**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

----

**FORM 10-Q**

 
| **(Mark One)**                                          |
|---------------------------------------------------------|
|                                                    |
| **x**                                                   | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                    |
| **For The Quarterly Period Ended March 31,  2007** |
|                                                    |
| **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**                                                |   | **22-3159793**       |
|-------------------------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of                            |   | (I.R.S. Employer     |
| Incorporation or  Organization)                             |   | Identification  No.) |
|                                                        |   |                 |
| **45  Hayden Avenue, Suite 3000, Lexington, Massachusetts** |   | **02421**            |
| (Address of  Principal Executive Offices)                   |   | (Zip Code)           |

 

Registrant’stelephone number, including area code: **(781) 266-4000**

Former Name, Former Address and Formal Fiscal Year, ifChanged Since Last Report

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes ý     No o

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

 
| Large  Accelerated Filer  o |   | Accelerated Filer  ý |   | Non-Accelerated Filer   o |
|---------------------------------------|--------|-------------------------------------|--------|-------------------------------------|

 

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

As of April 27, 2007, the registrant had 38,229,426shares of Common Stock, $0.01 par value per share, outstanding.

 

 

----

NITROMED, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

**TABLE OF CONTENTS**
|                    | ** ** | ** **                                                                                              | ** ** | ** ** | ** ** |
|--------------------|------------|---------------------------------------------------------------------------------------------------------|------------|------------|------------|
| PART I.       |       | FINANCIAL  INFORMATION                                                                                  |       |       |       |
| Item 1.            |       | Financial Statements                                                                                    |       |       |       |
|               |       | Condensed  Balance Sheets as of March 31, 2007 and December 31, 2006  (unaudited)             |       |       |       |
|               |       | Condensed Statements of Operations for the three  months ended March 31, 2007 and 2006 (unaudited) |       |       |       |
|               |       | Condensed Statements of Cash Flows for the three  months ended March 31, 2007 and 2006 (unaudited) |       |       |       |
|               |       | Notes To Unaudited Financial Statements                                                                 |       |       |       |
| Item 2.            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations             |       |       |       |
| Item 3.            |       | Quantitative and Qualitative Disclosures About Market  Risk                                             |       |       |       |
| Item 4.            |       | Controls and Procedures                                                                                 |       |       |       |
| PART II.      |       | OTHER  INFORMATION                                                                                      |       |       |       |
| Item  1A.          |       | Risk  Factors                                                                                           |       |       |       |
| Item 6.            |       | Exhibits                                                                                                |       |       |       |
| SIGNATURES         |       |                                                                                                    |       |
| EXHIBIT INDEX |       |                                                                                                    |       |

 

2

----

**PART I.FINANCIAL INFORMATION**

**Item 1.****           FinancialStatements (unaudited)**

**NITROMED, INC.CONDENSED BALANCE SHEETS(in thousands, except par value amounts)**
| ** **                                                                                                                                                                  | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                  | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                             |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                  |       | $                        | 16,184     |                        | $          | 21,074 |   |
| Marketable  securities                                                                                                                                                      |       | 16,298                   |       | 21,079                      |       |
| Accounts  receivable                                                                                                                                                        |       | 1,491                    |       | 1,370                       |       |
| Inventories                                                                                                                                                                 |       | 3,034                    |       | 2,846                       |       |
| Prepaid expenses  and other current assets                                                                                                                                  |       | 1,007                    |       | 570                         |       |
| Total current assets                                                                                                                                                        |       | 38,014                   |       | 46,939                      |       |
| Property and equipment,  net                                                                                                                                                |       | 301                      |       | 963                         |       |
| Restricted cash                                                                                                                                                             |       | 191                      |       | 803                         |       |
| Total assets                                                                                                                                                                |       | $                        | 38,506     |                        | $          | 48,705 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                              | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                        |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                            |       | $                        | 2,326      |                        | $          | 1,923 |   |
| Accrued expenses                                                                                                                                                            |       | 5,708                    |       | 6,545                       |       |
| Accrued  restructuring                                                                                                                                                      |       | —                   |       | 299                         |       |
| Deferred revenue                                                                                                                                                            |       | 65                       |       | 206                         |       |
| Current portion  of long-term debt                                                                                                                                          |       | 7,098                    |       | 6,925                       |       |
| Total current  liabilities                                                                                                                                                  |       | 15,197                   |       | 15,898                      |       |
| Long-term debt                                                                                                                                                              |       | 1,887                    |       | 3,728                       |       |
| Commitments and  contingencies (Note 12)                                                                                                                                    |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                                                  |       |                     |       |                        |       |
| Preferred stock,  $0.01 par value; 5,000 shares authorized; no shares issued or outstanding                                                                                 |       | —                   |       | —                      |       |
| Common stock,  $0.01 par value; 65,000 shares authorized; 37,476 and 37,181 shares issued  and outstanding at March 31, 2007 and December 31, 2006,  respectively |       | 375                      |       | 372                         |       |
| Additional  paid-in capital                                                                                                                                                 |       | 344,974                  |       | 342,528                     |       |
| Accumulated  deficit                                                                                                                                                        |       | (323,922                 | )          | (313,808                    | )          |
| Accumulated  other comprehensive loss                                                                                                                                       |       | (5                       | )          | (13                         | )          |
| Total stockholders’  equity                                                                                                                                            |       | 21,422                   |       | 29,079                      |       |
| Total liabilities and stockholders’ equity                                                                                                                             |       | $                        | 38,506     |                        | $          | 48,705 |   |

 

See accompanyingnotes.

3

----

 

**NITROMED, INC.CONDENSED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) (unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                            | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Product sales                                                         |       | $                                 | 3,568      |   | $ | 2,316 |   |
| Cost and operating expenses:                                          |       |                              |       |   |   |
| Cost of product sales                                                 |       | 954                               |       | 896 |   |
| Research and development (1)                                          |       | 3,007                             |       | 6,152 |   |
| Sales, general and administrative (1)                                 |       | 8,948                             |       | 19,632 |   |
| Restructuring charge                                                  |       | 1,004                             |       | 2,038 |   |
| Total cost and  operating expenses                                    |       | 13,913                            |       | 28,718 |   |
| Loss from  operations                                                 |       | (10,345                           | )          | (26,402 | ) |
| Non-operating  income:                                                |       |                              |       |   |   |
| Interest income                                                       |       | 469                               |       | 874 |   |
| Interest expense                                                      |       | (238                              | )          | (396 | ) |
|                                                                  |       | 231                               |       | 478 |   |
| Net loss                                                              |       | $                                 | (10,114    | ) | $ | (25,924 | ) |
| Basic and diluted net loss per common share                           |       | $                                 | (0.27      | ) | $ | (0.75 | ) |
| Shares used in  computing basic and diluted net loss per common share |       | 37,263                            |       | 34,597 |   |

----

(1)          Includesstock-based compensation expense as follows:

| Research and development           |   | $ | 542   |   | $ | 713   |   |
|------------------------------------|--------|---|-------|--------|---|-------|--------|
| Sales, general and  administrative |   | $ | 1,429 |   | $ | 1,021 |   |

 

See accompanyingnotes.

4

----

 

**NITROMED, INC.CONDENSED STATEMENTS OF CASH FLOWS(in thousands) (unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| **Operating  activities**                                                    | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                 | (10,114    | ) | $ | (25,924 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                              |       |   |   |
| Depreciation and amortization                                                |       | 178                               |       | 236 |   |
| Non-cash restructuring charge                                                |       | —                            |       | 597 |   |
| Stock-based compensation expense                                             |       | 1,971                             |       | 1,734 |   |
| Changes in operating assets and liabilities:                                 |       |                              |       |   |   |
| Accounts receivable                                                          |       | (121                              | )          | 3,376 |   |
| Inventories                                                                  |       | (188                              | )          | 91 |   |
| Prepaid expenses and other current assets                                    |       | (437                              | )          | 540 |   |
| Deferred revenue                                                             |       | (141                              | )          | (2,931 | ) |
| Accounts payable and accrued expenses                                        |       | (434                              | )          | (3,898 | ) |
| Accrued restructuring charge                                                 |       | (299                              | )          | 1,441 |   |
| Net cash used in  operating activities                                       |       | (9,585                            | )          | (24,738 | ) |
| **Investing  activities**                                                    | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                          |       | (44                               | )          | (100 | ) |
| Sale of  equipment                                                           |       | 528                               |       | — |   |
| Purchases of  marketable securities                                          |       | 17,813                            |       | 24,375 |   |
| Sales of  marketable securities                                              |       | (13,024                           | )          | (32,227 | ) |
| Other assets                                                                 |       | 612                               |       | 1 |   |
| Net cash  provided by (used in) investing activities                         |       | 5,885                             |       | (7,951 | ) |
| **Financing  activities**                                                    | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Proceeds from  sale of common stock                                          |       | —                            |       | 58,562 |   |
| Principal  payments on long-term debt                                        |       | (1,668                            | )          | (1,510 | ) |
| Proceeds from  employee stock plans                                          |       | 478                               |       | 87 |   |
| Net cash  provided by (used in) financing activities                         |       | (1,190                            | )          | 57,139 |   |
| Net change in cash  and cash equivalents                                     |       | (4,890                            | )          | 24,450 |   |
| Cash and cash  equivalents at beginning of period                            |       | 21,074                            |       | 11,091 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                 | 16,184     |   | $ | 35,541 |   |

 

See accompanyingnotes.

5

----

**NITROMED, INC.NOTES TO UNAUDITED FINANCIAL STATEMENTSMARCH 31, 2007**

### **(1)****                                 Operationsand Basis of Presentation**

The accompanying unaudited financial statements ofNitroMed, Inc. (“NitroMed” or the “Company”) have been prepared inaccordance with United States generally accepted accounting principles (“GAAP”)for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by GAAP for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for the fair presentation of theresults for the interim periods have been included. The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Interim results are not necessarilyindicative of results to be expected for the entire fiscal year endingDecember 31, 2007. These unaudited financial statements should be read inconjunction with the Company’s latest annual audited financial statements andrelated notes thereto included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) onMarch 8, 2007.

The Company’s principal source of revenue is from thesale of BiDil® (isosorbide dinitrate/hydralazinehydrochloride), the Company’s product for the treatment of heart failure in self-identifiedblack patients as an adjunct to current standard therapies.  The Company has used and will continue torequire substantial funds to manufacture, market and sell BiDil during 2007 andbeyond. The Company also expects to incur additional expenses relating to theongoing development of an extended release formulation of BiDil, known as BiDilXRTM, which commenced early-stage clinical development in October 2006. TheCompany believes that its existing cash, cash equivalents and marketablesecurities, and cash it expects to generate from sales of BiDil, will besufficient to fund its current business plan for at least the next ninemonths.  However, no assurances can begiven that such BiDil revenues will, in fact, be realized, or that the Companywill have sufficient capital to meet its obligations for the next nine-monthperiod. The Company will require substantial additional cash to fund itsoperations beyond the next nine-month period, and may seek to raise these fundsthrough financings, including public or private equity offerings, collaborativearrangements with corporate partners or a combination of any of the foregoing.There can be no assurance that funds will be available on terms acceptable tothe Company, if at all. If adequate funds are not available, the Company willbe required to delay, scale back or eliminate some or all of its sales andmarketing efforts for BiDil, as well as its development efforts with respect toBiDil XR.   The Company may also berequired to license to others the right to develop or commercialize products ortechnologies that the Company would otherwise seek to develop and commercializeon its own.  The Company could also berequired to limit, scale back or cease its operations, any of which would havea material and adverse effect on the Company.

### **(2)           RevenueRecognition**

As discussed above, the Company’s principal source ofrevenue is from the sale of BiDil. BiDil was launched and began shipping in thethird quarter of 2005.

*Product Sales/Deferred Revenue.  *TheCompany follows the provisions of Securities and Exchange Commission StaffAccounting Bulletin No. 104, *Revenue Recognition,*and recognizes revenue from product sales upon delivery of product towholesalers or pharmacies, when persuasive evidence of an arrangement exists,the fee is fixed or determinable, title to product and associated risk of losshas passed to the wholesalers and pharmacies, and collectibility of the relatedreceivable is reasonably assured. All revenues from product sales are recordednet of applicable allowances for sales returns, rebates, and discounts. Forarrangements where the risk of loss has not passed to wholesalers orpharmacies, the Company defers the recognition of revenue until such time thatrisk of loss has passed. In addition, the Company evaluates the level ofshipments to wholesalers and pharmacies on a quarterly basis compared to theestimated level of inventory in the channel, remaining shelf-life of theproduct shipped, weekly prescription data and quarterly forecasted sales. Thecost of BiDil associated with amounts recorded as deferred revenue are recordedin inventory until such time as risk of loss has passed.

*Sales Returns, Allowances, Rebates and Discounts.  *TheCompany’s product sales are subject to returns, wholesaler allowances, rebates,and cash and contract discounts that are customary in the pharmaceuticalindustry. A large portion of the Company’s product sales are made topharmaceutical wholesalers for further distribution through pharmacies topatients, who are consumers of the product. All revenues from product sales arerecorded net of applicable allowances for sales returns, wholesaler allowances,rebates and cash and contract discounts. The Company determines the provisionsfor sales returns, allowances, rebates and discounts based primarily onestimates and contractual terms. In developing a reasonable estimate for thereserve for product returns, the Company considers the factors in paragraph 8 ofStatement of Financial Accounting Standards No. 48, *RevenueRecognition When a Right of Return Exists*. The Company believes ithas developed a reasonable estimate of returns based on actual return datacompared to product shipped. The Company will continue to monitor actualreturns as the Company develops more sales experience with BiDil.

6

----

 

*Product Returns*.   Consistentwith industry practice, the Company offers contractual return rights that allowcustomers to return product only during the period that is six months prior to,and twelve months after product expiration. Commercial product shipped during 2005and the first half of 2006 had a shelf-life of twelve months from date ofmanufacture with expiration dates ranging from April 2006 toApril 2007. During the third quarter of 2006, the Company began shippingcommercial product with an expiration date of 18 months.  During the first quarter of 2007, BiDil’sshelf life for newly produced finished goods was increased to24 months.  Factors that areconsidered in the Company’s estimate of future product returns include ananalysis of the amount of product in the wholesaler and pharmacy channels,discussions with key wholesalers and other customers regarding inventory levelsand shipment trends, review of consumer consumption data based on aggregateweekly prescription data derived from Source Projected Launchtrac provided byWolters Kluwer Health, and the remaining time to expiration of the Company’sproduct. At March 31, 2007 and December 31, 2006, the Company’sproduct return reserve was $1.2 million and $1.3 million, respectively. Thisreserve is evaluated on a quarterly basis, assessing each of the factorsdescribed above, and adjusted accordingly. Based on the factors noted above,among others, the Company believes its estimate of product returns isreasonable, and changes, if any, from this estimate would not have a materialimpact to the Company’s financial statements.

*Sample Voucher and Co-Pay Programs*.   Beginning inthe third quarter of 2005, the Company initiated a sample voucher programwhereby the Company offers an incentive to patients in the form of a free30-day trial, or approximately 100 tablets, of BiDil. The Company accounts forthis program in accordance with Emerging Issues Task Force IssueNo. 01-09, *Accounting for Consideration Given by aVendor to a Customer*. These sample voucher programs have a six monthexpiration date, such that each sample voucher program is active for twoquarters at a time. As a result, at the end of each quarter the Company candetermine the actual amount of reimbursement claims received for the samplevouchers distributed during the quarter, and use this actual information toestimate the usuage for the next quarter. The amount of reimbursement isrecorded as a reduction to revenue. For the three month periods endedMarch 31, 2007 and 2006, the Company recorded a reduction to revenue of$28,000 and $343,000, respectively. The Company expects to continue to offersample voucher and co-pay incentives in future periods.

*Sales Discounts, Rebates and Allowances*.   Salesdiscounts, rebates and contractual allowances result primarily from sales undercontracts with healthcare providers, wholesalers, Medicare and Medicaidprograms and other governmental agencies. The Company estimates salesdiscounts, rebates and contractual allowances by considering the followingfactors: current contract prices, terms, sales volume, estimated customer andwholesaler inventory levels and current average rebate rates. For the threemonth periods ended March 31, 2007 and 2006, the Company recorded salesdiscounts, rebates and other allowances of $1.5 million, and $0.7 million,respectively.

