** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

** **

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**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,  2008** |
|                                                    |       |                                                                                                    |
| **Or**                                                  |
|                                                    |       |                                                                                                    |
| **o**                                                   | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                         |            |                                                                                                         |  |  |  |  |

 

**For theTransition Period from           to         **

 

**CommissionFile Number 000-50439**

 

**NitroMed, Inc.**

(ExactName 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, FormerAddress and Formal Fiscal Year, if Changed Since Last Report

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(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 x     No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large  accelerated filer o |   | Accelerated filer x |   | Non-accelerated  filer o  (Do not check if a smaller       reporting company) |   | Smaller reporting  company x |
|---------------------------------|--------|--------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|

 

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

 

As of May 2, 2008,the registrant had 46,098,901 shares of Common Stock, $0.01 par value pershare, outstanding.

 

 

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NITROMED, INC.

 

FORM 10-Q

 

FOR THE QUARTERLYPERIOD ENDED MARCH 31, 2008

 

**TABLE OFCONTENTS**

 
| PART I.       |   | FINANCIAL INFORMATION                                                                                    | 3  |
|--------------------|--------|----------------------------------------------------------------------------------------------------------|----|
| Item 1.            |   | Financial  Statements                                                                                    | 3  |
|               |   | Condensed Balance  Sheets as of March 31, 2008 and December 31, 2007 (unaudited)               | 3  |
|               |   | Condensed  Statements of Operations for the three months ended March 31, 2008 and  2007 (unaudited) | 4  |
|               |   | Condensed  Statements of Cash Flows for the three months ended March 31, 2008 and  2007 (unaudited) | 5  |
|               |   | Notes To  Unaudited Financial Statements                                                                 | 6  |
| Item 2.            |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              | 13 |
| Item 3.            |   | Quantitative  and Qualitative Disclosures About Market Risk                                              | 19 |
| Item 4.            |   | Controls  and Procedures                                                                                 | 20 |
| PART II.      |   | OTHER  INFORMATION                                                                                       | 21 |
| Item 1A.           |   | Risk Factors                                                                                             | 21 |
| Item 2.            |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                             | 34 |
| Item 6.            |   | Exhibits                                                                                                 | 34 |
| SIGNATURES         | 35     |
| EXHIBIT INDEX |   |

 

2

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**PART I. FINANCIAL INFORMATION**

 

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

 

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

 
| ** **                                                                                                                                                                  | ** ** | **March 31,   2008** | ** ** | **December 31,   2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| **Assets**                                                                                                                                                                  | ** ** | ** **                     | ** ** | ** **                        | ** ** |
| Current  assets:                                                                                                                                                            |       |                           |       |                              |       |
| Cash  and cash equivalents                                                                                                                                                  |       | $                              | 10,374     |                              | $          | 8,167 |   |
| Short-term  marketable securities                                                                                                                                           |       | 10,868                         |       | 23,233                            |       |
| Accounts  receivable                                                                                                                                                        |       | 1,733                          |       | 1,929                             |       |
| Inventories                                                                                                                                                                 |       | 1,260                          |       | 1,401                             |       |
| Prepaid  expenses and other current assets                                                                                                                                  |       | 353                            |       | 334                               |       |
| Total  current assets                                                                                                                                                       |       | 24,588                         |       | 35,064                            |       |
| Property  and equipment, net                                                                                                                                                |       | 197                            |       | 312                               |       |
| Long-term  marketable securities                                                                                                                                            |       | 1,594                          |       | —                            |       |
| Restricted  cash                                                                                                                                                            |       | 191                            |       | 191                               |       |
|                                                                                                                                                                        |       |                           |       |                              |       |
| Total  assets                                                                                                                                                               |       | $                              | 26,570     |                              | $          | 35,567 |   |
|                                                                                                                                                                        |       |                           |       |                              |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                               | ** ** | ** **                     | ** ** | ** **                        | ** ** |
| Current  liabilities:                                                                                                                                                       |       |                           |       |                              |       |
| Accounts  payable                                                                                                                                                           |       | $                              | 1,405      |                              | $          | 3,235 |   |
| Accrued  expenses                                                                                                                                                           |       | 3,714                          |       | 6,379                             |       |
| Accrued  restructuring                                                                                                                                                      |       | 1,305                          |       | —                            |       |
| Current  portion of long-term debt                                                                                                                                          |       | 1,887                          |       | 3,728                             |       |
|                                                                                                                                                                        |       |                           |       |                              |       |
| Total  current liabilities                                                                                                                                                  |       | 8,311                          |       | 13,342                            |       |
|                                                                                                                                                                        |       |                           |       |                              |       |
| Commitments  and contingencies (Note 10)                                                                                                                                    |       |                           |       |                              |       |
| 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; 45,985 and 45,381 shares  issued and outstanding at March 31, 2008 and December 31, 2007,  respectively |       | 460                            |       | 454                               |       |
| Additional  paid-in capital                                                                                                                                                 |       | 368,316                        |       | 367,125                           |       |
| Accumulated  deficit                                                                                                                                                        |       | (350,566                       | )          | (345,382                          | )          |
| Accumulated  other comprehensive income                                                                                                                                     |       | 49                             |       | 28                                |       |
| Total  stockholders’ equity                                                                                                                                            |       | 18,259                         |       | 22,225                            |       |
| Total  liabilities and stockholders’ equity                                                                                                                            |       | $                              | 26,570     |                              | $          | 35,567 |   |

 

Seeaccompanying notes.

 

3

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

 
| ** **                                                            | ** ** | **Three Months Ended   March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Product  sales                                                        |       | $                                                      | 3,933      |   | $ | 3,568 |   |
| Cost  and operating expenses:                                         |       |                                                   |       |   |   |
| Cost  of product sales                                                |       | 979                                                    |       | 954 |   |
| Research  and development (1)                                         |       | 1,630                                                  |       | 3,007 |   |
| Sales,  general and administrative (1)                                |       | 3,998                                                  |       | 8,948 |   |
| Restructuring  charge                                                 |       | 2,725                                                  |       | 1,004 |   |
| Total  cost and operating expenses                                    |       | 9,332                                                  |       | 13,913 |   |
| Loss  from operations                                                 |       | (5,399                                                 | )          | (10,345 | ) |
| Non-operating  income:                                                |       |                                                   |       |   |   |
| Interest  income                                                      |       | 299                                                    |       | 469 |   |
| Interest  expense                                                     |       | (68                                                    | )          | (238 | ) |
| Impairment  charge                                                    |       | (16                                                    | )          | — |   |
|                                                                  |       | 215                                                    |       | 231 |   |
| Net  loss                                                             |       | $                                                      | (5,184     | ) | $ | (10,114 | ) |
|                                                                  |       |                                                   |       |   |   |
| Basic  and diluted net loss per common share                          |       | $                                                      | (0.11      | ) | $ | (0.27 | ) |
| Shares  used in computing basic and diluted net loss per common share |       | 45,792                                                 |       | 37,263 |   |

 

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(1)          Includes stock-basedcompensation expense as follows:

 
| Research  and development          |   | $ | 272 |   | $ | 542   |   |
|------------------------------------|--------|---|-----|--------|---|-------|--------|
| Sales,  general and administrative |   | $ | 662 |   | $ | 1,429 |   |

 

Seeaccompanying notes.

 

4

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

 
| ** **                                                                   | ** ** | **Three Months Ended   March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| **Operating activities**                                                     | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Net  loss                                                                    |       | $                                                      | (5,184     | ) | $ | (10,114 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                                   |       |   |   |
| Depreciation  and amortization                                               |       | 30                                                     |       | 178 |   |
| Non-cash  restructuring charge                                               |       | 72                                                     |       | — |   |
| Stock-based  compensation expense                                            |       | 934                                                    |       | 1,971 |   |
| Impairment  charge on auction rate security                                  |       | 16                                                     |       | — |   |
| Changes  in operating assets and liabilities:                                |       |                                                   |       |   |   |
| Accounts  receivable                                                         |       | 196                                                    |       | (121 | ) |
| Inventories                                                                  |       | 141                                                    |       | (188 | ) |
| Prepaid  expenses and other current assets                                   |       | (19                                                    | )          | (437 | ) |
| Deferred  revenue                                                            |       | —                                                 |       | (141 | ) |
| Accounts  payable and accrued expenses                                       |       | (4,495                                                 | )          | (434 | ) |
| Accrued  restructuring charge                                                |       | 1,305                                                  |       | (299 | ) |
| Net  cash used in operating activities                                       |       | (7,004                                                 | )          | (9,585 | ) |
| **Investing activities**                                                     | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Purchase  of property and equipment                                          |       | —                                                 |       | (44 | ) |
| Proceeds  from sale of equipment                                             |       | 13                                                     |       | 528 |   |
| Sales  of marketable securities                                              |       | 18,280                                                 |       | 17,813 |   |
| Purchases  of marketable securities                                          |       | (7,504                                                 | )          | (13,024 | ) |
| Other  assets                                                                |       | —                                                 |       | 612 |   |
| Net  cash provided by investing activities                                   |       | 10,789                                                 |       | 5,885 |   |
| **Financing activities**                                                     | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Principal  payments on long-term debt                                        |       | (1,841                                                 | )          | (1,668 | ) |
| Proceeds  from employee stock plans                                          |       | 263                                                    |       | 478 |   |
| Net  cash used in financing activities                                       |       | (1,578                                                 | )          | (1,190 | ) |
| Net  change in cash and cash equivalents                                     |       | 2,207                                                  |       | (4,890 | ) |
| Cash  and cash equivalents at beginning of period                            |       | 8,167                                                  |       | 21,074 |   |
| Cash  and cash equivalents at end of period                                  |       | $                                                      | 10,374     |   | $ | 16,184 |   |

 

Seeaccompanying notes.

 

5

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**NITROMED, INC.NOTES TO UNAUDITED FINANCIAL STATEMENTSMARCH 31, 2008**

** **

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

###  

The accompanyingunaudited financial statements of NitroMed, Inc. (“NitroMed” or the “Company”)have been prepared in accordance with United States generally acceptedaccounting principles (“GAAP”) for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby GAAP for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary forthe fair presentation of the results for the interim periods have beenincluded. The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Interim resultsare not necessarily indicative of results to be expected for the entire fiscalyear ending December 31, 2008. These unaudited financial statements shouldbe read in conjunction with the Company’s latest annual audited financialstatements and related notes thereto included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2007, which wasfiled with the Securities and Exchange Commission (“SEC”) on March 6, 2008.

 

NitroMed is themaker of BiDil®. Since its inception, the Company has funded itsoperations mainly through the sale of equity securities, debt financings,license fees, research and development funding, milestone payments from itscollaborative partners, and more recently, sales of BiDil. In June 2005,the U.S. Food and Drug Administration (“FDA”) approved BiDil for the treatmentof heart failure in self-identified black patients as an adjunct to currentstandard therapies. BiDil is an orally administered fixed-dose combination ofisosorbide dinitrate and hydralazine hydrochloride. The Company commerciallylaunched BiDil in July 2005, and has since generated approximately $35.7 millionin product sales, including product sales of $3.9 million during the firstquarter of 2008.

 

Based upon theCompany’s determination that the successful commercialization of BiDil requiresa magnitude of resources that it cannot currently allocate to the program, aswell as the Company’s plans to conserve cash in order to pursue the developmentof an extended release formulation of BiDil, known as BiDil XRTM, in January 2008the Company discontinued active promotional efforts related to BiDil. TheCompany concurrently implemented a restructuring plan in which the Company immediatelyand significantly reduced its workforce. The Company is evaluating strategicalternatives to divest its current business in whole or in part in an effort tomaximize the value of its commercial organization and product developmentprograms for its shareholders. The Company has engaged an investment bank toadvise it in considering these potential strategic alternatives, which mayinclude the sale, license or divestiture of certain of its assets, includingits BiDil business, the assets relating to BiDil XR, and/or its nitric oxidetechnologies, the sale or merger of the Company, or other similar strategictransactions.

 

Although theCompany has discontinued active promotional efforts related to BiDil, theCompany intends to continue to manufacture and sell BiDil and maintain theproduct on the market for patients through normal wholesale and retailchannels. The Company also plans to conduct limited advertising in selectmedical publications, and may engage a third-party marketing firm to contacthealthcare professionals on the Company’s behalf, in each case in an effort tomaintain a limited market presence for BiDil. The Company also expects to incuradditional expenses related to the ongoing development of BiDil XR. If and forso long as the Company continues its current business and operations, theCompany will require substantial additional funds, which it expects to generatethrough a combination of BiDil sales and one or more strategic transactions.The Company may not be able to successfully consummate a strategic transaction,and additional financing may not be available to the Company on acceptableterms, if at all. If the Company is unable to obtain funding on a timely basis,whether through a strategic divestiture, financing or borrowing arrangements orother capital-raising transaction, the Company may not be able to supportcontinued prescriptions for BiDil, may be compelled to significantly curtail ordelay its development efforts with respect to BiDil XR, and the Company couldalso be required to limit, scale back or cease its operations. Currently, theCompany believes that its existing sources of liquidity and the cash expectedto be generated from future sales of BiDil, together with the significantreduction in expenditures as a result of its January 2008 restructuring,will be sufficient to fund the Company’s operations for at least the nexttwelve months.

 

### ** (2)****          Revenue Recognition**

###  

The Company’s principalsource of revenue is the sale of BiDil, which began shipping in July of2005.

 

6

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*Product Sales/Deferred Revenue.*TheCompany follows the provisions of SEC Staff Accounting Bulletin No. 104, *Revenue Recognition,* and recognizes revenue from productsales upon delivery of product to wholesalers or pharmacies, when persuasiveevidence of an arrangement exists, the fee is fixed or determinable, title toproduct and associated risk of loss has passed to the wholesalers andpharmacies, and collectibility of the related receivable is reasonably assured.All revenues from product sales are recorded net of applicable allowances forsales returns, rebates, and discounts. For arrangements where the risk of losshas not passed to wholesalers or pharmacies, the Company defers the recognitionof revenue until such time that risk of loss has passed. In addition, theCompany evaluates the level of shipments to wholesalers and pharmacies on aquarterly basis compared to the estimated level of inventory in the channel,remaining shelf life of the product shipped, weekly prescription data andquarterly forecasted sales.

