**UNITEDSTATESSECURITIES 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, 2007**                                                                                                                                                                                                                                   |
| ** **                                                                                                                                                                                                                                                                               |
| **Or**                                                                                                                                                                                                                                                                                   |
| ** **                                                                                                                                                                                                                                                                               |
| **o**                                                                                                                                                                                                                                                                                    |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                               |   | ** ** |
| **For the  Transition Period from                       to                    ** |
| ** **                                                                                                                                                                                                                                                                               |
| **Commission  File Number 000-50439**                                                                                                                                                                                                                                                    |

 

**NitroMed, Inc.**

(Exact Name of Registrantas Specified in Its Charter)

| **Delaware**                                                |   | **22-3159793**       |
|-------------------------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of                            |   | (I.R.S. Employer     |
| Incorporation or  Organization)                             |   | Identification  No.) |
|                                                        |   |                 |
| **45  Hayden Avenue, Suite 3000, Lexington, Massachusetts** |   | **02421**            |
| (Address of  Principal Executive Offices)                   |   | (Zip Code)           |

 

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

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

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.  (Check one):
| Large Accelerated Filer  o |   | Accelerated Filer  x |   | Non-Accelerated Filer   o |
|--------------------------------------|--------|--------------------------------|--------|-------------------------------------|

 

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

As of July 27, 2007, the registrant had 45,823,426shares of Common Stock, $0.01 par value per share, outstanding.

 

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NITROMED, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

**TABLE OF CONTENTS**
| PART I.       |   | FINANCIAL INFORMATION                                                                               |   |
|--------------------|--------|-----------------------------------------------------------------------------------------------------|--------|
| Item 1.            |   | Financial  Statements (unaudited)                                                                   |   |
|               |   | Condensed Balance  Sheets as of June 30, 2007 and December 31, 2006                       |   |
|               |   | Condensed  Statements of Operations for the three and six months ended June 30,  2007 and 2006 |   |
|               |   | Condensed Statements  of Cash Flows for the six months ended June 30, 2007 and 2006            |   |
|               |   | 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 4.            |   | Submission of  Matters to a Vote of Security Holders                                                |   |
| Item  6.           |   | Exhibits                                                                                            |   |
| SIGNATURES         |   |
| EXHIBIT INDEX |   |

 

2

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**PART I.FINANCIAL INFORMATION**

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

**NITROMED, INC.CONDENSED BALANCE SHEETS(in thousands, except par value amounts)**
| ** **                                                                                                                                                                 | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                 | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                            |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                 |       | $                       | 16,972     |                        | $          | 21,074 |   |
| Marketable  securities                                                                                                                                                     |       | 27,474                  |       | 21,079                      |       |
| Accounts  receivable                                                                                                                                                       |       | 1,368                   |       | 1,370                       |       |
| Inventories                                                                                                                                                                |       | 2,986                   |       | 2,846                       |       |
| Prepaid expenses  and other current assets                                                                                                                                 |       | 653                     |       | 570                         |       |
| Total current assets                                                                                                                                                       |       | 49,453                  |       | 46,939                      |       |
| Property and equipment,  net                                                                                                                                               |       | 370                     |       | 963                         |       |
| Restricted cash                                                                                                                                                            |       | 191                     |       | 803                         |       |
| Total assets                                                                                                                                                               |       | $                       | 50,014     |                        | $          | 48,705 |   |
|                                                                                                                                                                       |       |                    |       |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                             | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                       |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                           |       | $                       | 1,256      |                        | $          | 1,923 |   |
| Accrued expenses                                                                                                                                                           |       | 6,431                   |       | 6,545                       |       |
| Accrued  restructuring                                                                                                                                                     |       | —                  |       | 299                         |       |
| Deferred revenue                                                                                                                                                           |       | —                  |       | 206                         |       |
| Current portion  of long-term debt                                                                                                                                         |       | 7,277                   |       | 6,925                       |       |
|                                                                                                                                                                       |       |                    |       |                        |       |
| Total current  liabilities                                                                                                                                                 |       | 14,964                  |       | 15,898                      |       |
| Long-term debt                                                                                                                                                             |       | —                  |       | 3,728                       |       |
|                                                                                                                                                                       |       |                    |       |                        |       |
| Commitments and  contingencies (Note 13)                                                                                                                                   |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                                 |       |                    |       |                        |       |
| Preferred stock,  $0.01 par value; 5,000 shares authorized; no shares issued or outstanding                                                                                |       | —                  |       | —                      |       |
| Common stock,  $0.01 par value; 65,000 shares authorized; 45,156 and 37,181 shares issued  and outstanding at June 30, 2007 and December 31, 2006,  respectively |       | 452                     |       | 372                         |       |
| Additional  paid-in capital                                                                                                                                                |       | 364,753                 |       | 342,528                     |       |
| Accumulated  deficit                                                                                                                                                       |       | (330,158                | )          | (313,808                    | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                             |       | 3                       |       | (13                         | )          |
| Total stockholders’  equity                                                                                                                                           |       | 35,050                  |       | 29,079                      |       |
| Total liabilities and stockholders’ equity                                                                                                                            |       | $                       | 50,014     |                        | $          | 48,705 |   |

 

See accompanyingnotes.

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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,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Product revenue                                                       |       | $                                               | 3,715      |                                          | $          | 2,855 |   | $ | 7,283 |   | $ | 5,171 |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Cost and  operating expenses:                                         |       |                                            |       |                                          |       |   |   |   |   |
| Cost of product sales                                                 |       | 637                                             |       | 621                                           |       | 1,591 |   | 1,517 |   |
| Research and development (1)                                          |       | 2,931                                           |       | 4,516                                         |       | 5,938 |   | 10,515 |   |
| Sales, general and administrative (1)                                 |       | 6,634                                           |       | 16,580                                        |       | 15,582 |   | 36,365 |   |
| Restructuring charge                                                  |       | —                                          |       | —                                        |       | 1,004 |   | 2,038 |   |
| Total cost and  operating expenses                                    |       | 10,202                                          |       | 21,717                                        |       | 24,115 |   | 50,435 |   |
| Loss from  operations                                                 |       | (6,487                                          | )          | (18,862                                       | )          | (16,832 | ) | (45,264 | ) |
| Non-operating  income:                                                |       |                                            |       |                                          |       |   |   |   |   |
| Interest expense                                                      |       | (195                                            | )          | (358                                          | )          | (433 | ) | (754 | ) |
| Interest income                                                       |       | 446                                             |       | 940                                           |       | 915 |   | 1,814 |   |
|                                                                  |       | 251                                             |       | 582                                           |       | 482 |   | 1,060 |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Net loss                                                              |       | $                                               | (6,236     | )                                             | $          | (18,280 | ) | $ | (16,350 | ) | $ | (44,204 | ) |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Basic and  diluted net loss per common share                          |       | $                                               | (0.16      | )                                             | $          | (0.50 | ) | $ | (0.42 | ) | $ | (1.24 | ) |
| Shares used in  computing basic and diluted net loss per common share |       | 40,100                                          |       | 36,724                                        |       | 38,689 |   | 35,667 |   |

 

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(1) Includes stock-basedcompensation expense as follows:

 
| Research and development          |   | $ | 561 |   | $ | 885   |   | $ | 1,085 |   | $ | 1,599 |   |
|-----------------------------------|--------|---|-----|--------|---|-------|--------|---|-------|--------|---|-------|--------|
| Sales, general and administrative |   | $ | 869 |   | $ | 1,954 |   | $ | 2,316 |   | $ | 2,974 |   |

 

See accompanyingnotes.