*Collaboration Revenue*.   The Companyrecords collaboration revenue on an accrual basis as it is earned and whenamounts are considered collectible. Revenues received in advance of performanceobligations, or in cases where the Company has a continuing obligation toperform services, are deferred and recognized over the contractual orestimated performance period. Revenues from milestone payments that representthe culmination of a separate earnings process are recorded when the milestoneis achieved. Contract revenues are recorded as the services are performed. Whenthe Company is required to defer revenue, the period over which such revenueshould be recognized is subject to estimates by management and may changeover the course of the collaborative agreement. The Company had no collaborationrevenue for the three month periods ended March 31, 2007 and 2006.

**(3)           AccountsReceivable**

Accounts receivable consists of amounts due fromwholesalers and pharmacies for the purchase of BiDil. Ongoing evaluations ofcustomers’ credit worthiness are performed and collateral is generally notrequired. As of March 31, 2007, the Company has not reserved any amountfor bad debts related to the sale of BiDil. The Company continuously reviewsall customer accounts to determine if an allowance for uncollectible accountsis necessary. The Company currently provides substantially all of its customerswith payment terms of net 30 days. Amounts past due from customers aredetermined based on contractual payment terms. Through March 31, 2007,payments have generally been made in a timely manner.

**(4)           Inventories**

### Inventories are stated at thelower of cost or market, with cost determined on a first-in, first-out basis.Inventories consisted of the following (in thousands):

|                | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials  |       | $                        | 1,986      |                        | $          | 2,123 |   |
| Finished goods |       | 1,048                    |       | 723                         |       |
| Total          |       | $                        | 3,034      |                        | $          | 2,846 |   |

 

 

7

----

 

On a quarterly basis, the Company analyzes its currentinventory levels and future irrevocable inventory purchase commitments andwrites down inventory that has become un-saleable or has a cost basis in excessof its expected net realizable value. In addition, the Company evaluates itsfuture irrevocable inventory purchase commitments compared to forecastedproduct sales, the current level of inventory and its related product dating.Expired inventory is disposed of, and the related costs are written off. Forthe three month periods ended March 31, 2007 and 2006, the Companyrecorded inventory impairment charges of $384,000 and $482,000, respectively.

### **(5)****                                 Stock-BasedCompensation**

Effective January 1, 2006, the Company adoptedthe fair value recognition provisions of Statement of Financial AccountingStandards No. 123(R),*Share-BasedPayment* (“SFAS 123R”),using the modified-prospective-transition method. Under this transition method,compensation cost recognized for the first three months of 2007 includes:(a) compensation cost for all stock-based payments granted, but not yetvested as of January 1, 2006, based on the grant-date fair value estimatedin accordance with the original provisions of Statement of Financial AccountingStandards No. 123, *Accounting for Stock BasedCompensation* (“SFAS 123”), and (b) compensation cost for allstock-based payments granted subsequent to January 1, 2006, based on thegrant-date fair value estimated in accordance with the provisions of SFAS123R. Such amounts have been reduced by the Company’s estimate offorfeitures of all unvested awards. Results for prior periods have not beenrestated.

For stock options granted to non-employees, theCompany recognizes compensation expense in accordance with the requirements ofEmerging Issues Task Force No. 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services* (“EITF 96-18”)*.* EITF 96-18 requires that companies recognizecompensation expense based on the estimated fair value of options granted tonon-employees over their vesting period, which is generally the period duringwhich services are rendered by such non-employees. The fair value of unvestednon-employee stock awards is re-measured at each reporting period.

In January 2007, the Company modified the terms ofcertain vested stock option awards previously granted to the Company’s formerinterim president and chief executive officer in order to extend the term ofthe exerciseability of the vested portion of the options from three monthsfollowing the cessation of employment to five years following the cessation ofemployment.  As a result of thismodification, the Company incurred a stock-based compensation charge in theamount of $459,000.

In March 2007, theCompany entered into restricted stock agreements with key executive officersand employees of the Company, pursuant to which these employees were granted atotal of 728,227 shares of the Company’s common stock under the 2003 Plan,which are subject to forfeiture to the Company under certaincircumstances.  The forfeiture provisionlapses, as follows: 25% vest on the date that is six months after the grantdate; 25% vest on the first anniversary of the grant date; and 50% vest on thesecond anniversary of the grant date.  Upon a change in control of theCompany or upon termination of the employee’s employment without cause, allunvested restricted shares shall immediately vest in full. The Company willrecognize $2.4 million of stock-based compensation expense related to theawards ratably over the service period based on the intrinsic value of the awardson the date of grant.  The Company recognized $54,000 of stock-basedcompensation expense for the three months ended March 31, 2007.

In connection with recording stock-based compensationrelated to non-employees, the Company recorded an expense of $17,000 for thethree months ended March 31, 2007, and a reversal of ($34,000) for the threemonths ended March 31, 2006.

The fair value of eachstock option is estimated on the grant date using the Black-Scholesoption-pricing model. Information pertaining to stock options and relatedassumptions is noted in the following table:
| ** **                                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
|                                                          | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Options granted  (in thousands)                          |       | 605                               |       | 2,139 |   |
| Weighted-average  exercise price of stock options        |       | $                                 | 2.71       |   | $ | 9.46 |   |
| Weighted-average  grant date fair-value of stock options |       | $                                 | 1.60       |   | $ | 6.59 |   |
| Assumptions:                                             |       |                              |       |   |   |
| Volatility                                               |       | 76%                               |       | 73% |   |
| Risk-free interest rate                                  |       | 4.7%                              |       | 4.6% |   |
| Expected life (years)                                    |       | 5.0                               |       | 6.5 |   |
| Dividend                                                 |       | None                              |       | None |   |

Volatilityis determined exclusively using historical volatility data of the Company’scommon stock based on the period of time since the Company’s common stock hasbeen publicly traded. The risk-free interest rate is based on the U.S.Treasury yield curve in effect at the time of grant commensurate with theexpected life assumption. The expected life of stock options granted is basedexclusively on historical data and represents the weighted average period oftime that stock options granted are expected to be

8

----

 

outstanding. The expectedlife is applied to the stock option grant group as a whole, as the Company doesnot expect substantially different exercise or post-vesting terminationbehavior amongst its employee population.

The Company is using the straight-line attributionmethod to recognize stock-based compensation expense. The amount of stock-basedcompensation expense recognized during a period is based on the value of theportion of the awards that are ultimately expected to vest. SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. The term “forfeitures”is distinct from “cancellations” or “expirations” and represents only theunvested portion of the surrendered option. The Company has applied an annualforfeiture rate of 6.5% to all unvested options as of March 31, 2007. Thisanalysis will be re-evaluated quarterly and the forfeiture rate will beadjusted as necessary. Ultimately, the actual expense recognized over thevesting period will only be for those options that vest.

A summary of option activity under the Company’s 2003Plan as of March 31, 2007, and changes during the three month period thenended is presented below (in thousands, except weighted average data):
| ** **                                      | ** ** | **Options  Outstanding** | ** ** | **Weighted-  average  Exercise Price** | ** ** | **Weighted-  average  Remaining  Contracted  Term in  Years** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2006          |       | 4,936                    |       | $                                           | 6.90       |                                                               |       |                            |       |   |
| Granted                                         |       | 605                      |       | $                                           | 2.71       |                                                               |       |                            |       |   |
| Exercised                                       |       | (208                     | )          | $                                           | 0.95       |                                                               |       |                            |       |   |
| Forfeited/Cancelled                             |       | (448                     | )          | $                                           | 6.98       |                                                               |       |                            |       |   |
| Outstanding at  March 31, 2007             |       | 4,885                    |       | $                                           | 6.63       |                                                               | 7.90       |                            | $          | 1,602 |   |
| Exercisable at  March 31, 2007             |       | 2,052                    |       | $                                           | 7.34       |                                                               | 6.36       |                            | $          | 743 |   |
| Options expected to vest  at March 31, 2007 (1) |       | 2,255                    |       | $                                           | 6.10       |                                                               | 8.26       |                            | $          | 834 |   |

----

(1) Options expected to vest is calculated by applyingan estimated forfeiture rate to unvested options.

During the three months ended March 31, 2007 and2006, the total intrinsic value of options exercised (i.e. the differencebetween the market price at exercise and the price paid by the employee toexercise the options) was $434,000 and $345,000, respectively, and the totalamount of cash received from exercise of these options was $197,000 and $87,000,respectively. The total grant-date fair value of stock options that vestedduring the three months ended March 31, 2007 and 2006 was approximately$886,000 and $755,000, respectively.

As of March 31, 2007, there was $9.2 million oftotal unrecognized compensation cost related to unvested stock options. Thiscost is expected to be recognized over a weighted average period of 1.4 years.

A summary of the Company’s restricted stock awardactivity as of March 31, 2007 and changes during the three-month period thenended is presented below:
| ** **                                                   | ** ** | **Restricted Shares  Outstanding  (in thousands)** | ** ** | **Weighted-  Average  Grant Date  Fair Value  Per Share** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **Non-vested  shares outstanding at December 31, 2006** |       | —                                                       |       | $                                                                        | —     |   |
| Awards granted                                               |       | 728                                                          |       | $                                                                        | 3.23       |   |
| Restrictions  lapsed                                         |       | —                                                       |       | $                                                                        | —     |   |
| Awards forfeited                                             |       | —                                                       |       | $                                                                        | —     |   |
| **Non-vested shares outstanding  at March 31, 2007**         |       | 728                                                          |       | $                                                                        | 3.23       |   |

As ofMarch 31, 2007, there was $2.4 million of total unrecognized compensation costrelated to unvested restricted shares. The total fair value of theseshare-based awards is expected to be recognized over the vesting term of 2.0years.

**(6)**                                 Restructuring

On March 31, 2006, the Company recorded chargesof $2.0 million related to a restructuring of its discovery research operationsthat was intended to better align costs with revenue and operatingexpectations. The restructuring charges pertained to employee severance andimpairment of assets and were recorded in accordance with Statement ofFinancial Accounting Standards No. 146,*Accounting for Costs Associated with Exit or Disposal Activities*(“SFAS 146”)*,*and Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* (“SFAS144”)*.*

9

----

 

In connection with the restructuring plan, the Companyterminated 30 employees in its discovery research group, or approximately 30%of the Company’s workforce, resulting in a charge of $1.4 million. None ofthese employees remained employed as of March 31, 2006.

As a result of terminating these employees, theCompany recorded an impairment charge for certain research laboratoryequipment, computer equipment, and furniture and fixtures in an aggregateamount of $597,000 due to the fact that these assets would no longer beutilized. These assets were written down to their fair value utilizing a thirdparty appraiser to estimate the fair value of the assets based on currentmarket quotes and the current condition of the equipment, furniture andfixtures.

The following table summarizes the restructuringactivity as of March 31, 2007 as part of the March 2006 restructuringplan:

|                      | ** ** | **Charge** | ** ** | **Cash  Payments  and  Write-offs** | ** ** | **Accrued at  December 31, 2006** | ** ** | **Cash  Payments** | ** ** | **Accrued at  March 31, 2007** | ** ** |
|----------------------|------------|------------|------------|-------------------------------------|------------|--------------------------------------------------|------------|--------------------|------------|-----------------------------------------------|------------|
| Workforce  reduction |       | $          | 1,441,000  |                                | $          | (1,371,000                                       | )          | $                  | 70,000     |                                          | $          | (70,000 | ) | $ | — |   |
| Impairment           |       | 597,000    |       | (597,000                            | )          | —                                           |       | —             |       | —                                        |       |
| Total                |       | $          | 2,038,000  |                                | $          | (1,968,000                                       | )          | $                  | 70,000     |                                          | $          | (70,000 | ) | $ | — |   |

 

On October 10, 2006, theCompany recorded a restructuring charge of $3.2 million comprised of severancebenefits of $2.5 million and impairment charges of $0.7 million for certainresearch and development equipment, leasehold improvements, furniture andfixtures, and computers. The restructuring charges were recorded in accordancewith SFAS 146 and SFAS 144. The October 2006 restructuringprogram included the elimination of 120 sales personnel and 8 general andadministrative and research and development personnel. None of these employeesremained employed as of December 31, 2006. As a result of theseterminations, the Company’s decision to no longer pursue research anddevelopment internally, and the Company’s decision to move to a smallerfacility, certain research and development equipment, leasehold improvements,furniture and fixtures, and computers became impaired. These assets werewritten down to the fair value based on either a third-party quote, or theestimated discounted cash flows they would generate over their estimatedremaining economic life to the Company.

The followingtable summarizes the restructuring activity as of March 31, 2007 as part of theOctober 2006 restructuring plan:

|                      | ** ** | **Charge** | ** ** | **Cash  Payments  and  Write-offs** | ** ** | **Accrued at   December 31, 2006** | ** ** | **Cash  Payments** | ** ** | **Accrued at  March 31, 2007** | ** ** |
|----------------------|------------|------------|------------|-------------------------------------|------------|--------------------------------------------------------|------------|--------------------|------------|-----------------------------------------------|------------|
| Workforce  reduction |       | $          | 2,500,000  |                                | $          | (2,271,000                                             | )          | $                  | 229,000    |                                          | $          | (229,000 | ) | $ | — |   |
| Impairment           |       | 745,000    |       | (745,000                            | )          | —                                                 |       | —             |       | —                                        |       |
| Total                |       | $          | 3,245,000  |                                | $          | (3,016,000                                             | )          | $                  | 229,000    |                                          | $          | (229,000 | ) | $ | — |   |

In the first quarter of 2007, the Company recorded arestructuring charge of $1.0 million related to vacating its former headquarterslocation. The charge was recorded pursuant to SFAS 146. In March 2007, theCompany entered into an Assignment of Lease and Assumption Agreement (the “AssignmentAgreement”) with Shire Human Genetic Therapies, Inc. (“Shire”), pursuant towhich the Company assigned  its lease foroffice and laboratory space located at 125 Spring Street in Lexington,Massachusetts (the “Spring Street Lease”).  Pursuant to the terms of theAssignment Agreement, the Company agreed to pay Shire the amount ofapproximately $1,160,000 as consideration for Shire’s assumption of the SpringStreet Lease. In addition to this charge, the Company incurred $612,000 inexpenses primarily related to real estate brokerage fees and clean-upcosts.  Offsetting these charges was areversal of $768,000 in accrued rent related to the Spring Street Lease. Allamounts were paid as of March 31, 2007, and the Company had no furtherobligation related to this lease.

**(7)**                                 Accumulated OtherComprehensive Loss

TheCompany presents comprehensive loss in accordance with Statementof Financial Accounting Standards No. 130, *Reporting ComprehensiveIncome*. Accumulated othercomprehensive income is comprised entirely of net loss and unrealized gains andlosses on available-for-sale marketable securities. For the three months endedMarch 31, 2007 and 2006, total comprehensive loss equaled $10,106,000 and$25,875,000, respectively.

### **(8)****                                 NetLoss Per Share**

Basic net loss per share is computed by dividing netloss available to common stockholders by the weighted average number of sharesof common stock outstanding during the period. Since the Company has a net lossfor all periods presented, the effect of all potentially dilutive securities,which comprise stock options and restricted stock, is anti-dilutive.Accordingly, basic and diluted net loss per share are the same.

10

----

 

### As of March 31, 2007 and2006, options to purchase 4,884,580 and 5,126,666 shares of common stock,respectively, were not included in the computation of diluted net loss pershare since their inclusion would be anti-dilutive. In addition, 728,227 sharesof restricted common stock issued in March 2007 are also not included.

### **(9)****                                 SingleSource Suppliers**

### The Company currently obtainsone of the key active pharmaceutical ingredients for its commercialrequirements for BiDil from a single source. The Company also relies on theservices of one manufacturing source to produce BiDil. The disruption ortermination of the supply of the commercial requirement for BiDil or asignificant increase in the cost of the key active pharmaceutical ingredientfrom this single source, or the disruption or termination of the manufacturingsource, could have a material adverse effect on the Company’s business,financial position and results of operations.

### **(10)****                          Concentrationof Credit Risk**

Statement of Financial Accounting StandardsNo. 105, *Disclosure of Information about FinancialInstruments with Off-Balance-Sheet Risk and Financial Instruments withConcentrations of Credit Risk*, requires disclosure of anysignificant off-balance-sheet and credit risk concentrations. The Company hasno off-balance-sheet or concentrations of credit risk such as foreign exchangecontracts, options contracts or other foreign hedging arrangements. The Companymaintains its cash and cash equivalents and marketable securitites balanceswith several high-credit quality financial institutions.

