against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuit was without merit, we could incur substantial costs defending
the lawsuit.

On
July 20, 2004, the Market Regulation Department of the National Association of Securities Dealers, Inc. advised us that it is conducting a review of trading activity in
our common stock surrounding our July 19, 2004 announcement that we had halted our phase III confirmatory clinical trial of BiDil due to the significant survival benefit seen with BiDil. The
NASD is reviewing, among other things, information on relationships between our officers, directors and service providers and
individuals and institutions who may have traded in our common stock prior to the July 19, 2004 announcement. We are cooperating with this review and have identified certain persons on the list
provided to us by the NASD as having a relationship with our chief executive officer and others at NitroMed. We have established a special committee of our board of directors to oversee our response
to this review. The NASD may refer this matter to the SEC once it completes its review.

The
SEC or other securities regulators may investigate trading activity of insiders and others around events that result in stock price volatility, such as our July 19
announcement, and we may incur substantial costs in connection with any such government investigation or related action. A stockholder lawsuit, SEC or other investigation or action could also damage
our reputation or that of our officers or directors and divert their time and attention away from management of NitroMed.

Substantially all of our outstanding common stock may be sold into the market at any time. This could cause the market price of our common stock to drop
significantly.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the
holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of September 30, 2004, we had outstanding 26,356,630 shares of common stock.
Subject to lock up agreements which will restrict the sale of approximately 8,286,053 of these shares for a period of 60 days after this offering, substantially all of these shares may also be
resold in the public market at any time. In addition, we have a significant number of shares that are subject to outstanding options. The exercise of these options and the subsequent sale of the
underlying common stock could cause a further decline in our stock price. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem
appropriate.

Insiders have substantial control over us and could delay or prevent a change in corporate control.

As of September 30, 2004, our directors, executive officers and principal stockholders, together with their affiliates, own, in the aggregate,
approximately 53% of our outstanding common stock. As a result, these stockholders, if acting together, will have the ability to determine the outcome of matters submitted to our stockholders for
approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, if acting together, will have the
ability to control the management and affairs of our company. Accordingly, this concentration of ownership may harm the market price of our common stock by:



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Provisions in our charter documents and under Delaware law may prevent or frustrate attempts by stockholders to change current management and hinder
efforts to acquire a controlling interest in us.

Provisions of our restated certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that
stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may prevent or frustrate attempts by stockholders
to replace or remove our current management. These provisions include:



In
addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested
stockholder, generally defined as a person or entity which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the
date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay
or prevent a change in control of our company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk related to changes in interest rates. Our current investment policy is to maintain an investment portfolio consisting mainly of U.S.
money market and high-grade corporate securities, directly or through managed funds, with average contractual maturities of less than two years. Our cash is deposited in and invested
through highly rated financial institutions in North America. Our marketable securities 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 10% from levels at September 30, 2004, we estimate that the fair value of our investment portfolio would decline by an immaterial amount. We
have the ability to hold our fixed income investments until maturity, and therefore we do not expect our operating results or cash flows to be affected to any significant degree by a change in market
interest rates on our investments.

Item 4. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2004. Based on this evaluation, our chief executive officer and chief financial
officer concluded that, as of September 30, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us is made

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known
to our chief executive officer and chief financial officer by others within our company, particularly during the period in which this report was being prepared and (2) effective, in that
they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.

No
change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

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



On November 10, 2003, we completed an initial public offering of 6,000,000 shares of our common stock at a price to the public of $11.00 per share. The
offer and sale of all of the shares in the initial public offering were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File
No. 333-108104), which was declared effective by the Securities and Exchange Commission on November 5, 2003. Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and
Pacific Growth Equities were the managing underwriters of the initial public offering. The offering commenced on November 5, 2003 and did not terminate until after the sale of all of the
securities registered in the Registration Statement. As part of the initial public offering, we granted these underwriters an over-allotment option to purchase up to an additional 900,000 shares of
our common stock from us. The underwriters did not exercise the over-allotment option. There were no selling stockholders in the offering.

The
aggregate price of the offering amount registered on our behalf was $66.0 million. In connection with the offering, we paid approximately $4.6 million in underwriting
discounts and commissions to the underwriters and incurred an estimated $1.3 million in other offering expenses. None of the underwriting discounts and commissions or offering expenses were
incurred or paid to directors or officers of ours or their associates or to persons owning 10 percent or more of our common stock or to any affiliates of ours. After deducting the underwriting
discounts and commissions and offering expenses, we received net proceeds from the offering of approximately $60.1 million. As of September 30, 2004, all of such proceeds remain from the
offering, and pending use of the proceeds, we have invested these funds in short-term, interest-bearing, investment-grade securities.

Item 6. Exhibits.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                       |  | NITROMED, INC.
|---------------------- |  | --------------
|                       |  | By:           
|Date: November 8, 2004 |  |               

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                       
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1           |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|31.2           |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|32.1           |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                             
|32.2           |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                            

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