 

*Sales Returns, Allowances,Rebates and Discounts.*The Company’s product sales aresubject to returns, wholesaler allowances, rebates, and cash and contractdiscounts that are customary in the pharmaceutical industry. A large portion ofthe Company’s product sales are made to pharmaceutical wholesalers for furtherdistribution through pharmacies to patients, who are consumers of the product.All revenues from product sales are recorded net of applicable allowances forsales returns, wholesaler allowances, rebates and cash and contract discounts.The Company determines the provisions for sales returns, allowances, rebatesand discounts based primarily on historical experience, known trends andevents, and contractual terms.

 

*Product Returns*. Consistent withindustry 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. During the first quarter of 2008,BiDil’s shelf life for newly produced commercial product was increased to36 months from the date of manufacture. Factors that are considered in theCompany’s estimate of future product returns include an analysis of the amountof product in the wholesaler and pharmacy channels, discussions with keywholesalers and other customers regarding inventory levels and shipment trends,review of consumer consumption data, and the remaining time to expiration ofthe Company’s product. At March 31, 2008 and December 31, 2007, theCompany’s product return reserve was $0.8 million and $0.9 million,respectively. For the three months ended March 31, 2008 and 2007, theCompany recorded a reduction to revenue for product returns of $0.5 million and$0.3 million, respectively. The return rate and associated reserve areevaluated on a quarterly basis, assessing each of the factors described above,and adjusted accordingly. In developing a reasonable estimate for the reservefor product returns, the Company considers the factors in paragraph 8 ofStatement of Financial Accounting Standards No. 48, *RevenueRecognition When a Right of Return Exists*. Based on the factorsnoted above, 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.

 

*Sales Discounts, Rebates andAllowances*. Sales discounts, rebates and contractual allowances result primarilyfrom sales under contracts with healthcare providers, wholesalers, Medicare andMedicaid programs 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, 2008 and 2007, the Company recorded salesdiscounts, rebates and other allowances of $1.4 million and $1.2 million,respectively.

 

**(3)****           Fair Value Measurements**

 

In September 2006,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles and expands disclosures about fair valuemeasurements. SFAS 157 codifies the definition of fair value as the price thatwould be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date,clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing the asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. SFAS 157 is effective for fiscal years beginningafter November 15, 2007 and interim periods within those years. TheCompany adopted SFAS 157 on January 1, 2008. The three levels of the fairvalue hierarchy under SFAS 157 are described below:

 

·                  Level 1 – Observable inputssuch as quoted prices in active markets that are accessible at the measurementdate for identical assets or liabilities. The fair value hierarchy gives thehighest priority to Level 1 inputs.

 

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·                  Level 2 - Other inputs thatare observable, directly or indirectly, such as quoted prices for similarassets and liabilities or market corroborated inputs.

 

·                  Level3 - Unobservable inputs used when little or no market data is available andrequire the Company to develop its own assumptions about how marketparticipants would price the assets or liabilities. The fair value hierarchygives the lowest priority to Level 3 inputs.

 

In determining fairvalue, the Company utilizes valuation techniques that maximize the use ofobservable inputs and minimize the use of unobservable inputs to the extentpossible as well as considers counterparty credit risk in its assessment offair value.

 

The followingtables set forth by level within the fair value hierarchy a summary of the fairmarket value of available-for-sale securities classified as cash equivalentsand marketable securities the Company held at March 31, 2008:

 
| **March 31, 2008**                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Cash  equivalent available-for-sale investments |       | $                | 9,002      |             | $          | —           |       | $         | —     |   | $ | 9,002 |   |
| Auction  rate securities                        |       | $                | —     |             | $          | 2,250            |       | $         | 1,190      |   | $ | 3,440 |   |
| Corporate  securities                           |       | —           |       | 7,428            |       | —           |       | 7,428     |       |
| Total  short-term marketable securities         |       | $                | —     |             | $          | 10,868           |       | $         | 1,190      |   | $ | 10,868 |   |
| Long-term  marketable securities (1)            |       | $                | —     |             | $          | —           |       | $         | 1,594      |   | $ | 1,594 |   |

 

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(1)  TheCompany recorded an impairment charge of $16,000 for the three months ended March 31,2008 related to these securities.

 

The reconciliationof the Company’s assets measured at fair value on a recurring basis usingunobservable inputs (Level 3) is as follows:

 

| ** **                                          | ** ** | **Auction Rate Securities** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|
| Balance at January 1, 2008                          |       | $                           | —     |   |
| Transfers to Level 3                                |       | 1,600                       |       |
| Unrealized loss reported in statement of operations |       | (16                         | )          |
| Balance at March 31, 2008                           |       | $                           | 1,594      |   |

 

For available-for-salesecurities that utilize Level 1 and, if applicable, Level 2 inputs, the Companyutilizes both direct and indirect observable price quotes. Due to the lack ofmarket quotes or other inputs that are observable for certain of the auctionrate securities held by the Company, the Company utilizes valuation models forthese securities that rely exclusively on Level 3 inputs, including those thatare based on expected cash flow streams and collateral values, such asassessments of counterparty credit quality, default risk underlying thesecurity, discount rates and overall capital market liquidity. The valuation ofthe auction rate securities held by the Company is subject to uncertainties and,therefore, is difficult to predict. Factors that may impact the Company’svaluation for these securities include changes to credit ratings of thesecurities and to the underlying assets supporting those securities, rates ofdefault of the underlying assets, underlying collateral value, discount rates,counterparty risk and ongoing strength and quality of market credit andliquidity.

 

As of March 31,2008, the marketable securities held by the Company have maturity dates thatrange from 2008 to 2045.

 

As of March 31,2008, the Company held approximately $5.0 million of auction ratesecurities. These auction rate securities are comprised of approximately $2.2million of securities backed by municipalities, $2.5 million of preferred stockissued by closed-end funds and a $0.3 million security issued by agovernment-backed student loan organization. Auction rate securities aresecurities that are structured to allow for short-term interest rate resets,but with contractual maturity dates that can be well in excess of ten years. Auctionshave historically provided a liquid market for these securities. However,beginning in February 2008, the majority of auction rate securities in themarketplace failed at auction due to sell orders exceeding buy orders. Suchfailures resulted in the interest rate on these securities resetting topredetermined rates within the underlying loan agreement, which might be higheror lower than the current market rate of interest. The Company’s ability toliquidate its auction rate securities and fully recover the carrying value ofits investments

 

8

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in the near term may belimited or not exist. In the event that the Company needs to access itsinvestments in these auction rate securities, the Company will not be able todo so until a future auction of these investments is successful, the issuerredeems the outstanding securities, a buyer is found outside the auctionprocess, or the securities mature, which could be in as many as 37 years. As aresult of these factors, the Company may be required to record impairmentcharges on these investments from time to time and, as discussed below,recorded an impairment charge in the amount of $16,000 for the three monthsended March 31, 2008 for certain of these investments.

 

As of March 31,2008, approximately $3.4 million of the Company’s auction rate securities areclassified as short-term marketable securities because management hasdetermined that these securities may be liquidated within one year based onmanagement’s experience with liquidating other similar auction rate securities,discussions with investment advisors knowledgeable of the auction ratesecurities market, the nature of the securities (which are primarily backed byvarious municipalities), and redemptions and calls subsequent to March 31,2008. As of March 31, 2008, the Company reclassified $1.6 million ofauction rate securities from short-term to long-term marketable securities,reflecting management’s determination that these securities may not beliquidated within one year due to the auction failures described above. Subsequentto March 31, 2008, the Company has sold $1.5 million of its auction ratesecurities at par. The Company has not experienced any realized losses on salesof auction rate securities in 2008.

 

The Company hasrecorded an other-than-temporary impairment of $16,000 on its government-backedstudent loan auction rate security. The Company believes that themunicipality-backed securities and preferred stock issued by closed end fundsare not significantly impaired, primarily due to its experience of selling suchsecurities at par since the recent auction failures began, the redemption orcalls of similar securities by their issuers at par since the auction failuresbegan, redemptions and calls subsequent to March 31, 2008, and the creditworthiness of the issuers of the underlying securities.

 

The primary objective of the Company’s investmentactivities is to preserve principal while at the same time maximizing theincome the Company receives from the Company’s investments withoutsignificantly increasing risk. To achieve this objective, the Company maintainsits portfolio of cash equivalents and marketable securities in a variety ofsecurities, including U.S. government agencies, municipal notes, certainsecurities which may have an auction reset feature, corporate notes and bonds,commercial paper, and money market funds. These securities are classified asavailable for sale and consequently are recorded on the balance sheet at fairvalue with unrealized gains or losses, other than those determined to beother-than-temporary impairments, reported as a separate component ofaccumulated other comprehensive income (loss). If interest rates rise, the marketvalue of the Company’s investments may decline, which could result in arealized loss if the Company is forced to sell an investment before itsscheduled maturity. The Company does not utilize derivative financialinstruments to manage its interest rate risks.

 

**(4)****           Inventories**

 

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

 
| ** **      | ** ** | **March 31,   2008** | ** ** | **December 31,   2007** | ** ** |
|-----------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Raw  materials  |       | $                              | 75         |                              | $          | 349 |   |
| Finished  goods |       | 1,185                          |       | 1,052                             |       |
| Total           |       | $                              | 1,260      |                              | $          | 1,401 |   |

 

On a quarterly basis, theCompany analyzes its current inventory levels and future irrevocable inventorypurchase commitments and writes down inventory that has become un-saleable orhas a cost basis in excess of its expected net realizable value. In addition,the Company evaluates its future irrevocable inventory purchase commitmentscompared to forecasted product sales, the current level of inventory and itsrelated product dating. For the three month periods ended March 31, 2008and 2007, the Company recorded inventory impairment charges of $347,000 and $384,000,respectively.

 

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

###  

The Company follows thefair value recognition provisions of Statement of Financial AccountingStandards No. 123(R),*Share-BasedPayment* (“SFAS 123R”). Compensationcost recognized subsequent to December 31, 2005 includes: (a) compensationcost for all stock-based payments granted but not yet vested as of January 1,2006, based on the grant-date fair value estimated in accordance with theoriginal provisions of Statement of Financial Accounting Standards No. 123,*Accounting for Stock Based Compensation*(“SFAS 123”), and (b) compensation cost for all stock-based payments

 

9

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granted subsequent to January 1,2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS 123R. Such amounts have been reduced by the Company’sestimate of forfeitures of all unvested awards. Results for prior periods havenot been restated.

 

For stock options grantedto non-employees, the Company recognizes compensation expense in accordancewith the requirements of Emerging Issues Task Force No. 96-18, *Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services*(“EITF 96-18”)*.* EITF 96-18 requires thatcompanies recognize compensation expense based on the estimated fair value ofoptions granted to non-employees over their vesting period, which is generallythe period during which services are rendered by such non-employees. The fairvalue of unvested non-employee stock awards is re-measured at each reportingperiod.

 

In March and April 2007,the Company entered into restricted stock agreements with certain executiveofficers and employees of the Company, pursuant to which these individuals weregranted an aggregate of 734,790 shares of the Company’s common stock under theCompany’s Amended and Restated 2003 Stock Incentive Plan (the “2003 Plan”),which are subject to forfeiture to the Company prior to vesting under certaincircumstances, including voluntary separation or termination of employment forcause. The forfeiture provision lapses as follows: 25% of the shares are nolonger subject to forfeiture to the Company, or “vest,” on the date that is sixmonths after the grant date; 25% vest on the first anniversary of the grantdate; and 50% vest on the second anniversary of the grant date. Upon achange in control of the Company or upon termination of the employee’semployment without cause, all unvested restricted shares shall immediately vestin full. The Company recognized $874,000 and $54,000 of stock-basedcompensation expense related to this restricted common stock for the threemonth periods ended March 31, 2008 and 2007, respectively. Included in theexpense for the three months ended March 31, 2008 is $770,000 of expense foraccelerated vesting related to involuntary terminations in connection with theCompany’s January 2008 restructuring. On the accompanying balance sheets,the number of shares of the Company’s common stock outstanding as of March 31,2008 does not include 140,511 shares of unvested restricted common stock.

 

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,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| Options  granted (in thousands)                          |       | 250                                                      |       | 605 |   |
| Weighted-average  exercise price of stock options        |       | $                                                        | 0.94       |   | $ | 2.71 |   |
| Weighted-average  grant date fair-value of stock options |       | $                                                        | 0.62       |   | $ | 1.60 |   |
| Assumptions:                                             |       |                                                     |       |   |   |
| Volatility                                               |       | 76                                                       | %          | 76 | % |
| Risk-free  interest rate                                 |       | 2.9                                                      | %          | 4.7 | % |
| Expected  life (years)                                   |       | 5.5                                                      |       | 5.0 |   |
| Dividend                                                 |       | None                                                     |       | None |   |

 

Volatility is determinedexclusively using historical volatility data of the Company’s common stockbased on the period of time since the Company’s common stock has been publiclytraded. The risk-free interest rate is based on the U.S. Treasury yieldcurve in effect at the time of grant commensurate with the expected lifeassumption. The expected life of stock options granted is based exclusively onhistorical data and represents the weighted average period of time that stockoptions granted are expected to be outstanding. The expected life is applied tothe stock option grant group as a whole, as the Company does not expectsubstantially different exercise or post-vesting termination behavior among itsemployee population.

 

The Company is using thestraight-line attribution method to recognize stock-based compensation expense.The amount of stock-based compensation expense recognized during a period isbased on the value of the portion of the awards that are ultimately expected tovest. SFAS 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. The term “forfeitures” is distinct from “cancellations” or “expirations”and represents only the unvested portion of the surrendered option. The Companyhas applied an annual forfeiture rate of 5.2% to all unvested options as of March 31,2008. This analysis will be re-evaluated quarterly and the forfeiture rate willbe adjusted as necessary. Ultimately, the actual expense recognized over thevesting period will only be for those options that vest.