The following table summarizes the number of tradecustomers that individually comprise greater than 10% of total revenues andtheir respective percentage of the Company’s total revenues:
| ** **           | ** ** | **Number of** | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **           | ** ** | **Significant**    | ** ** | **Percentage of Total Revenues by Customer** | ** ** |
| ** **           | ** ** | **Customers**      | ** ** | **A**                                                                 | ** ** | **B**      | ** ** | **C**      | ** ** |
| Three months  ended: |       |               |       |                                                                  |       |       |       |       |       |
| March 31,  2007 |       | 3                  |       | 38                                                                    | %          | 36         | %          | 17         | %          |
| March 31, 2006  |       | 3                  |       | 35                                                                    | %          | 27         | %          | 21         | %          |

 

The following table summarizes the number of customersthat individually comprise greater than 10% of total accounts receivable andtheir respective percentage of the Company’s total accounts receivable:
| ** **           | ** ** | **Number of** | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **           | ** ** | **Significant**    | ** ** | **Percentage of Total Revenues by Customer** | ** ** |
| ** **           | ** ** | **Customers**      | ** ** | **A**                                                                 | ** ** | **B**      | ** ** | **C**      | ** ** |
| Three months  ended: |       |               |       |                                                                  |       |       |       |       |       |
| March 31,  2007 |       | 3                  |       | 40                                                                    | %          | 29         | %          | 20         | %          |
| December 31, 2006    |       | 3                  |       | 30                                                                    | %          | 37         | %          | 16         | %          |

Todate, the Company has not written off any significant accounts receivable.

### **(11)****                          LongTerm Debt**

OnJune 28, 2005, the Company borrowed (i) $10.0 million from OxfordFinance Corporation (“Oxford”), and (ii) $10.0 million from GeneralElectric Capital Corporation (“GECC”) pursuant to the terms of Promissory Notes(the “Notes”). The Notes bear interest at a fixed rate of 9.95% per annum andare payable in 36 consecutive monthly installments of principal and accruedinterest, beginning on July 1, 2005. Also on June 28, 2005, theCompany entered into Master Security Agreements with both Oxford and GECC (the “Agreements”). Underthe terms of these Agreements, the Company granted to both Oxford and GECC asecurity interest in and against all of the property of the Company and in andagainst all additions, attachments, accessories and accessions to suchproperty, all substitutions, replacements or exchanges, and all insuranceand/or other proceeds (the ‘Collateral”). The Collateral comprises all ofthe Company’s personal property and fixtures including, but not limited to, allinventory, equipment, fixtures, accounts, deposit accounts, documents,investment property, instruments, general intangibles, chattel paper and anyand all proceeds (but excluding intellectual property). The Collateraldoes not include any intellectual property or products (or interests in any intellectualproperty or products (including any royalties)) acquired, whether by purchase,license or otherwise, on or after the execution of the Agreements(collectively, “New Property”), nor do the Agreements limit any indebtednesssecured by any New Property provided that debt or non-cash equity (e.g.,stock) is used to acquire New Property. In the event that theCompany uses cash to purchase New Property, Oxford’s and GECC’s existingliens will extend to such New Property.

11

----

 

TheAgreements also contain a material adverse change clause with both Oxford andGECC. Under this clause, if Oxford or GECC reasonably determines that theCompany’s ability to repay the Notes has been materially impaired, the Companywould be considered in default. As ofMarch 31, 2007, the Company was in compliance with this clause.

In February 2007, in connection with (i) theCompany’s assignment to Shire of certain office furniture, laboratoryequipment and other personal property pursuant to the terms of the AssignmentAgreement and (ii) the sale of certainlaboratory equipment previously used by the Company’s discovery research group,the Company entered into a Release of Collateral (the “Release”) with bothOxford and GECC.  Pursuant to the termsof each Release, GECC and Oxford released any and all security interestsor liens that either GECC or Oxford had in all laboratory equipment, officefurniture and leasehold improvements and fixtures then located at 125 SpringStreet in Lexington, Massachusetts as of the date of the Release. In addition,GECC and Oxford each released any and all security interests or liens thateither GECC or Oxford may have had in any and all computer and electronicequipment, wherever located, to the extent that such computer and electronicequipment was acquired by the Company prior to the date of the Release.

### **(12)****                          Commitmentsand Contingencies**

In connection with the Company’s efforts to obtain theapproval of BiDil from the FDA, the Company contracted with the law firm ofFoxKiser LLC (“FoxKiser”) for services related to the regulatory approvalprocess for BiDil. The agreement provided for payment of legal consulting feesupon receipt of written FDA approval of BiDil. On June 23, 2005, theCompany received written FDA approval of BiDil, and in July 2005 theCompany paid FoxKiser $2.4 million pursuant to the terms of this agreement. Inaddition, the agreement requires the Company to pay royalties to FoxKiser oncommercial sales of BiDil. The royalty term ends six months after the date ofmarket introduction of an FDA-approved generic version of BiDil. During thethird quarter of 2005, the Company entered into a separate consulting agreementwith FoxKiser following the approval by the FDA of BiDil, which ceased to beeffective in the third quarter of 2006. During the three month periods endedMarch 31, 2007 and 2006, the Company recorded charges of $-0- and $0.3 million,respectively, pertaining to the legal consulting fees related to theseagreements. During the three month periods ended March 31, 2007 and 2006,the Company also paid royalties to FoxKiser in the amounts of $0.1 million and$0.1 million, respectively.

In February 2005, the Company engaged SchwarzPharma Manufacturing, Inc. under a five-year exclusive manufacturing andsupply agreement solely for the three times daily immediate release dosageformulation of BiDil. Under the supply agreement, the Company has the right toengage a backup manufacturer, but to date has not elected to use this right. Inconnection with this supply agreement, the Company placed a binding purchaseorder of $432,000 for production of BiDil finished goods to occur during thesecond quarter of 2007.

### **(13)****                          NewLicense Agreement**

In February 2007, inconnection with the Company’s efforts to develop BiDil XR, the Company entered intoa license agreement with Elan Pharma International Limited (“Elan”). Pursuantto the agreement, Elan granted to the Company an exclusive worldwide license,for the term of the agreement, to certain know-how, patents and technology, andany improvements to any of the foregoing developed by either party during theterm of the agreement.  Pursuant to thislicense, the Company has the right to import, use, offer for sale and sell theoral capsule formulation incorporating specified technology referred to in theagreement and containing, as its sole active combination of ingredients, thecombination of the active drug substances isosorbide dinitrate and hydralazinehydrochloride, including BiDil XR.  Inconsideration for the grant of the license, the Company has agreed to pay Elanroyalties that are calculated by reference to annual net sales parameters setforth in the agreement.  In addition, theCompany has also agreed to pay Elan specified amounts upon the achievement ofspecified development and commercialization milestone events of up to$2.5 million of which $250,000 was paid in the three month period endedMarch 31, 2007.

The term of the agreement runs in the United Statesfrom the effective date of the agreement until the later of (a) the 20thanniversary of the date of the first sale of the product by us or a permittedsublicensee to an unaffiliated third party, which is referred to in theagreement as the first in market sale, or (b) the expiration of thelast-to-expire patent for the product listed in the FDA’s “Orange Book.”  Elsewhere in the world, the term will run ona country by country basis from the effective date of the agreement until thelater of (a) the 20th anniversary of the date of the first in market sale ofthe product in the country concerned or (b) the expiration of the life of thelast to expire patent included in the Elan intellectual property in thatcountry.  Following the expiration of theinitial term, the agreement shall continue automatically for rolling 3 yearperiods thereafter, unless the agreement has been terminated by either of theparties by serving 1 year’s written notice on the other party immediately priorto the end of the initial term or any such additional 3 year period.  Either Elan or the Company may terminate theagreement in the event of a material, uncured breach by the other party, or ifthe other party goes into liquidation or becomes bankrupt or insolvent.  In addition, the Company may terminate the agreementin the event of a technical failure, which is defined as the inability toachieve a pharmacokinetic profile for the product consistent with that of BiDiladministered three times daily (at 6 hour intervals).  Elan may terminate the agreement with respectto a particular country in the territory in the event that the Company does notmeet certain obligations set forth in the agreement with respect to suchcountry, provided that Elan must first consult with us and, if applicable,provide us with an opportunity to meet such obligations prior to exercisingElan’s termination rights.

12

----

 

### **(14)****                          OperatingLease**

In February 2007, the Company entered into a lease for19,815 square feet at 45 Hayden Avenue in Lexington, Massachusetts (the “HaydenAvenue Lease”). The term of the Hayden Avenue lease is for sixty-six monthsbeginning on April 1, 2007. The expected minimum rental commitments under theHayden Avenue lease are $401,000 in 2007, $542,000 in 2008, $560,000 in 2009,$580,000 in 2010 and $592,000 in, 2011, and $456,000 for the nine month periodending September 2012.

In March 2007, the Company entered into the AssignmentAgreement with Shire, pursuant to which the Company assigned  its lease for office and laboratory spacelocated at 125 Spring Street in Lexington, Massachusetts. The Company is nolonger responsible for obligations under the Spring Street Lease.

### **(15)****                          NewAccounting Standards**

In June 2006,the Financial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48,*Accounting for Uncertainty inIncome Taxes — an Interpretation of FASB Statement No. 109* (“FIN48”)*.*  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with Statement of Financial Accounting Standards No. 109,  *Accountingfor Income Taxes.*  FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The Company adopted the provisions ofFIN 48 on January 1, 2007. The adoption of FIN 48 has no impact to the Company’sfinancial position or results of operations.

13

----

 

**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Overview**

We are an emerging pharmaceutical company withsubstantial expertise and intellectual property in nitric oxide-based drugdevelopment. We have devoted substantially all of our efforts towards theresearch and development of our product candidates and the commercialization ofour currently marketed product, BiDil®. Since our inception, we have mainlyfunded our operations through the sale of equity securities, debt financings,license fees, research and development funding, milestone payments from ourcollaborative partners, and more recently, sales of BiDil. We have never beenprofitable and have incurred an accumulated deficit of $323.9 million as of March 31,2007.

In June 2005, the FDA approved our product,BiDil, for the treatment of heart failure in self-identified black patients asan adjunct to current standard therapies. BiDil is an orally administeredfixed-dose combination of isosorbide dinitrate and hydralazine hydrochloride.We commercially launched BiDil in July 2005. We engaged Schwarz Pharmaunder a five-year manufacturing and supply agreement exclusively for the threetimes daily immediate release dosage formulation of BiDil.

In March 2006, we eliminated our discoveryresearch program and terminated substantially all of the employees in ourdiscovery research group in a restructuring of our company that was intended tobetter align costs with revenue and operating expectations. In connection withour restructuring in March 2006, we determined to limit our futureinternal development activities to the continued development of an extendedrelease formulation of BiDil designed to be taken once per day, known as BiDilXRTM, as well as efforts to out-license our nitric oxide-enhancing technology inexchange for potential milestone payments and royalties on sales.

In October 2006, we implemented a revisedstrategy and business model in order to focus our resources on the developmentof BiDil XR as expeditiously as possible. As part of this strategic shift, weeliminated our sales force and replaced it with a small team of highlyexperienced senior cardiovascular business managers focused on hospitals andkey opinion leaders, resulting in a net reduction of approximately 120 in salesforce headcount. In addition, we also eliminated approximately 20% of ourgeneral and administrative personnel in connection with this restructuringprogram. Our current sales organization is managed by our senior vice presidentof commercial operations and is comprised of approximately 25 to 30 people. InApril 2007, we began to implement a program designed to double our sales forcein specific geographic areas with a focus on selected prescriber targets.

While we are assembling this highly specialized team,our sales force will continue to focus on regional and national thought-leaderphysicians, current BiDil prescribers, as well as key institutions inmetropolitan centers that treat, and influence the treatment of, large numbersof African-Americans diagnosed with heart failure. We also continue to exploreadditional marketing methods that can be utilized to reach the broader numberof existing and potential BiDil prescribers. We believe that this strategy willallow us to refocus the market presence of the current BiDil formulation as wecontinue our development efforts with respect to BiDil XR. Preclinical studieswith BiDil XR have been positive, and we commenced early-stage clinicaldevelopment of BiDil XR in October 2006. We expect to provide furtherupdates on the clinical timeline and regulatory pathway for BiDil XR afterpreliminary clinical data have been assessed.

In connection with our efforts to develop BiDil XR, inFebruary 2007, we entered into a license agreement with Elan PharmaInternational Limited, or Elan, pursuant to which Elan granted to us anexclusive worldwide royalty-bearing license, with specified sublicense rights,to specified intellectual property of Elan, as well as any improvements to anyof the foregoing developed by either party during the term of the agreement.Pursuant to the license, we may import, use, offer for sale and sell an oralcapsule formulation incorporating specified technology owned or controlled byElan and containing, as its sole active combination of ingredients, thecombination of the active drug substances isosorbide dinitrate and hydralazinehydrochloride. In consideration for the grant of the license, we have agreed topay Elan royalties that are calculated by reference to annual net salesparameters set forth in the agreement. In addition, we have also agreed to payElan specified amounts upon the achievement of specified development andcommercialization milestone events set forth in the agreement.

In the near-term, a key driver of our success will beour ability to successfully commercialize and sustain market penetration ofBiDil with our restructured and smaller specialty sales force and to acceleratethe development of, and obtain regulatory approval for, the commercial sale ofBiDil XR. Since we commercially launched BiDil in July 2005, we havegenerated approximately $20.1 million in product sales, including product salesof $3.6 million in the three month period ending March 31, 2007. We will needto generate significant revenues from sales of BiDil and, if approved, BiDilXR, to achieve profitability. At the present time, we are unable to estimatethe level of revenues that we will realize from the sales of BiDil or, ifapproved, BiDil XR. We are therefore unable to estimate when we will achieveprofitability, if at all. We have also applied our nitric oxide technology todevelop novel pharmaceuticals, as well as safer and more effective versions ofexisting drugs, and to target significant diseases that are characterized by adeficiency in nitric oxide.

As a result of our restructurings in March andOctober 2006, we expect that research, development and commercializationexpenses will decline in 2007 as compared to 2006, due primarily to a decreasein headcount and research and commercialization activities, partially offset byan increase in ongoing development expenses for BiDil XR. We estimate that ouroperating expenses related to research and development and sales, general andadministrative functions for the year ended December 31, 2007 will be

 

14

----

approximately$55 million, excluding cost of product sales but including share-basedcompensation expense related to Statement of Financial Accounting StandardsNo. 123R. We estimate that our operating expenses will be reduced on anannualized basis by approximately $30 million as a result of our March 2006 andOctober 2006 restructurings. At March 31, 2007, our principal source ofliquidity was $32.5 million of cash and cash equivalents and marketablesecurities.

We believe that our existing cash, cash equivalentsand marketable securities, as well as cash expected to be generated from salesof BiDil, will be sufficient to fund our current business plan for at least thenext nine months. We have used and will continue to require substantial fundsto manufacture, market and sell BiDil during 2007 and beyond. We also expect toincur additional expenses relating to the ongoing development of BiDil XR.Accordingly, we will require substantial additional cash to fund our operationsbeyond the next nine-month period.  Wemay seek to raise these funds through financings, including public or privateequity offerings, collaborative arrangements with corporate partners or acombination of any of the foregoing. Even if we are able to raise additionalcapital, there can be no assurance that funds will be available on terms thatare acceptable to us, if at all.  Ifadequate funds are not available, we will be required to delay, scale back oreliminate some or all of our sales and marketing efforts for BiDil, as well asour development efforts with respect to BiDil XR. We may also be required tolicense to others the right to develop or commercialize products ortechnologies that we would otherwise seek to develop and commercialize on ourown.  We could also be required to limit,scale back or cease our operations, any of which would have a material andadverse effect on our business, financial condition and results of operations.

**FinancialOperations Overview**

*Revenue.*Our firstcommercial product, BiDil, was launched in July 2005, and generatedproduct sales of $3.6 million in the first quarter of 2007. Prior to the launchof BiDil, all of our revenue had been derived from license fees, research anddevelopment payments and milestone payments that we received from our corporatecollaborators. In future years, we will seek to generate revenue from acombination of product sales, license fees, and milestone and royalty paymentsin connection with collaborative or strategic relationships, as well asroyalties resulting from the license of our intellectual property. We expectthat any collaborative revenue we generate will fluctuate from quarter toquarter as a result of the timing and amount of research and development,milestone and other payments received under our collaborative or strategicrelationships and related continuing obligations, as well as the timing andamount of revenue we recognize for the sale of our products, to the extent anyare successfully commercialized.

*Research and Development.*Researchand development expense consists of expenses incurred in identifying,developing and testing product candidates. These expenses consist primarily ofsalaries and related expenses for personnel, fees paid to professional serviceproviders for independent monitoring and analysis of our clinical trials, costsof contract research and manufacturing, product development costs, costs offacilities and BiDil medical support costs.