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**NITROMED, INC.CONDENSED STATEMENTS OF CASH FLOWS(in thousands) (unaudited)**
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Operating  activities**                                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                             | (16,350    | ) | $ | (44,204 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                |       | 209                                           |       | 417 |   |
| Non-cash restructuring charge                                                |       | —                                        |       | 597 |   |
| Stock-based compensation expense                                             |       | 3,401                                         |       | 4,573 |   |
| Changes in operating assets and liabilities:                                 |       |                                          |       |   |   |
| Accounts receivable                                                          |       | 2                                             |       | 2,140 |   |
| Inventories                                                                  |       | (140                                          | )          | (3 | ) |
| Prepaid expenses and other current assets                                    |       | (83                                           | )          | 1,766 |   |
| Deferred revenue                                                             |       | (206                                          | )          | (1,870 | ) |
| Accounts payable and accrued expenses                                        |       | (501                                          | )          | (10,014 | ) |
| Accrued restructuring charge                                                 |       | (299                                          | )          | 709 |   |
| Net cash used in  operating activities                                       |       | (13,967                                       | )          | (45,889 | ) |
| **Investing  activities**                                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                          |       | (144                                          | )          | (104 | ) |
| Proceeds from  sale of equipment                                             |       | 528                                           |       | — |   |
| Purchases of  marketable securities                                          |       | (37,250                                       | )          | (90,331 | ) |
| Sales of  marketable securities                                              |       | 30,871                                        |       | 99,826 |   |
| Other assets                                                                 |       | 612                                           |       | — |   |
| Net cash  provided by (used in) investing activities                         |       | (5,383                                        | )          | 9,391 |   |
| **Financing  activities**                                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net proceeds  from sale of common stock                                      |       | 18,283                                        |       | 58,505 |   |
| Principal  payments on long-term debt                                        |       | (3,376                                        | )          | (3,058 | ) |
| Proceeds from  employee stock plans                                          |       | 341                                           |       | 656 |   |
| Net cash  provided by financing activities                                   |       | 15,248                                        |       | 56,103 |   |
| Net change in  cash and cash equivalents                                     |       | (4,102                                        | )          | 19,605 |   |
| Cash and cash  equivalents at beginning of period                            |       | 21,074                                        |       | 11,091 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                             | 16,972     |   | $ | 30,696 |   |

 

See accompanyingnotes.

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**NITROMED, INC.NOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2007**

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

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

The Company’s principal source of revenue is from thesale of BiDil® (isosorbide dinitrate/hydralazinehydrochloride), the Company’s product for the treatment of heart failure in self-identifiedblack patients as an adjunct to current standard therapies.  The Company has used and will continue torequire substantial funds to manufacture, market and sell BiDil during 2007 andbeyond. The Company also expects to incur additional expenses relating to theongoing development of a planned extended release formulation of BiDil, knownas BiDil XRTM, for which the Company commenced clinical development in October2006. The Company believes that its existing cash, cash equivalents andmarketable securities, and cash it expects to generate from sales of BiDil,will be sufficient to fund its current business plan for at least the nexttwelve months.  The Company will requiresubstantial additional cash to fund its operations beyond the next twelve-monthperiod, and may seek to raise these funds through financings, including publicor private equity offerings, debt financings, collaborative arrangements withcorporate partners or a combination of any of the foregoing. There can be noassurance that funds will be available on terms acceptable to the Company, ifat all. If adequate funds are not available, the Company will be required toscale back or eliminate some or all of its sales and marketing efforts forBiDil, as well as delay its development efforts with respect to BiDil XR. TheCompany may also be required to license to others the right to develop orcommercialize products or technologies that the Company would otherwise seek todevelop and commercialize on its own. The Company could also be required to limit, scale back or cease itsoperations, any of which would have a material and adverse effect on theCompany.

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

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

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

*Sales Returns, Allowances, Rebates and Discounts.  *TheCompany’s product sales are subject to returns, allowances, rebates, and cashand contract discounts that are customary in the pharmaceutical industry. Alarge portion of the Company’s product sales are made to pharmaceuticalwholesalers for further distribution through pharmacies to patients, who areconsumers of the product. All revenues from product sales are recorded net ofapplicable allowances for sales returns, allowances, rebates and cash andcontract discounts. The Company determines the provisions for sales returns,allowances, rebates and discounts based primarily on estimates and contractualterms.

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*Product Returns*.   Consistentwith industry practice, the Company offers contractual return rights that allowcustomers to return product only during the period that is six months prior to,and twelve months after product expiration. Commercial product shipped during2005 and the first half of 2006 had a shelf-life of twelve months from date ofmanufacture with expiration dates ranging from April 2006 toApril 2007. During the third quarter of 2006, the Company began shippingcommercial product with an expiration date of 18 months.  During the first quarter of 2007, BiDil’sshelf life for newly produced finished goods was increased to 24 months.The Company began shipping product with 24 month dating in the second quarterof 2007.  Factors that are considered inthe Company’s estimate of future product returns include an analysis of theamount of product in the wholesaler and pharmacy channels, discussions with keywholesalers and other customers regarding inventory levels and shipment trends,review of consumer consumption data based on aggregate weekly and monthlyprescription data derived from Source Projected Launchtrac provided by WoltersKluwer Health, and the remaining time to expiration of the Company’s product.At June 30, 2007 and December 31, 2006, the Company’s product returnreserve was $1.1 million and $1.3 million, respectively. This reserve isevaluated on a quarterly basis, assessing each of the factors described above,and adjusted accordingly. In developing a reasonable estimate for the reservefor product returns, the Company considers the factors in paragraph 8 ofStatement of Financial Accounting Standards No. 48, *RevenueRecognition When a Right of Return Exists*. The Company believes ithas developed a reasonable estimate of returns based on actual return datacompared to product shipped. The Company will continue to monitor actualreturns as the Company develops more sales experience with BiDil. Based on thefactors noted above, among others, the Company believes its estimate of productreturns is reasonable, and changes, if any, from this estimate would not have amaterial impact to the Company’s financial statements.

*Sample Voucher and Co-Pay Programs*.   Beginning inthe third quarter of 2005, the Company initiated a sample voucher programwhereby the Company offers an incentive to patients in the form of a free30-day trial, or approximately 100 tablets, of BiDil. The Company accounts forthis program in accordance with Emerging Issues Task Force IssueNo. 01-09, *Accounting for Consideration Given by aVendor to a Customer*. These sample voucher programs have a six monthexpiration date, such that each sample voucher program is active for twoquarters at a time. At the end of each quarter the Company estimates the amountof reimbursement claims based on those claims received for the sample vouchersdistributed during the quarter, and uses this information to estimate the usagefor the next quarter. At the end of each semi-annual period the Company adjuststhe estimated voucher usage to actual. The amount of reimbursement is recordedas a reduction to revenue. For the three month periods ended June 30, 2007and 2006, the Company recorded a reduction to revenue of $6,000 and $13,000,respectively. For the six month periods ended June 30, 2007 and 2006, theCompany recorded a reduction to revenue of $34,000 and $356,000, respectively.The Company expects to continue to offer sample voucher and co-pay incentives infuture periods.

*Sales Discounts, Rebates and Allowances*.   Salesdiscounts, rebates and contractual allowances result primarily from sales undercontracts with healthcare providers, wholesalers, Medicare and Medicaidprograms and other governmental agencies. The Company estimates salesdiscounts, rebates and contractual allowances by considering the followingfactors: current contract prices, terms, sales volume, estimated customer andwholesaler inventory levels and current average rebate rates. For the threemonth periods ended June 30, 2007 and 2006, the Company recorded salesdiscounts, rebates and other allowances of $1.4 million and $0.2 million,respectively. For the six month periods ended June 30, 2007 and 2006, theCompany recorded sales discounts, rebates and other allowances of $2.5 millionand $0.6 million, respectively.

