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**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 June 30,  2008** |
|                                                   |   |   |
| **Or**                                                 |
|                                                   |   |   |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the Transition Period from           to**

 

**Commission File Number 000-50439**

 

**NitroMed, Inc.**

(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 check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

 

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 July 31, 2008,the registrant had 46,086,825 shares of Common Stock, $0.01 par value pershare, outstanding.

 

 

 

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NITROMED, INC.

 

FORM 10-Q

 

FOR THE QUARTERLYPERIOD ENDED JUNE 30, 2008

 

**TABLE OFCONTENTS**

 
| PART I.       | FINANCIAL  INFORMATION                                                                             |   |
|--------------------|----------------------------------------------------------------------------------------------------|--------|
| Item 1.            | Financial  Statements (unaudited)                                                                  |   |
|               | Condensed Balance Sheets as of June 30, 2008 and  December 31, 2007                      |   |
|               | Condensed Statements of Operations for the three and  six months ended June 30, 2008 and 2007 |   |
|               | Condensed Statements of Cash Flows for the six months  ended June 30, 2008 and 2007           |   |
|               | Notes To Unaudited Financial Statements                                                            |   |
| Item 2.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations        |   |
| Item 3.            | Quantitative  and Qualitative Disclosures About Market Risk                                        |   |
| Item 4.            | Controls and  Procedures                                                                           |   |
| PART II.      | OTHER INFORMATION                                                                                  |   |
| Item 1A.           | Risk  Factors                                                                                      |   |
| Item 2.            | Unregistered  Sales of Equity Securities and Use of Proceeds                                       |   |
| Item 4.            | Submission  of Matters to a Vote of Security Holders                                               |   |
| Item 6.            | Exhibits                                                                                           |   |
| SIGNATURES         |                                                                                               |
| EXHIBIT INDEX |                                                                                               |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.****           Financial Statements(unaudited)**

 

**NITROMED, INC.CONDENSED BALANCE SHEETS**

**(in thousands, except parvalue amounts)**

 
| ** **                                                                                                                                                                | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                           |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                 |       | $                       | 11,904     |                        | $          | 8,167 |   |
| Short-term marketable securities                                                                                                                                          |       | 6,849                   |       | 23,233                      |       |
| Accounts receivable                                                                                                                                                       |       | 1,796                   |       | 1,929                       |       |
| Inventories                                                                                                                                                               |       | 1,535                   |       | 1,401                       |       |
| Prepaid expenses and other current assets                                                                                                                                 |       | 193                     |       | 334                         |       |
| Total current assets                                                                                                                                                      |       | 22,277                  |       | 35,064                      |       |
| Property and equipment, net                                                                                                                                               |       | 167                     |       | 312                         |       |
| Long-term marketable securities                                                                                                                                           |       | 1,598                   |       | —                      |       |
| Restricted cash                                                                                                                                                           |       | —                  |       | 191                         |       |
|                                                                                                                                                                      |       |                    |       |                        |       |
| Total assets                                                                                                                                                              |       | $                       | 24,042     |                        | $          | 35,567 |   |
|                                                                                                                                                                      |       |                    |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                             | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                      |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                          |       | $                       | 1,132      |                        | $          | 3,235 |   |
| Accrued expenses                                                                                                                                                          |       | 3,616                   |       | 6,379                       |       |
| Accrued restructuring                                                                                                                                                     |       | 137                     |       | —                      |       |
| Current portion of long-term debt                                                                                                                                         |       | —                  |       | 3,728                       |       |
|                                                                                                                                                                      |       |                    |       |                        |       |
| Total current liabilities                                                                                                                                                 |       | 4,885                   |       | 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; 46,042 and 45,381 shares issued and outstanding at  June 30, 2008 and December 31, 2007, respectively |       | 460                     |       | 454                         |       |
| Additional paid-in capital                                                                                                                                                |       | 368,264                 |       | 367,125                     |       |
| Accumulated deficit                                                                                                                                                       |       | (349,584                | )          | (345,382                    | )          |
| Accumulated other comprehensive income                                                                                                                                    |       | 17                      |       | 28                          |       |
| Total stockholders’ equity                                                                                                                                           |       | 19,157                  |       | 22,225                      |       |
| Total liabilities and stockholders’ equity                                                                                                                           |       | $                       | 24,042     |                        | $          | 35,567 |   |

 

Seeaccompanying notes.

 

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**NITROMED, INC.CONDENSED STATEMENTS OF OPERATIONS**

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

 
| ** **                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                             |       |                                            |       |                                          |       |   |   |   |   |
| Product sales                                         |       | $                                               | 3,831      |                                          | $          | 3,715 |   | $ | 7,764 |   | $ | 7,283 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Cost and operating expenses:                          |       |                                            |       |                                          |       |   |   |   |   |
| Cost of product sales                                 |       | 536                                             |       | 637                                           |       | 1,515 |   | 1,591 |   |
| Research and development (1)                          |       | 509                                             |       | 2,931                                         |       | 2,139 |   | 5,938 |   |
| Sales, general and administrative (1)                 |       | 1,906                                           |       | 6,634                                         |       | 5,904 |   | 15,582 |   |
| Restructuring charge                                  |       | —                                          |       | —                                        |       | 2,725 |   | 1,004 |   |
| Total cost and operating expenses                     |       | 2,951                                           |       | 10,202                                        |       | 12,283 |   | 24,115 |   |
| Income (loss) from operations                         |       | 880                                             |       | (6,487                                        | )          | (4,519 | ) | (16,832 | ) |
| Non-operating income:                                 |       |                                            |       |                                          |       |   |   |   |   |
| Interest expense                                      |       | (18                                             | )          | (195                                          | )          | (86 | ) | (433 | ) |
| Interest income                                       |       | 156                                             |       | 446                                           |       | 455 |   | 915 |   |
| Other expense                                         |       | (36                                             | )          | —                                        |       | (52 | ) | — |   |
| Total non-operating income                            |       | 102                                             |       | 251                                           |       | 317 |   | 482 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss)                                     |       | $                                               | 982        |                                          | $          | (6,236 | ) | $ | (4,202 | ) | $ | (16,350 | ) |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted net income (loss) per  common share |       | $                                               | 0.02       |                                          | $          | (0.16 | ) | $ | (0.09 | ) | $ | (0.42 | ) |
| Weighted average shares outstanding:                  |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                 |       | 46,029                                          |       | 40,100                                        |       | 45,910 |   | 38,689 |   |
| Diluted                                               |       | 46,033                                          |       | 40,100                                        |       | 45,910 |   | 38,689 |   |

 

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(1) Includes stock-based compensation expense asfollows:

 
| Research and development          |   | $ | (179 | )      | $ | 561 |   | $ | 93  |   | $ | 1,085 |   |
|-----------------------------------|--------|---|------|--------|---|-----|--------|---|-----|--------|---|-------|--------|
| Sales, general and administrative |   | $ | 127  |   | $ | 869 |   | $ | 789 |   | $ | 2,316 |   |

 

See accompanying notes.

 

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**NITROMED, INC.CONDENSED STATEMENTS OF CASH FLOWS**

**(inthousands) (unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| **Operating activities**                                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                             | (4,202     | ) | $ | (16,350 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                |       | 59                                            |       | 209 |   |
| Non-cash restructuring charge                                                |       | 72                                            |       | — |   |
| Stock-based compensation expense                                             |       | 882                                           |       | 3,401 |   |
| Impairment charge on auction rate  securities                                |       | 52                                            |       | — |   |
| Changes in operating assets and  liabilities:                                |       |                                          |       |   |   |
| Accounts receivable                                                          |       | 133                                           |       | 2 |   |
| Inventories                                                                  |       | (134                                          | )          | (140 | ) |
| Prepaid expenses and other current assets                                    |       | 141                                           |       | (83 | ) |
| Deferred revenue                                                             |       | —                                        |       | (206 | ) |
| Accounts payable and accrued expenses                                        |       | (4,866                                        | )          | (501 | ) |
| Accrued restructuring charge                                                 |       | 137                                           |       | (299 | ) |
| Net cash used in operating activities                                        |       | (7,726                                        | )          | (13,967 | ) |
| **Investing activities**                                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                           |       | —                                        |       | (144 | ) |
| Proceeds from sale of equipment                                              |       | 14                                            |       | 528 |   |
| Sales of marketable securities                                               |       | 23,284                                        |       | 30,871 |   |
| Purchases of marketable securities                                           |       | (8,561                                        | )          | (37,250 | ) |
| Other assets                                                                 |       | 191                                           |       | 612 |   |
| Net cash provided by investing activities                                    |       | 14,928                                        |       | (5,383 | ) |
| **Financing activities**                                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net proceeds from sale of common stock                                       |       | —                                        |       | 18,283 |   |
| Principal payments on long-term debt                                         |       | (3,728                                        | )          | (3,376 | ) |
| Proceeds from employee stock plans                                           |       | 263                                           |       | 341 |   |
| Net cash used in financing activities                                        |       | (3,465                                        | )          | 15,248 |   |
| Net change in cash and cash equivalents                                      |       | 3,737                                         |       | (4,102 | ) |
| Cash and cash equivalents at beginning of  period                            |       | 8,167                                         |       | 21,074 |   |
| Cash and cash equivalents at end of period                                   |       | $                                             | 11,904     |   | $ | 16,972 |   |

 

Seeaccompanying notes.

 

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**NITROMED, INC.**

**NOTESTO UNAUDITED FINANCIAL STATEMENTS**

**JUNE30, 2008**

 

### **(1)****           Operations and 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 required by GAAP forcomplete financial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for the fairpresentation of the results for the interim periods have been included. Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Interim results are notnecessarily indicative of results to be expected for the entire fiscal yearending December 31, 2008. These unaudited financial statements should beread in conjunction with the Company’s latest annual audited financial statementsand related notes thereto included in the Company’s Annual Report on Form 10-K forthe fiscal year ended December 31, 2007, which was filed with theSecurities and Exchange Commission (“SEC”) on March 6, 2008.

 

NitroMed is the maker of BiDil®.Since its inception, the Company has funded its operations mainly through thesale of equity securities, debt financings, license fees, research anddevelopment funding, milestone payments from its collaborative partners, andmore recently, sales of BiDil. In June 2005, the U.S. Food and DrugAdministration (“FDA”) approved BiDil 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 Company commercially launched BiDil in July 2005,and has since generated approximately $39.6 million in product sales,including product sales of $3.8 million during the second quarter of 2008.

 

Based upon the Company’s determination thatthe successful commercialization of BiDil requires a magnitude of resourcesthat it cannot currently allocate to the program, as well as the Company’splans to conserve cash in order to pursue the development of an extendedrelease formulation of BiDil, known as BiDil XRTM, in January 2008 theCompany discontinued active promotional efforts related to BiDil. The Companyconcurrently 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 operations and product development programs for itsshareholders. The Company has engaged an investment bank to advise it inconsidering these potential strategic alternatives, which may include the sale,license or divestiture of certain of its assets, including its BiDil business,the assets relating to BiDil XR, and/or its nitric oxide technologies, the saleor merger of the Company, or other similar strategic transactions.

 

Although the Company has discontinued activepromotional efforts related to BiDil, the Company continues to manufacture andsell BiDil and maintain the product on the market for patients through normalwholesale and retail channels. The Company is also conducting limitedadvertising in select medical publications, and utilizes a third-partymarketing firm to contact healthcare professionals on the Company’s behalf, ineach case in an effort to maintain a limited market presence for BiDil. TheCompany also expects to incur additional expenses related to the ongoingdevelopment of BiDil XR. If and for so long as the Company continues itscurrent business and operations, the Company will require substantialadditional funds, which it expects to generate through a combination of BiDilsales and one or more strategic transactions. The Company may not be able tosuccessfully consummate a strategic transaction, and additional financing maynot be available to the Company on acceptable terms, if at all. If the Companyis unable to obtain funding on a timely basis, whether through a strategicdivestiture, financing or borrowing arrangements or other capital-raisingtransaction, the Company may not be able to support continued prescriptions forBiDil, may be compelled to significantly curtail or delay its developmentefforts with respect to BiDil XR, and the Company could also be required tolimit, scale back or cease its operations. Currently, the Company believes thatits existing sources of liquidity and the cash expected to be generated fromfuture sales of BiDil, together with the significant reduction in expendituresas a result of its January 2008 restructuring, will be sufficient to fundthe Company’s operations for at least the next twelve months.

 

### **(2)****           RevenueRecognition**

###  

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

 

*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 

 

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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 as the 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 sales 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 June 30, 2008 and December 31, 2007, theCompany’s product return reserve was $0.9 million and $0.9 million,respectively. For the three months ended June 30, 2008 and 2007, theCompany recorded a reduction to revenue for product returns of $0.3 million and$0.3 million, respectively. For the six months ended June 30, 2008 and2007, the Company recorded a reduction to revenue for product returns of $0.7million and $0.6 million, respectively. The return rate and associated reserve are evaluated on a quarterlybasis, assessing each of the factors described above, and adjusted accordingly.In developing a reasonable estimate for the reserve for product returns, theCompany considers the factors in paragraph 8 of Statement of FinancialAccounting Standards No. 48, *Revenue Recognition When aRight of Return Exists*. Based on the factors noted above, theCompany believes its estimate of product returns is reasonable, and changes, ifany, from this estimate would not have a material impact to the Company’sfinancial 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 June 30, 2008 and 2007, the Company recorded salesdiscounts, rebates and other allowances of $1.6 million and $1.4 million,respectively. For the six month periods ended June 30, 2008 and 2007, theCompany recorded sales discounts, rebates and other allowances of $3.0 millionand $2.5 million, respectively.