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

•*  BiDil.* From May 2001 to July 2004, weenrolled 1,050 patients at 169 clinical sites in the United States in our phaseIII clinical trial for BiDil. We halted the trial in July 2004 due to asignificant survival benefit in the preliminary data for patients taking BiDil.The FDA approved BiDil on June 23, 2005, and we launched BiDil inJuly 2005. The total cost for the BiDil A-HeFT trial was approximately$43.0 million.

•  *BiDil XR*. The current formulation ofBiDil is an immediate-release tablet that must be taken three times daily. Weare currently pursuing the development of BiDil XR, an extended releaseformulation of BiDil, that could be taken once a day. To date, we haveincurred approximately $4.5 million in connection with the development of BiDilXR. Preclinical studies with BiDil XR have been positive, and we commencedclinical development of BiDil XR during October 2006. Because of its stage ofdevelopment, and the uncertainties inherent in pharmaceutical developmentgenerally, we may not be able to successfully develop and commercializeBiDil XR. Moreover, we cannot reasonably estimate or know the nature, timing andestimated costs of the efforts necessary to complete the development of, or theperiod in which material cash inflows are expected to commence, if at all, forBiDil XR.

•  *Nitric Oxide-Enhancing**Cardiovascular Compounds*. We have utilized our nitric oxideexpertise and proprietary position to develop a proprietary nitricoxide-enhancing cardio-renal compound, referred to as NMI-3377. We haveretained all commercial rights to this product candidate and are currentlyseeking out-licensing and collaboration opportunities for this compound.Currently, we do not intend to incur additional internal research anddevelopment expenses related to NMI-3377. Because this compound has not beendeveloped beyond the pre-clinical stage, the successful development of thisproduct candidate is highly uncertain. In addition, we cannot be certain if wewill be able to secure an out-licensing or collaboration partner for thiscompound on favorable terms, if at all. As such, we are not able to estimatewhen material cash inflows from product sales, milestones and royalties couldcommence, if at all.

•  *Other Discovery Research*. We have usedour know-how and expertise in nitric oxide to develop drug candidates that arenitric oxide-enhancing versions of existing medicines in the areas of cardiovascular,gastrointestinal/anti-inflammatory and pulmonary medicine. These studies havenot progressed beyond a discovery stage of testing, and it remains speculativewhether the addition of

15

----

nitricoxide will result in an improved clinical profile of these medicines. We arecurrently seeking out-licensing and collaboration opportunities for theseproduct candidates, and are not presently engaging in any internal research anddevelopment activities with respect to these drugs. We cannot be certain if wewill be able to secure out-licensing or collaboration partners for theseproduct candidates on favorable terms, if at all. As such, we are not able toestimate when material cash inflows from product sales, milestones androyalties could commence, if ever.

•  *Nitric Oxide Stents.*We formerly had a research program with Boston Scientific Corporation, orBoston Scientific, to develop cardiovascular stents enhanced with abio-compatible polymer that is capable of releasing nitric oxide. In accordancewith the terms of our agreement with Boston Scientific, the research termexpired in December 2005. The research program under this agreementfocused on pre-clinical development. We intend to seek out-licensing andcollaboration opportunities for these product candidates, subject to the termsof our agreement with Boston Scientific and pending resolution of the ongoingrights of the parties with respect to this technology. We cannot be certain ifwe will be able to secure out-licensing or collaboration partners for theseproduct candidates on favorable terms, if at all. Significant additionalexpenditures will be required to conduct pre-clinical testing and to apply for,and conduct, clinical trials. We are not presently engaging in any internalresearch and development activities with respect to cardiovascular stents.Because this program has not progressed beyond a pre-clinical stage ofdevelopment, the successful development of products based upon this program ishighly uncertain. As such, we are unable to estimate when material cash inflowsfrom milestones and royalties could commence, if at all.

*Sales, General and Administrative.*Sales, general andadministrative expense consists primarily of salaries and other related costsfor personnel in sales and marketing, executive, finance, investor relations,accounting, business development and human resource functions. Other costsinclude facility costs not otherwise included in research and developmentexpense; costs for public relations, advertising and promotion services;professional fees for legal and accounting services; and costs related to ourformer contract sales agreement with Publicis Selling Solutions, Inc., orPublicis.

*Non-Operating Income.*Interestincome includes interest earned on our cash, cash equivalents and marketablesecurities, and interest expense associated with our long-term debt.

**Results of Operations**

***Three Months Ended March 31, 2007 and 2006***

*Revenue.*Totalrevenue for the three months ended March 31, 2007 was $3.6 millioncompared to $2.3 million for the three months ended March 31, 2006.Product sales of BiDil accounted for all of the revenue for both the threemonth periods ended March 31, 2007 and 2006.

*Cost of Product Sale*s. Cost ofproduct sales was $954,000 for the three month period ended March 31, 2007 and$896,000 for the three month period ended March 31, 2006. For the threemonth periods ended March 31, 2007 and 2006, we recorded inventoryimpairment charges of $384,000 and $482,000, respectively.  These inventory impairment charges wererelated to commercial trade and patient sample inventory product in excess ofexpected future inventory requirements and future purchase commitments, basedon our current sales forecast.

*Research and Development.*Researchand development expense for the three months ended March 31, 2007 was $3.0million compared to $6.2 million for the three months ended March 31,2006. The $3.2 million, or 51%, decrease in research and development expensesin the current period was primarily due to $1.3 million in reduced headcountexpenses as a result of our restructuring action in March 2006, and a $1.8million decrease in medical expenditures supporting the commercial launch ofBiDil. These decreases are partially offset by increased spending related tothe development of BiDil XR.

The following table summarizes the primary componentsof our research and development expense for our principal research anddevelopment programs for the three month periods ended March 31, 2007 and2006:

|                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| **Research  and Development Program (in millions)** | ** ** | ** **                        | ** ** | ** ** | ** ** |
| BiDil                                               |       | $                                 | 1.2        |   | $ | 3.3 |   |
| BiDil XR                                            |       | 1.7                               |       | 0.1 |   |
| Other discovery  research                           |       | 0.1                               |       | 1.1 |   |
| Nitric  oxide-enhancing cardiovascular compounds    |       | —                            |       | 1.5 |   |
| Nitric  oxide-enhanced stents                       |       | —                            |       | 0.2 |   |
| Total research and  development expense             |       | $                                 | 3.0        |   | $ | 6.2 |   |

 

16

----

 

*Sales, General and Administrative.*Sales,general and administrative expense for the three months ended March 31,2007 was $8.9 million compared to $19.6 million for the three months endedMarch 31, 2006. The $10.7 million, or 54% decrease in sales, general andadministrative expense was primarily due to a decrease of $6.6 million inexpenses related to our former contract sales force agreement with Publicis,$2.9 million in decreased advertising expenses and $0.9 million of severancebenefits related to the cessation of service on March 20, 2006 of ourthen-president and chief executive officer and our then-chief financialofficer, chief business officer and treasurer.

*Restructuring Charge.* OnMarch 31, 2006, we recorded charges of $2.0 million for a restructuring ofour discovery research operations that was intended to better align costs withrevenue and operating expectations. The restructuring charges pertain toemployee severance benefits and impairment of assets. The restructuring chargeswere recorded in accordance with Statement of Financial AccountingStandards No. 146,*Accounting forCosts Associated with Exit or Disposal Activities,* and Statement ofFinancial Accounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets.* In connectionwith the restructuring plan, we terminated 30 employees from our discoveryresearch group, or approximately 30% of our workforce, resulting in a charge of$1.4 million, which was accrued as of March 31, 2006. None of theseemployees remained employed as of March 31, 2006, and no amounts werepayable at March 31, 2007. As a result of terminating these employees werecorded an impairment charge for certain research laboratory equipment,computer equipment, and furniture and fixtures aggregating $597,000. Theseassets were written down to their fair value utilizing a third party appraiserto estimate fair value based on current market quotes and the current conditionof the equipment, furniture and fixtures.

In the firstquarter of 2007, we recorded a restructuring charge of $1.0 million related tovacating our former headquarters location. The charge was recorded pursuant toStatement of Financial Accounting Standards No. 146. In March 2007, we enteredinto an Assignment of Lease and Assumption Agreement, which we refer to as theAssignment Agreement, with Shire Human Genetic Therapies, Inc., or Shire,pursuant to which we assigned our lease for office and laboratory space locatedat 125 Spring Street in Lexington, Massachusetts, which we refer to as theSpring Street Lease.  Pursuant to the terms of the Assignment Agreement,we agreed to pay Shire the amount of approximately $1,160,000 as considerationfor Shire’s assumption of the Spring Street Lease. In addition to this charge,we incurred $612,000 in expenses primarily related to real estate brokeragefees and clean-up costs.  Offsettingthese charges was a reversal of $768,000 in accrued rent related to the SpringStreet Lease. All amounts were paid as of March 31, 2007.

*Stock-based Compensation Expense.*OnJanuary 1, 2006, we adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004),*Share-BasedPayment,* or SFAS 123R, using the modified prospective applicationmethod. Compensation cost is calculated on the date of grant using the fairvalue of the options as determined by the Black-Scholes valuation model and isrecognized ratably over the employee’s service period.

Prior to the adoption of SFAS 123R, we accounted forshare-based payments to employees using the intrinsic value method ofAccounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*. As such, wegenerally recognized no compensation cost for employee stock options. Theadoption of SFAS 123R under the modified prospective application method allowedus to recognize compensation cost beginning with the effective date based on(a) the requirement of SFAS 123R for all share-based payments granted after theeffective date and (b)  the requirements of Statement of FinancialAccounting Standards No. 123, *Accounting for Stock BasedCompensation*, for all awards granted to employees prior to theeffective date of SFAS 123R that remain unvested on the effective date. Underthe modified prospective application method, prior periods are not restated forthe effect of SFAS 123R.

As a result of adopting SFAS 123R on January 1,2006, we recognized $1.9 million and $1.7 million in stock-based compensationexpense for the three months ended March 31, 2007 and 2006, respectively.

As of March 31, 2007, the total unrecognizedcompensation cost related to unvested awards was approximately$11.6 million, which will be recognized over a weighted average period of1.4 years.

*Non-Operating Income.*Non-operatingincome for the three months ended March 31, 2007 was $231,000 compared to$478,000 for the three months ended March 31, 2006. The $247,000, or 52%,decrease was primarily due to lower fund balances available for investment,offset by a $158,000 reduction in interest expense incurred on long-term debt.

**Liquidity and Capital Resources**

Since our inception, we have primarily funded ouroperations through the sale of equity securities, debt financings, licensefees, research and development funding, milestone payments from ourcollaborative partners and, more recently, sales of BiDil. As of March 31,2007, we have received net proceeds of $323 million from the issuance of equitysecurities, primarily as the result of the sale of $99.1 million of ourredeemable convertible preferred stock, net proceeds of $60.1 million fromour initial public offering in November 2003, net proceeds of $81.8million from our follow-on public offering in December 2004, and netproceeds of $58.5 million from our registered direct offering inJanuary 2006. At March 31, 2007, we had $32.5 million in cash, cashequivalents and marketable securities.

17

----

 

During the three months ended March 31, 2007,operating activities used cash of $9.6 million, primarily due to a net loss of$10.1 million, and decreases in accounts payable and accrued expenses of$0.4 million, a reduction in accrued restructuring charges of $0.3 million, andan increase in prepaid expenses and other current assets of $0.4 million,offset by stock-based compensation expense of $2.0 million.

During the three months ended March 31, 2007,investing activities provided cash of $5.9 million primarily due to net salesof marketable securities of $4.8 million, the sale of $0.5 million in fixedassets, and a reduction of restricted cash in the amount of $0.6 million.

During the three months ended March 31, 2007,financing activities used cash of $1.2 million due to $1.7 million in long-termdebt payments, offset by $0.5 million in proceeds from employee stockpurchases.

On June 28, 2005, we borrowed (i) $10.0million from Oxford Finance Corporation, or Oxford, and (ii) $10.0 millionfrom General Electric Capital Corporation, or GECC, pursuant to the terms ofpromissory notes made by us with both Oxford and GECC, respectively. The notesbear interest at a fixed rate of 9.95% per annum and are payable in 36consecutive monthly installments of principal and accrued interest, beginningJuly 1, 2005. The notes are secured by a security interest in all ourpersonal property and fixtures with the exception of any intellectual propertyor products acquired, whether by purchase, license or otherwise, on or afterthe execution of the notes, provided that debt or non-cash equity is used toacquire the new property.

Theagreements that we entered into with each of Oxford and GECC in connection withthe notes also contain a material adverse change clause with both Oxford andGECC. Under this clause, if Oxford or GECC reasonably determine that ourability to repay the notes has been materially impaired, we would be consideredin default. As of March 31, 2007,we were in compliance with this clause. As of March 31, 2007, we had paid aggregate principal in the amount of$11.0 million

In February 2007, in connection with (i) our assignmentto Shire Human Genetic Therapies, Inc., or Shire, of certain office furniture,laboratory equipment and other personal property in connection with theassignment to Shire of the lease for our former office and laboratory spacelocated at 125 Spring Street in Lexington, Massachusetts and (ii) the sale of certain laboratory equipmentpreviously used by our discovery research group, we entered into a release ofcollateral with both Oxford and GECC. Pursuant to the terms of each release, GECC and Oxford released anyand all security interests or liens that either GECC or Oxford had in alllaboratory equipment, office furniture and leasehold improvements and fixturesthen located at 125 Spring Street in Lexington, Massachusetts as of the date ofthe release.  In addition, GECC andOxford each released any and all security interests or liens that either GECCor Oxford may have had in any and all computer and electronic equipment,wherever located, to the extent that such computer and electronic equipment wasacquired by us prior to the date of the release.

*Contractual Obligations*

The following table summarizes our contractualobligations at March 31, 2007, and the effects such obligations areexpected to have on our liquidity and cash flows in future periods.
| **Contractual Obligations**    | ** ** | ** ** | ** ** | **Total** | ** ** | **Less than  one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  five years** | ** ** |
|-------------------------------------|------------|------------|------------|-----------|------------|-----------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------------|------------|
| Long term debt                      |       | 9,594,000  |       | 7,675,000 |       | 1,919,000                         |       | —             |       | —             |       |
| Operating lease  obligation         |       | $          | 3,131,000  |      | $          | 535,000                           |       | $                  | 1,110,000  |               | $          | 1,179,000                           |       | $ | 307,000 |   |
| Purchase obligations  (1)           |       | 432,000    |       | 432,000   |       | —                            |       | —             |       | —             |       |
| License  milestones(2)              |       | —     |       | —    |       | —                            |       | —             |       | —             |       |
| Total contractual cash  obligations |       | $          | 13,157,000 |      | $          | 8,642,000                         |       | $                  | 3,029,000  |               | $          | 1,179,000                           |       | $ | 307,000 |   |

----

(1)  In  January 2007, we placed a bindingpurchase order in the approximate amount of $0.4 million with Schwarz PharmaManufacturing, Inc. for production of BiDil finished goods during thesecond quarter of 2007.

(2)  On February 9, 2007, we entered into aLicense Agreement with Elan, pursuant to which we may be obligated to pay certainmilestone payments in the aggregate amount of $2,500,000, of which $250,000 waspaid in the first quarter of 2007.  Weare uncertain as to the timing of any future payments pursuant to the terms ofthe License Agreement.

We believe that our existing cash, cash equivalentsand marketable securities, as well as cash expected to be generated from salesof BiDil, will be sufficient to fund the current business plan for at least thenext nine months. We will require substantial additional funding in the futureand may seek that funding through collaborative co-promotion arrangementsand/or public or private 

18

----

financings.However, additional funding may not be available to us on acceptableterms, if at all. In addition, the terms of any financing may adverselyaffect the holdings or the rights of our stockholders. For example, if we raiseadditional funds by issuing equity securities or convertible debt securities,further dilution to our existing stockholders may result. We also could berequired to seek funds through arrangements with collaborators or others thatmay require us to relinquish rights to some of our technologies, productcandidates or products. If we are unable to obtain funding on a timely basis,we may be required to significantly curtail certain of our sales andmarketing efforts, as well as our development efforts with respect to BiDilXR.  In addition, we may be required tolimit, scale back or cease our operations.

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

·              the magnitude ofproduct sales of BiDil;

·              the successfulcommercialization of BiDil;

·              the cost ofmanufacturing, marketing and selling BiDil;

·              the timing of whenwe receive significant revenue from BiDil, if at all;

·              the time and costsinvolved in completing the clinical trials and further development of, andobtaining regulatory approvals for, BiDil XR, if at all;

·              our ability toestablish and maintain co-promotion, out-licensing and collaborativearrangements;

·              the timing, receiptand amount of royalties, milestone and other payments, if any, from potentialcollaborators;

·              the effect ofcompeting technological and market developments;

·              the costs involvedin preparing, filing, prosecuting, maintaining and enforcing patent claims; and

·              thecost of obtaining and maintaining licenses to use patented technologies.