* ***(3)****          AccountsReceivable**

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

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

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

|                    | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials |       | $                       | 1,950      |                        | $          | 2,123 | ** ** |
| Finished goods     |       | 1,036                   |       | 723                         |       |
| Total              |       | $                       | 2,986      |                        | $          | 2,846 |   |

 

On a quarterly basis, the Company analyzes its currentinventory levels and future irrevocable inventory purchase commitments andwrites down inventory that has become un-saleable or has a cost basis in excessof its expected net realizable value. The Company relies on Sumitomo Corp. asthe sole worldwide source for the supply of hydralazine hydrochloride, which isone of the two active ingredients in BiDil. The Company currently has $1.9million of hydralazine hydrochloride in inventory at June 30, 2007 whichrepresents approximately 6 to 8 years supply. This inventory will be requiredto be retested for stability on a continuing basis subsequent to its initialretest dates which occur at various dates between January and June of 2008. TheCompany believes that the retests will be successful and will continue toevaluate this raw material on an ongoing basis based on the results ofstability retesting and industry practices. In addition, the Company evaluatesits future irrevocable inventory purchase commitments compared to forecastedproduct sales, the current level of inventory and its related product dating.Expired inventory is disposed of, and the related costs are written off. Forthe three month periods ended June 30, 2007 and 2006, the Company recordedinventory impairment charges of $161,000 and $83,000, respectively. For the sixmonth periods ended June 30, 2007 and 2006, the Company recorded inventoryimpairment charges of $545,000 and $565,000, respectively.

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

Effective January 1, 2006, the Company adoptedthe fair value recognition provisions of Statement of Financial AccountingStandards No. 123(R),*Share-BasedPayment* (“SFAS 123R”),using the modified-prospective-transition method. Under this transition method,compensation cost recognized subsequent to December 31, 2005. includes:(a) compensation cost for all stock-based payments granted, but not yetvested as of January 1, 2006, based on the grant-date fair value estimatedin accordance with the original provisions of Statement of Financial AccountingStandards No. 123, *Accounting for Stock BasedCompensation* (“SFAS 123”), and (b) compensation cost for all stock-basedpayments granted subsequent to January 1, 2006, based on the grant-datefair value estimated in accordance with the provisions of SFAS 123R. Suchamounts have been reduced by the Company’s estimate of forfeitures of allunvested awards. Results for prior periods have not been restated.

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

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

In May 2007, the Company entered into a TransitionAgreement with L. Gordon Letts, Ph.D., the Company’s former Chief ScientificOfficer and Senior Vice President of Research and Development.  Pursuant to the terms of the TransitionAgreement, options previously granted by the Company to Dr. Letts will continueto vest during a one-year transition period, during which time Dr. Letts willcontinue to be an employee of the Company. Pursuant to the terms of the Transition Agreement, the terms of stockoption awards granted to Dr. Letts were modified in order to extend the term ofthe exerciseability of the options from three months following the cessation ofemployment to two years following the cessation of the one-year transitionperiod. As a result of this modification, the Company incurred a stock-basedcompensation charge in the amount of $146,000 for the three months ended June30, 2007, and will continue to recognize additional amounts as the optionsvest.

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In March and April 2007,the Company entered into restricted stock agreements with certain executiveofficers and employees of the Company, pursuant to which these employees 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 under certaincircumstances.  The forfeiture provisionlapses as follows: 25% of the shares are no longer subject to forfeiture to theCompany, or “vest,” on the date that is six months after the grant date; 25%vest on the first anniversary of the grant date; and 50% vest on the secondanniversary of the grant date.  Upon a change in control of the Company orupon termination of the employee’s employment without cause, all unvestedrestricted shares shall immediately vest in full. The Company recognized$263,000 of stock-based compensation expense for the three months ended June30, 2007 and $317,000 for the six months ended June 30, 2007.  On the accompanying condensed balance sheetsto which these notes refer, the number of shares of the Company’s common stock outstandingas of June 30, 2007 does not include 667,084 shares of unvested restrictedcommon stock.

In connection with recording stock-based compensationexpense related to non-employees, the Company recorded reversals of $22,000 and$143,000 for the three months ended June 30, 2007 and June 30, 2006,respectively. The Company recorded reversals of stock-based compensationexpense related to non-employees of $5,000 and $176,000 for the six monthsended June 30, 2007 and June 30, 2006, respectively.

The fair value of each stock option is estimated onthe grant date using the Black-Scholes option-pricing model. Informationpertaining to stock options and related assumptions is noted in the followingtable:
|                                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Options granted  (in thousands)                          |       | 822                                           |       | 2,671 |   |
| Weighted-average  exercise price of stock options        |       | $                                             | 2.69       |   | $ | 8.58 |   |
| Weighted-average  grant date fair-value of stock options |       | $                                             | 1.63       |   | $ | 5.27 |   |
| Assumptions:                                             |       |                                          |       |   |   |
| Volatility                                               |       | 76                                            | %          | 73 | % |
| Risk-free interest rate                                  |       | 4.8                                           | %          | 4.7 | % |
| Expected life (years)                                    |       | 5.0                                           |       | 5.9 |   |
| Dividend                                                 |       | None                                          |       | None |   |

 

Volatility is determined exclusively using historicalvolatility data of the Company’s common stock based on the period of time sincethe Company’s common stock has been publicly traded. The risk-free interestrate is based on the U.S. Treasury yield curve in effect at the time ofgrant commensurate with the expected life assumption. The expected life ofstock options granted is based exclusively on historical data and representsthe weighted average period of time that stock options granted are expected tobe outstanding. The expected life is applied to the stock option grant group asa whole, as the Company does not expect substantially different exercise orpost-vesting termination behavior amongst its employee population.

The Company is using the straight-line attributionmethod to recognize stock-based compensation expense. The amount of stock-basedcompensation expense recognized during a period is based on the value of theportion of the awards that are ultimately expected to vest. SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. The term “forfeitures”is distinct from “cancellations” or “expirations” and represents only theunvested portion of the surrendered option. The Company has applied an annualforfeiture rate of 6.0% to all unvested options as of June 30, 2007. Thisanalysis will be re-evaluated quarterly and the forfeiture rate will beadjusted as necessary. Ultimately, the actual expense recognized over thevesting period will only be for those options that vest.

A summary of option activity under the Company’s 2003Plan as of June 30, 2007, and changes during the six month period thenended is presented below (in thousands, except weighted average data):

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| ** **                                     | ** ** | **Options  Outstanding** | ** ** | **Weighted-  average  Exercise Price** | ** ** | **Weighted-  average  Remaining  Contracted  Term in  Years** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2006         |       | 4,936                    |       | $                                           | 6.90       |                                                               |       |                            |       |   |
| Granted                                        |       | 822                      |       | $                                           | 2.69       |                                                               |       |                            |       |   |
| Exercised                                      |       | (273                     | )          | $                                           | 1.14       |                                                               |       |                            |       |   |
| Forfeited/Cancelled                            |       | (658                     | )          | $                                           | 7.03       |                                                               |       |                            |       |   |
| Outstanding at  June 30, 2007             |       | 4,827                    |       | $                                           | 6.49       |                                                               | 7.96       |                            | $          | 322 |   |
| Exercisable at  June 30, 2007             |       | 2,190                    |       | $                                           | 7.39       |                                                               | 6.78       |                            | $          | 288 |   |
| Options expected to  vest at June 30, 2007 (1) |       | 2,478                    |       | $                                           | 6.09       |                                                               | 7.72       |                            | $          | 34 |   |

 

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

During the six months ended June 30, 2007 and2006, the total intrinsic value of options exercised (i.e. the differencebetween the market price at exercise and the price paid by the employee toexercise the options) was $526,000 and $1.8 million, respectively, and thetotal amount of cash received from exercise of these options was $311,000 and$605,000, respectively. The total grant-date fair value of stock options thatvested during the six months ended June 30, 2007 and 2006 wasapproximately $3.2 million and $1.1 million, respectively.