 

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

 

In September 2006, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standards No. 157,*Fair Value Measurements* (“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles and expandsdisclosures about fair value measurements. SFAS 157 codifies the definition offair value as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date, clarifies the principle that fair value should be basedon the assumptions market participants would use when pricing the asset orliability and establishes a fair value hierarchy that prioritizes theinformation used to develop those assumptions. SFAS 157 is effective for fiscalyears beginning after November 15, 2007 and interim periods within thoseyears. The Company adopted SFAS 157 on January 1, 2008. The three levelsof the fair value hierarchy under SFAS 157 are described below:

 

·**                 **Level1 – Observable inputs such as quoted prices in active markets that areaccessible at the measurement date for identical assets or liabilities. Thefair value hierarchy gives the highest priority to Level 1 inputs.

 

·**                 **Level2 - Other inputs that are observable, directly or indirectly, such asquoted prices for similar assets and liabilities or market corroborated inputs.

 

·**                 **Level 3- 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.

 

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In determining fair value, the Company utilizes valuation techniquesthat maximize the use of observable inputs and minimize the use of unobservableinputs to the extent possible as well as considers counterparty credit risk inits assessment of fair value.

 

The following tables set forth by levelwithin the fair value hierarchy a summary of the fair market value ofavailable-for-sale securities classified as cash equivalents and marketablesecurities the Company held at June 30, 2008:

 
| **June 30, 2008**                     | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Cash equivalent available-for-sale  investments |       | $                | 10,458     |             | $          | —           |       | $         | —     |   | $ | 10,458 |   |
| Auction rate securities                         |       | $                | —     |             | $          | 675              |       | $         | —     |   | $ | 675 |   |
| Corporate securities                            |       | —           |       | 6,174            |       | —           |       | 6,174     |       |
| Total short-term marketable securities          |       | $                | —     |             | $          | 6,849            |       | $         | —     |   | $ | 6,849 |   |
| Long-term marketable securities (1)             |       | $                | —     |             | $          | —           |       | $         | 1,598      |   | $ | 1,598 |   |

 

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(1)  The Company has recorded impairmentcharges of $52,000 for the six months ended June 30, 2008 related to thesesecurities.

 

The reconciliation of the Company’s assetsmeasured at fair value on a recurring basis using unobservable inputs (Level 3)is as follows:

 
| ** **                                           | ** ** | **Auction Rate  Securities** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| Balance at January 1, 2008                      |       | $                                 | —     |   |
| Transfers to Level 3                                 |       | 1,650                             |       |
| Unrealized loss reported in statement of  operations |       | (52                               | )          |
| Balance at June 30, 2008                        |       | $                                 | 1,598      |   |

 

For available-for-sale securities that utilize Level 1 and, ifapplicable, Level 2 inputs, the Company utilizes both direct and indirectobservable price quotes. Due to the lack of market quotes or other inputs thatare observable for certain of the auction rate securities held by the Company,the Company utilizes valuation models for these securities that relyexclusively on Level 3 inputs, including those that are based on expected cashflow streams and collateral values, such as assessments of counterparty creditquality, default risk underlying the security, discount rates and overallcapital market liquidity. The valuation of the auction rate securities held bythe Company is subject to uncertainties and, therefore, is difficult topredict. Factors that may impact the Company’s valuation for these securitiesinclude changes to credit ratings of the securities and to the underlyingassets supporting those securities, rates of default of the underlying assets,underlying collateral value, discount rates, counterparty risk and ongoingstrength and quality of market credit and liquidity.

 

As of June 30, 2008, all marketablesecurities held by the Company have maturity dates that range from 2008 to2045.

 

As of June 30, 2008, the Company heldapproximately $2.3 million of auction rate securities. These auction ratesecurities are comprised of approximately $0.7 million of securities backed bymunicipalities, approximately $1.3 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. The Company’s ability toliquidate its auction rate securities and fully recover the carrying value ofits investments in the near term may be limited or not exist. In the event thatthe Company needs to access its investments in these auction rate securities,the Company will not be able to do so until a future auction of theseinvestments is successful, the issuer redeems the outstanding securities, abuyer is found outside the auction process, or the securities mature, whichcould be in as many as 37 years. As a result of these factors, the Company maybe required to record additional impairment charges on these investments fromtime to time, as discussed below.  Forthe three and six month periods ended June 30, 2008, the Company recordedimpairment charges of $36,000 and $52,000, respectively.

 

As of June 30, 2008, approximately $0.7million of the Company’s auction rate securities are classified as short-termmarketable securities because management has determined that these securitiesmay be liquidated within one year based on management’s experience withliquidating other similar auction rate securities, discussions with investmentadvisors knowledgeable of the auction rate securities market, the nature of thesecurities (which are primarily backed by various municipalities), andredemptions and calls subsequent to June 30, 2008. During the firstquarter of 2008, the Company reclassified approximately $1.6 million of 

 

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auction rate securities from short-term to long-term marketablesecurities, reflecting management’s determination that these securities may notbe liquidated within one year due to the auction failures described above. TheCompany has not experienced any realized losses on sales of auction ratesecurities in 2008.

 

For the six months ended June 30, 2008, theCompany has recorded an other-than-temporary impairment of $16,000 on itsgovernment-backed student loan auction rate security and another-than-temporary impairment of $36,000 on a preferred stock closed endfund. The Company believes that the municipality-backed securities are notsignificantly impaired, primarily due to its experience of selling such securitiesat par since the recent auction failures began, the redemption or calls ofsimilar securities by their issuers at par since the auction failures began,redemptions and calls subsequent to June 30, 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, themarket value 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):

 
| ** **     | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials  |       | $                       | 144        |                        | $          | 349 |   |
| Finished goods |       | 1,391                   |       | 1,052                       |       |
| Total          |       | $                       | 1,535      |                        | $          | 1,401 |   |

 

On a quarterly basis, the Company analyzes its current inventory levelsand future irrevocable inventory purchase commitments and writes down inventorythat has become un-saleable or has a cost basis in excess of its expected netrealizable value. In addition, the Company evaluates its future irrevocable inventorypurchase commitments compared to forecasted product sales, the current level ofinventory and its related product dating. For the three month period ended June 30,2008, the Company did not record an inventory impairment charge. For the threemonth period ended June 30, 2007, the Company recorded an inventoryimpairment charge of $161,000. For the six month periods ended June 30,2008 and 2007, the Company recorded inventory impairment charges of $347,000and $545,000, respectively.

 

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

###  

The Company follows the fair value recognition provisions of Statementof Financial Accounting Standards No. 123(R),*Share-Based Payment*(“SFAS 123R”). Compensation cost recognized subsequent to December 31,2005 includes: (a) compensation cost for all stock-based payments grantedbut not yet vested as of January 1, 2006, based on the grant-date fairvalue estimated in accordance with the original provisions of Statement ofFinancial Accounting Standards No. 123, *Accountingfor Stock Based Compensation*, and (b) compensation cost for allstock-based payments granted subsequent to January 1, 2006, based on thegrant-date fair value estimated in accordance with the provisions of SFAS123R. Such amounts have been reduced by the Company’s estimate of forfeituresof all unvested awards. Results for prior periods have not been restated.

 

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

 

In 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 

 

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for cause. The forfeiture provision lapses as follows:25% of the shares are no longer subject to forfeiture to the Company, or “vest,”on the date that is six months after the grant date; 25% vest on the firstanniversary of the grant date; and 50% vest on the second anniversary of thegrant date. Upon a change in control of the Company or upon termination ofthe employee’s employment without cause, all unvested restricted shares shallimmediately vest in full. The Company recognized $64,000 and $263,000 ofstock-based compensation expense related to this restricted common stock forthe three month periods ended June 30, 2008 and 2007, respectively. TheCompany recognized $938,000 and $317,000 of stock-based compensation expenserelated to this restricted common stock for the six month periods ended June 30,2008 and 2007, respectively.  Included inthe expense for the six months ended June 30, 2008 is $770,000 of expensefor accelerated vesting related to involuntary terminations in connection withthe Company’s January 2008 restructuring. On the accompanying balance sheets, the number of shares of the Company’scommon stock outstanding as of June 30, 2008 does not include 45,025shares of unvested restricted common stock.

 

The fair value of each stock option is estimated on the grant dateusing the Black-Scholes option-pricing model. Information pertaining to stockoptions and related assumptions is noted in the following table:

 
| ** **                                               | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| Options granted (in thousands)                           |       | 385                                           |       | 822 |   |
| Weighted-average exercise price of stock  options        |       | $                                             | 1.01       |   | $ | 2.69 |   |
| Weighted-average grant date fair-value of  stock options |       | $                                             | 0.67       |   | $ | 1.63 |   |
| Assumptions:                                             |       |                                          |       |   |   |
| Volatility                                               |       | 76                                            | %          | 76 | % |
| Risk-free interest rate                                  |       | 3.1                                           | %          | 4.8 | % |
| Expected life (years)                                    |       | 5.5                                           |       | 5.0 |   |
| Dividend                                                 |       | None                                          |       | None |   |

 

Volatility is determined exclusively using historical volatility dataof the Company’s common stock based on the period of time since the Company’scommon stock has been publicly traded. The risk-free interest rate isbased on the U.S. Treasury yield curve in effect at the time of grantcommensurate with the expected life assumption. The expected life of stockoptions granted is based exclusively on historical data and represents theweighted average period of time that stock options granted are expected to beoutstanding. The expected life is applied to the stock option grant group as awhole, as the Company does not expect substantially different exercise orpost-vesting termination behavior among its employee population.

 

The Company is using the straight-line attribution method to recognizestock-based compensation expense. The amount of stock-based compensationexpense recognized during a period is based on the value of the portion of theawards that are ultimately expected to vest. SFAS 123R requires forfeitures tobe estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. The term “forfeitures”is distinct from “cancellations” or “expirations” and represents only theunvested portion of the surrendered option. The Company has applied an annualforfeiture rate of 5.6% to all unvested options as of June 30, 2008. Thisanalysis will be re-evaluated quarterly and the forfeiture rate will beadjusted as necessary. Ultimately, the actual expense recognized over thevesting period will only be for those options that vest.

 

A summary of option activity under the Company’s 2003 Plan as of June 30,2008 and changes during the six month period then ended is presented below (inthousands, 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                                           |       | 385                      |       | $                                           | 1.01       |                                                               |       |                            |       |   |
| Exercised                                         |       | (102                     | )          | $                                           | 0.72       |                                                               |       |                            |       |   |
| Forfeited/Cancelled                               |       | (1,510                   | )          | $                                           | 5.99       |                                                               |       |                            |       |   |
| Outstanding at June 30, 2008                 |       | 3,521                    |       | $                                           | 5.99       |                                                               | 5.57       |                            | $          | 13 |   |
| Vested or expected to vest at June 30,  2008 |       | 3,425                    |       | $                                           | 6.07       |                                                               | 5.48       |                            | $          | 12 |   |
| Exercisable at June 30, 2008                 |       | 2,560                    |       | $                                           | 6.95       |                                                               | 4.40       |                            | $          | 3 |   |

 

During the six months ended June 30, 2008 and 2007, the totalintrinsic value of options exercised (i.e., the difference between the marketprice at exercise and the price paid by the employee to exercise the options)was $26,000 and $526,000, respectively, and the total amount of cash receivedfrom exercise of these options was $73,000 and $311,000, respectively. Thetotal 

 

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grant-date fair value of stock options that vested during the six monthsended June 30, 2008 and 2007 was approximately $1.8 million and $3.2million, respectively.

 

As of June 30, 2008, there was $2.7 million of total unrecognizedcompensation cost related to unvested stock options. This cost is expected tobe recognized over a weighted average period of 2.1 years.

 

A summary of the Company’s restricted stock award activity as of June 30,2008 and changes during the six-month period then ended is presented below:

 
| ** **                                                   | ** ** | **Restricted Shares  Outstanding** | ** ** | **Weighted-  Average  Grant Date  Fair Value  Per Share** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)**                 | ** ** | ** **                                                               | ** ** |
| **Non-vested shares outstanding at  December 31, 2007** |       | 452                                     |       | $                                                                        | 3.22       |   |
| Awards granted                                               |       | —                                  |       | $                                                                        | —     |   |
| Restrictions lapsed                                          |       | 313                                     |       | $                                                                        | 3.22       |   |
| Awards forfeited                                             |       | 94                                      |       | $                                                                        | 3.22       |   |
| **Non-vested shares outstanding at  June 30, 2008**     |       | 45                                      |       | $                                                                        | 3.22       |   |

 

As of June 30, 2008, there was $103,000 of total unrecognizedcompensation cost related to unvested restricted shares. The remainingcompensation cost is expected to be recognized over the remaining vesting termof less than a year.

 

**(6)**                                 Restructuring

** **

In the first quarter of 2007, the Companyrecorded a net restructuring charge of $1.0 million related to its leaseobligation at its former headquarters. The charge was recorded pursuant toStatement of Financial Accounting Standards No. 146, *Accounting for Costs Associated with Exit or DisposalActivities* (“SFAS 146”). In March 2007, the Companyassigned its lease to a third party and vacated the space. The Company paid$1.2 million to end its lease obligation and incurred $0.6 million inexpenses primarily related to real estate brokerage fees and 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 furtherobligations related to this lease.