**Critical Accounting Policies and Estimates**

Our discussion and analysis of our financial conditionand results of operations are based on our financial statements, which havebeen prepared in accordance with United States generally accepted accountingprinciples. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting periods. On an on-going basis, we evaluate our estimatesand judgments, including those related to revenue and related reserves,accounts receivable, inventories, accrued expenses and the factors used todetermine the fair value assigned to our stock options. We base our estimateson historical experience, known trends and events and various other factorsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. There were no material changes in our judgments or estimates duringthe first quarter of 2007. For a detailed explanation of the judgments made inthese areas, refer to Management’s Discussion and Analysis of FinancialCondition and Results of Operations within our Annual Report on Form 10-Kfor the year ended December 31, 2006, which is on file with the Securitiesand Exchange Commission, or SEC.

**Recently Issued Accounting Pronouncements**

In June 2006,the Financial Accounting Standards Board, or FASB, issued FASB InterpretationNo. 48,*Accounting for Uncertainty inIncome Taxes — an Interpretation of FASB Statement No. 109*, orFIN 48.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with Statement of Financial Accounting Standards No. 109,*Accounting for Income Taxes.*  FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. FIN 48 is effectivefor fiscal years beginning after December 15, 2006 (beginning with our2007 fiscal year). The adoption of FIN 48 had no material impact on ourfinancial position or results of operations.

**Inflation**

We believe the effects of inflation generally do nothave a material adverse impact on our operations or financial condition.

19

----

 

**Off-BalanceSheet Arrangements**

We do not have any material off-balance sheetarrangements.

**Forward-Looking Statements**

This Quarterly Report on Form 10-Q includes forward-lookingstatements within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended, which we refer to as the Exchange Act. For thispurpose, any statements contained herein regarding our strategy, futureoperations, 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 similarexpressions are intended to identify forward-looking statements, although notall forward-looking statements contain these identifying words. We cannotguarantee that we actually will achieve the plans, intentions or expectationsdisclosed in our forward-looking statements. There are a number of importantfactors that could cause actual results or events to differ materially fromthose disclosed in the forward-looking statements we make. These importantfactors include the risk factors set forth below under Part II, Item 1A., “RiskFactors.” Although we may elect to update forward-looking statements inthe future, we specifically disclaim any obligation to do so, even if ourestimates change, except as specifically required by law or the rules ofthe S EC, and readers should not rely on those forward-looking statements asrepresenting our views as of any date subsequent to the date of this quarterlyreport.

**Item 3.    Quantitative and Qualitative DisclosuresAbout Market Risk**

We are exposed to market risk related to changes ininterest rates. Our current investment policy is to maintain an investmentportfolio consisting mainly of U.S. money market and high-grade corporate andU.S. government-related securities, directly or through managed funds, withmaturities of two years or less. In addition, we hold auction rate securitiesthat reset monthly.  However, thematurities of these securities at March 31, 2007 range from 2007 to 2045. Ourcash is deposited in and invested through highly rated financial institutionsin North America. Our marketable securities are subject to interest rate riskand will fall in value if market interest rates increase. If market interestrates were to increase immediately and uniformly by 10% from levels atMarch 31, 2007, we estimate that the fair value of our investmentportfolio would decline by an immaterial amount. We have the ability to holdour fixed income investments until maturity, and therefore we do not expect ouroperating results or cash flows to be affected to any significant degree by theeffect of a change in market interest rates on our investments.

**Item 4.    Controls and Procedures**

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour disclosure controls and procedures as of March 31, 2007. The term “disclosurecontrols and procedures,” as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, means controls and other procedures of acompany that are designed to ensure that information required to be disclosedby a company in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.Management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives, and management necessarily applies its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based on theevaluation of our disclosure controls and procedures as of March 31, 2007,our chief executive officer and chief financial officer concluded that, as ofsuch date, our disclosure controls and procedures were effective at the reasonableassurance level.

No change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the fiscal quarter ended March 31, 2007, that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

**PART II.OTHER INFORMATION**

**Item 1A. Risk Factors**

You should carefully consider the following riskfactors, in addition to other information included in this Quarterly Report onForm 10-Q, in evaluating NitroMed and our business. If any of thefollowing risks occur, our business, financial condition and operating resultscould be materially adversely affected.

The following risk factors restate and supersede therisk factors previously disclosed in Item 1A. of our Annual Report on Form10-K for the year ended December 31, 2006.

20

----

** **

**RisksRelating to our Business**

**Our business issubstantially dependent on the commercial success of BiDil, and if we do notmaintain market presence of BiDil during the development of BiDil XR, ourbusiness will be materially harmed and our stock price will decline.**

On June 23,2005, the FDA approved BiDil for the treatment of heart failure inself-identified black patients as an adjunct to current standard therapy. Welaunched BiDil in July 2005 and therefore have only recently begun toreceive revenue from sales of BiDil. BiDil is currently our only commercialproduct, and we expect that it will account for all of our product sales andsubstantially all of our total revenues for the near future. We face a numberof significant risks relating to our ability to successfully commercializeBiDil, including risks relating to:

·       our ability to successfullymarket and sell BiDil with our significantly reduced sales force andcentralized marketing efforts;

·       the success of our revisedsales and marketing strategies for BiDil;

·       our ability to recruit andtrain our specialty sales force and the effectiveness of our sales force ininfluencing prescribing behavior with heart failure specialists and keyinstitutions;

·       our ability to successfullysecure preferable reimbursement treatment from government and third-partyinsurers for BiDil;

·       our ability to successfullyenter into a co-promotion agreement for BiDil on favorable terms, if at all;

·       our ability to gain marketacceptance of BiDil as safe, effective and medically necessary;

·       the availability ofsubstantial amounts of cash to fund our BiDil commercialization plans;

·       competitive factors,including competition resulting from physicians prescribing the two lower costgenerically available components of BiDil (isosorbide dinitrate and hydralazinehydrochloride) as a substitute for BiDil, and adverse effects on pricing orreimbursement resulting from this substitution;

·       our ability to effectivelydevelop and/or contract for adequate marketing, manufacturing, and distributioncapabilities;

·       our ability to maintain thenecessary patent protection, licenses and regulatory approvals required tomarket and sell BiDil; and

·       the various other factorsdiscussed in detail throughout this section titled “Risk Factors.”

In order for us to successfully commercialize BiDil,we must maintain our market presence of BiDil in the near term and must build asufficient commercial foundation from which to launch BiDil XR in the future.If we fail to sustain market awareness of BiDil, our near-term ability togenerate product revenue, our reputation and our ability to raise additionalcapital will be materially impaired, and the value of our stock will decline.

**We will requiresubstantial additional amounts of cash to fund our operating plan, includingcommercializing BiDil and seeking to develop and commercialize BiDil XR, and,if additional capital is not available, we may need to limit, scale backor cease our operations.**

We have used and will continue to require substantialfunds to manufacture, market and sell BiDil during 2007 and beyond. We alsoexpect to incur additional expenses relating to the ongoing development ofBiDil XR, which commenced clinical development during October 2006. We believethat our existing cash, cash equivalents and marketable securities, as well ascash expected to be generated from sales of BiDil, will be sufficient to fundthe current business plan for at least the next nine months.

However, ourfuture capital requirements, and the period in which we expect our current cashto support our operations, may vary from what we expect due to a number offactors, including the following:

·       the magnitude of productsales of BiDil;

·       the successfulcommercialization of BiDil;

·       the cost of manufacturing,marketing and selling BiDil;

·       the timing of when wereceive significant revenue from BiDil, if at all;

·       the time and costs involvedin completing the clinical trials and further development of, and obtainingregulatory approvals for, BiDil XR, if at all;

·       our ability to establishand maintain co-promotion, out-licensing and collaborative arrangements;

·       the timing, receipt andamount of royalties, milestone and other payments, if any, from potentialcollaborators;

·       the effect of competingtechnological and market developments;

·       the costs involved inpreparing, filing, prosecuting, maintaining and enforcing patent claims; and

·       the cost of obtaining andmaintaining licenses to use patented technologies.

21

----

 

We will require substantial additional funding in thefuture and may seek such funding through collaborative co-promotionarrangements and/or public or private financings. While we are actively seekingfinancing alternatives, we currently have no firm commitments for additionalcapital through any of such sources. Additional financing may not beavailable to us on acceptable terms, if at all. In addition, the terms of anyfinancing may adversely affect the holdings or the rights of ourstockholders. For example, if we raise additional funds by issuing equity securities,further dilution to our then-existing stockholders will result. If we areunable to obtain funding on a timely basis, we may be compelled tosignificantly curtail our sales and marketing efforts for BiDil and/or ourdevelopment efforts with respect to BiDil XR. We may also be compelled to seekfunds through arrangements with collaborators or others that may requireus to relinquish rights to some of our technologies, product candidates orproducts. We could also be required to limit, scale back of cease itsoperations, any of which would have a material and adverse effect on ourbusiness, financial condition and results of operations.

**Poor performanceby our sales force, or difficulties arising from the restructuring andexpansion of our sales organization, could prevent us from achieving theresults we need to maintain market presence of BiDil.**

In October 2006, we initiated a restructuringprogram that included a reduction of our sales force and administrativeheadcount. As part of the restructuring program, we eliminated our existingsales force and replaced it with a small team of highly experienced seniorcardiovascular business managers focused on hospitals and key opinion leaders,resulting in a net reduction of approximately 120 in sales force headcount. Inaddition, we also eliminated approximately 20% of our general andadministrative personnel in connection with this restructuring program. Ourcurrent sales organization is managed by our senior vice president ofcommercial operations and is comprised of approximately 25 to 30 people. InApril 2007, we began to implement a program designed to double our sales forcein specific geographic areas with a focus on selected prescriber targets. Ournear-term revenue for BiDil will depend significantly upon the efforts andsuccess of our restructured and expanded sales organization.  If our expanded sales organization does notgenerate additional prescriptions, our ability to generate product revenue willbe harmed and the value of our stock will decline.

During the first quarter of 2006, we elected to reducethe number of sales territories in which we have sales representation. As aresult of our October 2006 restructuring, we significantly reduced thenumber of individuals in our sales organization who cover these territories.Even if we begin to expand our sales force in certain geographic areas, anyfailure to adequately cover our current sales territories, or to cover throughalternative marketing efforts the territories in which we have elected not tohave sales representation, will result in reduced sales force productivityand loss of revenue related to BiDil.

The success of our revised selling strategy will alsodepend on our ability to recruit the caliber of representatives necessary toimplement our new strategy. Since launching BiDil, we have dramatically reducedour sales force representation through various territory realignments andrestructurings, which could significantly limit our ability to successfullyrecruit and retain highly qualified sales personnel. In addition, we areseeking sales representatives with a very high level of technical, selling andinstitutional experience to fill our cardiovascular business manager andcardiovascular specialist positions. These are highly specialized skills and wemay not be able to hire sales personnel who meet these qualifications. Anydelay in our ability to recruit the required number of individuals to cover ourrevised sales territories, or any failure to attract and retain qualifiedpersonnel, could significantly delay or hinder the success of our revisedselling strategy.

**If we do notsuccessfully market and sell BiDil, either directly through our small,restructured sales force or indirectly through third-party co-promotionarrangements, our future revenue will be limited.**

We launched BiDil in the United States ourselves,using a contract sales force. We transitioned to the use of a smaller salesforce during the first quarter of 2006, we internalized this sales force duringthe second quarter of 2006, and in October 2006 we replaced this salesforce with a small team of highly experienced senior cardiovascular businessmanagers. In April 2007, we began to implement a program to expand our salesforce in specific geographic areas. The transition to and expansion of thisspecialized sales force could adversely affect our marketing of BiDil anddepress the value of our stock.

As part of our October 2006 restructuring, werevised our marketing strategy to reduce the level of our direct face-to-facemarketing efforts and adopted a more centralized approach to marketing thatwill involve various non-personal methods of contacting current and potentialprescribers. The direct marketing efforts in which we will continue to engagethrough our small, specialized sales team will be focused on national thoughtleaders, regional heart failure specialists and key institutions in majormetropolitan centers that treat, and influence the treatment of, large numbersof African Americans who have been diagnosed with heart failure. Our approachis to educate those thought leaders and institutions on the value of BiDil, andthen leverage their influence to impact the broader base of prescribers. If weare unable to convince these thought leaders and institutions that BiDil issafe, effective and medically necessary, we will be unsuccessful in ourmarketing approach. In addition, even if we are successful in gainingacceptance of BiDil with these key targets, these thought leaders andinstitutions may not be willing or able to influence the prescribing activityof other physicians, or to do so within a timeframe that will impact BiDilprescriptions in the near term. Furthermore, our indirect marketing efforts maynot be successful in maintaining market awareness of BiDil with current andpotential prescribers.

22

----

 

If we decide to expand our marketing reach for BiDil,we will likely pursue sales, marketing and distribution arrangements with thirdparties, including co-promotion arrangements. We may not be able tosuccessfully enter into sales, marketing and/or distribution agreements withthird parties on terms that are favorable to us, if at all. In addition, wemay have limited or no control over the sales, marketing and distributionactivities of these third parties. If we decide to rely on third-party entitiesfor sales, marketing and distribution support, our future revenues for BiDilwill depend heavily on the success of the efforts of these third parties.

**If the governmentor third-party payors do not reimburse patients for BiDil, or do not reimbursefor BiDil at favorable levels, BiDil might not be used or purchased, and ourrevenues and profits will be adversely affected.**

Our revenues andprofits depend heavily upon the availability of coverage and favorablereimbursement for the use of BiDil from third-party healthcare and state andfederal government payors. Reimbursement by a third party payor may dependupon a number of factors, including the third-party payor’s determination thatuse of a product is:

·       safe, effective andmedically necessary;

·       appropriate for thespecific patient;

·       cost-effective; and

·       neither experimental norinvestigational.

Since reimbursement approval for a product is requiredfrom third-party and government payors in order for patients to be reimbursedfor the cost of a product, seeking this approval, particularly when seekingapproval for a preferred form of reimbursement over other competitiveproducts, is a time-consuming and costly process. Third-party payors conductclinical reviews of pharmaceutical products to determine whether a product issafe, effective and medically necessary. These third-party payors may find thatBiDil is not sufficiently effective to justify reimbursement approval or thatthe effectiveness of BiDil does not justify its cost. In addition, third-partypayors may require cost-benefit analysis data from us in order todemonstrate the cost-effectiveness of BiDil. For any individual third-partypayor, we may not be able to provide data sufficient to gain reimbursementon a similar or preferred basis to competitive products, if at all.Furthermore, some third-party payors may consider the generically availableindividual components of BiDil to be substitutable for, or therapeuticallyequivalent to, BiDil, despite the lack of FDA approval for the use of thoseindividual components in the treatment of heart failure. This misconceptionamong third-party payors may further limit our ability to obtain preferentialreimbursement, if at all, from those third-party payors.

Even after reimbursement at an agreed level isapproved by a third-party payer, we may lose that reimbursement entirely,or we may lose the similar or better reimbursement we receive compared tocompetitive 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 thereimbursement was approved. In addition, legislative or regulatory efforts tocontrol or reduce healthcare costs or reform government healthcareprograms could result in lower prices or rejection of BiDil. Changes incoverage and reimbursement policies or healthcare cost containment initiativesthat limit or restrict reimbursement for BiDil may cause our revenues todecline. Any failure by us to obtain reimbursement for BiDil, or to secure apreferred form of reimbursement that reduces costs to patients,may negatively impact market acceptance of BiDil and adversely affect ourability to generate revenues from sales.

A number of private insurers and Medicare Part Dplans that cover BiDil cover the product at the Tier III level. Tier level is aterm generally used to denote the level of reimbursement and, consequently, thelevel of patient co-pay, for a product that is approved by a third-party payor.At Tier III, patient co-pays are at a significantly higher level than theywould be at Tier II, ranging from approximately $30.00 to $50.00 perprescription. Tier II reimbursement denotes a preferential level ofreimbursement at which patient co-pays range from approximately $15.00 to $30.00per prescription. We may not be able to obtain reimbursement coverage forBiDil from many private insurers or Medicare Part D plans or, even if weobtain such coverage, we may not be able to obtain preferential reimbursementtreatment. Any failure by us to secure such coverage, or to secure it atpreferential levels, would have a substantially negative effect on sales ofBiDil, market acceptance of BiDil would be negatively impacted and our abilityto generate revenues from sales would be significantly impaired. Although wehave been added to preferred formularies covering nearly 70% of insured AfricanAmericans over the age of 45, we have not achieved preferential reimbursementon all plans. Furthermore, we cannot know if BiDil will continue to be listedon any of these plans at a preferential reimbursement level, if at all. Inaddition, although preferential reimbursement for BiDil removes a financialbarrier to accessing the product, it does not require or guarantee thatphysicians will prescribe the drug. Accordingly, we cannot assess the impactthat the current listing of BiDil on any given plan will have on our futurerevenues, if any.