As of June 30, 2007, there was $9.6 million oftotal unrecognized compensation cost related to unvested stock options. Thiscost is expected to be recognized over a weighted average period of 2.5 years.

A summary of theCompany’s restricted stock award activity as of June 30, 2007 and changesduring the six-month period then ended is presented below:
| ** **                                                   | ** ** | **Restricted Shares  Outstanding  (in thousands)** | ** ** | **Weighted-  Average  Grant Date  Fair Value  Per Share** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **Non-vested  shares outstanding at December 31, 2006** |       | —                                                       |       | $                                                                        | —     |   |
| Awards granted                                               |       | 735                                                          |       | $                                                                        | 3.22       |   |
| Restrictions  lapsed                                         |       | —                                                       |       | $                                                                        | —     |   |
| Awards forfeited                                             |       | (68                                                          | )          | $                                                                        | 3.22       |   |
| **Non-vested shares outstanding  at June 30, 2007**          |       | 667                                                          |       | $                                                                        | 3.22       |   |

 

As of June 30, 2007, there was $1.5 million of totalunrecognized compensation cost related to unvested restricted shares. The totalfair value of these share-based awards will be recognized over the remainingvesting term of 1.7 years.

**(6)**                                 Restructuring

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

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

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

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The following table summarizes the restructuringactivity as of June 30, 2007 as part of the March 2006 restructuring plan:

|                      | ** ** | **Charge** | ** ** | **Cash  Payments  and  Write-offs** | ** ** | **Accrued at  December 31, 2006** | ** ** | **Cash  Payments** | ** ** | **Accrued at  June 30, 2007** | ** ** |
|----------------------|------------|------------|------------|-------------------------------------|------------|--------------------------------------------------|------------|--------------------|------------|----------------------------------------------|------------|
| Workforce  reduction |       | $          | 1,441,000  |                                | $          | (1,371,000                                       | )          | $                  | 70,000     |                                         | $          | (70,000 | ) | $ | — |   |
| Impairment           |       | 597,000    |       | (597,000                            | )          | —                                           |       | —             |       | —                                       |       |
| Total                |       | $          | 2,038,000  |                                | $          | (1,968,000                                       | )          | $                  | 70,000     |                                         | $          | (70,000 | ) | $ | — |   |

 

On October 10, 2006, theCompany recorded a restructuring charge of $3.2 million, which was comprised ofseverance benefits of $2.5 million and impairment charges of $0.7 million forcertain research and development equipment, leasehold improvements, furnitureand fixtures, and computers. The restructuring charges were recorded inaccordance with SFAS 146 and SFAS 144. The October 2006restructuring program included the elimination of 120 sales personnel and 8general and administrative and research and development personnel. None ofthese employees remained employed as of December 31, 2006. As a result ofthese terminations, the Company’s decision to no longer pursue research anddevelopment internally, and the Company’s decision to move to a smallerfacility, certain research and development equipment, leasehold improvements,furniture and fixtures, and computers became impaired. These assets werewritten down to the fair value based on either a third-party quote, or theestimated discounted cash flows they would generate over their estimatedremaining economic life to the Company.

The following table summarizes the restructuringactivity as of June 30, 2007 as part of the October 2006 restructuringplan:

|                      | ** ** | **Charge** | ** ** | **Cash  Payments  and  Write-offs** | ** ** | **Accrued at   December 31, 2006** | ** ** | **Cash  Payments** | ** ** | **Accrued at  June 30, 2007** | ** ** |
|----------------------|------------|------------|------------|-------------------------------------|------------|--------------------------------------------------------|------------|--------------------|------------|----------------------------------------------|------------|
| Workforce  reduction |       | $          | 2,500,000  |                                | $          | (2,271,000                                             | )          | $                  | 229,000    |                                         | $          | (229,000 | ) | $ | — |   |
| Impairment           |       | 745,000    |       | (745,000                            | )          | —                                                 |       | —             |       | —                                       |       |
| Total                |       | $          | 3,245,000  |                                | $          | (3,016,000                                             | )          | $                  | 229,000    |                                         | $          | (229,000 | ) | $ | — |   |

 

In the firstquarter of 2007, the Company recorded a restructuring charge of $1.0 millionrelated to vacating its former headquarters location. The charge was recordedpursuant to SFAS 146. In March 2007, the Company entered into an Assignment ofLease and Assumption Agreement (the “Assignment Agreement”) with Shire HumanGenetic Therapies, Inc. (“Shire”), pursuant to which the Company assigned itslease for office and laboratory space located at 125 Spring Street inLexington, Massachusetts (the “Spring Street Lease”).  Pursuant to theterms of the Assignment Agreement, the Company agreed to pay Shire the amountof approximately $1,160,000 as consideration for Shire’s assumption of theSpring Street Lease. In addition to this charge, the Company incurred $612,000in expenses primarily related to real estate brokerage fees and clean-upcosts.  Offsetting these charges was areversal of $768,000 in accrued rent related to the Spring Street Lease. Allamounts were paid as of March 31, 2007, and the Company has no furtherobligations related to this lease.

**(7)**                                 Accumulated OtherComprehensive Loss

TheCompany presents comprehensive loss in accordance with Statementof Financial Accounting Standards No. 130, *Reporting ComprehensiveIncome*. Accumulated othercomprehensive income is comprised entirely of net loss and unrealized gains andlosses on available-for-sale marketable securities. For the three months endedJune 30, 2007 and 2006, total comprehensive loss equaled $6,228,000 and$18,282,000, respectively. For the six months ended June 30, 2007 and2006, total comprehensive loss equaled $16,334,000 and $44,157,000,respectively.

**(8)****           Sale of Common Stock**

OnMay 30, 2007, the Company completed a direct offering of shares ofthe Company’s common stock previously registered under an effective shelfregistration statement. Pursuant to this offering, the Company soldapproximately 7.6 million shares of the Company’s common stock to selectedinstitutional investors at a price of $2.60 per share. Proceeds to the Companyfrom this registered direct offering, net of offering expenses and placementagency fees, totaled $18.3 million.

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### **(9)****                                 NetLoss Per Share**

Basic net loss per share is computed by dividing netloss by the weighted average number of shares of common stock outstandingduring the period. Since the Company has a net loss for all periods presented,the effect of all potentially dilutive securities, which comprise stock optionsand restricted stock, is anti-dilutive. Accordingly, basic and diluted net lossper share are the same.

As of June 30, 2007 and 2006, options to purchase4,827,067 and 5,003,026 shares of common stock, respectively, were not includedin the computation of diluted net loss per share since their inclusion would beanti-dilutive. In addition, 667,084 shares of restricted common stock are alsonot included.

### **(10)****                          SingleSource Suppliers**

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

### **(11)****                          Concentrationof Credit Risk**

Statement of Financial Accounting StandardsNo. 105, *Disclosure of Information about Financial Instrumentswith Off-Balance-Sheet Risk and Financial Instruments with Concentrations ofCredit Risk*, requires disclosure of any significantoff-balance-sheet and credit risk concentrations. The Company has nooff-balance-sheet or concentrations of credit risk such as foreign exchangecontracts, options contracts or other foreign hedging arrangements. The Companymaintains its cash and cash equivalents and marketable securities balances withseveral high-credit quality financial institutions.