 

10

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A summary of optionactivity under the Company’s 2003 Plan as of March 31, 2008, and changesduring the three month period then ended 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, 2007             |       | 4,748                          |       | $                                                 | 6.28       |                                                                           |       |                            |       |   |
| Granted                                            |       | 250                            |       | $                                                 | 0.94       |                                                                           |       |                            |       |   |
| Exercised                                          |       | (102                           | )          | $                                                 | 0.72       |                                                                           |       |                            |       |   |
| Forfeited/Cancelled                                |       | (715                           | )          | $                                                 | 4.94       |                                                                           |       |                            |       |   |
| Outstanding  at March 31, 2008                |       | 4,181                          |       | $                                                 | 6.32       |                                                                           | 6.56       |                            | $          | 36 |   |
| Vested  or expected to vest at March 31, 2008 |       | 4,013                          |       | $                                                 | 6.41       |                                                                           | 6.47       |                            | $          | 32 |   |
| Exercisable  at March 31, 2008                |       | 2,607                          |       | $                                                 | 7.26       |                                                                           | 5.35       |                            | $          | 4 |   |

 

During the three monthsended March 31, 2008 and 2007, the total intrinsic value of optionsexercised (i.e., the difference between the market price at exercise and theprice paid by the employee to exercise the options) was $26,000 and $434,000,respectively, and the total amount of cash received from exercise of theseoptions was $73,000 and $197,000, respectively. The total grant-date fair valueof stock options that vested during the three months ended March 31, 2008and 2007 was approximately $914,000 and $886,000, respectively.

 

As of March 31, 2008,there was $3.6 million of total unrecognized compensation cost related tounvested stock options. This cost is expected to be recognized over a weightedaverage period of 2.1 years.

 

A summary of the Company’srestricted stock award activity as of March 31, 2008 and changes duringthe three-month period then ended is presented below:

 
| ** **                                                   | ** ** | **Restricted Shares  Outstanding  (in thousands)** | ** ** | **Weighted-  Average  Grant Date  Fair Value   Per Share** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Non-vested shares outstanding at  December 31, 2007** |       | 452                                                          |       | $                                                                              | 3.22       |   |
| Awards  granted                                              |       | —                                                       |       | $                                                                              | —     |   |
| Restrictions  lapsed                                         |       | 311                                                          |       | $                                                                              | 3.22       |   |
| Awards  forfeited                                            |       | —                                                       |       | $                                                                              | —     |   |
| **Non-vested shares outstanding at March 31,  2008**    |       | 141                                                          |       | $                                                                              | 3.22       |   |

 

As of March 31, 2008,there was $452,000 of total unrecognized compensation cost related to unvestedrestricted shares. The remaining compensation cost is expected to be recognizedover the remaining vesting term of one year.

 

**(6)**                                 Restructuring

** **

In the firstquarter of 2007, the Company recorded a net restructuring charge of$1.0 million related to its lease obligation at its former headquarters.The charge was recorded pursuant to Statement of Financial Accounting StandardsNo. 146, *Accounting for CostsAssociated with Exit or Disposal Activities* (“SFAS 146”). In March 2007,the Company assigned its lease to a third party and vacated the space. TheCompany paid $1.2 million to end its lease obligation and incurred$0.6 million in expenses primarily related to real estate brokerage feesand clean-up costs. Offsetting these charges was a reversal of$0.8 million in accrued rent. All amounts were paid as of March 31,2007, and the Company has no further obligations related to this lease.

 

In the firstquarter of 2008, the Company recorded restructuring charges of$2.7 million, which was comprised of severance benefits of$2.6 million and impairment charges of $0.1 million for disposed computerequipment. The severance benefits were recorded in accordance with Statement ofFinancial Accounting Standards No. 112, *Employers’**Accounting for Postemployment Benefits*(“SFAS 112”) for contractual termination benefits for certain executivesand SFAS 146 for one-time termination benefits for the remainder ofemployees terminated. In conjunction with the January 2008 restructuring,the Company eliminated approximately 80 positions and discontinued active promotionalactivities related to BiDil.

 

11

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The followingtable summarizes the activity as of March 31, 2008 related to the January 2008restructuring plan:

 
| ** **           | ** ** | **Charge** | ** ** | **Cash  Payments and   Write-offs** | ** ** | **Accrued at    March 31, 2008** | ** ** |
|----------------------|------------|------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------|------------|
| Workforce  reduction |       | $          | 2,653      |                                          | $          | (1,348                                                    | )          | $ | 1,305 |   |
| Impairment           |       | 72         |       | (72                                           | )          | —                                                    |       |
| Total                |       | $          | 2,725      |                                          | $          | (1,420                                                    | )          | $ | 1,305 |   |

 

**(7)**                                 AccumulatedOther Comprehensive Loss

** **

The Company 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 ended March 31,2008 and 2007, total comprehensive loss equaled $5.2 million and $10.1 million,respectively.

 

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

###  

Basic net loss per shareis computed by dividing net loss available to common stockholders by theweighted average number of shares of common stock outstanding during theperiod. Since the Company has a net loss for all periods presented, the effectof all potentially dilutive securities, which are comprised of stock optionsand restricted stock, is anti-dilutive. Accordingly, basic and diluted net lossper share are the same.

 

### As of March 31, 2008 and 2007, optionsto purchase 4,180,505 and 4,884,580 shares of common stock, respectively, werenot included in the computation of diluted net loss per share since theirinclusion would be anti-dilutive. In addition, 140,511 shares of restrictedcommon stock issued and outstanding as of March 31, 2008 were also notincluded since their inclusion would be anti-dilutive.

###  

### **(9)****                                 Concentrationof Credit Risk**

###  

Statement of FinancialAccounting Standards No. 105, *Disclosure of Informationabout Financial Instruments with Off-Balance-Sheet Risk and FinancialInstruments with Concentrations of Credit Risk*, requires disclosureof any significant off-balance-sheet and credit risk concentrations. TheCompany has no off-balance-sheet or concentrations of credit risk such asforeign exchange contracts, options contracts or other foreign hedgingarrangements. The Company maintains its cash and cash equivalents andmarketable securities balances with several high-credit quality financial institutions.

 

The following tablesummarizes the number of trade customers that individually comprise greaterthan 10% of total revenues and their respective percentage of the Company’stotal revenues:

 

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| ** **           | ** ** | **Number of** | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **           | ** ** | **Significant**    | ** ** | **Percentage of Total Revenues by Customer** | ** ** |
| ** **           | ** ** | **Customers**      | ** ** | **A**                                                                 | ** ** | **B**      | ** ** | **C**      | ** ** |
| Three  months ended: |       |               |       |                                                                  |       |       |       |       |       |
| March 31,  2008 |       | 3                  |       | 35                                                                    | %          | 38         | %          | 19         | %          |
| March 31,  2007 |       | 3                  |       | 38                                                                    | %          | 36         | %          | 17         | %          |
|                      |            |                    |            |                                                                       |            |            |            |            |            |  |

 

The following tablesummarizes the number of customers that individually comprise greater than 10%of total accounts receivable and their respective percentage of the Company’stotal accounts receivable:

 
| ** **              | ** ** | **Number of ** | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------|------------|--------------------------|------------|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | **Significant**          | ** ** | **Percentage of Total Accounts Receivable by Customer** | ** ** |
| ** **              | ** ** | **Customers**            | ** ** | **A**                                                                                 | ** ** | **B**      | ** ** | **C**      | ** ** |
| Three  months ended:    |       |                     |       |                                                                                  |       |       |       |       |       |
| March 31,  2008    |       | 3                        |       | 32                                                                                    | %          | 42         | %          | 18         | %          |
| December 31,  2007 |       | 3                        |       | 34                                                                                    | %          | 38         | %          | 17         | %          |

 

To date, the Company hasnot written off any significant accounts receivable.

 

### **(10)****                          Commitmentsand Contingencies**

###  

In February 2005,the Company engaged Schwarz Pharma Manufacturing, Inc. under a five-yearexclusive manufacturing and supply agreement solely for the three times dailyimmediate release dosage formulation of BiDil. Under the supply agreement, theCompany has the right to engage a backup manufacturer, but to date has notelected to use this right. In connection with this supply agreement, theCompany placed a binding purchase order of $324,000 for production of BiDilfinished goods to occur during the second quarter of 2008.

 

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

 

**Overview**

** **

We are the makerof BiDil®, which is indicated for the treatment of heart failure inself-identified black patients as an adjunct to current standard therapies.BiDil is an orally administered fixed-dose combination of isosorbide dinitrateand hydralazine hydrochloride. The U.S. Food and Drug Administration, or FDA,approved BiDil in June 2005, and we commercially launched BiDil in July 2005.We are currently a party to an exclusive five-year manufacturing and supplyagreement with Schwarz Pharma Manufacturing, Inc., or Schwarz Pharma, forthe three times daily immediate release dosage formulation of BiDil.

 

Since ourinception, we have mainly funded our operations through the sale of equitysecurities, debt financings, license fees, research and development funding,milestone payments from our collaborative partners, and more recently, sales ofBiDil. We have never been profitable and have incurred an accumulated deficitof $350.6 million as of March 31, 2008.

 

Based upon ourdetermination that the successful commercialization of BiDil requires amagnitude of resources that we cannot currently allocate to the program, aswell as our plans to conserve cash in order to pursue the development of BiDilXRTM, an extended release formulation of BiDil, in January 2008 we discontinuedactive promotional activities for BiDil. We concurrently implemented arestructuring plan that eliminated approximately 80 positions, reducingheadcount to approximately 10 positions. Although we have discontinued activepromotional efforts related to BiDil, we intend to continue to manufacture andsell BiDil and maintain the product on the market for patients through normalwholesale and retail channels. We also plan to conduct limited advertising inselect medical publications, and may engage a third-party marketing firm tocontact healthcare professionals on our behalf, in each case in an effort tomaintain a limited market presence for BiDil. In conjunction with implementingour January 2008 restructuring plan, we intend to evaluate and pursuestrategic alternatives for our business, which may include the divestiture ofour BiDil and BiDil XR business and/or our nitric oxide patent portfolio, amerger or consolidation with another company, or other comparable arrangements.

 

Our January 2008restructuring follows the elimination of our discovery research program in March 2006and the replacement of our sales force with a small team of seniorcardiovascular business managers in October 2006. The January

 

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2008 restructuring alsofollows our efforts in August 2007 to deploy an expanded fieldorganization designed to focus on selected prescriber targets.

 

As a result of ourJanuary 2008 restructuring, we estimate that our operating expensesrelated to research and development and sales, general and administrativefunctions, excluding restructuring charges, for the year ending December 31,2008 will be approximately $16 million to $18 million, excluding costof product sales but including share-based compensation expense.

 

BiDil is an orally-administeredmedicine that is presently dosed three times daily. We are seeking to developBiDil XR as a once-daily formulation. In connection with our efforts to developBiDil XR, in February 2007 we entered into a license agreement with ElanPharma International Limited, or Elan, pursuant to which Elan granted to us anexclusive worldwide royalty-bearing license to import, use, offer for sale andsell an oral capsule formulation incorporating specified technology owned orcontrolled by Elan and containing, as its sole active combination ofingredients, the combination of the active drug substances isosorbide dinitrateand hydralazine hydrochloride (which includes BiDil XR). In considerationfor the grant of the license, we have agreed to pay Elan royalties that arecalculated by reference to annual net sales parameters set forth in theagreement. In addition, we have also agreed to pay Elan specified amounts uponthe achievement of specified development and commercialization milestone eventsset forth in the agreement.

 

In December 2007,we met with the FDA to discuss our proposed development plan for BiDil XR. TheFDA agreed that our clinical development plan to conduct bioequivalence andpharmacodynamic studies comparing BiDil XR to the current commercial immediaterelease formulation of BiDil is acceptable. Our proposed plan could support FDAapproval to commercialize BiDil XR, if bioequivalence is demonstrated. Thebioequivalence study design compares the pharmacokinetics of the BiDil XRformulation to the pharmacokinetics of BiDil. Pharmacokinetics refers to themanner in which the body absorbs, distributes, metabolizes and excretes thestudy drug. The adequacy of the results will ultimately be determined by theFDA during the regulatory review period. Our pilot clinical trials have testedseveral BiDil XR prototypes and compared their pharmacokinetic profile withBiDil tablets. In preliminary clinical studies in healthy volunteers, we havedemonstrated our ability to delay the release of isosorbide dinitrate andhydralazine hydrochloride by varying the amount of coating and ratios ofdifferent polymers on beads in capsules. We will need to conduct additionalformulation studies and trials in order to finalize the formulation prior tothe commencement of bioequivalence trials.

 

In the near-term,the key drivers of our success will be our ability to:

 

·                  maintain sales of BiDil following ourJanuary 2008 discontinuation of active promotional efforts related toBiDil;

 

·                  evaluate and pursue strategicalternatives for our business which may include the divestiture of our BiDiland BiDil XR business and/or our nitric oxide patent portfolio, a merger orconsolidation with another company, or other comparable arrangements; and

 

·                  successfully advance the developmentof BiDil XR.

 

At March 31,2008, our principal source of liquidity was $21.2 million of cash, cashequivalents and short-term marketable securities, which excludes $1.6 millionof auction rate securities classified as long-term marketable securities due toliquidity constraints. We believe that our existing sources of liquidity andthe cash expected to be generated from future sales of BiDil, together with thesignificant reduction in expenditures as a result of our January 2008restructuring, will be sufficient to fund our operations for at least the nexttwelve months. We expect to incur operating expenses going forward primarilyrelated to our continued development of BiDil XR and to keeping BiDil availableon the market. We expect to fund a substantial portion of our operatingexpenses through ongoing BiDil sales. However, the elimination of our salesforce and discontinuation of our active promotional efforts related to BiDilcould result in a decline in BiDil prescriptions by healthcare providers andcould also adversely affect third party payors’ willingness to providereimbursement at favorable levels. If physicians do not continue to prescribeBiDil in sufficient quantities, and/or if managed care providers remove BiDilfrom a preferential reimbursement tier on their plan formularies, then our futurerevenue from sales of BiDil will decline significantly, and we may not achievesufficient working capital to fund our continued operations, including withrespect to our planned development of BiDil XR. As we evaluate strategicoptions intended to maximize shareholder value for our company, we intend toexecute on our business strategy of ceasing active promotional efforts forBiDil while devoting substantially all of our resources to supporting ongoingBiDil prescriptions and the continued development of BiDil XR. If we are unableto successfully consummate one or more strategic transactions relating to ourbusiness, we may not have sufficient capital to execute on our current businessplan and could be required to further curtail or cease our operations.

 

14

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**FinancialOperations Overview**

 

*Revenue.*Our first commercial product, BiDil, was launched in July 2005,and generated product sales of $3.9 million in the first quarter of 2008. Priorto the launch of BiDil, all of our revenue had been derived from license fees,research and development payments and milestone payments that we received fromour corporate collaborators. We discontinued active promotion of BiDil in January 2008.