**Physicians,third-party payors and patients may not be receptive to BiDil, which couldprevent us from achieving profitability.**

Our business is substantially dependent on marketacceptance of BiDil. We currently market BiDil only in the United States, andkey participants in the U.S. pharmaceutical marketplace, such as physicians,third-party payors and patients, may not accept and use BiDil.

23

----

 

Factors that webelieve will materially affect market acceptance of BiDil include:

·       the availability offavorable government and third-party payor reimbursement;

·       the ability to produce andsell BiDil at a competitive price;

·       the availability in genericform of the individual components that constitute BiDil and the misperceptionthat these generic components are equivalent to BiDil;

·       the failure of physicians,third-party payors and patients to accept a product intended to improvetherapeutic results based on ethnicity;

·       the success of ourpromotional programs, which will be centralized in nature going forward;

·       the timing of our receiptof marketing approval, if any, for our next-generation BiDil product, BiDil XR,or for any expansion of our current label for BiDil, such as extended productdating or inclusion of new data;

·       the safety, efficacy andease of administration of BiDil; and

·       the timing of our receiptof any marketing approvals outside the U.S., the terms of any non-U.S.approval, including labeling requirements and/or limitations, and the countriesin which approvals are obtained, if any.

**The availabilityof lower priced generic forms of the components of BiDil may adverselyaffect our sales of BiDil and the pricing or reimbursement we are able toobtain for BiDil.**

BiDil is afixed-dosed combination of two individual components, both of which areavailable in generic form and are separately marketed (isosorbide dinitrate forangina and hydralazine hydrochloride for hypertension) at prices substantiallybelow the prices we are charging for BiDil. Moreover, isosorbide dinitrate isavailable in the dosage that we include in BiDil. While neither of these twogeneric drugs is approved for the treatment of heart failure, as a practicalmatter it may be impossible for us to prevent physicians from prescribinga combination of these two, lower cost generic drugs as a substitute forprescribing BiDil. If substantial numbers of physicians prescribe thecombination of these two generic drugs, rather than BiDil, we could fail toachieve the sales of BiDil necessary for successful commercialization whichwould severely limit our ability to generate revenue from the sales of BiDil.Our ability to generate revenue could also be limited if:

·       potential large purchasersof BiDil, such as hospitals or health maintenance organizations, requiresubstitution of these generic drugs for BiDil;

·       state formularies, othergovernment agencies or private payors that approve reimbursement for drugsrequire substitution of these generic drugs for BiDil; or

·       the availability of thesegeneric drugs reduces the price or reimbursement amounts we are able to achievefor BiDil.

**We do nothave the internal technology to successfully develop BiDil XR and our successwill depend on our ability to co-develop such technology with a collaborativepartner.**

Although we intend to pursue the development of BiDilXR as expeditiously as possible, we do not currently have the internaltechnology to pursue this development on our own. The technology underlyingextended release formulations of pharmaceutical products is highly proprietaryand would take years and the expenditure of significant amounts of capital forus to develop. We have entered into a license agreement with Elan, pursuant towhich we have licensed proprietary extended release technology which we believeis compatible for use with BiDil. We have done extensive preclinicaldevelopment with Elan, but we cannot be sure that our development efforts willresult in a successful extended release formulation of BiDil.

**We cannot becertain that clinical testing of BiDil XR will be successful, nor can we becertain that we will be able to obtain regulatory approval for BiDil XR.**

We cannot predictwhether the results of any clinical studies conducted with respect to BiDil XRwill be successful. Furthermore, we cannot predict the number or the type ofclinical trials that will be necessary to adequately support regulatoryapproval for BiDil XR, nor can we predict the amount of time that will berequired in order to complete those clinical trials. The fact that BiDil is acombination of two active ingredients (isosorbide dinitrate and hydralazinehydrochloride) may further complicate the development of the extended releaseformulation. Depending on the results of initial clinical studies, additionaltesting with alternate formulations of BiDil XR may also be required. If thesestudies and testing are not successful, we will incur increased costs and thefiling for regulatory approval of BiDil XR with the FDA and other healthauthorities will be significantly delayed. We could also experience delays orfailures in clinical trials for a number of other reasons. For example:

·       the results from earlyclinical trials may not be statistically significant or predictive of resultsthat will be obtained from expanded, advanced clinical trials;

·       we may encounterdifficulties or delays in manufacturing sufficient quantities of BiDil XR usedin any clinical trials;

24

----

 

·       the timing and completionof clinical trials of BiDil XR depend on, among other factors, the number ofpatients we will be required to enroll in the clinical trials and the rate atwhich those patients are enrolled and any increase in the required number ofpatients, decrease in recruitment rates or difficulties retaining studyparticipants may result in increased costs, program delays or programtermination;

·       BiDil XR may prove to haveundesirable or unintended side effects, toxicities or other characteristics thatmay prevent or limit its commercial use;

·       we, along with ourcollaborators and subcontractors, may not employ, in any capacity, persons whohave been debarred under the FDA’s Application Integrity Policy. Employment ofsuch a debarred person (even if inadvertently) may result in delays in FDA’sreview or approval of our products, or the rejection of data developed with theinvolvement of such person(s); and

·       institutional review boardsor regulators, including the FDA, or our collaborators may hold, suspend orterminate our clinical research or the clinical trials of BiDil XR for variousreasons, including failure to achieve established success criteria,noncompliance with regulatory requirements or if, in their opinion, theparticipating subjects are being exposed to unacceptable health risks.

In addition, even if clinical testing of BiDil XR issuccessful, we still may not be able to obtain regulatory approval for BiDilXR. The FDA may conclude that the data provided is insufficient and may requirethat we perform additional studies. If we are ultimately unable to produce aformulation of BiDil XR that meets regulatory requirements, if we are delayedin our efforts to obtain regulatory approval for BiDil XR, or if we arerequired by the FDA to conduct large-scale outcomes studies, we may not be ableto successfully develop and commercialize this product and our ability togenerate revenue from BiDil XR will be materially impaired.

**The developmentand future commercialization of BiDil XR may be terminated or delayed, andthe cost of development and future commercialization may increase, ifthird parties on whom we rely to manufacture BiDil XR do not fulfill theirobligations.**

We do not havemanufacturing capabilities for BiDil XR and have no current plans to developany such capacity in the future. In order to continue to develop BiDil XR,apply for regulatory approvals and commercialize this product, we plan to relyon our collaborative licensor, Elan, for the production of clinical andcommercial quantities of BiDil XR. Although we are in the process ofnegotiating a manufacturing and supply agreement with Elan, we may not beable to finalize an agreement on commercially favorable terms, if at all. Inaddition, contract manufacturers are subject to ongoing periodic, unannouncedinspection by the FDA and corresponding state and foreign agencies or theirdesignees to ensure strict compliance with current Good ManufacturingPractices, or cGMP, and other governmental regulations and correspondingforeign standards. The cGMP requirements govern, among other things, qualitycontrol of the manufacturing process and documentation of policies andprocedures. Other than through contract, we do not have control over complianceby our contract manufacturers with these regulations and standards. Our presentor future contract manufacturers may not be able to comply with cGMP andother FDA requirements or similar regulatory requirements outside the UnitedStates. Any failure by our contract manufacturers or us to comply withapplicable regulations could result in sanctions being imposed on us, includingfines, injunctions, civil penalties, failure of regulatory authorities to grantmarketing approval of our product candidate, delays, suspension or withdrawalof approvals, seizures or recalls of such product candidate, operatingrestrictions, and criminal prosecutions, any of which could significantly andadversely affect our business. We will depend upon these third parties toperform their obligations in a timely manner and in accordance withapplicable laws and regulations, including those related to quality control andquality assurance. To the extent that third-party manufacturers with whom wecontract fail to perform their obligations in accordance with applicable lawsand regulations, we may be adversely affected in a number of ways,including:

·       we may not be able toinitiate or continue clinical trials of BiDil XR;

·       we may be delayed insubmitting applications for regulatory approvals for BiDil XR; and

·       even if we successfullycommercialize BiDil XR, we may be required to cease distribution and/orrecall some or all batches of the product and we may not be able to meetcommercial demands for our products or achieve profitability.

**Currently, we areengaging in limited internal research and development activities and,accordingly, our ability to generate future revenue from our nitric oxidetechnology portfolio is completely dependent on our ability to enter intoscientifically and commercially successful out-licensing or collaborativearrangements with third parties.**

At the end of the first quarter of 2006, we scaledback our research and development staff in a restructuring of our company andhave limited our internal research and development activities to the continued developmentof BiDil XR. We are currently seeking out-licensing and collaborationopportunities for our other potential product candidates based on ourproprietary nitric oxide technology, including NMI-3377, a pre-clinicalcardio-renal compound. The application of our proprietary nitric oxidetechnology is unproven in humans and, as a result, we may not be able tosuccessfully out-license any products based on this technology. Our productcandidates include nitric oxide enhancements of existing drugs; in these cases,we are modifying compounds whose chemical and pharmacological profiles arewell-documented and understood. Many of our potential product candidates,however, are new molecules with chemical and pharmacological profiles thatdiffer from that of the existing drugs. These compounds may not

 

25

----

demonstrate in patientsthe chemical and pharmacological properties shown in laboratory studies, andthey may interact with human biological systems in unforeseen, ineffectiveor harmful ways. In addition, it is possible that existing drugs ornewly-discovered drugs may not benefit from the application of our nitricoxide technology. We may not be able to secure out-licensing orcollaboration partners for these potential product candidates. Even if we aresuccessful in entering into out-licensing or collaborative arrangements withrespect to our potential product candidates, we have no assurance that we willbe able to secure such arrangements on terms completely favorable to us. If ourout-licensing or collaboration arrangements include unfavorable financialterms, our ability to generate revenue from our technology portfolio will beseverely limited.

Additional factorsthat may affect the success of our potential future collaborations includethe following:

·       our future licensingpartners or collaborators may be pursuing alternative technologies ordeveloping alternative product candidates, either on their own or incollaboration with others, that may be competitive with the productcandidate which they have licensed from us or will be collaborating with us andwhich could affect their commitment to our future collaboration;

·       future reductions inmarketing or sales efforts or a discontinuation of marketing or sales of ourproducts by our licensing partners or collaborators would reduce our revenues,which would be based on a percentage of net sales by the partner orcollaborator;

·       our future licensingpartners or collaborators may terminate their agreements with us, whichcould make it difficult for us to attract new partners or collaborators oradversely affect how we are perceived in the business and financialcommunities; and

·       our future licensingpartners or collaborators may pursue higher-priority programs or changethe focus of their development programs, which could affect a partner’s orcollaborator’s commitment to us.

As a result of the foregoing factors, our potentialstrategic partners or collaborators may not be successful in developingand commercializing any products based on our proprietary nitric oxidetechnology. Any failure of such potential partners or collaborators at anystage of the development or commercialization process with respect to ourpotential product candidates would significantly reduce the possibility that wewould realize any future revenue from our technology portfolio.

**Because we have ahistory of losses and our future profitability is uncertain, an investment inour common stock is highly speculative.**

We have experienced significant operating losses sinceour inception in 1992. For the quarter ended March 31, 2007, we had a netloss of $10.1 million. As of March 31, 2007, we had an accumulateddeficit of $323.9 million. We expect that we will continue to incursubstantial losses and that our cumulative losses will increase as ourcommercialization efforts continue. We expect that the losses that we incurwill fluctuate from quarter to quarter and that these fluctuations may besubstantial.

A large portion of our expenses is fixed, includingexpenses related to facilities, equipment and personnel. We have spentsignificant amounts to launch our first product, BiDil, and we expect to incursignificant operating expenses in connection with our ongoing commercializationactivities related to BiDil. We received approval for BiDil from the FDA onJune 23, 2005, and launched commercial sales of BiDil in July 2005.We have also spent significant amounts to fund research, development andcommercialization of our product candidates and to enhance our coretechnologies. Currently, our research and development activities are limited tothe continued development of BiDil XR. We are not engaging in any internalresearch and development activities with respect to other potential productcandidates and, therefore, do not expect to incur substantial research anddevelopment expenses in the near term. Although we currently estimate that ouroperating expenses will decrease in fiscal year 2007, we will still need togenerate significant revenue to achieve profitability. We are currently unableto estimate the level of revenues that we will realize from thecommercialization of BiDil. We are therefore unable to estimate when we willachieve profitability, if at all. Even if we do achieve profitability, wemay not be able to sustain or increase profitability on a quarterly orannual basis. Our failure to become and remain profitable could depress themarket price of our common stock and could impair our ability to raise capitalor continue our operations.

Our BiDil product revenues have been and will continueto be subject to considerable variation due to the significant reduction in ourdirect sales force, volatility in prescription volume, the manner in which weaccount for product sales considering product returns rates, level of discountsincurred, the level of purchases by individual customers and other mattersrelated to the commercialization of this product. We have experienced and arelikely to continue to experience significant revenue deferrals and productreturns, as well as additional charges and expenses associated with stockingincentives, rebates, discounts, and other promotional incentives, and othermatters related to the commercialization of this product. Significant inventoryadjustments may also occur due to sales forecast variances or otherfactors. Any deferrals, returns or adjustments that negatively impact revenue,or our failure, for this or any other reason, to generate significant near-termrevenue growth, would reduce our stock price and adversely affect our abilityto raise capital.

**If the third-partymanufacturer of BiDil encounters delays or difficulties in production, wemay not be able to meet demand for the product and we may losepotential revenue, which could cause the price of our common stock to decline.**

We do not manufacture BiDil and have no plans to doso. We engaged Schwarz Pharma under a five-year exclusive manufacturing andsupply agreement solely for the three times daily immediate release dosageformulation of BiDil. Under the supply agreement, we have the right to engage abackup manufacturer but do not currently have any backup manufacturingagreement in place. The terms of the supply agreement provide that itmay be terminated by either us or Schwarz Pharma under specified

26

----

circumstances, includinga material breach of the supply agreement by either party, the occurrence of apayment default by us, our material impairment of the manufacturing licenses wehave granted to Schwarz Pharma or a failure of Schwarz Pharma to supplyconforming products. In addition, either party may terminate the supplyagreement in the event the FDA takes any action, the result of which is topermanently prohibit the manufacture, sale or use of the product.

Furthermore,Schwarz Pharma may encounter difficulties in production. These problems may include,but are not limited to:

·       difficulties withproduction costs and yields;

·       quality control andassurance;

·       difficulties obtainingingredients for our products;

·       shortages of qualifiedpersonnel;

·       compliance with strictlyenforced federal, state and foreign regulations; and

·       lack of capital funding.

If we are unable to maintain a commercially reasonablemanufacturing agreement for the production of BiDil with Schwarz Pharma, wehave no back-up manufacturing facility and thus we would not be able tomanufacture and sell BiDil until another facility was qualified. The number ofthird-party manufacturers with the manufacturing and regulatory expertise andfacilities necessary to manufacture finished products for us on a commercialscale is limited, and it would take a significant amount of time to arrange,qualify, and receive necessary regulatory approval for alternativearrangements. We may not be able to contract for alternative manufacturingon acceptable terms, if at all.

If we are unable to successfully contract forthird-party manufacturing, or if Schwarz Pharma or any other third-partymanufacturer of BiDil fails to deliver the required commercial quantities offinished product on a timely basis and at commercially reasonable prices, we may beunable to meet the demand for our product and we may lose potentialrevenues, all of which could cause the price of our common stock to decline.

**We rely on asingle source supplier for one of the two active ingredients in BiDil, and theloss of this supplier could prevent us from selling BiDil, which wouldmaterially harm our business.**

We rely on Sumitomo Corp. for our supply ofhydralazine hydrochloride, one of the two active ingredients in BiDil. Sumitomois currently the only supplier of hydralazine hydrochloride worldwide. We donot have any agreement with Sumitomo regarding the supply of hydralazinehydrochloride. If Sumitomo stops manufacturing or is unable to manufacturehydralazine hydrochloride, or if we are unable to procure hydralazine hydrochloridefrom Sumitomo on commercially favorable terms, we may be unable tocontinue to sell BiDil on commercially viable terms, if at all. Furthermore,because Sumitomo is currently the sole supplier of hydralazine hydrochloride,Sumitomo has unilateral control over the price of hydralazine hydrochloride.Any increase in the price for hydralazine hydrochloride may reduce ourgross margins and adversely affect our ability to achieve profitability.