The following table summarizes the number of tradecustomers that individually comprise greater than 10% of total revenues andtheir respective percentage of the Company’s total revenues:
| ** **                             | ** ** | **Number of  Significant  Customers** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|--------------------------------------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|
| ** **                             | ** ** | ** **                                 | **Percentage of Total Revenues by Customer** | ** ** |
| ** **                             | ** ** | ** **                                 | **A**                                                                 | ** ** | **B**      | ** ** | **C**      | ** ** |
|                                   |       |                                       |                                                                  |       |       |       |       |       |       |
| Three months  ended June 30, 2007 |       | 3                                          |                                                                  | 36         | %          | 34         | %          | 18         | %          |
| Three months  ended June 30, 2006 |       | 3                                          |                                                                  | 39         | %          | 31         | %          | 18         | %          |
| Six months ended  June 30, 2007   |       | 3                                          |                                                                  | 36         | %          | 36         | %          | 18         | %          |
| Six months ended  June 30, 2006   |       | 3                                          |                                                                  | 33         | %          | 33         | %          | 19         | %          |

 

The following table summarizes the number of customersthat individually comprise greater than 10% of total accounts receivable andtheir respective percentage of the Company’s total accounts receivable:
| ** **          | ** ** | **Number of** | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------|------------|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **Significant**    | ** ** | **Percentage of Total Accounts Receivable** | ** ** |
| ** **          | ** ** | **Customers**      | ** ** | **A**                                                           | ** ** | **B**      | ** ** | **C**      | ** ** |
| As of:              |       |               |       |                                                            |       |       |       |       |       |
| June 30,  2007 |       | 3                  |       | 27                                                              | %          | 40         | %          | 20         | %          |
| December 31, 2006   |       | 3                  |       | 30                                                              | %          | 37         | %          | 16         | %          |

 

To date, the Company has not written off anysignificant accounts receivable.

### **(12)****                          LongTerm Debt**

OnJune 28, 2005, the Company borrowed (i) $10.0 million from OxfordFinance Corporation (“Oxford”), and (ii) $10.0 million from GeneralElectric Capital Corporation (“GECC”) pursuant to the terms of Promissory Notes(the “Notes”). The Notes bear interest at a fixed rate of 9.95% per annum andare payable in 36 consecutive monthly installments 

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of principal and accrued interest, beginning onJuly 1, 2005. Also on June 28, 2005, the Company entered intoMaster Security Agreements with both Oxford and GECC (the “Agreements”). Underthe terms of these Agreements, the Company granted to both Oxford and GECC asecurity interest in and against all of the property of the Company and in andagainst all additions, attachments, accessories and accessions to suchproperty, all substitutions, replacements or exchanges, and all insuranceand/or other proceeds (the “Collateral”). The Collateral comprises all ofthe Company’s personal property and fixtures including, but not limited to, allinventory, equipment, fixtures, accounts, deposit accounts, documents,investment property, instruments, general intangibles, chattel paper and anyand all proceeds (but excluding intellectual property). The Collateraldoes not include any intellectual property or products (or interests in anyintellectual property or products (including any royalties) acquired, whetherby purchase, license or otherwise, on or after the execution of the Agreements(collectively, “New Property”), nor do the Agreements limit any indebtednesssecured by any New Property provided that debt or non-cash equity (e.g.,stock) is used to acquire New Property. In the event that theCompany uses cash to purchase New Property, Oxford’s and GECC’s existingliens will extend to such New Property.

TheAgreements also contain a material adverse change clause with both Oxford andGECC. Under this clause, if Oxford or GECC reasonably determines that theCompany’s ability to repay the Notes has been materially impaired, the Companywould be considered in default. As ofJune 30, 2007, the Company was in compliance with this clause.

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

### **(13)****                          Commitmentsand Contingencies**

In connection with the Company’s efforts to obtain theapproval of BiDil from the FDA, the Company contracted with the law firm ofFoxKiser LLC (“FoxKiser”) for services related to the regulatory approvalprocess for BiDil. The agreement provided for payment of legal consulting feesupon receipt of written FDA approval of BiDil. On June 23, 2005, theCompany received written FDA approval of BiDil, and in July 2005 theCompany paid FoxKiser $2.4 million pursuant to the terms of this agreement. Inaddition, the agreement requires the Company to pay royalties to FoxKiser oncommercial sales of BiDil. The royalty term ends six months after the date ofmarket introduction of an FDA-approved generic version of BiDil. During thethird quarter of 2005, the Company entered into a separate consulting agreementwith FoxKiser following the approval by the FDA of BiDil, which ceased to beeffective in the third quarter of 2006. During the three month periods endedJune 30, 2007 and 2006, the Company recorded expenses of $0.0 and $0.3 million,respectively, pertaining to the legal consulting fees related to theseagreements. During the six month periods ended June 30, 2007 and 2006, theCompany recorded expenses of $0.0 and $0.7 million, respectively, pertaining tothe legal consulting fees related to these agreements. During the three monthperiods ended June 30, 2007 and 2006, the Company also paid royalties toFoxKiser in the amounts of $0.1 million and $0.1 million, respectively. Duringthe six month periods ended June 30, 2007 and 2006, the Company also paidroyalties to FoxKiser in the amounts of $0.2 million and $0.2 million,respectively.

In February 2005, the Company engaged SchwarzPharma Manufacturing, Inc. under a five-year exclusive manufacturing andsupply agreement solely for the three times daily immediate release dosageformulation of BiDil. Under the supply agreement, the Company has the right toengage a backup manufacturer, but to date has not elected to use this right. Inconnection with this supply agreement, the Company placed binding purchaseorders of $648,000 for production of BiDil finished goods to occur during thethird and fourth quarters of 2007.

### **(14)****                          LicenseAgreement**

In February 2007, inconnection with the Company’s efforts to develop BiDil XR, the Company enteredinto a license agreement with Elan Pharma International Limited (“Elan”).Pursuant to the agreement, Elan granted to the Company an exclusive worldwidelicense, for the term of the agreement, to certain know-how, patents andtechnology, and any improvements to any of the foregoing developed by eitherparty during the term of the agreement. Pursuant to this license, the Company has the right to import, use,offer for sale and sell the oral capsule formulation incorporating specified 

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technology referred to inthe agreement and containing, as its sole active combination of ingredients,the combination of the active drug substances isosorbide dinitrate andhydralazine hydrochloride, including BiDil XR. In consideration for the grantof the license, the Company has agreed to pay Elan royalties that arecalculated by reference to annual net sales parameters set forth in theagreement.  In addition, the Company hasalso agreed to pay Elan specified amounts upon the achievement of specifieddevelopment and commercialization milestone events of up to $2.5 million,of which $250,000 has been paid to date.

The term of the agreement runs in the United Statesfrom the effective date of the agreement until the later of (a) the 20thanniversary of the date of the first sale of the product by the Company or apermitted sublicensee to an unaffiliated third party, which is referred to inthe agreement as the first in market sale, or (b) the expiration of thelast-to-expire patent for the product listed in the FDA’s “Orange Book.”Elsewhere in the world, the term will run on a country by country basis fromthe effective date of the agreement until the later of (a) the 20th anniversaryof the date of the first in market sale of the product in the country concernedor (b) the expiration of the life of the last to expire patent included in theElan intellectual property in that country. Following the expiration of the initial term, the agreement shallcontinue automatically for rolling three year periods thereafter, unless theagreement has been terminated by either of the parties by serving one year’swritten notice on the other party immediately prior to the end of the initialterm or any such additional three year period. Either Elan or the Company mayterminate the agreement in the event of a material, uncured breach by the otherparty, or if the other party goes into liquidation or becomes bankrupt orinsolvent. In addition, the Company may terminate the agreement in the event ofa technical failure, which is defined as the inability to achieve apharmacokinetic profile for the product consistent with that of BiDiladministered three times daily.  Elan mayterminate the agreement with respect to a particular country in the territoryin the event that the Company does not meet certain obligations set forth inthe agreement with respect to such country, provided that Elan must firstconsult with the Company and, if applicable, provide the Company with anopportunity to meet such obligations prior to exercising Elan’s terminationrights.

### **(15)****                          OperatingLease**

In February 2007, the Company entered into a lease for19,815 square feet of office space at 45 Hayden Avenue in Lexington,Massachusetts (the “Hayden Avenue Lease”). The term of the Hayden Avenue leaseis for sixty-six months beginning on April 1, 2007. The expected minimum rentalcommitments under the Hayden Avenue lease are $202,000 for the remainder of2007, $510,000 in 2008, $560,000 in 2009, $580,000 in 2010, $592,000 in 2011and $456,000 for the nine month period ending September 2012.