 

In the first quarter of 2008, the Companyrecorded restructuring charges of $2.7 million, which was comprised ofseverance benefits of $2.6 million and impairment charges of$0.1 million for disposed computer equipment. The severance benefits wererecorded in accordance with Statement of Financial Accounting Standards No. 112,*Employers’**Accounting for Postemployment Benefits* for contractualtermination benefits for certain executives and SFAS 146 for one-timetermination benefits for the remainder of employees terminated. In conjunctionwith the January 2008 restructuring, the Company eliminated approximately80 positions and discontinued active promotional activities related to BiDil.

 

The following table summarizes the activityas of June 30, 2008 related to the January 2008 restructuring plan:

 

| ** **          | ** ** | **Charge** | ** ** | **Cash  Payments and  Write-offs** | ** ** | **Accrued at  June 30, 2008** | ** ** |
|---------------------|------------|------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|
| Workforce reduction |       | $          | 2,653      |                                    | $          | (2,516                                       | )          | $ | 137 |   |
| Impairment          |       | 72         |       | (72                                     | )          | —                                       |       |
| Total               |       | $          | 2,725      |                                    | $          | (2,588                                       | )          | $ | 137 |   |

 

**(7)**                                 AccumulatedOther Comprehensive Income/(Loss)

** **

The Company presents comprehensive income/(loss) inaccordance with Statement of Financial AccountingStandards No. 130, *Reporting Comprehensive Income*. Accumulated othercomprehensive income is comprised of net income/(loss) and unrealized gains andlosses on available-for-sale marketable securities. For the three months ended June 30,2008 and 2007, total comprehensive income/(loss) equaled $949,000 and($6,228,000), respectively. For the six months ended June 30, 2008 and2007, total comprehensive income/(loss) equaled ($4,214,000) and ($16,334,000),respectively.

 

### **(8)****                                 Income(Loss) Per Share**

###  

TheCompany follows the provisions of Statement of Financial Accounting Standards No. 128,*Earnings Per Share* (“SFAS 128”). Basicincome (loss) per share for the three and six-month periods ended June 30,2008 and 2007 were computed on the basis of the weighted average number ofshares of common stock outstanding during the period. Diluted income (loss) pershare is computed on the basis of the weighted average number of shares ofcommon stock plus the effect of dilutive potential common shares 

 

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outstandingduring the period using the treasury stock method in accordance with SFAS 128.Dilutive potential common shares include outstanding stock options.

 

Basicand diluted weighted average shares outstanding were as follows:

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares                     |       | 46,028,722                                      |       | 40,099,699                                    |       | 45,910,238 |   | 38,689,345 |   |
|                                               |       |                                            |       |                                          |       |   |   |   |   |
| Dilutive common stock options                      |       | 3,832                                           |       | —                                        |       | — |   | — |   |
|                                               |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average common shares, assuming  dilution |       | 46,032,554                                      |       | 40,099,699                                    |       | 45,910,238 |   | 30,689,345 |   |

 

Forthe three month period ended June 30, 2008, options to purchase 3,832shares of the Company’s common stock were included in the calculation ofdiluted income per share because the Company incurred net income during thisperiod and the exercise prices of these stock options were less than theaverage closing price of the Company’s common stock during the three monthsended June 30, 2008. For the three month period ended June 30, 2008,options to purchase 3,516,638 shares of common stock were excluded from thecalculation of diluted income per share because the exercise prices of thesestock options were greater than or equal to the average closing price of theCompany’s common stock during the three months ended June 30, 2008. Forthe six month period ended June 30, 2008, options to purchase 3,520,470shares of the Company’s common stock were excluded from the calculation ofdiluted income (loss) per share because the Company incurred a net loss duringthe period and the effect of these options would be anti-dilutive.  In addition, 45,025 shares of restrictedcommon stock were also excluded from the calculation of diluted income (loss)per share for the three and six month periods ended June 30, 2008 becausetheir inclusion would be anti-dilutive.

 

For the three and six month periods ended June 30, 2007, optionsto purchase 4,827,067 shares of the Company’s common stock were excluded fromthe calculation of diluted income (loss) per share because the Company incurreda net loss during the period and the effect of these options would beanti-dilutive. In addition, 667,084 shares of restricted common stock were alsoexcluded from the calculation of diluted income (loss) per share for the threeand six month periods ended June 30, 2007 because their inclusion would beanti-dilutive.

 

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

###  

Statement of Financial Accounting Standards No. 105, *Disclosure of Information about Financial Instruments with Off-Balance-SheetRisk and Financial Instruments with Concentrations of Credit Risk*,requires disclosure of any significant off-balance-sheet and credit riskconcentrations. The Company has no off-balance-sheet or concentrations ofcredit risk such as foreign exchange contracts, options contracts or otherforeign hedging arrangements. The Company maintains its cash and cashequivalents and marketable securities balances with several high-credit qualityfinancial institutions.

 

The following table summarizes the number of trade customers thatindividually comprise greater than 10% of total revenues and their respectivepercentage of the Company’s total revenues:

 
| ** **                            | ** ** | **Number of** | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **Significant**    | ** ** | **Percentage of Total Revenues by Customer** | ** ** |
| ** **                            | ** ** | **Customers**      | ** ** | **A**                                                                 | ** ** | **B**      | ** ** | **C**      | ** ** |
| Three months ended June 30, 2008 |       | 3                  |       | 39                                                                    | %          | 34         | %          | 18         | %          |
| Three months ended June 30, 2007 |       | 3                  |       | 36                                                                    | %          | 34         | %          | 18         | %          |
| Six months ended June 30, 2008   |       | 3                  |       | 38                                                                    | %          | 35         | %          | 18         | %          |
| Six months ended June 30, 2007   |       | 3                  |       | 36                                                                    | %          | 36         | %          | 18         | %          |

 

The following table summarizes the number of customers thatindividually comprise greater than 10% of total accounts receivable and theirrespective percentage of the Company’s total accounts receivable:

 
| ** **             | ** ** | **Number of** | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------|------------|--------------------|------------|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **             | ** ** | **Significant**    | ** ** | **Percentage of Total Accounts Receivable by Customer** | ** ** |
| ** **             | ** ** | **Customers**      | ** ** | **A**                                                                                 | ** ** | **B**      | ** ** | **C**      | ** ** |
| As of:                 |       |               |       |                                                                                  |       |       |       |       |       |
| June 30, 2008     |       | 3                  |       | 40                                                                                    | %          | 33         | %          | 19         | %          |
| December 31, 2007 |       | 3                  |       | 38                                                                                    | %          | 34         | %          | 17         | %          |

 

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To date, the Company has not written off any significant accountsreceivable.

 

### **(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 $216,000 for production of BiDilfinished goods to occur during the third quarter of 2008.

 

**(11)****                          Sublease**

 

In May 2008, theCompany entered into an Assignment of Lease and Assumption Agreement (the “AssignmentAgreement”) with Cubist Pharmaceuticals, Inc. (“Cubist”), pursuant towhich the Company assigned to Cubist its lease of approximately 19,815 squarefeet of office space in Lexington, Massachusetts (the “Premises”).  Concurrent with the execution of the AssignmentAgreement, the Company entered into a Sublease (the “Sublease”) with Cubist,pursuant to which the Company agreed to sublease approximately 4,000 squarefeet of the Premises.  The term of the Sublease (the “Term”) is for threemonths beginning on June 1, 2008.  Upon the expiration of the Term,the Company has the right to extend the Sublease, without notice, on amonth-to-month basis.  Pursuant to theterms of the Sublease, the Company is obligated to pay rent to Cubist in theamount of approximately $9,200 per month in advance.

 

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

 

**Overview**

** **

We are the maker of BiDil®, whichis indicated for the treatment of heart failure in self-identified blackpatients as an adjunct to current standard therapies. BiDil is an orallyadministered fixed-dose combination of isosorbide dinitrate and hydralazinehydrochloride. The U.S. Food and Drug Administration, or FDA, approved BiDil inJune 2005, and we commercially launched BiDil in July 2005. We arecurrently a party to an exclusive five-year manufacturing and supply agreementwith Schwarz Pharma Manufacturing, Inc., or Schwarz Pharma, for the threetimes daily immediate release dosage formulation of BiDil.

 

Since our inception, we have mainly fundedour operations through the sale of equity securities, debt financings, licensefees, research and development funding, milestone payments from ourcollaborative partners, and more recently, sales of BiDil. Although we recordednet income of $982,000 in the quarter ended June 30, 2008, we have notbeen profitable in any prior quarter since our inception and we may incurlosses in future periods.  We haveincurred an accumulated deficit of $349.6 million as of June 30, 2008.

 

Based upon our determination that thesuccessful commercialization of BiDil requires a magnitude of resources that wecannot currently allocate to the program, as well as our plans to conserve cashin order to pursue the development of BiDil XRTM, an extended releaseformulation of BiDil, in January 2008 we discontinued active promotionalactivities for BiDil. We concurrently implemented a restructuring plan thateliminated approximately 80 positions, reducing headcount to approximately 7positions. Although we have discontinued active promotional efforts related toBiDil, we continue to manufacture and sell BiDil and maintain the product onthe market for patients through normal wholesale and retail channels. We are alsoconducting limited advertising in select medical publications, and utilizing 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. Inconjunction with implementing our January 2008 restructuring plan, weintend to evaluate and pursue strategic alternatives for our business, whichmay include the divestiture of our BiDil and BiDil XR business and/or ournitric oxide patent portfolio, a merger or consolidation with another company,or other comparable arrangements.

 

BiDil is an orally-administered medicine thatis presently dosed three times daily. We are seeking to develop BiDil XR as aonce-daily formulation. In connection with our efforts to develop BiDil XR, in February 2007we entered into a license agreement with Elan Pharma International Limited, orElan, pursuant to which Elan granted to us an exclusive worldwideroyalty-bearing license to import, use, offer for sale and sell an oral capsuleformulation incorporating specified technology owned or controlled by Elan andcontaining, as its sole active combination of ingredients, the combination ofthe active drug substances isosorbide dinitrate and hydralazine hydrochloride(which includes BiDil XR). In consideration for the grant of the license,we have agreed to pay Elan royalties that are calculated by reference to annualnet sales parameters set forth in the agreement. In addition, we have alsoagreed to pay Elan specified amounts upon the achievement of specifieddevelopment and commercialization milestone events set forth in the agreement.

 

In December 2007, we met with the FDA todiscuss our proposed development plan for BiDil XR. The FDA agreed that ourclinical development plan to conduct bioequivalence and pharmacodynamic studiescomparing BiDil XR to the current commercial 

 

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immediate release formulation of BiDil is acceptable. Our proposed plancould support FDA approval to commercialize BiDil XR, if bioequivalence isdemonstrated. The bioequivalence study design compares the pharmacokinetics ofthe BiDil XR formulation to the pharmacokinetics of BiDil. Pharmacokineticsrefers to the manner in which the body absorbs, distributes, metabolizes andexcretes the study drug. The adequacy of the results will ultimately bedetermined by the FDA during the regulatory review period. Our pilot clinicaltrials have tested several BiDil XR prototypes and compared theirpharmacokinetic profile with BiDil tablets. In preliminary clinical studies inhealthy volunteers, we have demonstrated our ability to delay the release ofisosorbide dinitrate and hydralazine hydrochloride by varying the amount ofcoating and ratios of different polymers on beads in capsules. We will need toconduct additional formulation studies and trials in order to finalize theformulation prior to the commencement of bioequivalence trials.

 

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

 

·**                 **maintainsales of BiDil following our January 2008 discontinuation of activepromotional efforts related to BiDil;

 

·**                 **evaluateand pursue strategic alternatives for our business which may include thedivestiture of our BiDil and BiDil XR business and/or our nitric oxide patentportfolio, a merger or consolidation with another company, or other comparablearrangements; and

 

·**                 **successfullyadvance the development of BiDil XR.

 

Our January 2008 restructuring followsthe elimination of our discovery research program in March 2006 and thereplacement of our sales force with a small team of senior cardiovascularbusiness managers in October 2006. The January 2008 restructuringalso follows our efforts in August 2007 to deploy an expanded fieldorganization designed to focus on selected prescriber targets.

 

As a result of the continued implementationof our January 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 $14 million to $16 million, excluding costof product sales but including share-based compensation expense.

 

At June 30, 2008, our principal sourceof liquidity was $18.8 million of cash, cash equivalents and short-termmarketable securities, which excludes $1.6 million of auction rate securitiesclassified as long-term marketable securities due to liquidity constraints. Webelieve that our existing sources of liquidity and the cash expected to begenerated from future sales of BiDil, together with the significant reductionin expenditures as a result of our January 2008 restructuring, will besufficient to fund our operations for at least the next twelve months. Weexpect to incur operating expenses going forward primarily related to ourcontinued development of BiDil XR and to keeping BiDil available on the market.We expect to fund a substantial portion of our operating expenses throughongoing BiDil sales. However, the elimination of our sales force anddiscontinuation of our active promotional efforts related to BiDil could resultin a decline in BiDil prescriptions by healthcare providers and could alsoadversely affect third party payors’ willingness to provide reimbursement atfavorable levels. If physicians do not continue to prescribe BiDil insufficient quantities, and/or if managed care providers remove BiDil from apreferential 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 to executeon our business strategy of ceasing active promotional efforts for BiDil whiledevoting substantially all of our resources to supporting ongoing BiDilprescriptions and the continued development of BiDil XR. If we are unable tosuccessfully 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.