 

*Research and Development.*Research and development expense consists of expenses incurredin identifying, developing and testing product candidates. These expensesconsist primarily of salaries and related expenses for personnel, fees paid toprofessional service providers for independent monitoring and analysis of ourclinical trials, costs of contract research and manufacturing, productdevelopment costs, costs of facilities and BiDil medical support costs.

 

Thefollowing summarizes our primary research and development programs. We have notprovided program costs because prior to 2000 we did not track and accumulatecost information by research program.

 

·*    BiDil.* From May 2001to July 2004, we enrolled 1,050 patients at 169 clinical sites in theUnited States in our phase III clinical trial for BiDil. We halted the trial inJuly 2004 due to a significant survival benefit in the preliminary datafor patients taking BiDil. The FDA approved BiDil on June 23, 2005, and welaunched BiDil in July 2005. The total cost for the BiDil A-HeFT trial wasapproximately $43.0 million.

 

·     *BiDil XR*. The current formulation of BiDil isan immediate-release tablet that must be taken three times daily. We arecurrently pursuing the development of BiDil XR, an extended release formulationof BiDil, that could be taken once a day. To date, we have incurred expenses ofapproximately $10.5 million in connection with the development of BiDilXR. Preliminary clinical studies of BiDil XR demonstrated proof of principle,and we commenced clinical development of BiDil XR in October 2006. We willneed to conduct additional formulation studies and trials in order to finalizethe formulation prior to the commencement of bioequivalence trials. Weanticipate that we will finalize the BiDil XR formulation in 2009. Assumingthat the BiDil XR formulation is successfully finalized, we anticipateinitiating pivotal bioequivalence trials and then filing the new drugapplication in 2010 or 2011. Because of its stage of development, and theuncertainties inherent in pharmaceutical development generally, we may not beable to successfully develop and commercialize BiDil XR.

 

·      *Other Discovery Research.* We have used our know-how and expertise in nitricoxide to develop drug candidates that are nitric oxide-enhancing versions ofexisting medicines in the areas of cardiovascular, gastrointestinal/anti-inflammatoryand pulmonary medicine. These studies have not progressed beyond a discoverystage of testing, and it remains speculative whether the addition of nitricoxide will result in an improved clinical profile of these medicines. We arecurrently seeking out-licensing opportunities for these product candidates, andare not presently engaging in any internal research and development activitieswith respect to these drugs. We cannot be certain if we will be able to secureout-licensing arrangements for these product candidates on favorable terms, ifat all. As such, we are not able to estimate when material cash inflows fromproduct sales, milestones and royalties could commence, if ever.

 

*Sales,**General andAdministrative.*Sales,general and administrative expense consists primarily of salaries and otherrelated costs for personnel in sales and marketing, executive, finance,investor relations, accounting, business development and human resourcefunctions. Other costs include facility costs not otherwise included inresearch and development expense; costs for public relations, advertising andpromotion services; professional fees for legal and accounting services; andcosts related to our former arrangements with a contract sales organization.

 

*Non-Operating Income.*Interest income includes interest earned on our cash,cash equivalents and marketable securities, and interest expense associatedwith our current portion of long-term debt.

 

**Resultsof Operations**

 

***ThreeMonths Ended March 31, 2008 and 2007***

** **

*Revenue.*Totalrevenue for the three months ended March 31, 2008 was $3.9 million,compared to $3.6 million for the three months ended March 31, 2007.Product sales of BiDil accounted for all of the revenue for the three monthperiods ended March 31, 2008 and 2007. The increase in product revenue inthe 2008 period is due to increased shipments of BiDil as a result of increaseddemand in the 2008 period.

 

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*Cost ofProduct Sale*s. Cost of product sales was $979,000 for thethree month period ended March 31, 2008 compared to $954,000 for the threemonth period ended March 31, 2007. The increase in cost of product salesin the 2008 period is due to increased sales of BiDil. For the three month periodsended March 31, 2008 and 2007, we recorded inventory impairment charges of$347,000 and $384,000, respectively. These inventory impairment charges were relatedto commercial trade, patient sample inventory product and raw materials inexcess of expected future inventory requirements and future purchasecommitments, based on our current sales forecast. The decrease in inventoryimpairment charges in the 2008 period is due to a reduction in charges relatedto commercial trade resulting from the extension of BiDil’s shelf life, offsetby impairment charges to raw materials.

 

*Researchand Development.*Research and development expense for thethree months ended March 31, 2008 was $1.6 million, compared to $3.0 millionfor the three months ended March 31, 2007. The $1.4 million, or 46%,decrease in research and development expenses in the current period wasprimarily due to $0.5 million in reduced headcount expenses as a result of ourrestructuring action in January 2008, a $0.4 million decrease in medical expendituressupporting the commercialization of BiDil and a $0.4 million decrease in spendingrelated to the development of BiDil XR.

 

The followingtable summarizes the primary components of our research and development expensefor our principal research and development programs for the three month periodsended March 31, 2008 and 2007:

 
| ** **                                          | ** ** | **Three Months   Ended   March 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| **Research  and Development Program (in millions)** | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| BiDil                                               |       | $                                                        | 0.6        |   | $ | 1.2 |   |
| BiDil XR                                            |       | 1.0                                                      |       | 1.7 |   |
| Other discovery  research                           |       | —                                                   |       | 0.1 |   |
| Total research  and development expense             |       | $                                                        | 1.6        |   | $ | 3.0 |   |

 

*Sales,General and Administrative.*Sales, general and administrativeexpense for the three months ended March 31, 2008 was $4.0 million,compared to $8.9 million for the three months ended March 31, 2007. The $4.9million, or 55%, decrease in sales, general and administrative expense wasprimarily due to $3.1 million in reduced salary and benefit expenses as aresult of reduced headcount related to our January 2008 restructuring and$1.7 million in decreased advertising expenses as a result of our decision to discontinueactive promotional efforts for BiDil.

 

*RestructuringCharge.* In thefirst quarter of 2007, we recorded a net restructuring charge of $1.0 millionrelated to our lease obligation at our former headquarters. The charge wasrecorded pursuant to Statement of Financial Accounting Standards No. 146,*Accounting for Costs Associated with Exit orDisposal Activities*,or SFAS 146. In March 2007 we assigned our lease to a third party andvacated the space.  We paid $1.2 million to end our lease obligation andincurred $0.6 million in expenses primarily related to real estate brokeragefees and clean-up costs. Offsetting these charges was a reversal of $0.8million in accrued rent. All amounts were paid as of March 31, 2007.

 

In the firstquarter of 2008, we recorded restructuring charges of $2.7 million, whichwas comprised of severance benefits of $2.6 million related to thereduction of our employee headcount from approximately 90 to approximately 10positions, and impairment charges of $0.1 million for disposal of computerequipment. The severance benefit charges were recorded in accordance withStatement of Financial Accounting Standards No. 112, *Employers’**Accounting for Postemployment Benefits*, or SFAS 112, for contractualtermination benefits for certain executives and SFAS 146 for one-timetermination benefits for the remainder of employees terminated. As of March 31,2008, we owed $1.3 million for salary continuation payments. As a result ofthis restructuring, we now estimate that our operating expenses related toresearch and development and sales, general and administrative functions,excluding restructuring charges, for the year ending December 31, 2008will now be approximately $16 million to $18 million, excluding costof product sales but including share-based compensation expense.

 

*Stock-based Compensation Expense.*We recognized $0.9 million and $2.0million in stock-based compensation expense for the three months ended March 31,2008 and 2007, respectively. As of March 31, 2008, the total unrecognizedcompensation cost related to unvested awards was approximately $4.1 million,which will be recognized over a weighted average period of 2.1 years.

 

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*Non-OperatingIncome.*Non-operating income for the three months ended March 31,2008 was $215,000 compared to $231,000 for the three months ended March 31,2007. The $16,000 decrease for the three month period ended March 31, 2008compared to the three month period ended March 31, 2007 is primarily dueto lower fund balances available for investment, offset by a $169,000 reductionin interest expense incurred on long-term debt.

 

**Liquidityand Capital Resources**

** **

Since our inception,we have primarily funded our operations through the sale of equity securities,debt financings, license fees, research and development funding, milestonepayments from our collaborative partners and, more recently, sales of BiDil. Asof March 31, 2008, we have received net proceeds of $321.2 millionfrom the issuance of equity securities, including net proceeds of$18.2 million from our registered direct offering in May 2007.

 

At March 31,2008, we had $21.2 million in cash, cash equivalents and short-term marketablesecurities, which excludes $1.6 million of auction rate securities classifiedas long-term marketable securities due to liquidity constraints.

 

Duringthe three months ended March 31, 2008, operating activities used cash of$7.0 million, primarily due to a net loss of $5.2 million and decreases inaccounts payable and accrued expenses of $4.5 million, offset by an increase inaccrued restructuring charges of $1.3 million, and stock-based compensationexpense of $0.9 million.

 

During the threemonths ended March 31, 2008, investing activities provided cash of $10.8million primarily due to net sales of marketable securities.

 

Duringthe three months ended March 31, 2008, financing activities used cash of$1.6 million due to $1.8 million in long-term debt payments, offset by $0.3million in proceeds from employee stock plans.

 

On June 28,2005, we borrowed (i) $10.0 million from Oxford Finance Corporation,or Oxford, and (ii) $10.0 million from General Electric CapitalCorporation, or GECC, pursuant to the terms of promissory notes made by us withboth Oxford and GECC, respectively. The notes bear interest at a fixed rate of9.95% per annum and are payable in 36 consecutive monthly installments ofprincipal and accrued interest, beginning July 1, 2005. The notes aresecured by a security interest in all our personal property and fixtures withthe exception of any intellectual property or products acquired, whether bypurchase, license or otherwise, on or after the execution of the notes. The agreementsthat we entered into with each of Oxford and GECC in connection with the notesalso contain a material adverse change clause with both Oxford and GECC. Underthis clause, if Oxford or GECC reasonably determine that our ability to repaythe notes has been materially impaired, we would be considered in default. Asof March 31, 2008, we were in compliance with this clause and $1.9 millionof principal remained outstanding and unpaid. We expect that the promissorynotes will be fully paid by June 30, 2008.

 

As of March 31,2008, the marketable securities held by us have maturity dates that range from2008 to 2045.

 

As of March 31,2008, we held approximately $5.0 million of auction rate securities. Theseauction rate securities are comprised of approximately $2.2 million ofsecurities backed by municipalities, $2.5 million of preferred stock issued byclosed-end funds and a $0.3 million security issued by a government-backedstudent loan organization. Auction rate securities are securities that arestructured to allow for short-term interest rate resets, but with contractualmaturity dates that can be well in excess of ten years. Auctions havehistorically provided a liquid market for these securities. However, beginningin February 2008, the majority of auction rate securities in themarketplace failed at auction due to sell orders exceeding buy orders. Suchfailures resulted in the interest rate on these securities resetting topredetermined rates within the underlying loan agreement, which might be higheror lower than the current market rate of interest. Our ability to liquidate ourauction rate securities and fully recover the carrying value of our investmentsin the near term may be limited or not exist. In the event that we need toaccess our investments in these auction rate securities, we will not be able todo so until a future auction of these investments is successful, the issuerredeems the outstanding securities, a buyer is found outside the auctionprocess, or the securities mature, which could be in as many as 37 years. As aresult of these factors, we may be required to record impairment charges onthese investments from time to time and, as discussed below, recorded animpairment charge in the amount of $16,000 for the three months ended March 31,2008 for certain of these investments.

 

As of March 31,2008, approximately $3.4 million of our auction rate securities are classifiedas short-term marketable securities because management has determined thatthese securities may be liquidated within one year based on management’s

 

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experience with liquidating other similar auction ratesecurities, discussions with investment advisors knowledgeable of the auctionrate securities market, the nature of the securities (which are primarilybacked by various municipalities), and redemptions and calls subsequent to March 31,2008. As of March 31, 2008, we reclassified $1.6 million of auction ratesecurities from short-term to long-term marketable securities, reflectingmanagement’s determination that these securities may not be liquidated withinone year due to the auction failures described above. Subsequent to March 31,2008, we have sold $1.5 million of our auction rate securities at par. We havenot experienced any realized losses on sales of auction rate securities in2008.

 

We have recorded another-than-temporary impairment of $16,000 on our government-backed studentloan auction rate security. We believe that the municipality-backed securitiesand preferred stock issued by closed end funds are not significantly impaired,primarily due to our experience of selling such securities at par since therecent auction failures began, the redemption or calls of similar securities bytheir issuers at par since the auction failures began, redemptions and callssubsequent to March 31, 2008, and the credit worthiness of the issuers of theunderlying securities.

 

*Contractual Obligations*

 

Thefollowing table summarizes our contractual obligations at March 31, 2008,and the effects such obligations are expected to have on our liquidity and cashflows in future periods.

 
| **Contractual Obligations** | ** ** | **Total** | ** ** | **Less than   one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than   five years** | ** ** |
|----------------------------------|------------|-----------|------------|-----------------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------------------|------------|
| Long term debt                   |       | $         | 1,919,000  |                                    | $          | 1,919,000          |       | $                  | —     |                                      | $          | — |   | $ | — |   |
| Operating lease                  |       | 2,596,000 |       | 545,000                                 |       | 1,149,000          |       | 902,000            |       | —                                    |       |
| Purchase  obligations (1)        |       | 425,000   |       | 425,000                                 |       | —             |       | —             |       | —                                    |       |
| License  milestones(2)           |       | —    |       | —                                  |       | —             |       | —             |       | —                                    |       |
| Total                            |       | $         | 4,940,000  |                                    | $          | 2,889,000          |       | $                  | 1,149,000  |                                      | $          | 902,000 |   | $ | — |   |

 

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(1) In January of 2008, we placed a binding purchase order totaling $324,000with Schwarz Pharma for production of BiDil finished goods during the secondquarter of 2008. In November 2007, we placed a binding purchase order for$101,000 for the purchase of raw materials from Flavine International, Inc.,the U.S. representative of Sumitomo Corp., for delivery during the secondquarter of 2008.

 

 (2)  On February 9,2007, we entered into a License Agreement with Elan, pursuant to which we maybe obligated to pay certain milestone payments in the aggregate amount of $2.5million, of which $250,000 was paid in the first quarter of 2007. We areuncertain as to the timing of any future payments pursuant to the terms of theLicense Agreement.