**If ourcollaborative partners do not obtain and maintain the regulatory approvalsrequired to market and sell our potential nitric-oxide based product candidatesin the United States, then our business may be unsuccessful, and the marketprice of our stock may substantially decline.**

We are currentlyseeking out-licensing and collaboration opportunities for our potential productcandidates based on our proprietary nitric oxide technology, including NMI-3377,a pre-clinical cardio-renal compound. Our partners will not be able to marketany of our potential nitric-oxide based product candidates in the United Stateswithout marketing approval from the FDA. The process of obtaining FDA approvalof pharmaceutical products is costly, complex and time consuming. Any newpharmaceutical product must undergo rigorous pre-clinical and clinical testingand an extensive regulatory approval process mandated by the FDA. Suchregulatory review includes the determination of manufacturing capability andproduct performance. The drug approval process is affected by such factors as:

·       the severity of thedisease;

·       the quality of theregulatory submission;

·       the drug’s clinicalefficacy and safety;

·       the strength of thechemistry and manufacturing control of the process;

·       the manufacturing facility’scompliance with cGMP requirements and other applicable regulatory requirements;

·       the availability ofalternative treatments;

·       the risks and benefitsdemonstrated in clinical trials; and

·       the patent status andmarketing exclusivity rights of certain innovative products.

 

27

----

The regulatory process to obtain market approval for anew drug takes many years and requires substantial expenditures. There can beno assurance that our strategic partners will be successful in obtaining FDAapproval for our potential nitric-oxide based product candidates. If ourstrategic partners do not receive the required regulatory approval or clearanceto market any of our potential product candidates, these partners will not beable to develop and commercialize these product candidates, which will significantlyimpair our ability to realize revenue from these product candidates and whichwill likely affect our ability to achieve profitability and cause themarket price of our common stock to substantially decline.

**We or ourpotential strategic collaborators may not be able to obtain the necessaryregulatory approvals in order to market and sell BiDil, or our productcandidates, in foreign countries.**

Our marketing approval for BiDil is limited to theUnited States. Until we or our potential strategic collaborators obtain therequired regulatory approvals for BiDil or any potential product candidates inany specific foreign country, neither we nor our collaborators will be able tosell these products in that country. International regulatory authorities haveimposed numerous and varying regulatory requirements, and the approvalprocedures could involve testing in addition to that required by the FDA.Furthermore, approval by one regulatory authority does not ensure approval byany other regulatory authority. In addition, if we enter into collaborativepartnerships in order to obtain foreign regulatory approval for BiDil or any ofour product candidates, we may be dependent upon these collaborators toconduct clinical or other testing and to obtain such regulatory approvals. Weor our collaborators may not be able to obtain final regulatory approvalsfor BiDil or for any of our other potential product candidates in foreigncountries. Any failure to obtain the necessary governmental approvals or failureto obtain approvals of the scope requested could delay, or even preclude,us or our licensees or other collaborators from marketing BiDil or our productcandidates, or limit the commercial use of BiDil or our product candidates inthese foreign jurisdictions. Alternatively, foreign regulatory approvalsmay entail limitations on the indicated uses of BiDil or our productcandidates and impose labeling requirements which may also adverselyimpact our ability to market BiDil or our product candidates.

**Even if we or ourstrategic partners obtain regulatory approvals, our marketed products,including BiDil, will be subject to ongoing regulatory review and oversight. Ifwe, or our strategic partners, fail to comply with continuing United States andforeign regulations, we could lose our approvals to market BiDil, our strategicpartners could lose approvals to market our out-licensed products based on ourproprietary nitric oxide technology, and our business would be seriouslyharmed.**

Even after approval, any products we or our potentialstrategic partners develop will be subject to ongoing regulatory review andrestrictions, including the review of clinical results which are reported aftersuch products are made commercially available, and restrictions on the indicationsfor which we or our potential strategic partners can market the product. TheFDA can propose to withdraw approval if new clinical data or experience showsthat a product is not safe for use under the approved conditions of use. TheFDA, we or our potential strategic partners may need to send importantinformation about such products to healthcare providers. The marketing claimswe or our potential strategic partners are permitted to make in labeling oradvertising regarding our marketed products are limited to those specified inany FDA approval.

For example, because BiDil is specifically approvedfor use by self-identified black patients, we may not promote BiDil foruse in other patient populations. We must submit copies of our advertisementsand promotional labeling for BiDil, including, for example, professionaljournal advertisements, website pages, professional direct mailers,direct-to-consumer advertisements, convention booth panels and handouts, to theFDA at the time of initial publication or dissemination. If the FDA believesthese materials or statements made by our sales representatives or othercompany officials promote our products for unapproved indications, the FDAcould allege that our promotional activities misbrand our products. Specifically,the FDA could issue an untitled letter or warning letter, which requests, amongother things, that we cease such promotional activities, includingdisseminating the advertisements and promotional labeling, and that we issuecorrective advertisements and labeling, including sending letters to healthcareproviders. The FDA also could take enforcement action including seizure ofallegedly misbranded product, injunction or criminal prosecution against us andour officers or employees. If we repeatedly or deliberately fail to submit suchadvertisements and labeling to the agency, the FDA could withdraw ourapprovals. The FDA also monitors manufacturers’ support of continuing medicaleducation, or CME, programs where the programs involve the manufacturers’ or acompetitor’s products to ensure that manufacturers do not influence the CMEcontent as a means of promoting their products for off-label uses. In addition,the Department of Justice enforces laws prohibiting kickbacks to healthcareproviders and false claims in connection with government-funded reimbursementprograms for drug purchases, such as Medicare and Medicaid, and any off-labelmarketing of BiDil could subject us to civil or criminal prosecution, for whichthe government could seek to recover substantial monetary penalties, theimposition of restrictions on our marketing activities, and the exclusion ofBiDil from eligibility for government reimbursement programs.

In addition, the manufacturer and the manufacturingfacilities we use to produce BiDil, or that our potential strategic partnersmay use to produce product candidates based on our nitric oxidetechnology, are subject to periodic review and inspection by the FDA. We or ourpotential strategic partners are required to report any serious and unexpectedadverse experiences and certain quality problems with BiDil or the respectiveproduct candidate and make other periodic reports to the FDA. The discovery ofany previously unknown problems with a product, manufacturer or facilitymay result in restrictions on the product, manufacturer or manufacturingfacility, including withdrawal of the product from the market. Certain changesto an approved product, including the way it is manufactured or promoted, oftenrequire prior FDA approval before the product as modified may be marketed.If we or our potential strategic partners fail to comply with applicablecontinuing regulatory requirements, we or our potential strategic partnersmay be subject to fines, untitled letters, warning letters, civil penalties,suspension or withdrawal of regulatory approvals, product recalls and seizures,injunctions, operating restrictions and/or criminal prosecutions and penalties.

28

----

 

**If we, ourthird-party manufacturers or our service providers fail to comply with applicablelaws and regulations, we or they could be subject to enforcement actions, whichcould affect our ability to develop, market and sell BiDil, or any potentialproduct candidates, and harm our reputation.**

If we or ourthird-party manufacturers or service providers fail to comply with applicablefederal, state or foreign laws or regulations, we or they could be subject toenforcement actions which could affect our ability to develop, market and sellBiDil, or any potential product candidates, successfully and could harm ourreputation and lead to lower acceptance of BiDil, or any potential productcandidates, by the market. These enforcement actions include:

·       product seizures;

·       voluntary or mandatoryrecalls;

·       patient or physiciannotifications, including letters to healthcare professionals and correctiveadvertising;

·       withdrawal of productapprovals;

·       restrictions on, orprohibitions against, marketing our products;

·       operating restrictions;

·       fines;

·       restrictions on importationor exportation of our products;

·       injunctions;

·       debarments;

·       civil and criminalpenalties; and

·       suspension of review of, orrefusal to approve, pending applications.

**If the clinicaltrials for any product candidates our strategic partners advance into clinicaltesting are not successful, these partners may not be able to successfullydevelop and commercialize our potential product candidates.**

In order to obtain regulatory approvals for thecommercial sale of product candidates that we out-license, our collaboratorswill be required to complete extensive clinical trials in humans to demonstratethe safety and efficacy of our product candidates. Our strategic partnersmay not be able to obtain authority from the FDA or other regulatoryagencies to commence or complete these clinical trials. Even if permitted, suchclinical testing may not prove that our product candidates aresufficiently safe and effective to permit our strategic partners to obtainmarketing approvals from regulatory authorities. Moreover, positive resultsdemonstrated in pre-clinical studies and early clinical trials that ourstrategic partners complete may not be indicative of results obtained infuture clinical trials. Furthermore, our collaborators, institutional reviewboards or regulatory agencies may suspend, hold or terminate clinicaltrials at any time for various reasons, including failure to achieveestablished success criteria, noncompliance with regulatory requirements or ifit is believed that the patients participating in such trials are being exposedto unacceptable health risks. Adverse or inconclusive clinical trial resultsconcerning any of our product candidates could require our strategic partnersto conduct additional clinical trials, result in increased costs andsignificantly delay the filing for marketing approval for those productcandidates with the FDA, result in a filing for a narrower indication than wasoriginally sought or result in a decision to discontinue development of thoseproduct candidates.

The successful completion of our strategic partners’clinical trials will depend on, among other things, the rate of patientenrollment. Patient enrollment is a function of many factors, including thesize of the patient population, the nature of the clinical protocol, theavailability of alternative treatments, the proximity of patients to clinicalsites and the eligibility criteria for the study. Our strategic partnersmay be unable to enroll the number of patients we need to complete a trialon a timely basis, if at all. Moreover, delays in planned patient enrollmentfor clinical trials may cause our strategic partners to incur increasedcosts and delay commercialization. Because we will need to rely on thirdparties for the development of our product candidates, we will have less controlover the timing and other aspects of these clinical trials than if we conductedthem on our own. These third parties may not complete activities on schedule,or may not conduct clinical trials in accordance with regulatory requirementsor the trial design.

As a result of these factors, third parties on whom werely may not successfully begin or complete clinical trials on ourpotential product candidates in a timely manner, if at all. Moreover, if ourstrategic partners do not successfully develop, obtain the necessary regulatoryapprovals for, and commercialize our products, our future revenues may bematerially impaired.

29

----

 

**If the estimateswe make and the assumptions on which we rely in preparing our financialstatements prove inaccurate, our actual results may vary significantly.**

Our financial statements have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of our assets, liabilities, revenuesand expenses, the amounts of charges taken by us and related disclosure. Suchestimates and judgments include revenue recognition, product returns, thecarrying value of our accounts receivable, inventory and property andequipment, our estimates of accrued expenses and liabilities and our estimatesof the fair value of equity instruments granted or sold by us. We base ourestimates and judgments on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances. However,these estimates and judgments, or the assumptions underlying them,may prove to be incorrect. Accordingly, our actual financial resultsmay vary significantly from the estimates contained in our financialstatements. For a further discussion of the estimates and judgments that wemake and the critical accounting policies that affect these estimates andjudgments, see “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Critical Accounting Policies and Estimates” above.

**RisksRelating to our Intellectual Property Rights**

**Our patent protection for BiDil, the individualcomponents of which are available in generic form, is limited, and wemay be subject to generic substitution or competition and resultingpricing pressure.**

We have no composition of matter patent coveringBiDil, our product for the treatment of heart failure in self-identified blackpatients as an adjunct to current standard therapy. BiDil is a fixed-dosecombination of two individual components, isosorbide dinitrate and hydralazinehydrochloride, both of which are available in generic form, which are approvedand separately marketed, in dosages similar to those we include in BiDil, forindications other than heart failure, at prices below the prices we arecharging for BiDil. We have two issued method-of-use patents that expire in2020.  One patent covers the use of thecombination of isosorbide dinitrate and hydralazine hydrochloride to reducemortality associated with chronic congestive heart failure, for improving theoxygen consumption, for improving the quality of life or for improving exercisetolerance in a black patient. The other patent covers the use of thecombination of isosorbide dinitrate and hydralazine hydrochloride in certaindosage amounts for reducing mortality associated with heart failure in a blackpatient. Our method of use patent that covered the use of the combination ofisosorbide dinitrate and hydralazine hydrochloride to reduce the incidence ofmortality associated with chronic congestive heart failure expired inaccordance with its terms in April 2007.

We may not be able to enforce our method-of-usepatents to prevent physicians from prescribing isosorbide dinitrate and hydralazinehydrochloride separately for the treatment of heart failure in black patients,even though neither drug is approved for such use. We also may not be ableto enforce these method-of-use patents to prevent hospitals and pharmacies fromsupplying such patients with these individual components separately in lieu ofBiDil.

Other factors may also adversely affect ourpatent protection for BiDil. If we are successful in marketing BiDil,manufacturers of generic drugs will have an incentive to challenge our patentposition. The combination therapy of isosorbide dinitrate and hydralazinehydrochloride for use in heart failure was developed through lengthy,publicly-sponsored clinical trials conducted during the 1980s, prior to thefiling of the patent application that resulted in the 2007 patent. The U.S.Patent and Trademark Office considered published reports on these clinicaltrials and concluded that they did not constitute prior art that would preventthe issuance of the 2007 patent. The U.S. patent office also considered thequestion of whether the 2007 patent constituted prior art with respect to the2020 patents, and determined that the claims of the 2020 patents werenon-obvious and patentable. A court considering the validity of the 2020patents with respect to questions of prior art might be presented with otheralleged prior art or might reach conclusions different than those reached bythe U.S. patent office. If the 2020 patents were to be invalidated or ifphysicians were to prescribe isosorbide dinitrate and hydralazine hydrochlorideseparately for heart failure in black patients, our BiDil revenue could besignificantly reduced, we could fail to recover the cost of developing BiDiland BiDil might not be a viable commercial product.

**If we are not able to obtain and enforce patentprotection for our discoveries, our ability to secure out-licensing orcollaborative arrangements with respect to our product candidates will beharmed, and we may not be able to operate our business profitably.**

Our success depends, in part, on our ability toprotect proprietary methods and technologies that we developed under the patentand other intellectual property laws of the United States and other countries,in order to prevent others from using our inventions and proprietaryinformation. Because certain United States patent applications are confidentialuntil patents issue, such as applications filed prior to November 29,2000, or applications filed after such date which will not be filed in foreigncountries, third parties may have filed patent applications for technologycovered by our pending patent applications without our being aware of thoseapplications, and our patent applications may not have priority overpatent applications of others.

Prior to the restructuring of our research anddevelopment activities, our intellectual property strategy depended on ourability to rapidly identify and seek patent protection for our discoveries.This process is expensive and time consuming, and we may not be able to prosecuteall necessary or desirable patent applications or maintain all issued patentsat a reasonable cost. Despite our efforts to protect our proprietary rights,unauthorized parties may be able to obtain and use information that weregard as proprietary. The mere issuance of a patent does not guarantee that itis valid or enforceable; even if we have obtained patents, they may not bevalid or enforceable against third parties.

30

----

 

The issued patents and patent applications for ourproduct candidates and nitric oxide technology include claims with respect toboth the composition of specific products or compounds and specific methods ofusing these products or compounds in therapeutic areas. In some cases, likeBiDil, our only patent protection is with respect to the method of using aproduct or compound, and we do not have patent claims covering the underlyingcomposition of the product or compound. Method-of-use patents may provideless protection for our product candidates and products because it may bemore difficult to prove direct infringement against a pharmaceuticalmanufacturer or distributor once they have gained approval for an alternativeindication. In addition, if any other company gains FDA approval for anindication separate from the one we or our potential strategic partners arepursuing and markets a product that we or our potential strategic partnersexpect to market under the protection of a method-of-use patent, physicianswill be able to prescribe that product for use in the indication for which weor our potential strategic partners have obtained approval, even though theproduct is not approved for such indication. As a practical matter, we or ourpotential strategic partners may not be able to enforce our method-of-usepatents against physicians prescribing products for such off-label use.Off-label use and any resulting off-label sales could make it more difficult toobtain the price we or our potential strategic partners would otherwise wish toachieve for, or to successfully commercialize, our products. In addition, inthose situations where we have only method-of-use patent coverage for a productcandidate, it may be more difficult to find a pharmaceutical companypartner to license or support development of our product candidate.