 

**Financial Operations Overview**

 

*Revenue.*Ourfirst commercial product, BiDil, was launched in July 2005, and generatedproduct sales of $3.8 million in the second quarter of 2008. Prior to thelaunch 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 andDevelopment.*Research and development expense consistsof expenses incurred in identifying, developing and testing product candidates.These expenses consist primarily of salaries and related expenses forpersonnel, fees paid to professional service providers for independentmonitoring and analysis of our clinical trials, costs of contract research andmanufacturing, product development costs, costs of facilities and BiDil medicalsupport costs.

 

The following summarizes our primary researchand development programs. We have not provided program costs because prior to2000 we did not track and accumulate cost information by research program.

 

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

 

·*     **BiDil XR*. Thecurrent formulation of BiDil is an immediate-release tablet that must be takenthree times daily. We are currently pursuing the development of BiDil XR, anextended release formulation of BiDil, that could be taken once a day. To date,we have incurred expenses of approximately $10.8 million in connectionwith the development of BiDil XR. Preliminary clinical studies of BiDil XRdemonstrated proof of principle, and we commenced clinical development of BiDilXR in October 2006. We will need to conduct additional formulation studiesand trials in order to finalize the formulation prior to the commencement ofbioequivalence trials. We anticipate that we will finalize the BiDil XRformulation in 2009. Assuming that the BiDil XR formulation is successfullyfinalized, we anticipate initiating pivotal bioequivalence trials and thenfiling the new drug application in 2010 or 2011. Because of its stage ofdevelopment, and the uncertaintiesinherent in pharmaceutical development generally, we may not be able tosuccessfully develop and commercialize BiDil XR.

 

·*      OtherDiscovery Research.* We have used our know-how and expertise in nitric oxideto develop drug candidates that are nitric oxide-enhancing versions of existingmedicines 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. Wecontinue to seek 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 and Administrative.*Sales, general andadministrative expense have historically consisted primarily of salaries andother related 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 in researchand development expense; costs for public relations, advertising and promotionservices; professional fees for legal and accounting services; and costsrelated to our former arrangements with a contract sales organization.

 

*Non-OperatingIncome.*Interest income includes interest earned onour cash, cash equivalents and marketable securities, and interest expenseassociated with our current portion of long-term debt.

 

**Results of Operations**

 

***ThreeMonths Ended June 30, 2008 and 2007***

** **

*Revenue.*Total revenue for the three months ended June 30, 2008was $3.8 million, compared to $3.7 million for the three months ended June 30,2007. Product sales of BiDil accounted for all of the revenue for the threemonth periods ended June 30, 2008 and 2007. The increase in productrevenue in the 2008 period is due to increased shipments of BiDil as a resultof a modest increase in demand in the 2008 period.

 

*Cost ofProduct Sale*s. Cost of product sales was $536,000 for thethree month period ended June 30, 2008, compared to $637,000 for the threemonth period ended June 30, 2007. The decrease in cost of product sales inthe 2008 period is due to the sale of previously reserved inventory. There wereno inventory impairment charges in the three month period ended June 30,2008, compared to $161,000 in inventory impairment charges in the three monthperiod ended June 30, 2007. The inventory impairment charges in the 2007period were related to commercial trade, patient sample inventory product andraw materials in excess of expected future inventory requirements and futurepurchase commitments, based on current sales forecasts. The decrease ininventory impairment charges in the 2008 period is due to a reduction incharges related to commercial trade resulting from the extension of BiDil’sshelf life.

 

*Researchand Development.*Research and development expense for thethree months ended June 30, 2008 was $0.5 million, compared to$2.9 million for the three months ended June 30, 2007. The $2.4million, or 83%, decrease in research and development expenses in the currentperiod was primarily due to a $1.5 million decrease in headcount and relatedcompensation expenses as a result of our January 2008 restructuring, a$0.5 million decrease in medical expenditures supporting the commercializationof BiDil and a $0.4 million decrease in spending related to the development ofBiDil XR.

 

The followingtable summarizes the primary components of our research and development expensefor our principal research and development programs for the three month periodsended June 30, 2008 and 2007:

 

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| ** **                                          | ** ** | **Three Months  Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| **Research and Development Program (in  millions)** | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| BiDil                                               |       | $                                           | 0.2        |   | $ | 1.1 |   |
| BiDil XR                                            |       | 0.3                                         |       | 1.8 |   |
| Total research and development expense              |       | $                                           | 0.5        |   | $ | 2.9 |   |

 

*Sales,General and Administrative.*Sales, general and administrativeexpense for the three months ended June 30, 2008 was $1.9 million,compared to $6.6 million for the three months ended June 30, 2007. The$4.7 million, or 71%, decrease in sales, general and administrative expense wasprimarily due to $2.2 million in reduced salary and benefit expenses, $0.7million in reduced compensation expense related to our January 2008restructuring and $0.9 million in decreased advertising expenses as a result ofour decision to discontinue active promotional efforts for BiDil in January 2008.

 

*Restructuring Charges.*In the first quarter of 2007, we recorded a net restructuring charge of $1.0million related to our lease obligation at our former headquarters. The chargewas recorded 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 first quarter of 2008, we recordedrestructuring charges of $2.7 million, which was comprised of severancebenefits of $2.6 million related to the reduction of our employeeheadcount from approximately 90 to approximately 7 positions, and impairmentcharges of $0.1 million for disposal of computer equipment. The severancebenefit charges were recorded in accordance with Statement of FinancialAccounting 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 June 30,2008, we owed $0.1 million for salary continuation payments. As a result of thecontinued implementation of this restructuring, we estimate that our operatingexpenses related to research and development and sales, general andadministrative functions, excluding restructuring charges, for the year ending December 31,2008 will be approximately $14 million to $16 million, excluding costof product sales but including share-based compensation expense.

 

*Leasing Arrangements*.In May 2008, we entered into an assignment of lease and assumptionagreement with Cubist Pharmaceuticals, Inc., or Cubist, pursuant to whichwe assigned to Cubist our lease of approximately 19,815 square feet of officespace in Lexington, Massachusetts. Concurrent with the execution of this assignment agreement, we enteredinto a sublease with Cubist, pursuant to which we agreed to subleaseapproximately 4,000 square feet of office space covered under the assignedlease.  The term of this sublease is for three months beginning on June 1,2008.  Upon the expiration of the initial term, we have the right toextend the sublease, without notice, on a month-to-month basis.  Pursuant to the terms of the sublease, we areobligated to pay rent to Cubist in the amount of approximately $9,200 per monthin advance.

** **

*Stock-basedCompensation Expense.*We reversed $0.1 million andrecognized $1.4 million in stock-based compensation expense for the threemonths ended June 30, 2008 and 2007, respectively. As of June 30,2008, the total unrecognized compensation cost related to unvested awards wasapproximately $2.7 million, which will be recognized over a weightedaverage period of 2.1 years.

 

*Non-OperatingIncome.*Non-operating income was $102,000 for the threemonths ended June 30, 2008, compared to $251,000 for the three monthsended June 30, 2007. The $149,000 decrease for the three month periodended June 30, 2008 compared to the three month period ended June 30,2007 is primarily due to lower fund balances available for investment, offsetby a $177,000 reduction in interest expense incurred on long-term debt and animpairment charge of $36,000 related to auction rate securities.

 

***SixMonths Ended June 30, 2008 and 2007***

** **

*Revenue.*Total revenue for the six months ended June 30, 2008 was$7.8 million, compared to $7.3 million for the six months ended June 30,2007. Product sales of BiDil accounted for all of the revenue for the six monthperiods ended June 30, 2008 and 2007. The increase in product revenue in the2008 period is due to increased shipments of BiDil as a result of a modestincrease in demand in the 2008 period.

 

*Cost ofProduct Sale*s. Cost of product sales was $1.5 million for thesix month period ended June 30, 2008, compared to $1.6 million for the sixmonth period ended June 30, 2007. For the six month periods ended June 30,2008 and 2007, we recorded 

 

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inventory impairment charges of $347,000 and $545,000, respectively.These inventory impairment charges were related to commercial trade, patientsample inventory product and raw materials in excess of expected futureinventory requirements and future purchase commitments, based on our currentsales forecast. The decrease in inventory impairment charges in the 2008 periodis due to a reduction in charges related to commercial trade resulting from theextension of BiDil’s shelf life, offset by impairment charges to raw materials.

 

*Researchand Development.*Research and development expense for the sixmonths ended June 30, 2008 was $2.1 million, compared to $5.9 millionfor the six months ended June 30, 2007. The $3.8 million, or 64%, decreasein research and development expenses in the current period was primarily due toa $2.0 million reduction in headcount and related compensation expenses as aresult of our January 2008 restructuring, a $0.9 million decrease inmedical expenditures supporting the commercialization of BiDil and a $0.8million decrease in spending related 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 six month periodsended June 30, 2008 and 2007:

 
| ** **                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| **Research and Development Program (in  millions)** | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| BiDil                                               |       | $                                             | 0.8        |   | $ | 2.3 |   |
| BiDil XR                                            |       | 1.3                                           |       | 3.5 |   |
| Other discovery research                            |       | —                                        |       | 0.1 |   |
| Total research and development expense              |       | $                                             | 2.1        |   | $ | 5.9 |   |

 

*Sales,General and Administrative.*Sales, general and administrativeexpense for the six months ended June 30, 2008 was $5.9 million, comparedto $15.6 million for the six months ended June 30, 2007. The $9.7 million,or 62%, decrease in sales, general and administrative expense was primarily dueto $5.3 million in reduced salary and benefit expenses, $1.5 million in reducedcompensation expense as a result of our January 2008 restructuring and$2.6 million in decreased advertising expenses as a result of our decision todiscontinue active promotional efforts for BiDil in January 2008.

 

*Restructuring Charges.*In the first quarter of 2007, we recorded a net restructuring charge of $1.0million related to our lease obligation at our former headquarters. The chargewas recorded pursuant to SFAS 146. In March 2007 we assigned our lease toa third party and vacated the space.  We paid $1.2 million to end ourlease obligation and incurred $0.6 million in expenses primarily related toreal estate brokerage fees and clean-up costs. Offsetting these charges was areversal of $0.8 million in accrued rent. All amounts were paid as of March 31,2007.

 

In the first quarter of 2008, we recordedrestructuring charges of $2.7 million, which was comprised of severancebenefits of $2.6 million related to the reduction of our employeeheadcount from approximately 90 to approximately 7 positions, and impairmentcharges of $0.1 million for disposal of computer equipment. The severancebenefit charges were recorded in accordance with SFAS 112 for contractualtermination benefits for certain executives and SFAS 146 for one-timetermination benefits for the remainder of employees terminated. As of June 30,2008, we owed $0.1 million for salary continuation payments. As a result of thecontinued implementation of this restructuring, we estimate that our operatingexpenses related to research and development and sales, general andadministrative functions, excluding restructuring charges, for the year ending December 31,2008 will be approximately $14 million to $16 million, excluding costof product sales but including share-based compensation expense.

 

*Leasing Arrangements*.In May 2008, we entered into an assignment of lease and assumptionagreement with Cubist, pursuant to which we assigned to Cubist our lease ofapproximately 19,815 square feet of office space in Lexington,Massachusetts.  Concurrent with theexecution of this assignment agreement, we entered into a sublease with Cubist,pursuant to which we agreed to sublease approximately 4,000 square feet ofoffice space covered under the assigned lease.  The term of this subleaseis for three months beginning on June 1, 2008.  Upon the expirationof the initial term, we have the right to extend the sublease, without notice,on a month-to-month basis.  Pursuant tothe terms of the sublease, we are obligated to pay rent to Cubist in the amountof approximately $9,200 per month in advance.

 

*Stock-basedCompensation Expense.*We recognized $0.9 million and $3.4million in stock-based compensation expense for the six months ended June 30,2008 and 2007, respectively. As of June 30, 2008, the total unrecognizedcompensation cost related to unvested awards was approximately$2.7 million, which will be recognized over a weighted average period of2.1 years.

 

*Non-OperatingIncome.*****Non-operating incomewas $0.3 million for the six months ended June 30, 2008, compared to $0.5million for the six months ended June 30, 2007. The $0.2 million decreasefor the six month period ended June 30, 2008 compared to 

 

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the six month period ended June 30, 2007 is primarily due to lowerfund balances available for investment, offset by a $346,000 reduction ininterest expense incurred on long-term debt and an impairment charge of $52,000related to auction rate securities.

 

**Liquidityand Capital Resources**

** **

Since our inception, we have primarily fundedour operations through the sale of equity securities, debt financings, licensefees, research and development funding, milestone payments from ourcollaborative partners and, more recently, sales of BiDil. As of June 30,2008, we have received net proceeds of $321.2 million from the issuance ofequity securities, including net proceeds of $18.2 million from ourregistered direct offering in May 2007.

 

At June 30, 2008, we had $18.8 millionin cash, cash equivalents and short-term marketable securities, which excludes$1.6 million of auction rate securities classified as long-term marketablesecurities due to liquidity constraints.

 

During the six months ended June 30,2008, operating activities used cash of $7.7 million, primarily due to a netloss of $4.2 million and decreases in accounts payable and accruedexpenses of $4.9 million, offset by stock-based compensation expense of $0.9million.

 

During the six months ended June 30,2008, investing activities provided cash of $14.9 million, primarily due to netsales of marketable securities.