 

In January 2008,we ceased actively promoting sales of BiDil, which is our only significantsource of revenue. We intend to continue incurring costs related to supportingongoing prescriptions for BiDil, and we also expect to incur additionalexpenses relating to the ongoing development of BiDil XR. We believe that ourexisting sources of liquidity and the cash expected to be generated from futuresales of BiDil, together with the significant reduction in expenditures as aresult of our January 2008 restructuring, will be sufficient to fund ouroperations for at least the next twelve months. However, our future capitalrequirements, and the period in which we expect our current cash to support ouroperations, may vary due to a number of factors, including the following:

 

·                  our ability to successfully consummate one or more strategicarrangements relating to our business and assets;

 

·                  the amount of future product sales of BiDil;

 

·                  the cost of manufacturing and selling BiDil;

 

·                  the timing of collections related to sales of BiDil;

 

·                  the time and costs involved in completing the clinical trials andfurther development of, and obtaining regulatory approvals for, BiDil XR, if atall;

 

·                  the effect of competing technological and market developments;

 

·                  the costs involved in preparing, filing, prosecuting, maintaining andenforcing patent claims; and

 

·                  the cost of maintaining licenses to use patented technologies.

 

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Our business planis to seek to divest all or substantially all of our business through a merger,asset sale, license, business combination or the like. However, if and for solong as we continue our current business and operations, we will requiresubstantial additional funds, which we expect to generate through a combinationof BiDil sales and one or more strategic transactions. We may not be able tosuccessfully consummate a strategic transaction, and additional financing maynot be available to us on acceptable terms, if at all.

 

If weare unable to obtain funding on a timely basis, whether through a strategicdivestiture, financing or borrowing arrangements or other capital-raisingtransaction, we may not be able to support continued prescriptions for BiDil,we may be compelled to significantly curtail or delay our development effortswith respect to BiDil XR, and we could also be required to limit, scale back orcease our operations, any of which would have a material and adverse effect onour business, financial condition and results of operations.

 

**CriticalAccounting Policies and Estimates**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based on our financial statements, which have been prepared in accordancewith United States generally accepted accounting principles. The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting periods. Onan on-going basis, we evaluate our estimates and judgments, including thoserelated to revenue and related reserves, the net realizable value of inventory,accrued expenses and the factors used to determine the fair value assigned toour stock options. We base our estimates on historical experience, known trendsand events and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. There were no materialchanges in our judgments or estimates during the first quarter of 2008. For adetailed explanation of the judgments made in these areas, refer to Management’sDiscussion and Analysis of Financial Condition and Results of Operations withinour Annual Report on Form 10-K for the year ended December 31, 2007,which is on file with the Securities and Exchange Commission, or SEC.

 

**Inflation**

 

Webelieve the effects of inflation generally do not have a material adverseimpact on our operations or financial condition.

 

**Off-BalanceSheet Arrangements**

 

We donot have any material off-balance sheet arrangements.

 

**Forward-LookingStatements**

 

This QuarterlyReport on Form 10-Q includes forward-looking statements within the meaningof Section 21E of the Securities Exchange Act of 1934, as amended, whichwe refer to as the Exchange Act. For this purpose, any statements containedherein regarding our strategy, future operations, financial position, futurerevenues, projected costs, prospects, plans and objectives of management, otherthan statements of historical facts, are forward-looking statements. The words “anticipates,”“believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,”“would” and similar expressions are intended to identify forward-lookingstatements, although not all forward-looking statements contain theseidentifying words. We cannot guarantee that we actually will achieve the plans,intentions or expectations disclosed in our forward-looking statements. Thereare a number of important factors that could cause actual results or events todiffer materially from those disclosed in the forward-looking statements wemake. These important factors include the risk factors set forth below under Part II,Item 1A., “Risk Factors.” Although we may elect to update forward-lookingstatements in the future, we specifically disclaim any obligation to do so,even if our estimates change, except as specifically required by law or the rules ofthe SEC, and readers should not rely on those forward-looking statements as representingour views as of any date subsequent to the date of this quarterly report.

 

**Item 3.****   Quantitative and QualitativeDisclosures About Market Risk**

 

We are exposed tomarket risk related to changes in interest rates. Our current investment policyis to maintain an

 

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investment portfolioconsisting mainly of U.S. money market and high-grade corporate and U.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, the maturities of these securities at March 31,2008 range from 2008 to 2045. Our cash is deposited in and invested throughhighly rated financial institutions in North America. Our marketable securitiesare subject to interest rate risk and will fall in value if market interestrates increase. If market interest rates were to increase immediately anduniformly by 10% from levels at March 31, 2008, we estimate that the fairvalue of our investment portfolio would decline by an immaterial amount. Wehave the ability to hold our fixed income investments until maturity, andtherefore we do not expect our operating results or cash flows to be affectedto any significant degree by the effect of a change in market interest rates onour investments.

 

The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing the income we receive from our investments withoutsignificantly increasing risk. To achieve this objective, we maintain ourportfolio of cash equivalents and marketable securities in a variety ofsecurities, including U.S. government agencies, municipal notes which may havean auction reset feature, corporate notes and bonds, commercial paper, andmoney market funds. These securities are classified as available for sale andconsequently are recorded on the balance sheet at fair value with unrealizedgains or losses reported as a separate component of accumulated othercomprehensive income (loss). If interest rates rise, the market value of ourinvestments may decline, which could result in a realized loss if we are forcedto sell an investment before its scheduled maturity. We do not utilizederivative financial instruments to manage our interest rate risks.

 

As of March 31,2008, the marketable securities held by us have maturity dates that range from2008 to 2045.

 

As of March 31,2008, we held approximately $5.0 million of auction rate securities. Theseauction rate securities are comprised of approximately $2.2 million ofsecurities backed by municipalities, $2.5 million of preferred stock issued byclosed-end funds and a $0.3 million security issued by a government-backedstudent loan organization. Auctions have historically provided a liquid marketfor these securities. However, beginning in February 2008, the majority ofauction rate securities in the marketplace failed at auction due to sell ordersexceeding buy orders. Our ability to liquidate our auction rate securities andfully recover the carrying value of our investments in the near term may belimited or not exist. In the event that we need to access our investments inthese auction rate securities, we will not be able to do so until a futureauction of these investments is successful, the issuer redeems the outstandingsecurities, a buyer is found outside the auction process, or the securitiesmature, which could be in as many as 37 years. As a result of these factors, wemay be required to record impairment charges on these investments from time totime and, as discussed below, recorded an impairment charge in the amount of$16,000 for the three months ended March 31, 2008 for certain of theseinvestments. 

 

As of March 31,2008, approximately $3.4 million of our auction rate securities are classifiedas short-term marketable securities because management has determined thatthese securities may be liquidated within one year based on management’sexperience with liquidating other similar auction rate securities, discussionswith investment advisors knowledgeable of the auction rate securities market,the nature of the securities (which are primarily backed by variousmunicipalities), and redemptions and calls subsequent to March 31, 2008.As of March 31, 2008, we reclassified $1.6 million of auction ratesecurities from short-term to long-term marketable securities, reflectingmanagement’s determination that these securities may not be liquidated withinone year due to the auction failures described above. Subsequent to March 31,2008, we have sold $1.5 million of our auction rate securities at par. We havenot experienced any realized losses on sales of auction rate securities in2008.

 

We have recordedan other-than-temporary impairment of $16,000 on our government-backed studentloan auction rate security. We believe that the municipality-backed securitiesand preferred stock issued by closed end funds are not significantly impaired,primarily due to our experience of selling such securities at par since therecent auction failures began, the redemption or calls of similar securities bytheir issuers at par since the auction failures began, redemptions and callssubsequent to March 31, 2008, and the credit worthiness of the issuers of theunderlying securities.

 

**Item 4.****   Controls and Procedures**

 

Our chiefexecutive officer and interim chief financial officer evaluated theeffectiveness of our disclosure controls and procedures as of March 31,2008. The term “disclosure controls 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 well

 

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designed and operated,can provide only reasonable assurance of achieving their objectives, andmanagement necessarily applies its judgment in evaluating the cost-benefitrelationship of possible controls and procedures. Based on the evaluation ofour disclosure controls and procedures as of March 31, 2008, our chiefexecutive officer and interim chief financial officer concluded that, as ofsuch date, our disclosure controls and procedures were effective at thereasonable assurance level.

 

No change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedMarch 31, 2008, that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1A. Risk Factors**

 

Youshould carefully consider the following risk factors, in addition to otherinformation included in this Quarterly Report on Form 10-Q, in evaluatingNitroMed and our business. If any of the following risks occur, our business,financial condition and operating results could be materially adverselyaffected.

 

Thefollowing risk factors restate and supersede the risk factors previouslydisclosed in Item 1A. of our Annual Report on Form 10-K for the yearended December 31, 2007.

 

**RisksRelating to our Business, Strategy and Financial Condition**

 

**Wehave recently discontinued active promotional activities related to our onlycommercially-available product, BiDil, which could significantly adverselyaffect our future revenue and our ability to continue to fund our operations.**

 

Based upon ourdetermination that the successful commercialization of BiDil requires amagnitude of resources that we cannot currently allocate to the program, aswell as our plans to conserve cash in order to pursue the development of BiDilXR, in January 2008 we discontinued active promotional activities forBiDil. We concurrently implemented a restructuring plan that eliminatedapproximately 80 positions, reducing headcount to approximately 10 positions.Although we have discontinued our promotional activities for BiDil, we intendto continue to manufacture and sell BiDil and maintain the product on themarket for patients through normal wholesale and retail channels. We also planto conduct limited advertising in select medical publications, and may engage athird-party marketing firm to contact healthcare professionals on our behalf,in each case in an effort to maintain a limited market presence for BiDil.

 

We expect to incuroperating expenses going forward primarily related to our continued developmentof BiDil XR and to keeping BiDil available on the market. We expect to fund asubstantial portion of these operating expenses through ongoing BiDil sales. Weexpect that the elimination of our sales force and discontinuation of ouractive promotional efforts related to BiDil could result in a decline in BiDilprescriptions by healthcare providers and could also adversely affect thirdparty payors’ willingness to provide reimbursement at favorable levels. Ifphysicians do not continue to prescribe BiDil in sufficient quantities, and/orif managed care providers remove BiDil from a preferential reimbursement tieron their plan formularies, then our future revenue from sales of BiDil willdecline significantly, and we may not generate sufficient capital to fund ourcontinued operations, including with respect to our planned development ofBiDil XR.

 

**Weare evaluating strategic alternatives that may involve the divestiture of someor all of our business. If we are unable to successfully consummate one or moreof such strategic alternatives, we may not have sufficient capital to fund ourbusiness and may be required to substantially curtail or cease our operations.**

 

In conjunctionwith our January 2008 restructuring plan, in which we ceased activepromotion of BiDil and significantly reduced our workforce, we are evaluatingstrategic alternatives to divest our current business in whole or in part inour effort to maximize the value of our commercial organization and productdevelopment programs for our shareholders. We have engaged an investment bankto advise us in considering these potential strategic alternatives, which mayinclude the sale, license or divestiture of certain of our assets, includingour BiDil business, the assets relating to BiDil XR and/or our nitric oxidetechnologies, the sale or merger of our company, or other similar strategictransactions. We do not know that our evaluation of strategic alternatives willresult in one or more such transactions being successfully consummated or, ifsuccessful, that any such transaction would achieve our goal of maximizing thevalue of our organization and programs for our stockholders. As we evaluatestrategic options intended to maximize shareholder value for our company, weintend to execute on our business strategy of ceasing active promotionalefforts for BiDil while devoting substantially all of our

 

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resources to supporting ongoing BiDil prescriptionsand the continued development of BiDil XR. If we are unable to successfullyconsummate one or more strategic transactions relating to our business, we maynot have sufficient capital to execute on our current business plan and couldbe required to further curtail or cease our operations.

 

**Wehave a history of operating losses and we will require substantial additionalamounts of cash to fund our operating plan, including our plans to support anycontinued sales of BiDil and to seek to develop and commercialize BiDil XR. Ifadditional capital is not available, we will need to limit, scale back or ceaseour operations.**

 

We haveexperienced significant operating losses since our inception in 1992. For thequarter ended March 31, 2008, we had a net loss of $5.2 million. Asof March 31, 2008, we had an accumulated deficit of $350.6 million.We expect that we will continue to incur substantial losses and that ourcumulative losses will increase as we continue our efforts to develop BiDil XRand support ongoing prescriptions for BiDil. We expect that the losses that weincur will fluctuate from quarter to quarter and that these fluctuations may besubstantial.

 

In January 2008,we ceased actively promoting sales of BiDil, which is our only significantsource of revenue. We intend to continue incurring costs relating to supportingongoing BiDil prescriptions, and we also expect to incur additional expensesrelating to the ongoing development of BiDil XR. We believe that our existingsources of liquidity and the cash expected to be generated from future sales ofBiDil, together with the significant reduction in expenditures as a result ofour January 2008 restructuring, will be sufficient to fund our operationsfor at least the next twelve months. However, our future capital requirements,and the period in which we expect our current cash to support our operations,may vary due to a number of factors, including the following:

 

·                  our ability to successfully consummate one or more strategicarrangements relating to our business and assets;

 

·                  the amount of future product sales of BiDil;

 

·                  the cost of manufacturing and selling BiDil;

 

·                  the timing of collections related to sales of BiDil;

 

·                  the time and costs involved in completing the clinical trials andfurther development of, and obtaining regulatory approvals for, BiDil XR, if atall;

 

·                  the effect of competing technological and market developments;

 

·                  the costs involved in preparing, filing, prosecuting, maintaining andenforcing patent claims; and

 

·                  the cost of maintaining licenses to use patented technologies.

 

Our business planis to seek to divest all or substantially all of our business through a merger,asset sale, license, business combination or the like. However, if and for solong as we continue our current business and operations, we will requiresubstantial additional funds, which we expect to generate through a combinationof BiDil sales and one or more strategic transactions. However, we may not beable to successfully consummate a strategic transaction, and additionalfinancing may not be available to us on acceptable terms, if at all.

 

If we are unableto obtain funding on a timely basis, whether through a strategic divestiture,financing or borrowing arrangements or other capital-raising transaction, wemay not be able to support continued prescriptions for BiDil, we may be compelledto significantly curtail or delay our development efforts with respect to BiDilXR, and we could also be required to limit, scale back or cease our operations,any of which would have a material and adverse effect on our business,financial condition and results of operations.