In March 2007, the Company entered into the AssignmentAgreement with Shire, pursuant to which the Company assigned its lease foroffice and laboratory space located at 125 Spring Street in Lexington,Massachusetts. The Company is no longer responsible for obligations under theSpring Street Lease.

### **(16)****                          NewAccounting Standards**

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

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards No. 157, *Fair ValueMeasurements* (“SFAS 157”), which defines fair value,establishes a framework for measuring fair value under GAAP and expandsdisclosures about fair value measurements. SFAS 157 applies to otheraccounting pronouncements that require or permit fair value measurements. The newguidance is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and for interim periods within thosefiscal years. The Company is currently evaluating the requirements ofSFAS 157; however, the Company does not believe that the adoption willhave a material effect on its consolidated financial statements.

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In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*(“SFAS 159”). SFAS 159 provides companies with an option to report selectedfinancial assets and liabilities at fair value. The objective of SFAS 159 is toreduce both complexity in accounting for financial instruments and thevolatility in earnings caused by measuring related assets and liabilitiesdifferently. Generally accepted accounting principles have required differentmeasurement attributes for different assets and liabilities that can createartificial volatility in earnings. The FASB has indicated that it believes SFAS159 helps to mitigate this type of accounting-induced volatility by enablingcompanies to report related assets and liabilities at fair value, which wouldlikely reduce the need for companies to comply with detailed rules for hedgeaccounting. SFAS 159 also establishes presentation and disclosure requirementsdesigned to facilitate comparisons between companies that choose differentmeasurement attributes for similar types of assets and liabilities. Forexample, SFAS 159 requires companies to provide additional information thatwill help investors and other users of financial statements to more easilyunderstand the effect of a company’s choice to use fair value on its earnings.SFAS 159 also requires companies to display the fair value of those assets andliabilities for which a company has chosen to use fair value on the face of thebalance sheet. SFAS 159 does not eliminate disclosure requirements included inother accounting standards, including requirements for disclosures about fairvalue measurements included in SFAS 157 and Statement of Financial AccountingStandards No. 107, *Disclosures about FairValue of Financial Instruments*. SFAS 159 is effective as of thebeginning of a company’s first fiscal year beginning after November 15,2007. Early adoption is permitted as of the beginning of the previous fiscalyear, provided that the company makes that choice in the first 120 days of thatfiscal year and also elects to apply the provisions of SFAS 157.

In June 2007, theEmerging Issues Task Force issued EITF Issue 07-03, *Accountingfor Advance Payments for Goods or Services to Be Used in Future Research andDevelopment* (“EITF 07-03”). EITF 07-03 addresses the diversity whichexists with respect to the accounting for the non-refundable portion of apayment made by a research and development entity for future research anddevelopment activities. Under EITF 07-03, an entity would defer and capitalizenon-refundable advance payments made for research and development activitiesuntil the related goods are delivered or the related services are performed.EITF 07-03 is effective for fiscal years beginning after December 15, 2007 andinterim periods within those years. The Company does not expect the adoption ofEITF 07-03 to have a material impact on its financial position or results ofoperations.

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

**Overview**

We are an emerging pharmaceutical company withsubstantial intellectual property in nitric oxide-based drug development. Wehave devoted substantially all of our efforts towards the research anddevelopment of our product candidates and the commercialization of ourcurrently marketed product, BiDil®. We have also applied our nitric oxidetechnology to develop novel pharmaceuticals, as well as safer and moreeffective versions of existing drugs, and to target significant diseases thatare characterized by a deficiency in nitric oxide. Since our inception, we havemainly funded our operations through the sale of equity securities, debtfinancings, license fees, research and development funding, milestone paymentsfrom our collaborative partners, and more recently, sales of BiDil. We havenever been profitable and have incurred an accumulated deficit of $330.2million as of June 30, 2007.

In June 2005, the U.S. Food and DrugAdministration, or FDA, approved our product, BiDil, for the treatment of heartfailure in self-identified black patients as an adjunct to current standardtherapies. BiDil is an orally administered fixed-dose combination of isosorbidedinitrate and hydralazine hydrochloride. We commercially launched BiDil inJuly 2005. We engaged Schwarz Pharma Manufacturing Inc., or SchwarzPharma, under a five-year manufacturing and supply agreement exclusively forthe three times daily immediate release dosage formulation of BiDil.

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

In October 2006, we implemented a revisedstrategy and business model in order to focus our resources on the developmentof BiDil XR as expeditiously as possible. As part of this strategic shift, weeliminated our sales force and replaced it with a small team of highlyexperienced senior cardiovascular business managers focused on hospitals andkey opinion leaders, resulting in a net reduction of approximately 120 in salesforce headcount. In addition, we also eliminated approximately 20% of ourgeneral and administrative personnel in connection with this restructuringprogram. In April 2007, we began to implement a program designed to double oursales force in specific geographic areas with a focus on selected prescribertargets. Our current field sales organization is managed by our senior vicepresident of commercial operations and is comprised of approximately 50 people.

Our sales force will continue to focus on regional andnational thought-leader physicians, current BiDil prescribers, as well as keyinstitutions that treat, and influence the treatment of, large numbers ofAfrican-Americans diagnosed with heart failure. We also continue to exploreadditional marketing methods that can be utilized to reach the broader numberof existing and potential BiDil prescribers. We believe that this strategy willallow us to refocus our marketing of the current BiDil formulation as wecontinue our development efforts with respect to BiDil XR. Based on ourpreclinical studies with BiDil XR, we commenced clinical development of BiDilXR in October 2006. We anticipate that before the end of 2007 we willrequest a meeting with the FDA to discuss the available clinical study resultsand development plan for BiDil XR.

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

In the near-term, a key driver of our success will beour ability to successfully commercialize and sustain market penetration ofBiDil with our restructured and smaller specialty sales force and to acceleratethe development of, and obtain regulatory approval for, the commercial sale ofBiDil XR. Since we commercially launched BiDil in July 2005, we have 

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generated approximately$23.8 million in product sales, including product sales of $3.7 million in thethree month period ending June 30, 2007. We will need to generate significantrevenues from sales of BiDil and, if approved, BiDil XR, to achieveprofitability. At the present time, we are unable to estimate the level ofrevenues that we will realize from the sales of BiDil or, if approved, BiDilXR. We are therefore unable to estimate when we will achieve profitability, ifat all.

As a result of our restructurings in March andOctober 2006, we expect that research, development and commercializationexpenses will decline in 2007 as compared to 2006, due primarily to a decreasein headcount and research and commercialization activities, partially offset byan increase in ongoing development expenses for BiDil XR. We estimate that ouroperating expenses related to research and development and sales, general andadministrative functions for the year ended December 31, 2007 will beapproximately $50 to $55 million, excluding cost of product sales butincluding share-based compensation expense related to Statement of FinancialAccounting Standards No. 123R. We estimate that our operating expenses in2007 will be reduced on an annualized basis by approximately $30 million as aresult of our March 2006 and October 2006 restructurings.

At June 30, 2007, our principal source ofliquidity was $44.4 million of cash and cash equivalents and marketablesecurities. We believe that our existing cash, cash equivalents and marketablesecurities, as well as cash expected to be generated from sales of BiDil, willbe sufficient to fund our current business plan for at least the next twelvemonths. We have used and will continue to require substantial funds tomanufacture, market and sell BiDil during 2007 and beyond. We also expect toincur additional expenses relating to the ongoing development of BiDil XR.Accordingly, we will require substantial additional cash to fund our operationsbeyond the next twelve-month period. We may seek to raise these funds throughfinancings, including public or private equity offerings, debt financings,collaborative arrangements with corporate partners or a combination of any ofthe foregoing. Even if we are able to raise additional capital, there can be noassurance that funds will be available on terms that are acceptable to us, ifat all. If adequate funds are not available, we will be required to scale backor eliminate some or all of our sales and marketing efforts for BiDil, as wellas delay our development efforts with respect to BiDil XR. We may also berequired to license to others the right to develop or commercialize products ortechnologies that we would otherwise seek to develop and commercialize on ourown. We could also be required to limit, scale back or cease our operations,any of which would have a material and adverse effect on our business,financial condition and results of operations.