Our pending patent applications may not result inissued patents. The patent position of pharmaceutical or biotechnologycompanies, including ours, is generally uncertain and involves complex legaland factual considerations. The standards which the U.S. patent office and itsforeign counterparts use to grant patents are not always applied predictably oruniformly and can change over time. There is also no uniform, worldwide policyregarding the subject matter and scope of claims granted or allowable inpharmaceutical or biotechnology patents. Accordingly, we do not know the degreeof future protection for our proprietary rights or the breadth of claimsallowed in any patents issued to us or to others.

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

**If we become involved in patent litigation or otherproceedings to enforce our patent rights, we would incur substantial costs andexpenses, as well as substantial liability for damages, and/or we, or ourstrategic partners, could be required to stop product development andcommercialization efforts.**

A third party may sue us or our potentialstrategic partners for infringing on its patent rights. Likewise, we or ourpotential strategic partners may need to resort to litigation to enforce apatent issued to us or to determine the scope and validity of third-partyproprietary rights. The cost to us or our potential strategic partners of anylitigation or other proceedings relating to intellectual property rights, evenif resolved in our or our partner’s favor, could be substantial, and thelitigation would divert management efforts. Some of our competitors may beable to sustain the costs of complex patent litigation more effectively than wecan because they have substantially greater resources. In addition, ourstrategy of providing nitric oxide-enhancing versions of existing productscould lead to more patent litigation due to the fact that the markets for theseexisting products are very large and competitive. Uncertainties resulting fromthe initiation and continuation of any litigation could limit our ability tocontinue our operations. For example, we filed an opposition in the EuropeanPatent 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 oforganic compounds containing a nitrate group or inorganic compounds containinga nitric oxide group to reduce the toxicity caused by certain drugs, includingnon-steroidal anti-inflammatory drugs. The basis for our opposition, in part,is that the claims in EP ’110 are anticipated and therefore invalid ifthey are construed to cover a single compound chemically linked to a nitratemoiety. In March 2007, the three-member EPO Opposition Division invalidated allof the claims of EP ‘110.  The officialwritten decision from the EPO Opposition Division is expected within six monthsof the March 2007 action. Pursuant to the rules of the EPO, NicOx may file anappeal regarding this invalidation decision. While we believe that the invalidation decision will be upheld, wecannot predict with certainty the outcome of the appeal. If the EPO overrulesthe invalidation and finds that there are valid claims in EP ’110 thatcover compounds chemically linked to nitrates, we may be adverselyaffected in our ability to market our product candidates for reducinggastrointestinal toxicity without first obtaining a license from NicOx, whichmay not be available on favorable terms, if at all.

If any parties are able to successfully claim that thecreation or use by us or our potential strategic partners of proprietarytechnologies infringes upon their intellectual property rights, we or ourpotential strategic partners might be forced to pay damages, potentiallyincluding treble damages, if we or our potential strategic partners are foundto have willfully infringed on such parties’ patent rights. In addition to anydamages we or our potential strategic partners might have to pay, a court couldrequire us or our potential strategic partners to stop the infringing activityor obtain a license on terms that are unfavorable to us. In addition, somelicenses may be non-exclusive, and therefore our competitors may haveaccess to the same technology licensed to us. If we or our potential strategicpartners fail to obtain a required license or are unable to design around apatent, we or our potential strategic partners may be unable toeffectively market some of our technology and product candidates, which couldlimit our ability to generate revenues or achieve profitability and possiblyprevent us from generating sufficient revenue to sustain our operations.

31

----

 

**We in-license a significant portion of our principalproprietary technologies, and if we fail to comply with our obligations underany of the related agreements, we could lose license rights that are necessaryto commercializing BiDil and out-licensing our other product candidates.**

We are a party to a number of licenses that give usrights to third-party intellectual property that are necessary for ourbusiness. In particular, we have obtained the exclusive right to develop andcommercialize BiDil pursuant to a license agreement with Dr. Jay N. Cohn,and some of our intellectual property rights relating to nitric oxide compoundshave been obtained pursuant to license agreements with the Brigham and Women’sHospital and Boston University. In addition, we may enter into additionallicenses in the future. These licenses impose various development,commercialization, funding, royalty, diligence, and other obligations on us. Ifwe breach these obligations, the licensor may have the right to terminatethe license or render the license non-exclusive, which would result in us beingunable to develop, manufacture and sell products that are covered by thelicensed technology.

**RisksRelating to our Industry**

**We could be negatively impacted by the application or enforcement offederal and state fraud and abuse laws, including anti-kickback laws and otherfederal and state anti-referral laws.**

We are subject to various federal and state lawspertaining to healthcare fraud and abuse, including anti-kickback laws andphysician self-referral laws. Violations of these laws are punishable bycriminal and civil sanctions, including, in some instances, imprisonment andexclusion from participation in federal and state healthcare programs,including the Medicare, Medicaid and Veterans Administration health programs.Because of the far-reaching nature of these laws, we may be required toalter or discontinue one or more of our practices to be in compliance withthese laws. Healthcare fraud and abuse regulations are complex, and even minorirregularities can potentially give rise to claims that a statute orprohibition has been violated. Any violations of these laws, or any actionagainst us for violation of these laws, even if we successfully defend againstit, could result in a material adverse effect on our business, financialcondition and results of operations. If there is a change in law, regulation oradministrative or judicial interpretations, we may have to change ordiscontinue our business practices or our existing business practices could bechallenged as unlawful, which could have a material adverse effect on ourbusiness, financial condition and results of operations.

In addition, we could become subject to false claimslitigation under federal statutes, which can lead to treble damages based onthe reimbursements by federal healthcare programs, civil money penalties(including penalties levied on a per false claim basis), restitution, criminalfines and imprisonment, and exclusion from participation in Medicare, Medicaidand other federal and state healthcare programs. These false claims statutesinclude the False Claims Act, which allows any person to bring suit on behalfof the federal government alleging the submission of false or fraudulentclaims, or causing to present such false or fraudulent claims, under federalprograms or contracts claims or other violations of the statute and to share inany amounts paid by the entity to the government in fines or settlement. Thesesuits against biotechnology companies have increased significantly in recentyears and have increased the risk that a healthcare company will have to defenda false claim action, pay fines or restitution, or be excluded from theMedicare, Medicaid or other federal and state healthcare programs as a resultof an investigation arising out of such action. It is possible that we couldbecome subject to such litigation and, if we are not successful in defendingagainst it, such litigation would have a material adverse effect on ourbusiness, financial condition and results of operations. In addition, the costof defending claims or allegations under the False Claims Act, even ifsuccessful, would also have a material adverse effect on our business,financial condition and results of operations.

**We face significant competition, which may resultin others commercializing products more successfully than ours.**

The pharmaceuticalindustry is highly competitive and characterized by rapid and significanttechnological change. Our principal competitors in the markets we havetargeted, including cardiovascular disease, are large, multinationalpharmaceutical companies that have substantially greater financial and otherresources than we do and are conducting extensive research and developmentactivities on technologies and product candidates similar to or competitivewith ours. Many of our competitors are more experienced than we are inpharmaceutical development and commercialization, obtaining regulatoryapprovals and product marketing and manufacturing. As a result, they may:

·                                          developand commercialize products that render BiDil obsolete or non-competitive orthat cause our product candidates to be less desirable as a result of patent ornon-patent exclusivity;

·                                          developproduct candidates and market products that are less expensive or moreeffective than BiDil;

·                                          commercializecompeting products before our partners can launch any products developed from ourproduct candidates;

·                                          initiateor withstand substantial price competition more successfully than we can;

·                                          havegreater success in recruiting skilled scientific workers from the limited poolof available talent;

·                                          moreeffectively negotiate third-party licenses and strategic relationships; and

·                                          takeadvantage of product acquisition or other opportunities more readily than wecan.

32

----

 

There are a number of companies currently marketingand selling products to treat heart failure in the general population that willcompete with BiDil. These include GlaxoSmithKline, plc, which currently marketsCoreg®, Merck & Co., Inc., which currently markets Vasotec® andAstra Zeneca, plc, which currently markets Toprol XL®.

We also face competition from other pharmaceuticalcompanies seeking to develop drugs using nitric oxide technology. For example,we are aware of at least seven companies working in the area of nitric oxidebased therapeutics. These companies are: Angiogenix Inc., GB Therapeutics,NicOx S.A., OxoN Medica, RenoPharm, Vasopharm BIOTECH GmbH and Nitrox LLC.

**We may be exposed to product liability claims andmay not be able to obtain or maintain adequate product liabilityinsurance.**

Our business exposes us to the risk of productliability claims that is inherent in the manufacturing and marketing of humantherapeutic products. Our commercial product liability insurance is subject todeductibles and coverage limitations. We may not be able to obtain ormaintain insurance on acceptable terms, if at all. Moreover, any insurance thatwe do obtain may not provide adequate protection against potentialliabilities, and our capital resources could be depleted as a result.

**RisksRelating to our Common Stock**

**The price of our common stock is likely to continue tobe volatile in the future.**

The stock markethas from time to time experienced significant price and volume fluctuationsthat may be unrelated to the operating performance of particularcompanies. In particular, the market price of our common stock, like that of thesecurities of other biopharmaceutical companies, has been and may continueto be highly volatile. During the period from January 1, 2005 toMarch 31, 2007, our stock price has ranged from a low of $2.04 per share(on October 13, 2006) to a high of $27.99 per share (on February 2,2005). The following factors, among others, may affect the price of ourcommon stock:

·                                          fluctuationsin our financial results, including with respect to sales of BiDil;

·                                          announcementsconcerning fundamental or material corporate transactions, restructuring or thelike;

·                                          generalmarket conditions;

·                                          announcementsof technological innovations or new commercial products by our competitors;

·                                          announcementsof actual or potential medical results relating to products under developmentby our potential strategic partners or our competitors’ products;

·                                          governmentalregulations and regulatory developments in both the U.S. and foreign countriesaffecting us or our competitors;

·                                          disputesrelating to patents or other proprietary rights affecting us, our potentialstrategic partners or our competitors;

·                                          publicconcern as to the safety of products developed by us, our potential strategicpartners or other biotechnology and pharmaceutical companies;

·                                          fluctuationsin price and volume in the stock market in general, or in the trading of thestock of biopharmaceutical and biotechnology companies in particular, that areunrelated to our operating performance;

·                                          issuancesof securities in equity, debt or other financings;

·                                          salesof common stock by existing stockholders; and

·                                          theperception that such issuances or sales could occur.

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

As ofApril 27, 2007, our directors, executive officers and principalstockholders, together with their affiliates, owned, in the aggregate,approximately 40% of our outstanding common stock. As a result, thesestockholders, if acting together, may have the ability to determine theoutcome of matters submitted to our stockholders for approval, including theelection and removal of directors and any merger, consolidation or sale of allor substantially all of our assets. In addition, these persons, if actingtogether, will have the ability to control the management and affairs of ourcompany. Accordingly, this concentration of ownership may harm the marketprice of our common stock by:

·                                          delaying,deferring or preventing a change in control of our company;

·                                          impedinga merger, consolidation, takeover or other business combination involving ourcompany; or

·                                          discouraginga potential acquirer from making a tender offer or otherwise attempting toobtain control of our company.

33

----

 

**Provisions in our charter documents and underDelaware law may prevent or frustrate attempts by stockholders to changecurrent management and hinder efforts to acquire a controlling interest in ourcompany.**

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

·                                          aprohibition on stockholder action through written consent;

·                                          arequirement that special meetings of stockholders be called only by a majorityof the board of directors, the chairman of the board or the chief executiveofficer;

·                                          advancenotice requirements for stockholder proposals and nominations;

·                                          limitationson the ability of stockholders to amend, alter or repeal our certificate ofincorporation or bylaws; and

·                                          theauthority of the board of directors to issue preferred stock with such terms asthe board of directors may determine.

In addition, Section 203 of the Delaware GeneralCorporation Law prohibits a publicly held Delaware corporation from engaging ina business combination with an interested stockholder, generally defined as aperson or entity which together with its affiliates owns or within the lastthree years has owned 15% of our voting stock, for a period of three yearsafter the date of the transaction in which the person became an interestedstockholder, unless the business combination is approved in a prescribedmanner. Accordingly, Section 203 may discourage, delay or prevent achange in control of our company.

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

Sales of a substantial number of shares of our commonstock in the public market could occur at any time. These sales, or theperception in the market that the holders of a large number of shares intend tosell shares, could reduce the market price of our common stock. As ofApril 27, 2007, there were 38,229,426 shares of common stockoutstanding. Substantially all of these shares may also be resold in thepublic market at any time. In addition, we have a significant number of sharesthat are subject to outstanding options. The exercise of these options and thesubsequent sale of the underlying common stock could cause a further decline inour stock price. These sales also might make it difficult for us to sell equitysecurities in the future at a time and at a price that we deem appropriate.

**We may incur significant costs and suffer managementdistraction and reputational damage from class action litigation.**

Our stock price has been, and is likely to continue tobe, volatile. When the market price of a company’s stock is volatile, holdersof that company’s stock may bring securities class action litigationagainst the company that issued the stock. If any of our stockholders were tobring a lawsuit of this type against us, even if the lawsuit was without merit,we could incur substantial costs defending the lawsuit.

**Item6.    Exhibits**

See the Exhibit Index on thepage immediately preceding the exhibits for a list of exhibits filed aspart of this Quarterly Report on Form 10-Q, which Exhibit Indexis incorporated herein by this reference.

34

----

 

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                         | NITROMED, INC. |
|-------------------------|---------------------|
|                    |                |
|                    |                |
|                    | By:                 | /s/  JAMES G. HAM, III |
|                    |                | James  G. Ham, III |
|                    |                | Vice  President, Chief Financial Officer, Treasurer |
|                    |                | and  Secretary *(Principal Financial Officer and  Principal Accounting Officer)* |
| Date:  May 2, 2007 |                |

 

35

----

**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                        | ** ** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.1            |       | Employment  Offer Letter, dated as of January 19, 2007, between NitroMed, Inc. and  Kenneth M. Bate, filed as an exhibit to NitroMed’s Current Report on  Form 8-K (File No. 000-50439) filed on January 25, 2007 and  incorporated herein by reference.                                                 |       |
| 10.2            |       | Retention  Agreement, dated as of January 23, 2007, between NitroMed, Inc. and Kenneth  M. Bate, filed as an exhibit to NitroMed’s Current Report on  Form 8-K (File No. 000-50439) filed on January 25, 2007 and  incorporated herein by reference.                                                               |       |
| 10.3            |       | Severance  Agreement, dated as of January 23, 2007, between NitroMed, Inc. and Kenneth  M. Bate, filed as an exhibit to NitroMed’s Current Report on  Form 8-K (File No. 000-50439) filed on January 25, 2007 and  incorporated herein by reference.                                                               |       |
| 10.4            |       | Assignment  of Lease and Assumption Agreement, dated as of March 9, 2007, by and between  NitroMed, Inc, and Shire Human Genetic Therapies, Inc., filed as an  exhibit to NitroMed’s Current Report on Form 8-K (File  No. 000-50439) filed on March 14, 2007 and incorporated herein by  reference.          |       |
| 10.5            |       | Form  of Restricted Stock Agreement entered into between NitroMed, Inc. and certain  of its executive officers, together with a schedule of such officers, filed  as an exhibit to NitroMed’s Current Report on Form 8-K (File  No. 000-50439) filed on March 22, 2007 and incorporated herein by  reference. |       |
| 10.6            |       | Employment  Offer Letter, dated as of March 29, 2007, between NitroMed, Inc. and Manuel  Worcel, M.D., filed as an exhibit to NitroMed’s Current Report on  Form 8-K (File No. 000-50439) filed on April 4, 2007 and  incorporated herein by reference.                                                            |       |
| 10.7            |       | Lease  between NitroMed, Inc. and The Realty Associates Fund VI, L.P., dated as of  February 23, 2007, filed as an exhibit to NitroMed’s Annual Report on  Form 10-K for the year ended December 31, 2006 (File  No. 000-50439) filed on March 8, 2007 and incorporated herein by  reference.                 |       |
| 10.8            | †     | License  Agreement between NitroMed, Inc. and Elan Pharma International Limited, dated  as of February 9, 2007, filed as an exhibit to NitroMed’s Annual Report  on Form 10-K for the year ended December 31, 2006 (File  No. 000-50439) filed on March 8, 2007 and incorporated herein by  reference.        |       |
| 10.9            |       | Employment Offer  Letter, dated as of August 1, 2005, between NitroMed, Inc. and Jane Kramer.                                                                                                                                                                                                                                          |       |
| 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 amended                                                                                                                                                                              |       |
| 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 amended                                                                                                                                                                              |       |
| 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                                                                                                                                                                      |       |

----

†                     Confidential treatment requested as tocertain portions, which portions have been filed separately with the Securitiesand Exchange Commission.

----