 

During the six months ended June 30,2008, financing activities used cash of $3.5 million due to $3.7 million inlong-term debt payments, offset by $0.3 million in proceeds from employee stockplans.

 

On June 28, 2005, we borrowed (i) $10.0 millionfrom Oxford Finance Corporation, or Oxford, and (ii) $10.0 millionfrom General Electric Capital Corporation, or GECC, pursuant to the terms ofpromissory notes made by us with both Oxford and GECC, respectively. The notesbore interest at a fixed rate of 9.95% per annum and were payable in 36consecutive monthly installments of principal and accrued interest, beginning July 1,2005. The notes were secured by a security interest in all our personalproperty and fixtures with the exception of any intellectual property orproducts acquired, whether by purchase, license or otherwise, on or after theexecution of the notes. As of June 30, 2008, the promissory notes had beenpaid in full.

 

As of June 30, 2008, all marketable securitiesheld by us have maturity dates that range from 2008 to 2045.

 

As of June 30, 2008, we heldapproximately $2.3 million of auction rate securities. These auction ratesecurities are comprised of approximately $0.7 million of securities backed bymunicipalities, approximately $1.3 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 additional impairmentcharges on these investments from time to time and, as discussed below, werecorded impairment charges of $36,000 and $52,000 for the three and six monthsended June 30, 2008, respectively.

 

As of June 30, 2008, approximately $0.7million of our auction rate securities are classified as short-term marketablesecurities because management has determined that these securities may beliquidated within one year based on management’s experience with liquidatingother similar auction rate securities, discussions with investment advisorsknowledgeable of the auction rate securities market, the nature of thesecurities (which are primarily backed by various municipalities), and redemptionsand calls subsequent to June 30, 2008. During the first quarter of 2008,we reclassified $1.6 million of auction rate securities from short-term tolong-term marketable securities, reflecting management’s determination thatthese securities may not be liquidated within one year due to the auctionfailures described above. We have not experienced any realized losses on salesof auction rate securities in 2008.

 

For the six months ended June 30, 2008, wehave recorded an other-than-temporary impairment of $16,000 on ourgovernment-backed student loan auction rate security and another-than-temporary impairment of $36,000 on a preferred stock closed endfund. We believe that the municipality-backed securities are not significantlyimpaired, primarily due to our experience of selling such securities at parsince the recent auction failures began, the redemption or calls of similarsecurities by their issuers at par since the 

 

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auction failures began, redemptions and calls subsequent to June 30,2008, and the credit worthiness of the issuers of the underlying securities.

 

*Contractual Obligations*

 

The following table summarizes ourcontractual obligations at June 30, 2008, and the effects such obligationsare expected to have on our liquidity and cash flows in future periods.

 
| **Contractual Obligations** | ** ** | **Total** | ** ** | **Less than  one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  five years** | ** ** |
|----------------------------------|------------|-----------|------------|-----------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------------|------------|
| Operating lease (1)              |       | $         | 18,000     |                              | $          | 18,000             |       | $                  | —     |                                | $          | — |   | $ | — |   |
| Purchase obligations (2)         |       | 216,000   |       | 216,000                           |       | —             |       | —             |       | —                              |       |
| License milestones (3)           |       | —    |       | —                            |       | —             |       | —             |       | —                              |       |
| Total                            |       | $         | 234,000    |                              | $          | 234,000            |       | $                  | —     |                                | $          | — |   | $ | — |   |

 

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(1)  In May 2008, we entered into asublease with Cubist, pursuant to which we agreed to sublease approximately4,000 square feet of office space at a rate of approximately $9,200 per monthin advance. The term of this sublease is for three months beginning on June 1,2008.  Upon the expiration of the initial term, we have the right toextend the sublease, without notice, on a month-to-month basis.

 

(2)  In April 2008, we placed abinding purchase order totaling $216,000 with Schwarz Pharma for production ofBiDil finished goods during the third quarter of 2008.

 

(3)  In February 2007,we entered into a License Agreement with Elan, pursuant to which we may beobligated 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 future payments, if any, pursuant to the terms ofthe License Agreement.

 

In January 2008, we ceased activelypromoting sales of BiDil, which is our only significant source of revenue. Weintend to continue incurring costs related to supporting ongoing prescriptionsfor BiDil, and we also expect to incur additional expenses relating to theongoing development of BiDil XR. We believe that our existing sources ofliquidity and the cash expected to be generated from future sales of BiDil,together with the significant reduction in expenditures as a result of our January 2008restructuring, will be sufficient to fund our operations for at least the nexttwelve months. However, our future capital requirements, and the period inwhich we expect our current cash to support our operations, may vary due to anumber of factors, including the following:

 

·*                 *ourability to successfully consummate one or more strategic arrangements relatingto our business and assets;

 

·*                 *theamount of future product sales of BiDil;

 

·*                 *thecost of manufacturing and selling BiDil;

 

·*                 *thetiming of collections related to sales of BiDil;

 

·*                 *thetime and costs involved in completing the clinical trials and furtherdevelopment of, and obtaining regulatory approvals for, BiDil XR, if at all;

 

·*                 *theeffect of competing technological and market developments;

 

·*                 *thecosts involved in preparing, filing, prosecuting, maintaining and enforcingpatent claims; and

 

·*                 *thecost of maintaining licenses to use patented technologies.

 

Our business plan is to seek to divest all orsubstantially all of our business through a merger, asset sale, license,business combination or the like. However, if and for so long as we continueour current business and operations, we will require substantial additionalfunds, which we expect to generate through a combination of BiDil sales and oneor more strategic transactions. We may not be able to successfully consummate astrategic transaction, and additional financing may not be available to us onacceptable terms, if at all.

 

If we are unable to obtain funding on atimely basis, whether through a strategic divestiture, financing or borrowingarrangements or other capital-raising transaction, we may not be able tosupport continued prescriptions for BiDil, we may be compelled to significantlycurtail or delay our development efforts with respect to BiDil XR, and we couldalso be required to limit, scale back or cease our operations, any of whichwould have a material and adverse effect on our business, financial conditionand results of operations.

 

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**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of our financialcondition and results of operations are based on our financial statements,which have been prepared in accordance with United States generally acceptedaccounting principles. The preparation of these financial statements requiresus to make estimates and judgments that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting periods. On an on-going basis, we evaluate ourestimates and judgments, including those related to revenue and relatedreserves, the net realizable value of inventory, accrued expenses and thefactors used to determine the fair value assigned to our stock options. We baseour estimates on historical experience, known trends and events and variousother factors that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions. There were no material changes in our judgments orestimates during the second quarter of 2008. For a detailed explanation of thejudgments made in these areas, refer to Management’s Discussion and Analysis ofFinancial Condition and Results of Operations within our Annual Report on Form 10-Kfor the year ended December 31, 2007, which is on file with the Securitiesand Exchange Commission, or SEC.

 

**Inflation**

 

We believe the effects of inflation generallydo not have a material adverse impact on our operations or financial condition.

 

**Off-Balance Sheet Arrangements**

 

We do not have any material off-balance sheetarrangements.

 

**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 fact, 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 asrepresenting our views as of any date subsequent to the date of this quarterlyreport.

 

**Item 3.***        ***Quantitativeand Qualitative Disclosures About Market Risk**

 

We are exposed tomarket risk related to changes in interest rates. Our current investment policyis to maintain an investment portfolio consisting mainly of U.S. money marketand high-grade corporate and U.S. government-related securities, directly orthrough managed funds, with maturity dates of two years or less. In addition,we hold auction rate securities that reset monthly. However, the maturity datesof these securities at June 30, 2008 range from 2008 to 2045. Our cash isdeposited in and invested through highly rated financial institutions in NorthAmerica. Our marketable securities are subject to interest rate risk and willfall in value if market interest rates increase. If market interest rates wereto increase immediately and uniformly by 10% from levels at June 30, 2008,we estimate that the fair value of our investment portfolio would decline by animmaterial amount. We have the ability to hold our fixed income investmentsuntil maturity, and therefore we do not expect our operating results or cashflows to be affected to any significant degree by the effect of a change inmarket interest rates on our investments.

 

The primary objective of our investmentactivities is to preserve principal while at the same time maximizing theincome we receive from our investments without significantly increasing risk.To achieve this objective, we maintain our portfolio of cash equivalents andmarketable securities in a variety of securities, including U.S. governmentagencies, municipal notes which may have an auction reset feature, corporatenotes and bonds, commercial paper, and money market funds. These securities areclassified as available for sale and consequently are recorded on the balancesheet at fair value with unrealized gains or losses reported as a separatecomponent of accumulated other comprehensive income (loss). If interest ratesrise, the market value of our investments may 

 

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decline, which could result in a realized loss if we are forced to sellan investment before its scheduled maturity. We do not utilize derivativefinancial instruments to manage our interest rate risks.

 

As of June 30, 2008, all marketable securitiesheld by us have maturity dates that range from 2008 to 2045.

 

As of June 30, 2008, we heldapproximately $2.3 million of auction rate securities. These auction ratesecurities are comprised of approximately $0.7 million of securities backed bymunicipalities, $1.3 million of preferred stock issued by closed-end funds anda $0.3 million security issued by a government-backed student loanorganization. Auctions have historically provided a liquid market for thesesecurities. However, beginning in February 2008, the majority of auctionrate 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 additional impairment charges on these investmentsfrom time to time and, as discussed below, we recorded impairment charges of$36,000 and $52,000 for the three and six months ended June 30, 2008,respectively.

 

As of June 30, 2008, approximately $0.7million of our auction rate securities are classified as short-term marketablesecurities because management has determined that these securities may beliquidated within one year based on management’s experience with liquidatingother similar auction rate securities, discussions with investment advisorsknowledgeable of the auction rate securities market, the nature of thesecurities (which are primarily backed by various municipalities), andredemptions and calls subsequent to June 30, 2008. During the firstquarter of 2008, we reclassified $1.6 million of auction rate securities fromshort-term to long-term marketable securities, reflecting management’sdetermination that these securities may not be liquidated within one year dueto the auction failures described above. We have not experienced any realizedlosses on sales of auction rate securities in 2008.

 

For the six months ended June 30, 2008, wehave recorded an other-than-temporary impairment of $16,000 on ourgovernment-backed student loan auction rate security and another-than-temporary impairment of $36,000 on a preferred stock closed endfund. We believe that the municipality-backed securities are not significantlyimpaired, primarily due to our experience of selling such securities at parsince the recent auction failures began, the redemption or calls of similarsecurities by their issuers at par since the auction failures began,redemptions and calls subsequent to June 30, 2008, and the creditworthiness of the issuers of the underlying securities.

 

**Item 4.***        ***Controls andProcedures**

 

Our chiefexecutive officer and interim chief financial officer evaluated theeffectiveness of our disclosure controls and procedures as of June 30,2008. 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 welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives, and management necessarily applies its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based on theevaluation of our disclosure controls and procedures as of June 30, 2008,our chief executive officer and interim chief financial officer concluded that,as of such 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 endedJune 30, 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.

 

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**Risks Relating to our Business, Strategy andFinancial Condition**

 

**We have recently discontinued activepromotional activities related to our only commercially-available product,BiDil, which could significantly adversely affect our future revenue and ourability to continue to fund our operations.**

 

Based upon our determination that thesuccessful commercialization of BiDil requires a magnitude of resources that wecannot currently allocate to the program, as well as our plans to conserve cashin order to pursue the development of BiDil XR, in January 2008 wediscontinued active promotional activities for BiDil. We concurrentlyimplemented a restructuring plan that eliminated approximately 80 positions,reducing headcount to approximately 7 positions. Although we have discontinuedour promotional activities for BiDil, we continue to manufacture and sell BiDiland maintain the product on the market for patients through normal wholesaleand retail channels. We are also conducting limited advertising in selectmedical publications, and utilizing a third-party marketing firm to contacthealthcare professionals on our behalf, in each case in an effort to maintain alimited market presence for BiDil.

 

We expect to incur operating expenses goingforward primarily related to our continued development of BiDil XR and tokeeping BiDil available on the market. We expect to fund a substantial portionof these operating expenses through ongoing BiDil sales. We expect that theelimination of our sales force and discontinuation of our active promotionalefforts related to BiDil could result in a decline in BiDil prescriptions byhealthcare providers and could also adversely affect third party payors’willingness to provide reimbursement at favorable levels. If physicians do notcontinue to prescribe BiDil in sufficient quantities, and/or if managed careproviders remove BiDil from a preferential reimbursement tier on their planformularies, then our future revenue from sales of BiDil will declinesignificantly, and we may not generate sufficient capital to fund our continuedoperations, including with respect to our planned development of BiDil XR.

 

**We are evaluating strategic alternatives thatmay involve the divestiture of some or all of our business. If we are unable tosuccessfully consummate one or more of such strategic alternatives, we may nothave sufficient capital to fund our business and may be required tosubstantially curtail or cease our operations.**

 

In conjunction with our January 2008restructuring plan, in which we ceased active promotion of BiDil andsignificantly reduced our workforce, we are evaluating strategic alternativesto divest our current business in whole or in part in our effort to maximizethe value of our commercial organization and product development programs forour shareholders. We have engaged an investment bank to advise us inconsidering these potential strategic alternatives, which may include the sale,license or divestiture of certain of our assets, including our BiDil business,the assets relating to BiDil XR and/or our nitric oxide technologies, the saleor merger of our company, or other similar strategic transactions. We do notknow whether or not our evaluation of strategic alternatives will result in oneor more such transactions being successfully consummated or, if successful,that any such transaction would achieve our goal of maximizing the value of ourorganization and programs for our stockholders. 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, eitherof which would have a material and adverse effect on our business, financialcondition and results of operations.