**FinancialOperations Overview**

*Revenue.*Our firstcommercial product, BiDil, was launched in July 2005, and generatedproduct sales of $3.7 million in the second quarter of 2007. 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. In future years, we will seek to generate revenuefrom a combination of product sales, license fees, and milestone and royaltypayments in connection with collaborative or strategic relationships, as wellas royalties resulting from the license of our intellectual property. We expectthat any collaborative revenue we generate will fluctuate from quarter toquarter as a result of the timing and amount of research and development,milestone and other payments received under our collaborative or strategicrelationships and related continuing obligations, as well as the timing andamount of revenue we recognize for the sale of our products, to the extent anyare successfully commercialized.

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

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

·*BiDil.* From May 2001 to July 2004, 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 a significant survival benefit inthe preliminary data for patients taking BiDil. The FDA approved BiDil onJune 23, 2005, and we launched BiDil in July 2005. The total cost forthe BiDil A-HeFT trial was approximately $43.0 million.

·*BiDilXR*. The current formulationof BiDil is an immediate-release tablet that must be taken three times daily.We are currently pursuing the development of BiDil XR, an extended releaseformulation of BiDil, that could be taken once a day. To date, we haveincurred approximately $6.3 million in connection with the development of BiDilXR. Based on our 

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preclinical studies withBiDil XR, we commenced clinical development of BiDil XR during October 2006.Because of its stage of development, and the uncertainties inherent inpharmaceutical development generally, we may not be able to successfullydevelop and commercialize BiDil XR. Moreover, we cannot reasonably estimate orknow the nature, timing and estimated costs of the efforts necessary tocomplete the development of, or the period in which material cash inflows areexpected to commence, if at all, for BiDil XR.

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

·*OtherDiscovery Research*. We haveused our know-how and expertise in nitric oxide to develop drug candidates thatare nitric oxide-enhancing versions of existing medicines in the areas ofcardiovascular, gastrointestinal/anti-inflammatory and pulmonary medicine.These studies have not progressed beyond the discovery stage of testing, and itremains speculative whether the addition of nitric oxide will result in animproved clinical profile of these medicines. We are currently seekingout-licensing and collaboration 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 or collaboration partners for these product candidates onfavorable terms, if at all. As such, we are not able to estimate when materialcash inflows from product sales, milestones and royalties could commence, ifever.

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

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

**Results of Operations**

***Three Months Ended June 30, 2007 and 2006***

*Revenue.*Totalrevenue for the three months ended June 30, 2007 was $3.7 millioncompared to $2.9 million for the three months ended June 30, 2006. The$0.8 million, or 30% increase in revenues in the current period is due toincreased shipments of BiDil during the second quarter of 2007. Product salesof BiDil accounted for all of the revenue for both the three month periodsended June 30, 2007 and 2006.

*Cost of Product Sale*s. Cost ofproduct sales was $637,000 for the three month period ended June 30, 2007 and$621,000 for the three month period ended June 30, 2006. For the threemonth periods ended June 30, 2007 and 2006, we recorded inventoryimpairment charges of $161,000 and $83,000, respectively.  These inventory impairment charges wererelated to commercial trade and patient sample inventory product in excess ofexpected future inventory requirements and future purchase commitments, basedon our current sales forecast.

*Research and Development.*Researchand development expense for the three months ended June 30, 2007 was $2.9million compared to $4.5 million for the three months ended June 30,2006. The $1.6 million, or 35%, decrease in research and development expensesin the current period was primarily due to $0.6 million in reduced headcountexpenses and a $1.7 million decrease in medical expenditures supporting thecommercial launch of BiDil. These decreases are offset by a $0.7 millionincrease in spending related to the development of BiDil XR.

The following table summarizes the primary componentsof our research and development expense for our principal research anddevelopment programs for the three month periods ended June 30, 2007 and2006:

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|                                                     | ** ** | **Three Months  Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| **Research and Development  Program (in millions)** | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| BiDil                                               |       | $                                           | 1.1        |   | $ | 2.2 |   |
| BiDil XR                                            |       | 1.8                                         |       | 1.1 |   |
| Other discovery  research                           |       | —                                      |       | 0.5 |   |
| Nitric oxide-enhancing  cardiovascular compounds    |       | —                                      |       | 0.7 |   |
| Nitric oxide-enhanced  stents                       |       | —                                      |       | — |   |
| Total research and  development expense             |       | $                                           | 2.9        |   | $ | 4.5 |   |

 

*Sales, General and Administrative.*Sales,general and administrative expense for the three months ended June 30,2007 was $6.6 million compared to $16.6 million for the three months endedJune 30, 2006. The $10.0 million, or 60% decrease in sales, general andadministrative expense was primarily due to a decrease of $3.2 million relatedto a reduction in headcount, a decrease of $3.8 million in expenses related toour former contract sales force agreement with Publicis, and $1.8 million indecreased advertising expenses.

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

Prior to the adoption of SFAS 123R, we accounted forshare-based payments to employees using the intrinsic value method ofAccounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*. As such, wegenerally recognized no compensation cost for employee stock options. Theadoption of SFAS 123R under the modified prospective application methodrequired us to recognize compensation cost beginning with the effective datebased on (a) the requirement of SFAS 123R for all share-based payments grantedafter the effective date and (b)  the requirements of Statement ofFinancial Accounting Standards No. 123, *Accountingfor Stock Based Compensation*, for all awards granted to employeesprior to the effective date of SFAS 123R that remain unvested on the effectivedate. Under the modified prospective application method, prior periods are notrestated for the effect of SFAS 123R.

We recognized $1.4 million and $2.8 million instock-based compensation expense for the three months ended June 30, 2007and 2006, respectively.

*Non-Operating Income.*Non-operatingincome for the three months ended June 31, 2007 was $251,000 compared to$582,000 for the three months ended June 30, 2006. The $331,000, or 57%,decrease was primarily due to lower fund balances available for investment, anda $163,000 reduction in interest expense due to a lower long-term debt balancein 2007.

***Six Months Ended June 30, 2007 and 2006***

*Revenue.*Totalrevenue for the six months ended June 30, 2007 was $7.3 millioncompared to $5.2 million for the six months ended June 30, 2006. The $2.1million, or 41% increase in revenues in the current period is due to increasedshipments of BiDil during the second quarter of 2007. Product sales of BiDilaccounted for all of the revenue for both six month periods ended June 30,2007 and 2006.

*Cost of Product Sale*s. Cost ofproduct sales was $1.6 million for the six month period ended June 30, 2007 and$1.5 million for the six month period ended June 30, 2006. For the sixmonth periods ended June 30, 2007 and 2006, we recorded inventoryimpairment charges of $545,000 and $565,000, respectively.  These inventory impairment charges wererelated to commercial trade and patient sample inventory product in excess ofexpected future inventory requirements and future purchase commitments, basedon our current sales forecast.

*Research and Development.*Researchand development expense for the six months ended June 30, 2007 was $5.9million compared to $10.5 million for the six months ended June 30,2006. The $4.6 million, or 44%, decrease in research and development expensesin the current period was primarily due to $1.9 million in reduced headcountexpenses as a result of our restructuring action in March 2006 and a $5.0million decrease in medical expenditures supporting the commercial launch ofBiDil and other discovery research. These decreases are offset by a $2.3million increase in spending related to the 

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development of BiDil XR.