 

**Asignificant portion of our investment portfolio is invested in auction ratesecurities which have faced recent market failures. Failures in these auctionsmay affect our liquidity.**

 

As of March 31,2008, we held approximately $5.0 million of investments in auction ratesecurities. These securities are structured to allow for short-term interestrate resets, but with contractual maturity dates that can be well in excess often years. Auctions have historically provided a liquid market for thesesecurities. However, beginning in early February 2008,

 

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the majority of auction rate securities in themarketplace failed at auction due to sell orders exceeding buy orders. Ourability to liquidate our auction rate securities and fully recover the carryingvalue of our investment in the near term may be limited or not exist. In theevent that we need to access our investments in these types of securities, wewill not be able to do so until a future auction on these investments issuccessful, the issuer redeems the outstanding securities, a buyer is foundoutside the auction process, or the securities mature, which could be in as manyas 37 years. As of March 31, 2008, we reclassified $1.6 million ofour total amount of auction rate securities from short-term to long-termmarketable securities, and we recorded an other-than-temporary impairment of$16,000 on a government-backed student loan auction rate security, reflectingmanagement’s determination that these securities may not be liquidated withinone year due to the auction failures described above. In the future, should weexperience additional auction failures and/or determine that these auction ratesecurities have experienced other than temporary declines in fair value, wewould recognize a loss in our statement of operations, which could be material.In addition, any future failed auctions may adversely impact the liquidity ofour investments.

 

### **If we failto maintain the requirements for continued listing on the NASDAQ Global Market,our common stock could be delisted from trading, which would adversely affectthe liquidity of our common stock and our ability to raise additional capital.**

###  

Our common stockis currently listed for quotation on the NASDAQ Global Market. We are requiredto meet specified financial requirements in order to maintain our listing onthe NASDAQ Global Market. One such requirement is that we maintain a minimumclosing bid price of at least $1.00 per share for our common stock. During thefirst quarter of 2008, our common stock closed at prices below the minimum bidprice requirement, and in February 2008 we received a deficiency noticefrom NASDAQ. Although we regained compliance with NASDAQ’s minimum bid price rule inMarch 2008, if the closing bid price of our stock price falls below $1.00per share for 30 consecutive business days, we will again receive a deficiencynotice from NASDAQ advising us that we have 180 days to regain compliance bymaintaining a minimum closing bid price of at least $1.00 for a minimum of tenconsecutive business days. Under certain circumstances, NASDAQ could requirethat the minimum closing bid price exceed $1.00 for more than ten consecutivedays before determining that a company complies with its continued listingstandards. If in the future we fail to satisfy the NASDAQ Global Market’scontinued listing requirements, our common stock could be delisted from theNASDAQ Global Market, in which case we may transfer to the NASDAQ CapitalMarket, which generally has lower financial requirements for initial listingor, if we fail to meet its listing requirements, the OTC Bulletin Board. Thereare many factors that may adversely affect our minimum bid price, includingthose described throughout this section titled “Risk Factors.” Many of thesefactors are outside of our control. As a result, we may not be able to sustaincompliance with the minimum bid price rule in the long term. Any potentialdelisting of our common stock from the NASDAQ Global Market would make it moredifficult for our stockholders to sell our stock in the public market and wouldlikely result in decreased liquidity and increased volatility for our commonstock.

 

**Ifwe do not maintain an adequate level of revenue from sales of BiDil given ourlack of promotional activities, the availability of cash to fund our planneddevelopment of BiDil XR will significantly decline, our BiDil XR developmentefforts may not be successful and our business may fail.**

 

Our currentstrategy is to continue to advance the development of BiDil XR whilesimultaneously seeking strategic alternatives to divest all or substantiallyall of our current business. We will depend upon continued sales of BiDil tofund a substantial portion of our costs and expenses to develop BiDil XR. Wehave recently discontinued active promotional efforts related to BiDil, and weintend only to expend the resources necessary to maintain BiDil on the marketfor patients through normal wholesale and retail channels. As a result of ourlack of promotional efforts for BiDil, sales of BiDil may decline rapidly. Ourinability to successfully generate further revenue from BiDil sales willadversely affect our ability to seek to advance the development of BiDil XR, inwhich case we may be required to further curtail or cease our operations.

 

Factors that webelieve may materially adversely affect continued sales of BiDil, and may alsoaffect sales of BiDil XR, if it is successfully developed and commercialized,include:

 

·                  the discontinuation of our active promotional efforts related to BiDilas a result of our January 2008 restructuring plan;

 

·                  the unavailability of favorable government and third-party payorreimbursement;

 

·                  our inability to manufacture and sell BiDil at a competitive price;

 

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·                  the availability in generic form and at substantially lower prices ofthe individual components that constitute BiDil (isosorbide dinitrate, which isseparately marketed for angina, and hydralazine hydrochloride, which isseparately marketed for hypertension) and the misperception by physicians,patients and payors that these generic components are equivalent to BiDil;

 

·                  the requirement by potential large purchasers of BiDil, such ashospitals or health maintenance organizations, or by state formularies, othergovernment agencies or private payors that approve reimbursement for drugs,that the generic components of BiDil be substituted for BiDil;

 

·                  the failure of physicians, third-party payors and patients to accept aproduct intended to improve therapeutic results based on ethnicity or to acceptBiDil as being safe, effective, easy to administer and medically necessary; and

 

·                  our inability to maintain the necessary patent protection, licenses andregulatory approvals required to manufacture and sell BiDil.

 

**Ifthe third-party manufacturer of BiDil encounters delays or difficulties inproduction, we may not be able to meet demand for the product and we may losepotential revenue, which would adversely affect our financial results and ourability to execute our business plan.**

 

We do notphysically manufacture BiDil and have no plans to do so. We have engagedSchwarz Pharma under a five-year exclusive manufacturing and supply agreementsolely for the three times daily immediate release dosage formulation of BiDil.Under the supply agreement, we have the right to engage a backup manufacturerbut do not currently have any backup manufacturing agreement in place. Theterms of the supply agreement provide that it may be terminated by either us orSchwarz Pharma under specified circumstances, including a material breach ofthe supply agreement by either party, the occurrence of a payment default byus, our material impairment of the manufacturing licenses we have granted toSchwarz Pharma or a failure of Schwarz Pharma to supply conforming products. Inaddition, either party may terminate the supply agreement in the event the FDAtakes any action, the result of which is to permanently prohibit themanufacture, sale or use of the product.

 

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

 

·                  difficulties with production costs and yields;

 

·                  quality control and assurance;

 

·                  difficulties obtaining ingredients for our products;

 

·                  shortages of qualified personnel;

 

·                  compliance with strictly enforced federal, state and foreignregulations; and

 

·                  lack of capital funding.

 

If we are unableto maintain a commercially reasonable manufacturing agreement for theproduction of BiDil with Schwarz Pharma, we have no back-up manufacturingfacility and thus we would not be able to manufacture and sell BiDil untilanother facility was qualified. The number of third-party manufacturers withthe manufacturing and regulatory expertise and facilities necessary tomanufacture finished products for us on a commercial scale is limited, and itwould take a significant amount of time to arrange, qualify, and receivenecessary regulatory approval for alternative arrangements. We may not be ableto contract for alternative manufacturing on acceptable terms, if at all.

 

If we are unableto successfully contract for third-party manufacturing, or if Schwarz Pharma orany other third-party manufacturer of BiDil fails to deliver the requiredcommercial quantities of finished product on a timely basis and at commerciallyreasonable prices, we may be unable to meet the demand for our product and wemay lose potential revenues, all of which could cause the price of our commonstock to decline and would adversely affect our financial results and ourability to execute our business plan.

 

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**Werely on a single supplier for one of the two active ingredients in BiDil, andthe loss of this supplier could prevent or interrupt the sale of BiDil, whichwould materially harm our business.**

 

We rely onSumitomo Corp. for our supply of hydralazine hydrochloride, one of the twoactive ingredients in BiDil. Sumitomo is currently the only supplier which isqualified to provide hydralazine hydrochloride for the manufacture of BiDil. Wedo not 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 hydralazinehydrochloride from Sumitomo on commercially favorable terms, we will need toidentify, qualify, and obtain FDA approval of a New Drug Application, or NDA,supplement for an alternative manufacturer/supplier of hydralazinehydrochloride. If we are unable or delayed in doing this, we may be unable tocontinue to sell BiDil on commercially viable terms, if at all, or the supplyof BiDil may be interrupted. Furthermore, because Sumitomo is currently thesole qualified supplier of hydralazine hydrochloride for the manufacture ofBiDil, Sumitomo exercises control over the price of hydralazine hydrochloride thatwe purchase. Any increase in the price for hydralazine hydrochloride may reduceour gross margins and adversely affect our ability to sell BiDil at a favorableprice, unless an alternative manufacturer/supplier can be identified andqualified, a NDA supplement for the use of this manufacturer/supplier can be approvedby the FDA, and a favorable price can be negotiated.

 

**BiDilis subject to ongoing regulatory review and oversight. If we fail to complywith continuing United States regulations, we could lose our approval to marketBiDil and our business would be seriously harmed.**

 

Even afterapproval, any products we develop are subject to ongoing regulatory review andrestrictions, including the review of new clinical results and otherpost-marketing data. The FDA can propose to withdraw approval or placeadditional restrictions on indications for which we can market the product orthe manner in which we may distribute the product if new clinical data orexperience shows that a product is not safe for use under the approvedconditions of use. In addition, we are required to report any serious andunexpected adverse experiences and certain quality problems with BiDil and makeother periodic reports to the FDA.

 

The marketingclaims we are permitted to make in labeling or advertising regarding ourmarketed products must comply with FDA laws and regulations and are limited tothose specified in any FDA approval. Although we are not actively marketingBiDil, we could face liability for our previous marketing activities if the FDAbelieves that we have promoted our products for unapproved indications orotherwise failed to comply with the FDA’s promotional labeling or advertisingregulations, or guidelines regarding company support for continuing medicaleducation. Based on such allegations, the FDA could issue an untitled letter orwarning letter, or take other enforcement action including seizure of allegedlyviolative product, injunctions or civil or criminal prosecution against us andour officers or employees. In addition, the Department of Justice enforces lawsprohibiting kickbacks to healthcare providers and false claims in connectionwith government-funded reimbursement programs for drug purchases, such asMedicare and Medicaid, and any prior off-label marketing of BiDil could subjectus to civil or criminal prosecution, for which the government could seek torecover substantial monetary penalties, the imposition of restrictions on ourmarketing activities, and the exclusion of BiDil from eligibility for governmentreimbursement programs.

 

In addition, themanufacturer and the manufacturing facilities we use to produce BiDil aresubject to periodic review and inspection by the FDA. The discovery of anypreviously unknown problems with a product, manufacturer or facility may resultin restrictions on the product, manufacturer or manufacturing facility,including withdrawal of the product from the market. Certain changes to anapproved product often require prior FDA approval before the product, asmodified, may be marketed.

 

If we or our third-partymanufacturers or service providers fail to comply with applicable federal,state or foreign laws or regulations, we or they could be subject toenforcement actions which could affect our ability to develop, market and sellBiDil successfully and could harm our reputation and lead to lower acceptanceof BiDil by the market. These enforcement actions include product seizures;voluntary or mandatory recalls; patient or physician notifications, includingletters to healthcare professionals and corrective advertising; withdrawal ofproduct approvals; restrictions on, or prohibitions against, marketing ourproducts; operating restrictions; fines; restrictions on importation orexportation of our products; injunctions; debarments; civil and criminalpenalties; and suspension of review of, or refusal to approve, pendingapplications.

 

**Clinicaltesting of BiDil XR may not be successful, in which case we may be unable tocommercialize BiDil XR and the value of our business will substantiallydecline.**

 

In order to obtainregulatory approvals for the commercial sale of BiDil XR, we will be requiredto complete clinical trials in humans to demonstrate the safety and efficacy ofBiDil XR. Clinical testing is expensive, difficult to design and

 

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implement, can take many years to complete and isuncertain as to outcome. A failure of one or more of our clinical trials ofBiDil XR can occur at any stage of testing.

 

We met with theFDA in December 2007, and the agency agreed that our clinical developmentplan to conduct bioequivalence and pharmacodynamic studies comparing BiDil XRto the current commercial immediate release formulation of BiDil is acceptable.The agency indicated that such a plan could support FDA approval tocommercialize BiDil XR, if bioequivalence is demonstrated. The bioequivalencestudy design compares the pharmacokinetics of the XR formulation to thepharmacokinetics of the immediate release formulation. Pharmacokinetics refersto the manner in which the body absorbs, distributes, metabolizes and excretesthe study drug. The adequacy of the results will ultimately be determined bythe FDA during the regulatory review period. Although we are encouraged by thismeeting with the FDA, we may experience numerous unforeseen events during, oras a result of, our planned clinical trials of BiDil XR that could delay orprevent our ability to receive regulatory approval for, or commercialize, BiDilXR, including:

 

·                  conditions imposed on us by the FDA regarding the scope or design ofour clinical trials;

 

·                  difficulty obtaining or maintaining IRB approval of studies;

 

·                  problems in finalizing the formulation of BiDil XR through our plannedclinical studies;

 

·                  our clinical trials may produce negative or inconclusive results, andwe may decide, or regulators may require us, to conduct additional clinicaltrials, including testing alternative formulations of BiDil XR;

 

·                  the number of patients required for our clinical trials may be largerthan we anticipate, enrollment in our clinical trials may be slower than wecurrently anticipate, or participants may drop out of our clinical trials at ahigher rate than we anticipate, any of which would result in significant delaysand increased costs;

 

·                  our third party contractors may fail to comply with regulatoryrequirements or meet their contractual obligations to us in a timely manner;

 

·                  we might have to suspend or terminate one or more of our clinicaltrials if the participants are being exposed to unacceptable health risks;

 

·                  regulators may require that we hold, suspend or terminate clinicalresearch for various reasons, including noncompliance with regulatoryrequirements;

 

·                  the cost of our clinical trials may be greater than we anticipate;

 

·                  the supply or quality of BiDil XR or other materials necessary toconduct our clinical trials may be insufficient or inadequate; and

 

·                  the effects of BiDil XR may not be the desired effects or may includeundesirable side effects or may have other unexpected characteristics.