 

**We have a history of operating losses and wewill require substantial additional amounts of cash to fund our operating plan,including our plans to support any continued sales of BiDil and to seek todevelop and commercialize BiDil XR. If additional capital is not available, wewill need to limit, scale back or cease our operations.**

 

We have experienced significant operatinglosses since our inception in 1992. As of June 30, 2008, we had anaccumulated deficit of $349.6 million. Although we recorded net income of$982,000 in the quarter ended June 30, 2008, we have not been profitablein any prior quarter since our inception, we have discontinued active promotionof BiDil, and we may incur losses in future periods.  Losses that we may incur in the future couldfluctuate from quarter to quarter, and these fluctuations could be substantial.

 

In January 2008, we ceased activelypromoting sales of BiDil, which is our only significant source of revenue. Weintend to continue incurring costs relating to supporting ongoing BiDilprescriptions, and we also expect to incur additional expenses relating to theongoing development of BiDil XR. We believe that our existing sources ofliquidity and the cash expected to be generated from future sales of BiDil,together with the significant reduction in expenditures as a result of our January 2008restructuring, will be sufficient to fund our operations for at least the nexttwelve months. However, our future capital requirements, and the period inwhich we expect our current cash to support our operations, may vary due to anumber of factors, including the following:

 

·*                 *ourability to successfully consummate one or more strategic arrangements relatingto our business and assets;

 

·*                 *theamount of future product sales of BiDil;

 

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·*                 *thecost of manufacturing and selling BiDil;

 

·*                 *thetiming of collections related to sales of BiDil;

 

·*                 *thetime and costs involved in completing the clinical trials and furtherdevelopment of, and obtaining regulatory approvals for, BiDil XR, if at all;

 

·*                 *theeffect of competing technological and market developments;

 

·*                 *thecosts involved in preparing, filing, prosecuting, maintaining and enforcingpatent claims; and

 

·*                 *thecost of maintaining licenses to use patented technologies.

 

Our business plan is to seek to divest all orsubstantially all of our business through a merger, asset sale, license,business combination or the like. However, if and for so long as we continueour current business and operations, we will require substantial additionalfunds, which we expect to generate through a combination of BiDil sales and oneor more strategic transactions. However, we may not be able to successfullyconsummate a strategic transaction, and additional financing may not beavailable to us on acceptable terms, if at all.

 

If we are unable to obtain funding on atimely basis, whether through a strategic divestiture, financing or borrowingarrangements or other capital-raising transaction, we may not be able tosupport continued prescriptions for BiDil, we may be compelled to significantlycurtail or delay our development efforts with respect to BiDil XR, and we couldalso be required to limit, scale back or cease our operations, any of whichwould have a material and adverse effect on our business, financial conditionand results of operations.

 

**A significant portion of our investmentportfolio is invested in auction rate securities which have faced recent marketfailures. Failures in these auctions have and may continue to affect ourliquidity.**

 

As of June 30, 2008, we heldapproximately $2.3 million of investments in auction rate securities.These securities are structured to allow for short-term interest rate resets,but with contractual maturity dates that can be well in excess of ten years.Auctions have historically provided a liquid market for these securities.However, beginning in early February 2008, the majority of auction ratesecurities in the marketplace failed at auction due to sell orders exceedingbuy orders. Our ability to liquidate our auction rate securities and fullyrecover the carrying value of our investment in the near term may be limited ornot exist. In the event that we need to access our investments in these typesof securities, we will not be able to do so until a future auction on theseinvestments is successful, the issuer redeems the outstanding securities, abuyer is found outside the auction process, or the securities mature, whichcould be in as many as 37 years. During the first quarter of 2008, wereclassified $1.6 million of our total amount of auction rate securities fromshort-term to long-term marketable securities. For the six months ended June30, 2008, we have recorded an other-than-temporary impairment of $16,000 on a government-backedstudent loan auction rate security and an other-than-temporary impairment of$36,000 on a preferred stock closed end fund, reflecting management’sdetermination that these securities may not be liquidated within one year dueto the auction failures described above. In the future, should we experienceadditional auction failures and/or determine that these auction rate securitieshave experienced other than temporary declines in fair value, we wouldrecognize a loss in our statement of operations, which could be material. Inaddition, any future failed auctions may adversely impact the liquidity of ourinvestments.

 

### **Ifwe fail to maintain the requirements for continued listing on the NASDAQ GlobalMarket, our common stock could be delisted from trading, which would adverselyaffect the liquidity of our common stock and our ability to raise additionalcapital.**

###  

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. Our commonstock has recently closed at prices below the minimum bid price requirement,and in February 2008 we received a deficiency notice from NASDAQ. Althoughwe regained compliance with NASDAQ’s minimum bid price rule in March 2008,if the closing bid price of our stock price falls below $1.00 per share for 30consecutive business days, we will again receive a deficiency notice fromNASDAQ advising us that we have 180 days to regain compliance by maintaining aminimum closing bid price of at least $1.00 for a minimum of ten consecutivebusiness days. Under certain circumstances, NASDAQ could require that theminimum closing bid price exceed $1.00 for more than ten consecutive daysbefore determining that a company complies with its continued listingstandards. If in the future we fail to satisfy the NASDAQ Global Market’s continuedlisting requirements, our common stock could be delisted from the NASDAQ GlobalMarket, in which case we may transfer to the NASDAQ Capital Market, whichgenerally has lower financial requirements for initial listing or, if we failto meet its listing requirements, the OTC Bulletin Board. There are manyfactors that may adversely affect our minimum bid price, 

 

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including thosedescribed throughout this section titled “Risk Factors.” Many of these factorsare 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.

 

**If we do not maintain an adequate level ofrevenue from sales of BiDil given our lack of promotional activities, theavailability of cash to fund our planned development of BiDil XR willsignificantly decline, our BiDil XR development efforts may not be successfuland our business may fail.**

 

Our current strategy is to continue toadvance the development of BiDil XR while simultaneously seeking strategicalternatives to divest all or substantially all of our current business. Wewill depend upon continued sales of BiDil to fund a substantial portion of ourcosts and expenses to develop BiDil XR. We have recently discontinued activepromotional efforts related to BiDil, and we intend only to expend theresources necessary to maintain BiDil on the market for patients through normalwholesale and retail channels. As a result of our lack of active promotionalefforts for BiDil, sales of BiDil may decline rapidly. Our inability tosuccessfully generate further revenue from BiDil sales will adversely affectour ability to seek to advance the development of BiDil XR, in which case wemay be required to further curtail or cease our operations.

 

Factors that we believe may materiallyadversely affect continued sales of BiDil, and may also affect sales of BiDilXR, if it is successfully developed and commercialized, include:

 

·*                 *thediscontinuation of our active promotional efforts related to BiDil as a resultof our January 2008 restructuring plan;

 

·*                 *theunavailability of favorable government and third-party payor reimbursement;

 

·*                 *ourinability to manufacture and sell BiDil at a competitive price;

 

·*                 *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) and the misperception by physicians,patients and payors that these generic components are equivalent to BiDil;

 

·*                 *therequirement by potential large purchasers of BiDil, such as hospitals or healthmaintenance organizations, or by state formularies, other government agenciesor private payors that approve reimbursement for drugs, that the genericcomponents of BiDil be substituted for BiDil;

 

·*                 *thefailure of physicians, third-party payors and patients to accept a product intendedto improve therapeutic results based on ethnicity or to accept BiDil as beingsafe, effective, easy to administer and medically necessary; and

 

·*                 *ourinability to maintain the necessary patent protection, licenses and regulatoryapprovals required to manufacture and sell BiDil.

 

**If the third-party manufacturer of BiDilencounters delays or difficulties in production, we may not be able to meetdemand for the product and we may lose potential revenue, which would adverselyaffect our financial results and our ability to execute our business plan.**

 

We do not physically manufacture BiDil andhave no plans to do so. We have engaged Schwarz Pharma under a five-yearexclusive manufacturing and supply agreement solely for the three times dailyimmediate release dosage formulation of BiDil. Under the supply agreement, wehave the right to engage a backup manufacturer but do not currently have anybackup manufacturing agreement in place. The terms of the supply agreementprovide that it may be terminated by either us or Schwarz Pharma underspecified circumstances, including a material breach of the supply agreement byeither party, the occurrence of a payment default by us, our materialimpairment of the manufacturing licenses we have granted to Schwarz Pharma or afailure of Schwarz Pharma to supply conforming products. In addition, eitherparty may terminate the supply agreement in the event the FDA takes any action,the result of which is to permanently prohibit the manufacture, sale or use ofthe product.

 

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

 

·*                 *difficultieswith production costs and yields;

 

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·                  qualitycontrol and assurance;

 

·                  difficultiesobtaining ingredients for our products;

 

·                  shortagesof qualified personnel;

 

·                  compliancewith strictly enforced federal, state and foreign regulations; and

 

·                  lackof capital funding.

 

If we are unable to maintain a commerciallyreasonable manufacturing agreement for the production of BiDil with SchwarzPharma, we have no back-up manufacturing facility and thus we would not be ableto manufacture and sell BiDil until another facility was qualified. The numberof third-party manufacturers with the manufacturing and regulatory expertiseand facilities necessary to manufacture finished products for us on acommercial scale is limited, and it would take a significant amount of time toarrange, qualify, and receive necessary regulatory approval for alternativearrangements. We may not be able to contract for alternative manufacturing onacceptable terms, if at all.

 

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

 

**We rely on a single supplier for one of thetwo active ingredients in BiDil, and the loss of this supplier could prevent orinterrupt the sale of BiDil, which would materially harm our business.**

 

We rely on Sumitomo Corp. for our supply ofhydralazine hydrochloride, one of the two active ingredients in BiDil. Sumitomois currently the only supplier which is qualified to provide hydralazinehydrochloride for the manufacture of BiDil. We do not have any agreement withSumitomo regarding the supply of hydralazine hydrochloride. If Sumitomo stopsmanufacturing or is unable to manufacture hydralazine hydrochloride, or if weare unable to procure hydralazine hydrochloride from Sumitomo on commerciallyfavorable terms, we will need to identify, qualify, and obtain FDA approval ofa New Drug Application, or NDA, supplement for an alternativemanufacturer/supplier of hydralazine hydrochloride. If we are unable or delayedin doing this, we may be unable to continue to sell BiDil on commerciallyviable terms, if at all, or the supply of BiDil may be interrupted.Furthermore, because Sumitomo is currently the sole qualified supplier ofhydralazine hydrochloride for the manufacture of BiDil, Sumitomo exercisescontrol over the price of hydralazine hydrochloride that we purchase. Anyincrease in the price for hydralazine hydrochloride may reduce our grossmargins and adversely affect our ability to sell BiDil at a favorable price,unless an alternative manufacturer/supplier can be identified and qualified, aNDA supplement for the use of this manufacturer/supplier can be approved by theFDA, and a favorable price can be negotiated.

 

**BiDil is subject to ongoing regulatory reviewand oversight. If we fail to comply with continuing United States regulations,we could lose our approval to market BiDil and our business would be seriouslyharmed.**

 

Even after approval, any products we developare subject to ongoing regulatory review and restrictions, including the reviewof new clinical results and other post-marketing data. The FDA can propose towithdraw approval or place additional restrictions on indications for which wecan market the product or the manner in which we may distribute the product ifnew clinical data or experience shows that a product is not safe for use underthe approved conditions of use. In addition, we are required to report anyserious and unexpected adverse experiences and certain quality problems withBiDil and make other periodic reports to the FDA.

 

The marketing claims we are permitted to makein labeling or advertising regarding our marketed products must comply with FDAlaws and regulations and are limited to those specified in any FDA approval.Although we are not actively marketing BiDil, we could face liability for ourprevious marketing activities if the FDA believes that we have promoted ourproducts for unapproved indications or otherwise failed to comply with the FDA’spromotional labeling or advertising regulations, or guidelines regardingcompany support for continuing medical education. Based on such allegations,the FDA could issue an untitled letter or warning letter, or take otherenforcement action including seizure of allegedly violative product,injunctions or civil or criminal prosecution against us and our officers oremployees. In addition, the Department of Justice enforces laws prohibitingkickbacks to healthcare providers and false claims in connection withgovernment-funded reimbursement programs for drug purchases, such as Medicareand Medicaid, and any prior off-label marketing of BiDil could subject us tocivil or criminal prosecution, for which the government could seek to recoversubstantial monetary penalties, the imposition of restrictions on our marketingactivities, and the exclusion of BiDil from eligibility for governmentreimbursement programs.

 

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In addition, the manufacturer and themanufacturing facilities we use to produce BiDil are subject to periodic reviewand inspection by the FDA. The discovery of any previously unknown problemswith a product, manufacturer or facility may result in restrictions on theproduct, manufacturer or manufacturing facility, including withdrawal of theproduct from the market. Certain changes to an approved product often requireprior FDA approval before the product, as modified, may be marketed.

 

If we or our third-party manufacturers orservice providers fail to comply with applicable federal, state or foreign lawsor regulations, we or they could be subject to enforcement actions which couldaffect our ability to develop, market and sell BiDil successfully and couldharm our reputation and lead to lower acceptance of BiDil by the market. Theseenforcement actions include product seizures; voluntary or mandatory recalls;patient or physician notifications, including letters to healthcareprofessionals and corrective advertising; withdrawal of product approvals;restrictions on, or prohibitions against, marketing our products; operatingrestrictions; fines; restrictions on importation or exportation of ourproducts; injunctions; debarments; civil and criminal penalties; and suspensionof review of, or refusal to approve, pending applications.

 

**Clinical testing of BiDil XR may not besuccessful, in which case we may be unable to commercialize BiDil XR and thevalue of our business will substantially decline.**

 

In order to obtain regulatory approvals forthe commercial sale of BiDil XR, we will be required to complete clinicaltrials in humans to demonstrate the safety and efficacy of BiDil XR. Clinicaltesting is expensive, difficult to design and implement, can take many years tocomplete and is uncertain as to outcome. A failure of one or more of ourclinical trials of BiDil XR can occur at any stage of testing.

 

We met with the FDA in December 2007,and the agency agreed that our clinical development plan to conductbioequivalence and pharmacodynamic studies comparing BiDil XR to the currentcommercial immediate release formulation of BiDil is acceptable. The agencyindicated that such a plan could support FDA approval to commercialize BiDilXR, if bioequivalence is demonstrated. The bioequivalence study design comparesthe pharmacokinetics of the XR formulation to the pharmacokinetics of theimmediate release formulation. Pharmacokinetics refers to the manner in whichthe body absorbs, distributes, metabolizes and excretes the study drug. Theadequacy of the results will ultimately be determined by the FDA during theregulatory review period. Although we are encouraged by this meeting with theFDA, we may experience numerous unforeseen events during, or as a result of,our planned clinical trials of BiDil XR that could delay or prevent our abilityto receive regulatory approval for, or commercialize, BiDil XR, including:

 

·                  conditionsimposed on us by the FDA regarding the scope or design of our clinical trials;

 

·                  difficultyobtaining or maintaining IRB approval of studies;

 

·                  problemsin finalizing the formulation of BiDil XR through our planned clinical studies;

 

·                  ourclinical trials may produce negative or inconclusive results, and we maydecide, or regulators may require us, to conduct additional clinical trials,including testing alternative formulations of BiDil XR;

 

·                  thenumber of patients required for our clinical trials may be larger than weanticipate, enrollment in our clinical trials may be slower than we currentlyanticipate, or participants may drop out of our clinical trials at a higherrate than we anticipate, any of which would result in significant delays andincreased costs;

 

·                  ourthird party contractors may fail to comply with regulatory requirements or meettheir contractual obligations to us in a timely manner;

 

·                  wemight have to suspend or terminate one or more of our clinical trials if theparticipants are being exposed to unacceptable health risks;

 

·                  regulatorsmay require that we hold, suspend or terminate clinical research for variousreasons, including noncompliance with regulatory requirements;

 

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

 

·                  thesupply or quality of BiDil XR or other materials necessary to conduct ourclinical trials may be insufficient or inadequate; and

 

·                  theeffects of BiDil XR may not be the desired effects or may include undesirableside effects or may have other unexpected characteristics.

 

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If we are required to conduct additionalclinical trials or other testing of BiDil XR beyond those that we currentlycontemplate, if we are unable to successfully complete our clinical trials orother testing, if the results of these trials or tests are not positive or areonly modestly positive or if there are safety concerns, we may:

 

·                  bedelayed in obtaining marketing approval for BiDil XR;

 

·                  notbe able to obtain marketing approval;

 

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

 

·                  havethe product removed from the market after obtaining marketing approval.

 

Our product development costs will alsoincrease if we experience delays in testing or approvals. We do not knowwhether future clinical trials will begin as planned, will need to beredesigned or will be completed on schedule, if at all. Significant clinicaltrial delays also could shorten any periods during which we may have theexclusive right to commercialize BiDil XR, or allow our competitors to bringproducts to market before we do, which could impair our ability tocommercialize BiDil XR and may harm our business and results of operations.

 

**We currently rely on a third party contractresearch organization to conduct our clinical trials of BiDil XR, and we relyon other third party entities to conduct certain testing activities related tothese clinical trials. These third parties may not perform satisfactorily,including failing to meet established deadlines for the completion of suchtrials.**

 

We do not independently conduct clinicaltrials for BiDil XR. We rely on a third party contract research organization toenroll qualified patients and conduct our clinical trials of BiDil XR. Inaddition, we rely on other third party entities to conduct testing activitiesrelated to these clinical trials. Our reliance on these third parties forclinical development activities reduces our control over these activities. Weare responsible for ensuring that each of our clinical trials is conducted inaccordance with the general investigational plan and protocols for the trial.Moreover, the FDA requires us to comply with standards, commonly referred to asGood Clinical Practices, for conducting, recording, and reporting the resultsof clinical trials to assure that data and reported results are credible andaccurate and that the rights, integrity and confidentiality of trialparticipants are protected. Our reliance on third parties that we do notcontrol does not relieve us of these responsibilities and requirements.Furthermore, any of these third parties may also have relationships with otherentities, some of which may be our competitors. If any of these third partyentities fail to successfully carry out their contractual duties, meet expecteddeadlines or conduct our clinical trials and related testing in accordance withregulatory requirements or our stated protocols, we will not be able to obtain,or may be delayed in obtaining, regulatory approvals for BiDil XR and will notbe able to, or may be delayed in our efforts to, successfully commercializeBiDil XR.

 

**If we are not able to obtain requiredregulatory approvals, we will not be able to commercialize BiDil XR and ourability to generate revenue will be materially impaired.**

 

BiDil XR, and the activities associated withits development and commercialization, including testing, manufacture, safety,efficacy, recordkeeping, labeling, storage, approval, advertising, promotion,sale and distribution, are subject to comprehensive regulation by the FDA andother regulatory agencies in the United States and by authorities in othercountries. Failure to obtain regulatory approval for BiDil XR will prevent usfrom commercializing BiDil XR.

 

Securing FDA approval may require thesubmission of extensive preclinical and clinical data, information aboutproduct manufacturing processes and inspection of facilities and supportinginformation to the FDA for each therapeutic indication to establish the productcandidate’s safety and efficacy. Our future product, BiDil XR, may not beeffective, may be only moderately effective or may prove to have undesirableside effects, toxicities or other characteristics that may preclude ourobtaining regulatory approval or prevent or limit commercial use.

 

The process of obtaining regulatory approvalsis expensive and often takes many years, if approval is obtained at all, andcan vary substantially based upon the type, complexity and novelty of theproduct candidate involved. Changes in the regulatory approval policy duringthe development period, changes in or the enactment of additional statutes orregulations, or changes in regulatory review for each submitted productapplication, may cause delays in the approval or rejection of an application.The FDA has substantial discretion in the approval process and may refuse toaccept any application or may decide that our data are insufficient forapproval and require additional preclinical, clinical or other studies. Inaddition, varying interpretations of the data obtained from preclinical andclinical testing could delay, limit or prevent regulatory approval of a productcandidate. Any regulatory approval we ultimately obtain may be limited in scopeor subject to restrictions or post-approval commitments that render the productnot commercially viable. If any regulatory approval that we obtain is delayedor is limited, we may decide not to commercialize BiDil XR after receiving theapproval.

 

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**The development and future commercializationof BiDil XR may be terminated or delayed, and the cost of development andfuture commercialization may increase, if third parties on whom we rely tomanufacture BiDil XR do not fulfill their obligations.**

 

We do not have manufacturing capabilities forBiDil XR and have no current plans to develop any such capacity in the future.In order to continue to develop BiDil XR, apply for regulatory approvals andcommercialize this product, we plan to rely on our collaborative licensor,Elan, for the production of clinical and commercial quantities of BiDil XR. Inaddition, contract manufacturers are subject to ongoing periodic, unannouncedinspection by the FDA and corresponding state and foreign agencies or theirdesignees to ensure strict compliance with current Good Manufacturing Practices,or cGMP, and other governmental regulations and corresponding foreignstandards. The cGMP requirements govern, among other things, quality control ofthe manufacturing process and documentation of policies and procedures. Otherthan through contract, we do not have control over compliance by our contractmanufacturers with these regulations and standards. Our present or futurecontract manufacturers may not be able to comply with cGMP and other FDArequirements or similar regulatory requirements outside the United States. Anyfailure by our contract manufacturers or us to comply with applicableregulations could result in sanctions being imposed on us, including fines,injunctions, civil penalties, failure of regulatory authorities to grant marketingapproval of BiDil, delays, suspension or withdrawal of approvals, seizures orrecalls of such product candidate, operating restrictions, and criminalprosecutions, any of which could significantly and adversely affect ourbusiness. We will depend upon these third parties to perform their obligationsin a timely manner and in accordance with applicable laws and regulations,including those related to quality control and quality assurance. To the extentthat third-party manufacturers with whom we contract fail to perform theirobligations in accordance with applicable laws and regulations, we may beadversely affected in a number of ways, including:

 

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

 

·                  wemay be delayed in submitting applications for regulatory approvals for BiDilXR; and

 

·                  evenif we successfully commercialize BiDil XR, we may be required to ceasedistribution and/or recall some or all batches of the product and we may not beable to meet commercial demands for our products or achieve profitability.

 

**Our ability to generate future revenue fromour nitric oxide technology portfolio is completely dependent on our ability toenter into scientifically and commercially successful out-licensingarrangements with third parties.**

 

At the end of the first quarter of 2006, wescaled back our research and development staff in a restructuring of ourcompany and have limited our internal research and development activitiessolely to the continued development of BiDil XR. We are currently seekingout-licensing opportunities for our other potential product candidates based onour proprietary nitric oxide technology. The application of our proprietarynitric oxide technology is unproven in humans and, as a result, we may not beable to successfully out-license any products based on this technology. Ourpotential product candidates include nitric oxide enhancements of existingdrugs; in these cases, we have sought to modify compounds whose chemical andpharmacological profiles are well-documented and understood. Many of ourpotential product candidates, however, are new molecules with chemical andpharmacological 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 factors that may affect thesuccess of our potential future out-licensing arrangements include thefollowing:

 

·                  ourfuture licensing partners may be pursuing alternative technologies ordeveloping 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;

 

·                  futurereductions in marketing or sales efforts or a suspension of marketing or salesof our products by our licensing partners would reduce our revenues, whichcould be based on a percentage of net sales by the licensee;

 

·                  ourfuture licensing partners may terminate their agreements with us, which couldmake it difficult for us to attract new licensees or adversely affect how weare perceived in the business and financial communities; and

 

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·                  ourfuture licensing partners may pursue higher-priority programs or change thefocus of their development programs, which could affect a licensee’s commitmentto us.

 

As a result of the foregoing factors, ourpotential strategic licensees may not be successful in developing andcommercializing any products based on our proprietary nitric oxide technology.Any failure of such potential licensees at any stage of the development orcommercialization process with respect to our potential product candidates wouldsignificantly reduce the possibility that we would realize any future revenuefrom our technology portfolio.

 

**Risks Relating to our Intellectual PropertyRights**

 

**Our patent protection for BiDil, theindividual components of which are available in generic form, is limited, andwe may be subject to generic substitution or competition and resulting pricingpressure.**

 

We have no composition of matter patentcovering BiDil, our product for the treatment of heart failure inself-identified black patients as an adjunct to current standard therapy. BiDilis a fixed-dose combination of two individual components, isosorbide dinitrateand hydralazine hydrochloride, both of which are available in generic form,which are approved and separately marketed, in dosages similar to those weinclude in BiDil, for indications other than heart failure, at prices below theprices we are charging for BiDil. We have two issued method-of-use patents thatexpire in 2020. One patent covers the use of the combination of isosorbide dinitrateand hydralazine hydrochloride to reduce mortality associated with chroniccongestive heart failure, for improving the oxygen consumption, for improvingthe quality of life or for improving exercise tolerance in a black patient. Theother patent covers the use of the combination of isosorbide dinitrate andhydralazine hydrochloride in certain dosage amounts for reducing mortalityassociated with heart failure in a black patient. Our method of use patent thatcovered the use of the combination of isosorbide dinitrate and hydralazinehydrochloride to reduce the incidence of mortality associated with chroniccongestive heart failure expired in accordance with its terms in April 2007.

 

We may not be able to enforce ourmethod-of-use patents to prevent physicians from prescribing isosorbidedinitrate and hydralazine hydrochloride separately for the treatment of heartfailure in black patients, even though neither drug is approved for such use.We also may not be able to enforce these method-of-use patents to preventhospitals and pharmacies from supplying such patients with these individualcomponents separately in lieu of BiDil.

 

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

 

**If we are not able to obtain and enforcepatent protection for our discoveries, our ability to secure out-licensingarrangements with respect to our potential product candidates will be harmed,and we may not be able to operate our business profitably.**

 

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

 

The process of seeking patent protection forour discoveries is expensive and time consuming, and we may not be able toprosecute all necessary or desirable patent applications or maintain all issuedpatents at a reasonable cost. Despite our efforts to protect our proprietaryrights, unauthorized parties may be able to obtain and use information that weregard as proprietary. The mere issuance of a patent does not guarantee that itis valid or enforceable; even if we have obtained patents, they may not bevalid or enforceable against third parties.