 

If we are requiredto conduct additional clinical trials or other testing of BiDil XR beyond thosethat we currently contemplate, if we are unable to successfully complete ourclinical trials or other testing, if the results of these trials or tests arenot positive or are only modestly positive or if there are safety concerns, wemay:

 

·                  be delayed in obtaining marketing approval for BiDil XR;

 

·                  not be able to obtain marketing approval;

 

·                  obtain approval for an indication that is not as broad as intended; or

 

·                  have the product removed from the market after obtaining marketingapproval.

 

Our productdevelopment costs will also increase if we experience delays in testing orapprovals. We do not know whether future clinical trials will begin as planned,will need to be redesigned or will be completed on schedule, if at all.

 

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Significant clinical trial delays also could shortenany periods during which we may have the exclusive right to commercialize BiDilXR, or allow our competitors to bring products to market before we do, whichcould impair our ability to commercialize BiDil XR and may harm our businessand results of operations.

 

**Wecurrently rely on a third party contract research organization to conduct ourclinical trials of BiDil XR, and we rely on other third party entities to conductcertain testing activities related to these clinical trials. These third partiesmay not perform satisfactorily, including failing to meet established deadlinesfor the completion of such trials.**

 

We do notindependently conduct clinical trials for BiDil XR. We rely on a third partycontract research organization to enroll qualified patients and conduct ourclinical trials of BiDil XR. In addition, we rely on other third party entitiesto conduct testing activities related to these clinical trials. Our reliance onthese third parties for clinical development activities reduces our controlover these activities. We are responsible for ensuring that each of ourclinical trials is conducted in accordance with the general investigationalplan and protocols for the trial. Moreover, the FDA requires us to comply withstandards, commonly referred to as Good Clinical Practices, for conducting,recording, and reporting the results of clinical trials to assure that data andreported results are credible and accurate and that the rights, integrity andconfidentiality of trial participants are protected. Our reliance on third partiesthat we do not control does not relieve us of these responsibilities andrequirements. Furthermore, any of these third parties may also haverelationships with other entities, some of which may be our competitors. If anyof these third party entities fail to successfully carry out their contractualduties, meet expected deadlines or conduct our clinical trials and relatedtesting in accordance with regulatory requirements or our stated protocols, wewill not be able to obtain, or may be delayed in obtaining, regulatoryapprovals for BiDil XR and will not be able to, or may be delayed in ourefforts to, successfully commercialize BiDil XR.

 

**Ifwe are not able to obtain required regulatory approvals, we will not be able tocommercialize BiDil XR and our ability to generate revenue will be materiallyimpaired.**

 

BiDil XR, and theactivities associated with its development and commercialization, includingtesting, manufacture, safety, efficacy, recordkeeping, labeling, storage,approval, advertising, promotion, sale and distribution, are subject tocomprehensive regulation by the FDA and other regulatory agencies in the UnitedStates and by authorities in other countries. Failure to obtain regulatoryapproval for BiDil XR will prevent us from commercializing BiDil XR.

 

Securing FDAapproval may require the submission of extensive preclinical and clinical data,information about product manufacturing processes and inspection of facilitiesand supporting information to the FDA for each therapeutic indication toestablish the product candidate’s safety and efficacy. Our future product,BiDil XR, may not be effective, may be only moderately effective or may proveto have undesirable side effects, toxicities or other characteristics that maypreclude our obtaining regulatory approval or prevent or limit commercial use.

 

The process ofobtaining regulatory approvals is expensive and often takes many years, ifapproval is obtained at all, and can vary substantially based upon the type,complexity and novelty of the product candidate involved. Changes in theregulatory approval policy during the development period, changes in or theenactment of additional statutes or regulations, or changes in regulatoryreview for each submitted product application, may cause delays in the approvalor rejection of an application. The FDA has substantial discretion in theapproval process and may refuse to accept any application or may decide thatour data are insufficient for approval and require additional preclinical,clinical or other studies. In addition, varying interpretations of the dataobtained from preclinical and clinical testing could delay, limit or prevent regulatoryapproval of a product candidate. Any regulatory approval we ultimately obtainmay be limited in scope or subject to restrictions or post-approval commitmentsthat render the product not commercially viable. If any regulatory approvalthat we obtain is delayed or is limited, we may decide not to commercializeBiDil XR after receiving the approval.

 

**Thedevelopment and future commercialization of BiDil XR may be terminated ordelayed, and the cost of development and future commercialization may increase,if third 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. In addition, contract manufacturers aresubject to ongoing periodic, unannounced inspection by the FDA andcorresponding state and foreign agencies or their designees to ensure strictcompliance with current Good Manufacturing Practices, or cGMP, and othergovernmental regulations and corresponding foreign standards. The cGMPrequirements govern, among other things,

 

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quality control of the manufacturing process anddocumentation of policies and procedures. Other than through contract, we donot have control over compliance by our contract manufacturers with theseregulations and standards. Our present or future contract manufacturers may notbe able to comply with cGMP and other FDA requirements or similar regulatoryrequirements outside the United States. Any failure by our contractmanufacturers or us to comply with applicable regulations could result insanctions being imposed on us, including fines, injunctions, civil penalties,failure of regulatory authorities to grant marketing approval of BiDil, delays,suspension or withdrawal of approvals, seizures or recalls of such productcandidate, operating restrictions, and criminal prosecutions, any of whichcould significantly and adversely affect our business. We will depend uponthese third parties to perform their obligations in a timely manner and inaccordance with applicable laws and regulations, including those related toquality control and quality assurance. To the extent that third-partymanufacturers with whom we contract fail to perform their obligations in accordancewith applicable laws and regulations, we may be adversely affected in a numberof ways, including:

 

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

 

·                  we may be delayed in submitting applications for regulatory approvals forBiDil XR; and

 

·                  even if we successfully commercialize BiDil XR, we may be required tocease distribution and/or recall some or all batches of the product and we maynot be able to meet commercial demands for our products or achieveprofitability.

 

**Currently,we are engaging 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 arrangements withthird parties.**

 

At the end of thefirst quarter of 2006, we scaled back our research and development staff in arestructuring of our company and have limited our internal research anddevelopment activities solely to the continued development of BiDil XR. We arecurrently seeking out-licensing opportunities for our other potential productcandidates based on our proprietary nitric oxide technology. The application ofour proprietary nitric oxide technology is unproven in humans and, as a result,we may not be able to successfully out-license any products based on thistechnology. Our potential product candidates include nitric oxide enhancementsof existing drugs; in these cases, we have sought to modify compounds whosechemical and pharmacological profiles are well-documented and understood. Manyof our potential product candidates, however, are new molecules with chemicaland pharmacological profiles that differ from that of the existing drugs. Thesecompounds may not demonstrate in patients the chemical and pharmacologicalproperties shown in laboratory studies, and they may interact with humanbiological systems in unforeseen, ineffective or harmful ways. In addition, itis possible that existing drugs or newly-discovered drugs may not benefit fromthe application of our nitric oxide technology. We may not be able to secureout-licensing arrangements for these potential product candidates. Even if weare successful in entering into out-licensing arrangements with respect to ourpotential product candidates, we have no assurance that we will be able tosecure such arrangements on terms completely favorable to us. If ourout-licensing arrangements include unfavorable financial terms, our ability togenerate revenue from our technology portfolio will be severely limited.

 

Additional factorsthat may affect the success of our potential future out-licensing arrangementsinclude the following:

 

·                  our future licensing partners may be pursuing alternative technologiesor developing alternative product candidates, either on their own or incollaboration with others, that may be competitive with the product candidatewhich they have licensed from us and which could affect their commitment to ourprogram;

 

·                  future reductions in marketing or sales efforts or a suspension ofmarketing or sales of our products by our licensing partners would reduce ourrevenues, which could be based on a percentage of net sales by the licensee;

 

·                  our future licensing partners may terminate their agreements with us,which could make it difficult for us to attract new licensees or adverselyaffect how we are perceived in the business and financial communities; and

 

·                  our future licensing partners may pursue higher-priority programs orchange the focus of their development programs, which could affect a licensee’scommitment to us.

 

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As a result of theforegoing factors, our potential strategic licensees may not be successful indeveloping and commercializing any products based on our proprietary nitricoxide technology. Any failure of such potential licensees at any stage of thedevelopment or commercialization process with respect to our potential productcandidates would significantly reduce the possibility that we would realize anyfuture revenue from our technology portfolio.

 

**RisksRelating to our Intellectual Property Rights**

 

**Ourpatent protection for BiDil, the individual components of which are availablein generic form, is limited, and we may be subject to generic substitution orcompetition and resulting pricing pressure.**

 

We have nocomposition of matter patent covering BiDil, our product for the treatment ofheart failure in self-identified black patients as an adjunct to current standardtherapy. BiDil is a fixed-dose combination of two individual components,isosorbide dinitrate and hydralazine hydrochloride, both of which are availablein generic form, which are approved and separately marketed, in dosages similarto those we include in BiDil, for indications other than heart failure, atprices below the prices we are charging for BiDil. We have two issuedmethod-of-use patents that expire in 2020. 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 the combinationof isosorbide dinitrate and hydralazine hydrochloride in certain dosage amountsfor reducing mortality associated with heart failure in a black patient. Ourmethod of use patent that covered the use of the combination of isosorbidedinitrate and hydralazine hydrochloride to reduce the incidence of mortalityassociated with chronic congestive heart failure expired in accordance with itsterms in April 2007.

 

We may not be ableto enforce our method-of-use patents to prevent physicians from prescribingisosorbide dinitrate and hydralazine hydrochloride separately for the treatmentof heart failure in black patients, even though neither drug is approved forsuch use. We also may not be able to enforce these method-of-use patents toprevent hospitals and pharmacies from supplying such patients with theseindividual components separately in lieu of BiDil.

 

Other factors mayalso adversely affect our patent protection for BiDil. If we are successful inmarketing BiDil, manufacturers of generic drugs will have an incentive tochallenge our patent position. The combination therapy of isosorbide dinitrateand hydralazine hydrochloride for use in heart failure was developed throughlengthy, publicly-sponsored clinical trials conducted during the 1980s, priorto the filing of the patent application that resulted in the 2007 patent. TheU.S. Patent and Trademark Office, or U.S. patent office, considered publishedreports on these clinical trials and concluded that they did not constituteprior art that would prevent the issuance of the 2007 patent. The U.S. patentoffice also considered the question of whether the 2007 patent constitutedprior art with respect to the 2020 patents, and determined that the claims ofthe 2020 patents were non-obvious and patentable. A court considering thevalidity of the 2020 patents with respect to questions of prior art might bepresented with other alleged prior art or might reach conclusions differentthan those reached by the U.S. patent office. If the 2020 patents were to beinvalidated or if physicians were to prescribe isosorbide dinitrate andhydralazine hydrochloride separately for heart failure in black patients, ourBiDil revenue could be significantly reduced, we could fail to recover the costof developing BiDil and BiDil might not be a viable commercial product.

 

**Ifwe are not able to obtain and enforce patent protection for our discoveries,our ability to secure out-licensing arrangements with respect to our potentialproduct candidates will be harmed, and we may not be able to operate ourbusiness profitably.**

 

Our successdepends, in part, on our ability to protect proprietary methods andtechnologies that we developed under the patent and other intellectual propertylaws of the United States and other countries, in order to prevent others fromusing our inventions and proprietary information. Because certain United Statespatent applications are confidential until patents issue, such as applicationsfiled prior to November 29, 2000, or applications filed after such date whichwill not be filed in foreign countries, third parties may have filed patentapplications for technology covered by our pending patent applications withoutour being aware of those applications, and our patent applications may not havepriority over patent applications of others.

 

The process ofseeking patent protection for our discoveries is expensive and time consuming,and we may not be able to prosecute all necessary or desirable patentapplications or maintain all issued patents at a reasonable cost. Despite ourefforts to protect our proprietary rights, unauthorized parties may be able toobtain and use information that we regard as

 

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proprietary. The mere issuance of a patent does notguarantee that it is valid or enforceable; even if we have obtained patents,they may not be valid or enforceable against third parties.

 

The issued patentsand patent applications for our potential product candidates and nitric oxidetechnology include claims with respect to both the composition of specificproducts or compounds and specific methods of using these products or compoundsin therapeutic areas. In some cases, like BiDil, our only patent protection iswith respect to the method of using a product or compound. Method-of-usepatents may provide less protection for our product candidates and products. Ifanother company gains FDA approval for an indication separate from the oneclaimed in our method-of-use patents, physicians may be able to prescribe thatproduct for use in the approved indication. In addition, physicians mayprescribe a product for which we or our potential strategic partners haveobtained approval for an unapproved indication for that product. As a practicalmatter, we or our potential strategic partners may not be able to enforce ourmethod-of-use patents against physicians prescribing products for suchoff-label use. Off-label use and any resulting off-label sales could make itmore difficult to obtain the price we or our potential strategic partners wouldotherwise wish to achieve for, or to successfully commercialize, our potentialproducts. In addition, in those situations where we have only method-of-usepatent coverage for a product candidate, it may be more difficult to find apharmaceutical company partner to license or support development of ourpotential product candidates.

 

Our pending patentapplications may not result in issued patents. The patent position ofpharmaceutical or biotechnology companies, including ours, is generally uncertainand involves complex legal and factual considerations. The standards which theU.S. patent office and its foreign counterparts use to grant patents are notalways applied predictably or uniformly and can change over time. There is alsono uniform, worldwide policy regarding the subject matter and scope of claimsgranted or allowable in pharmaceutical or biotechnology patents. Accordingly,we do not know the degree of future protection for our proprietary rights orthe breadth of claims allowed in any patents issued to us or to others.

 

We also rely ontrade secrets, know-how and technology, which are not protected by patents, tomaintain our competitive position. If any trade secret, know-how or othertechnology not protected by a patent were to be disclosed to or independentlydeveloped by a competitor, our business and financial condition could bematerially adversely affected.

 

**Ifwe become involved in patent litigation or other proceedings to enforce ourpatent rights, we would incur substantial costs and expenses, as well assubstantial liability for damages, and/or we, or our strategic partners, couldbe required to stop product development and commercialization efforts.**

 

A third party maysue us or our potential strategic partners for infringing on its patent rights.Likewise, we or our potential strategic partners may need to resort tolitigation to enforce a patent issued to us or to seek a declaratory judgmenton the scope and validity of third-party proprietary rights. The cost to us orour potential strategic partners of any litigation or other proceedingsrelating to intellectual property rights, even if resolved in our or ourpartner’s favor, could be substantial, and the litigation would divertmanagement’s efforts. Some of our competitors may be able to sustain the costsof complex patent litigation more effectively than we can because they havesubstantially greater resources. In addition, our strategy of providing nitricoxide-enhancing versions of existing products could lead to more patentlitigation due to the fact that the markets for these existing products arevery large and competitive. Uncertainties resulting from litigation could limitour ability to continue our operations.

 

If a third partyis able to successfully claim that the development or use by us or ourpotential strategic partners of proprietary technologies infringes upon theirintellectual property rights, we or our potential strategic partners might beforced to pay damages, potentially including treble damages, if we or ourpotential strategic partners are found to have willfully infringed on suchparties’ patent rights. In addition to any damages we or our potentialstrategic partners might have to pay, a court could require us or our potentialstrategic partners to stop the infringing activity or obtain a license on termsthat are unfavorable to us. In addition, some licenses may be non-exclusive,and therefore our competitors may have access to the same technology licensedto us. If we or our potential strategic partners fail to obtain a requiredlicense or are unable to design around a patent, we or our potential strategicpartners may be unable to effectively market some of our technology and productcandidates, which could limit our ability to generate revenues or achieveprofitability and possibly prevent us from generating sufficient revenue tosustain our operations.

 

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**Wein-license a significant portion of our principal proprietary technologies, andif we fail to comply with our obligations under any of the related agreements,we could lose license rights that are necessary to commercializing BiDil andout-licensing our other product candidates.**

 

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

 

**RisksRelating to our Industry**

 

**Wecould be negatively impacted by the application or enforcement of federal andstate fraud and abuse laws, including anti-kickback laws and other federal andstate anti-referral laws.**

 

We are subject tovarious federal and state laws pertaining to healthcare fraud and abuse,including anti-kickback laws and physician self-referral laws. Violations ofthese laws are punishable by criminal and civil sanctions, including, in someinstances, imprisonment and exclusion from participation in federal and statehealthcare programs, including the Medicare, Medicaid and VeteransAdministration health programs. Because of the far-reaching nature of theselaws, we may be required to alter or discontinue one or more of our practicesto be in compliance with these laws. Healthcare fraud and abuse regulations arecomplex, and even minor irregularities can potentially give rise to claims thata statute or prohibition has been violated. Any violations of these laws, orany action against us for violation of these laws, even if we successfullydefend against it, could result in a material adverse effect on our business,financial condition and results of operations. If there is a change in law,regulation or administrative or judicial interpretations, we may have to changeor discontinue our business practices or our existing business practices couldbe challenged as unlawful, which could have a material adverse effect on our business,financial condition and results of operations.

 

In addition, wecould become subject to false claims litigation under federal statutes, whichcan lead to treble damages based on the reimbursements by federal healthcareprograms, civil money penalties (including penalties levied on a per falseclaim basis), restitution, criminal fines and imprisonment, and exclusion fromparticipation in Medicare, Medicaid and other federal and state healthcareprograms. These false claims statutes include the False Claims Act, whichallows any person to bring suit on behalf of the federal government allegingthe submission of false or fraudulent claims, or causing to present such falseor fraudulent claims, under federal programs or contracts claims or other violationsof the statute and to share in any amounts paid by the entity to the governmentin fines or settlement. These suits against pharmaceutical and biotechnologycompanies have increased significantly in recent years and have increased therisk that a healthcare company will have to defend a false claim action, payfines or restitution, or be excluded from the Medicare, Medicaid or otherfederal and state healthcare programs as a result of an investigation arisingout of such action. It is possible that we could become subject to suchlitigation and, if we are not successful in defending against it, suchlitigation would have a material adverse effect on our business, financialcondition and results of operations. In addition, the cost of defending claims orallegations under the False Claims Act, even if successful, would also have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**Weface significant competition, which may result in others commercializingproducts more successfully than ours.**

 

The pharmaceuticalindustry is highly competitive and characterized by rapid and significanttechnological change. Moreover, because we have discontinued all promotionalactivities for BiDil and we have ceased all research and development related toour nitric oxide-based product candidates, our ability to effectively competein the marketplace has been significantly adversely affected. Our principalcompetitors are large, multinational pharmaceutical companies that havesubstantially greater financial and other resources than we do and areconducting extensive research and development activities on technologies andproduct candidates similar to or competitive with ours. Many of our competitorsare more experienced than we are in pharmaceutical development andcommercialization, obtaining regulatory approvals and product marketing andmanufacturing. As a result, our competitors may:

 

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·                  develop and commercialize products that render BiDil and/or BiDil XR,if successfully developed and commercialized, obsolete or non-competitive orthat cause BiDil to be less desirable as a result of patent or non-patentexclusivity;

 

·                  develop product candidates and market products that are less expensiveor more effective than BiDil;

 

·                  initiate or withstand substantial price competition more successfullythan we can;

 

·                  have greater success in recruiting skilled scientific workers from thelimited pool of available talent;

 

·                  more effectively negotiate third-party licenses and strategicrelationships; and

 

·                  take advantage of product acquisition or other opportunities morereadily than we can.

 

There are a numberof companies currently marketing and selling products to treat heart failure inthe general population that will compete with BiDil. These includeGlaxoSmithKline, plc, which currently markets Coreg®, Merck & Co., Inc.,which currently markets Vasotec® and Astra Zeneca, plc, whichcurrently markets Toprol XL®. We also compete on the basis of theavailability in generic form and at substantially lower prices of theindividual components that constitute BiDil (isosorbide dinitrate, which isseparately marketed for angina, and hydralazine hydrochloride, which isseparately marketed for hypertension). Although these generic components arenot bioequivalent to BiDil, physicians have, and may in the future, prescribethem in lieu of prescribing BiDil.

 

We also facecompetition from other pharmaceutical companies seeking to develop drugs usingnitric oxide technology. For example, we are aware of at least seven companiesworking in areas of nitric oxide based therapeutics which may overlap areas inwhich we have previously engaged in discovery research activities. Thesecompanies are: Angiogenix, Inc., Vernalis plc, NicOx S.A.,Amulet Pharmaceuticals, Inc., RenoPharm, Vasopharm BIOTECH GmbH andN30 Pharmaceuticals, LLC.

 

We expect to facesimilar competitive factors with respect to BiDil XR to the extent that BiDilXR is successfully developed and commercialized.

 

**Wemay be exposed to product liability claims and may not be able to obtain ormaintain adequate product liability insurance.**

 

Our businessexposes us to the risk of product liability claims that is inherent in theclinical testing, manufacturing and marketing of human therapeutic products.Our clinical trial and commercial product liability insurance is subject todeductibles and coverage limitations. We may not be able to obtain or maintaininsurance on acceptable terms, if at all. Moreover, any insurance that we doobtain may not provide adequate protection against potential liabilities, andour capital resources could be depleted as a result.

 

**RisksRelating to our Common Stock**

 

**Theprice of our common stock is likely to continue to be 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 particular companies. Inparticular, the market price of our common stock, like that of the securitiesof other biopharmaceutical companies, has been and may continue to be highlyvolatile. During the period from January 1, 2006 to May 2, 2008, ourstock price has ranged from a low of $0.80 per share on January 22, 2008to a high of $14.90 per share on January 9, 2006. The following factors,among others, may affect the price of our common stock:

 

·                  fluctuations in our financial results, including with respect to salesof BiDil;

 

·                  announcements concerning fundamental or material corporatetransactions, restructuring or the like;

 

·                  general market conditions;

 

·                  announcements of technological innovations or new commercial productsby our competitors;

 

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·                  announcements of actual or potential results relating to our BiDil XRdevelopment program;

 

·                  governmental regulations and regulatory developments in both the U.S.and foreign countries affecting us or our competitors;

 

·                  disputes relating to patents or other proprietary rights affecting us,our potential strategic partners or our competitors;

 

·                  public concern as to the safety of products developed by us, ourpotential strategic partners or other biotechnology and pharmaceuticalcompanies;

 

·                  fluctuations in price and volume in the stock market in general, or inthe trading of the stock of biopharmaceutical and biotechnology companies inparticular, that are unrelated to our operating performance;

 

·                  issuances of securities in equity, debt or other financings;

 

·                  sales of common stock by existing stockholders; and

 

·                  the perception that such issuances or sales could occur.

 

**Insidershave substantial control over us and could delay or prevent a change incorporate control.**

 

As of May 2,2008, our directors and executive officers, together with their affiliates,owned, in the aggregate, approximately 33% of our outstanding common stock. Asa result, these stockholders, if acting together, may have the ability todetermine the outcome of matters submitted to our stockholders for approval,including the election and removal of directors and any merger, consolidationor sale of all or substantially all of our assets. In addition, these persons,if acting together, will have the ability to control the management and affairsof our company. Accordingly, this concentration of ownership may harm themarket price of our common stock by:

 

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

 

·                  impeding a merger, consolidation, takeover or other businesscombination involving our company; or

 

·                  discouraging a potential acquirer from making a tender offer orotherwise attempting to obtain control of our company.

 

**Provisionsin our charter documents and under Delaware law may prevent or frustrate attemptsby stockholders to change current management and hinder efforts to acquire acontrolling interest in our company.**

 

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

 

·                  a prohibition on stockholder action through written consent;

 

·                  a requirement that special meetings of stockholders be called only by amajority of the board of directors, the chairman of the board or the chiefexecutive officer;

 

·                  advance notice requirements for stockholder proposals and nominations;

 

·                  limitations on the ability of stockholders to amend, alter or repealour certificate of incorporation or bylaws; and

 

·                  the authority of the board of directors to issue preferred stock withsuch terms as the board of directors may determine.

 

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

 

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

 

Sales of asubstantial number of shares of our common stock in the public market couldoccur at any time. These sales, or the perception in the market that theholders of a large number of shares intend to sell shares, could reduce themarket price of our common stock. As of May 2, 2008, there were 46,098,901shares of common stock outstanding. Substantially all of these shares may alsobe resold in the public market at any time. In addition, we have a significantnumber of shares that are subject to outstanding options and restricted stockawards. The sale of the common stock underlying these options and pursuant tothese restricted stock awards after such time as the options and restrictedstock awards have vested and become exercisable or free from forfeiture, as thecase may be, could cause a further decline in our stock price. These sales alsomight make it difficult for us to sell equity securities in the future at atime and at a price that we deem appropriate.

 

**Wemay incur significant costs and suffer management distraction and reputationaldamage from class action litigation.**

 

Our stock pricehas been, and is likely to continue to be, volatile. When the market price of acompany’s stock is volatile, holders of that company’s stock may bringsecurities class action litigation against the company that issued the stock.If any of our stockholders were to bring a lawsuit of this type against us,even if the lawsuit was without merit, we could incur substantial costsdefending the lawsuit.

 

**Item 2.****    Unregistered Sales of EquitySecurities and Use of Proceeds**

 

The following table sets forth information concerning the purchase of ourequity securities by us during the first quarter of 2008:

 
| **Period**                                           | ** ** | **Total Number of  Shares Purchased   (1)** | ** ** | **Average  Price Per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or   Programs (2)** | ** ** | **Maximum Number  of Shares that May  Yet be Purchased  Under the Plans or   Programs** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1,  2008 – January 31, 2008   |       | 38,107                                                          |       | $                                  | 0.92       |                                                                                                                                  | —     |                                                                                                                                 | —     |   |
| February 1,  2008 – February 29, 2008 |       | 6,679                                                           |       | $                                  | 0.94       |                                                                                                                                  | —     |                                                                                                                                 | —     |   |
| March 1,  2008 – March 31, 2008       |       | 33,036                                                          |       | $                                  | 1.17       |                                                                                                                                  | —     |                                                                                                                                 | —     |   |
| Total                                                |       | 77,822                                                          |       |                               |       | —                                                                                                                                |       | —                                                                                                                               |       |

 

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(1)  The amount listedin this column represents shares of common stock surrendered by certainemployees to us in satisfaction of tax withholding obligations incurred uponthe lapse of restrictions on shares of common stock during the period inaccordance with the terms of restricted stock agreements previously enteredinto between us and certain employees.

 

(2) We currently have no plan or programto repurchase our equity securities, aside from additional shares that will besurrendered to us in satisfaction of tax withholding obligations incurred uponthe future lapse of restrictions on shares of common stock in accordance withthe terms of restricted stock agreements entered into between us and certainemployees.

 

**Item6.****    Exhibits**

 

See the Exhibit Index on the page immediatelypreceding the exhibits for a list of exhibits filed as part of thisQuarterly Report on Form 10-Q, which Exhibit Index is incorporatedherein by this reference.

 

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**SIGNATURES**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                    | NITROMED, INC. |
|-------------------------|---------------------|
|                    |                |   |
|                    |                |   |
|                    | By:                 | /s/  KENNETH M. BATE |
|                    |                | Kenneth  M. Bate |
|                    |                | President,  Chief Executive Officer and Interim Chief Financial   Officer |
| * *                | * *            | *(Principal Executive Officer and Principal Financial  Officer)* |
| Date:  May 7, 2008 |                |   |

 

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**EXHIBIT INDEX**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                               |
|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1               |       | Retention Agreement, dated as of January 15,  2008, 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 17, 2008 and incorporated herein by  reference.                                       |
| 10.2               |       | Retention Agreement, dated as of January 15,  2008, between NitroMed, Inc. and James G. Ham, III, filed as an  exhibit to NitroMed’s Current Report on Form 8-K (File  No. 000-50439) filed on January 17, 2008 and incorporated herein by  reference.                                |
| 10.3               |       | Retention and Separation Agreement, dated as of  January 17, 2008, between NitroMed, Inc. and Jane A. Kramer,  filed as an exhibit to NitroMed’s Current Report on Form 8-K (File  No. 000-50439) filed on January 17, 2008 and incorporated herein by  reference.                    |
| 10.4               |       | Separation Agreement, dated as of February 21,  2008, between NitroMed, Inc. and Gerald Bruce, filed as an  exhibit to NitroMed’s Annual Report on Form 10-K for the year ended  December 31, 2007 (File No. 000-50439) filed on March 6, 2008  and incorporated herein by reference. |
| 31.1               |       | Certification of the Chief Executive Officer and  Interim 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 and  Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                        |

** **

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