 

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The issued patents and patent applicationsfor our potential product candidates and nitric oxide technology include claimswith respect to both the composition of specific products or compounds andspecific methods of using these products or compounds in therapeutic areas. Insome cases, like BiDil, our only patent protection is with respect to themethod of using a product or compound. Method-of-use patents may provide lessprotection for our product candidates and products. If another company gainsFDA approval for an indication separate from the one claimed in ourmethod-of-use patents, physicians may be able to prescribe that product for usein the approved indication. In addition, physicians may prescribe a product forwhich we or our potential strategic partners have obtained approval for anunapproved indication for that product. As a practical matter, we or ourpotential strategic partners may not be able to enforce our method-of-usepatents against physicians prescribing products for such off-label use. Off-labeluse and any resulting off-label sales could make it more difficult to obtainthe price we or our potential strategic partners would otherwise wish toachieve for, or to successfully commercialize, our potential products. Inaddition, in those situations where we have only method-of-use patent coveragefor a product candidate, it may be more difficult to find a pharmaceuticalcompany partner to license or support development of our potential productcandidates.

 

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

 

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

 

**If we become involved in patent litigation orother proceedings to enforce our patent rights, we would incur substantialcosts and expenses, as well as substantial liability for damages, and/or we, orour strategic partners, could be required to stop product development andcommercialization efforts.**

 

A third party may sue us or our potentialstrategic partners for infringing on its patent rights. Likewise, we or ourpotential strategic partners may need to resort to litigation to enforce apatent issued to us or to seek a declaratory judgment on the scope and validityof third-party proprietary rights. The cost to us or our potential strategicpartners of any litigation or other proceedings relating to intellectualproperty rights, even if resolved in our or our partner’s favor, could besubstantial, and the litigation would divert management’s efforts. Some of ourcompetitors may be able to sustain the costs of complex patent litigation moreeffectively than we can because they have substantially greater resources. Inaddition, our strategy of providing nitric oxide-enhancing versions of existingproducts could lead to more patent litigation due to the fact that the marketsfor these existing products are very large and competitive. Uncertaintiesresulting from litigation could limit our ability to continue our operations.

 

If a third party is able to successfullyclaim that the development or use by us or our potential strategic partners ofproprietary technologies infringes upon their intellectual property rights, weor our potential strategic partners might be forced to pay damages, potentiallyincluding treble damages, if we or our potential strategic partners are foundto have willfully infringed on such parties’ patent rights. In addition to anydamages we or our potential strategic partners might have to pay, a court couldrequire us or our potential strategic partners to stop the infringing activityor obtain a license on terms that are unfavorable to us. In addition, somelicenses may be non-exclusive, and therefore our competitors may have access tothe same technology licensed to us. If we or our potential strategic partnersfail to obtain a required license or are unable to design around a patent, weor our potential strategic partners may be unable to effectively market some ofour technology and product candidates, which could limit our ability togenerate revenues or achieve profitability and possibly prevent us fromgenerating sufficient revenue to sustain our operations.

 

**We in-license a significant portion of ourprincipal proprietary technologies, and if we fail to comply with ourobligations under any of the related agreements, we could lose license rightsthat are necessary to commercializing BiDil and out-licensing our other productcandidates.**

 

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

 

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**Risks Relating to our Industry**

 

**We could be negatively impacted by theapplication or enforcement of federal and state fraud and abuse laws, includinganti-kickback laws and other federal and state anti-referral laws.**

 

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

 

In addition, we could become subject to falseclaims litigation under federal statutes, which can lead to treble damagesbased on the reimbursements by federal healthcare programs, civil moneypenalties (including penalties levied on a per false claim basis), restitution,criminal fines and imprisonment, and exclusion from participation in Medicare,Medicaid and other federal and state healthcare programs. These false claimsstatutes include the False Claims Act, which allows any person to bring suit onbehalf of the federal government alleging the submission of false or fraudulentclaims, or causing to present such false or fraudulent claims, under federalprograms or contracts claims or other violations of the statute and to share inany amounts paid by the entity to the government in fines or settlement. Thesesuits against pharmaceutical and biotechnology companies have increasedsignificantly in recent years and have increased the risk that a healthcarecompany will have to defend a false claim action, pay fines or restitution, orbe excluded from the Medicare, Medicaid or other federal and state healthcareprograms as a result of an investigation arising out of such action. It ispossible that we could become subject to such litigation and, if we are notsuccessful in defending against it, such litigation would have a materialadverse effect on our business, financial condition and results of operations.In addition, the cost of defending claims or allegations under the False ClaimsAct, even if successful, would also have a material adverse effect on ourbusiness, financial condition and results of operations.

 

**We face significant competition, which mayresult in others commercializing products more successfully than ours.**

 

The pharmaceutical industry is highlycompetitive and characterized by rapid and significant technological change.Moreover, because we have discontinued all promotional activities for BiDil andwe have ceased all research and development related to our nitric oxide-based productcandidates, our ability to effectively compete in the marketplace has beensignificantly adversely affected. Our principal competitors are large,multinational pharmaceutical companies that have substantially greaterfinancial and other resources than we do and are conducting extensive researchand development activities on technologies and product candidates similar to orcompetitive with ours. Many of our competitors are more experienced than we arein pharmaceutical development and commercialization, obtaining regulatoryapprovals and product marketing and manufacturing. As a result, our competitorsmay:

 

·                  developand commercialize products that render BiDil and/or BiDil XR, if successfullydeveloped and commercialized, obsolete or non-competitive or that cause BiDilto be less desirable as a result of patent or non-patent exclusivity;

 

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

 

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

 

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

 

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

 

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

 

There are a number of companies currentlymarketing and selling products to treat heart failure in the general populationthat will compete with BiDil. These include GlaxoSmithKline, plc, whichcurrently 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.

 

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We also face competition from otherpharmaceutical companies seeking to develop drugs using nitric oxidetechnology. For example, we are aware of at least seven companies working inareas of nitric oxide based therapeutics which may overlap areas in which wehave previously engaged in discovery research activities. These companies are:Angiogenix, Inc., Vernalis plc, NicOx S.A., AmuletPharmaceuticals, Inc., RenoPharm, Vasopharm BIOTECH GmbH and N30Pharmaceuticals, LLC.

 

We expect to face similar competitive factorswith respect to BiDil XR to the extent that BiDil XR is successfully developedand commercialized.

 

**We may be exposed to product liability claimsand may not be able to obtain or maintain adequate product liability insurance.**

 

Our business exposes us to the risk ofproduct liability claims that is inherent in the clinical testing,manufacturing and marketing of human therapeutic products. Our clinical trialand commercial product liability insurance is subject to deductibles andcoverage limitations. We may not be able to obtain or maintain insurance onacceptable terms, if at all. Moreover, any insurance that we do obtain may notprovide adequate protection against potential liabilities, and our capitalresources could be depleted as a result.

 

**Risks Relating to our Common Stock**

 

**The price of our common stock is likely tocontinue to be volatile in the future.**

 

The stock market has from time to time experiencedsignificant price and volume fluctuations that may be unrelated to theoperating performance of particular companies. In particular, the market priceof our common stock, like that of the securities of other biopharmaceuticalcompanies, has been and may continue to be highly volatile. During the periodfrom January 1, 2006 to July 31, 2008, our stock price has rangedfrom a low of $0.80 per share on January 22, 2008 to a high of $14.90 pershare on January 9, 2006. The following factors, among others, may affectthe price of our common stock:

 

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

 

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

 

·                  generalmarket conditions;

 

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

 

·                  announcementsof actual or potential results relating to our BiDil XR development program;

 

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

 

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

 

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

 

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

 

·                  issuancesof securities in equity, debt or other financings;

 

·                  salesof common stock by existing stockholders; and

 

·                  theperception that such issuances or sales could occur.

 

**Insiders have substantial control over us andcould delay or prevent a change in corporate control.**

 

As of July 31, 2008, our directors andexecutive officers, together with their affiliates, owned, in the aggregate,approximately 33% of our outstanding common stock. As a result, thesestockholders, if acting together, may have the ability to determine the outcomeof matters submitted to our stockholders for approval, including the electionand removal of directors and any 

 

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merger, consolidation or sale of all or substantially all of ourassets. In addition, these persons, if acting together, will have the abilityto control the management and affairs of our company. Accordingly, thisconcentration of ownership may harm the market price of our common stock by:

 

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

 

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

 

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

 

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

 

Provisions of our restated certificate ofincorporation and bylaws may discourage, delay or prevent a merger, acquisitionor other change in control that stockholders may consider favorable, includingtransactions in which stockholders might otherwise receive a premium for theirshares. These provisions may prevent or frustrate attempts by stockholders toreplace or remove our current management. These provisions include:

 

·                  aprohibition on stockholder action through written consent;

 

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

 

·                  advancenotice requirements for stockholder proposals and nominations;

 

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

 

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

 

In addition, Section 203 of the DelawareGeneral Corporation Law prohibits a publicly held Delaware corporation fromengaging in a business combination with an interested stockholder, generallydefined as a person or entity which together with its affiliates owns or withinthe last three years has owned 15% of our voting stock, for a period of threeyears after the date of the transaction in which the person became aninterested stockholder, unless the business combination is approved in aprescribed manner. Accordingly, Section 203 may discourage, delay or preventa change in control of our company.

 

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

 

Sales of a substantial number of shares ofour common stock in the public market could occur at any time. These sales, orthe perception in the market that the holders of a large number of sharesintend to sell shares, could reduce the market price of our common stock. As ofJuly 31, 2008, there were 46,086,825 shares of common stock outstanding.Substantially all of these shares may also be resold in the public market atany time. In addition, we have a significant number of shares that are subjectto outstanding options and restricted stock awards. The sale of the commonstock underlying these options and pursuant to these restricted stock awardsafter such time as the options and restricted stock awards have vested andbecome exercisable or free from forfeiture, as the case may be, could cause a furtherdecline in our stock price. These sales also might make it difficult for us tosell equity securities in the future at a time and at a price that we deemappropriate.

 

**We may incur significant costs and suffermanagement distraction and reputational damage from class action litigation.**

 

Our stock price has been, and is likely tocontinue to be, volatile. When the market price of a company’s stock isvolatile, holders of that company’s stock may bring securities class actionlitigation against the company that issued the stock. If any of ourstockholders were to bring a lawsuit of this type against us, even if thelawsuit was without merit, we could incur substantial costs defending thelawsuit.

 

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

 

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

 

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| **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** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1, 2008 – April 30, 2008 |       | 13,621                                                    |       | $                                  | 1.22       |                                                                                                                                      | —     |                                                                                                                                | —     |   |
| May 1, 2008 – May 31, 2008     |       | 466                                                       |       | $                                  | 1.26       |                                                                                                                                      | —     |                                                                                                                                | —     |   |
| June 1, 2008 – June 30, 2008   |       | —                                                    |       | $                                  | —     |                                                                                                                                      | —     |                                                                                                                                | —     |   |
| Total                                         |       | 14,087                                                    |       |                               |       | —                                                                                                                                    |       | —                                                                                                                              |       |

 

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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.

 

**Item4.**          Submissionof Matters to a Vote of Security Holders

** **

Our Annual Meeting of Stockholderswas held on May 14, 2008. At the Annual Meeting, the following matterswere voted upon by holders of 35,225,078, or approximately 76.4%, of the totaloutstanding shares of our common stock entitled to vote at the Annual Meeting:

 

1.             Toelect the following ten directors:

 
| ** **                    | ** ** | **VOTES  FOR** | ** ** | **VOTES  WITHHELD** | ** ** |
|-------------------------------|------------|----------------|------------|---------------------|------------|
| Argeris Karabelas, Ph.D.      |       | 32,792,380     |       | 2,432,698           |       |
| Kenneth M. Bate               |       | 32,719,420     |       | 2,505,658           |       |
| Robert S. Cohen               |       | 32,794,127     |       | 2,430,951           |       |
| Frank L. Douglas, M.D., Ph.D. |       | 30,019,944     |       | 5,205,134           |       |
| Zola Horovitz, Ph.D.          |       | 31,276,586     |       | 3,948,492           |       |
| Mark Leschly                  |       | 32,794,889     |       | 2,430,189           |       |
| John W. Littlechild           |       | 32,764,345     |       | 2,460,733           |       |
| Joseph Loscalzo, M.D., Ph.D.  |       | 30,041,027     |       | 5,184,051           |       |
| Davey Scoon                   |       | 32,791,929     |       | 2,433,149           |       |
| Christopher J. Sobecki        |       | 32,794,587     |       | 2,430,491           |       |

 

Each of the above named individuals was elected as adirector.

 

2.             To ratify the selection of Ernst &Young LLP as our independent registered public accounting firm for the fiscalyear ending December 31, 2008:

 
| **VOTES FOR** | ** ** | **VOTES AGAINST** | ** ** | **ABSTENTIONS** | ** ** | **BROKER  NON-VOTES** | ** ** |
|--------------------|------------|------------------------|------------|-----------------|------------|-----------------------|------------|
| 35,065,102         |       | 128,499                |       | 31,474          |       | —                |       |

 

The foregoing proposal was approved.

 

**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:  August 5, 2008 |                |   |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                   |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Assignment of Lease and Assumption Agreement, dated  as of May 29, 2008, by and between NitroMed, Inc. and Cubist  Pharmaceuticals, Inc., filed as an exhibit to NitroMed’s Current  Report on Form 8-K (File No. 000-50439) filed on June 3, 2008  and incorporated herein by reference. |
| 10.2                |       | Sublease, dated as of May 29, 2008, by and  between NitroMed, Inc. and Cubist Pharmaceuticals, Inc., filed as  an exhibit to NitroMed’s Current Report on Form 8-K (File  No. 000-50439) filed on June 3, 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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