The following table summarizes the primary componentsof our research and development expense for our principal research anddevelopment programs for the six month periods ended June 30, 2007 and2006:
|                                                     | ** ** | **Six Months  Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
| **Research and Development  Program (in millions)** | ** ** | ** **                                | ** ** | ** ** | ** ** |
| BiDil                                               |       | $                                         | 2.3        |   | $ | 5.3 |   |
| BiDil XR                                            |       | 3.5                                       |       | 1.2 |   |
| Other discovery  research                           |       | 0.1                                       |       | 1.6 |   |
| Nitric oxide-enhancing  cardiovascular compounds    |       | —                                    |       | 2.2 |   |
| Nitric oxide-enhanced  stents                       |       | —                                    |       | 0.2 |   |
| Total research and  development expense             |       | $                                         | 5.9        |   | $ | 10.5 |   |

 

*Sales, General and Administrative.*Sales,general and administrative expense for the six months ended June 30, 2007was $15.6 million compared to $36.4 million for the six months endedJune 30, 2006. The $20.8 million, or 57% decrease in sales, general andadministrative expense was primarily due to a decrease of $10.4 million inexpenses related to our former contract sales force agreement with Publicis,$2.9 million in decreased payroll and related expenses due to a decrease inheadcount related to the October 2006 restructure, $4.1 million in decreasedadvertising expenses and $0.7 million of severance benefits related to the cessationof service on March 20, 2006 of our then-president and chief executiveofficer and our then-chief financial officer, chief business officer andtreasurer.

*Restructuring Charge.* OnMarch 31, 2006, we recorded charges of $2.0 million for a restructuring ofour discovery research operations that was intended to better align costs withrevenue and operating expectations. The restructuring charges pertain toemployee severance benefits and impairment of assets. The restructuring chargeswere recorded in accordance with SFAS 146 and SFAS 144*.* In connection with the restructuringplan, we terminated 30 employees from our discovery research group, orapproximately 30% of our workforce, resulting in a charge of $1.4 million. Noneof these employees remained employed as of March 31, 2006, and all amountswere paid by March 31, 2007. As a result of terminating these employees werecorded an impairment charge for certain research laboratory equipment,computer equipment, and furniture and fixtures aggregating $597,000. Theseassets were written down to their fair value utilizing a third party appraiserto estimate fair value based on current market quotes and the current conditionof the equipment, furniture and fixtures.

In the firstquarter of 2007, we recorded a restructuring charge of $1.0 million related tovacating our former headquarters location. The charge was recorded pursuant toSFAS 146. In March 2007, we entered into an Assignment of Lease and AssumptionAgreement, which we refer to as the Assignment Agreement, with Shire HumanGenetic Therapies, Inc., or Shire, pursuant to which we assigned our lease foroffice and laboratory space located at 125 Spring Street in Lexington,Massachusetts, which we refer to as the Spring Street Lease.  Pursuant tothe terms of the Assignment Agreement, we agreed to pay Shire the amount ofapproximately $1,160,000 as consideration for Shire’s assumption of the SpringStreet Lease. In addition to this charge, we incurred $612,000 in expensesprimarily related to real estate brokerage fees and clean-up costs.  Offsetting these charges was a reversal of$768,000 in accrued rent related to the Spring Street Lease. All amounts werepaid as of June 30, 2007.

*Stock-based Compensation Expense.*Werecognized $3.4 million and $4.6 million in stock-based compensation expensefor the six months ended June 30, 2007 and 2006, respectively. As ofJune 30, 2007, the total unrecognized compensation cost related tounvested option awards was approximately $9.6 million, which will berecognized over a weighted average period of 2.5 years.  As of June 30, 2007, the totalunrecognized compensation cost related to unvested restricted shares wasapproximately $1.5 million, which will be recognized over the remainingvesting period of 1.7 years.

*Non-Operating Income.*Non-operatingincome for the six months ended June 30, 2007 was $0.5 million compared to$1.1 million for the six months ended June 30, 2006. The $0.6, or 55%,decrease was primarily due to lower fund balances available for investment, anda $321,000 reduction in interest expense due to lower long-term debt balancesin 2007.

**Liquidity and Capital Resources**

Since our inception, we have primarily funded ouroperations through the sale of equity securities, debt financings, 

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license fees, research and development funding,milestone payments from our collaborative partners and, more recently, sales ofBiDil. As of June 30, 2007, we have received net proceeds of $321.1million from the issuance of equity securities, primarily as the result of thesale of $99.1 million of our redeemable convertible preferred stock, netproceeds of $60.1 million from our initial public offering inNovember 2003, net proceeds of $81.8 million from our follow-on publicoffering in December 2004, net proceeds of $58.5 million from ourregistered direct offering in January 2006, and net proceeds of $18.3million from our registered direct offering in May 2007. At June 30,2007, we had $44.4 million in cash, cash equivalents and marketable securities.

During the six months ended June 30, 2007,operating activities used cash of $14.0 million, primarily due to a net loss of$16.4 million, and decreases in accounts payable and accrued expenses of$0.5 million, a reduction in accrued restructuring charges of $0.3 million, andan increase in prepaid expenses and other current assets of $0.1 million,offset by stock-based compensation expense of $3.4 million.

During the six months ended June 30, 2007,investing activities used cash of $5.4 million primarily due to net purchases ofmarketable securities of $6.4 million, offset by the sale of $0.5 million infixed assets, and a reduction of restricted cash in the amount of $0.6 million.

During the six months ended June 30, 2007,financing activities provided cash of $15.2 million due to $18.3 million inproceeds from the sale of common stock, and $0.3 million in proceeds fromemployee stock purchases, offset by $3.4 million in long-term debt payments.

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

Theagreements that we entered into with each of Oxford and GECC in connection withthe notes also contain a material adverse change clause with both Oxford andGECC. Under this clause, if Oxford or GECC reasonably determine that ourability to repay the notes has been materially impaired, we would be consideredin default. As of June 30, 2007,we were in compliance with this clause. As of June 30, 2007, we had paidaggregate principal in the amount of $12.7 million.

In February 2007, in connection with (i) our assignmentto Shire Human Genetic Therapies, Inc., or Shire, of certain office furniture,laboratory equipment and other personal property in connection with theassignment to Shire of the lease for our former office and laboratory spacelocated at 125 Spring Street in Lexington, Massachusetts and (ii) the sale of certain laboratory equipment previouslyused by our discovery research group, we entered into a release of collateralwith both Oxford and GECC.  Pursuant tothe terms of each release, GECC and Oxford released any and all securityinterests or liens that either GECC or Oxford had in all laboratory equipment,office furniture and leasehold improvements and fixtures then located at 125Spring Street in Lexington, Massachusetts as of the date of the release.  In addition, GECC and Oxford each releasedany and all security interests or liens that either GECC or Oxford may have hadin any and all computer and electronic equipment, wherever located, to theextent that such computer and electronic equipment was acquired by us prior tothe date of the release.

OnAugust 3, 2005, we filed a registration statement utilizing a “shelf”registration process with the Securities and Exchange Commission, or SEC. Underthis shelf process, we may sell from time to time, in one or moreofferings of common stock and debt securities up to a total dollar amount of $250million. This shelf registration is more fully detailed in a RegistrationStatement on Form S-3 we filed with the SEC on August 3, 2005. OnMay 30, 2007, we completed a direct offering of shares of our commonstock previously registered under our effective shelf registration statement.Pursuant to this offering, we sold approximately 7.6 million shares of ourcommon stock to selected institutional investors at a price of $2.60 per share.Proceeds to us from this registered direct offering, net of offering expensesand placement agency fees, totaled $18.3 million.

*Contractual Obligations*

The following table summarizes our contractualobligations at June 30, 2007, and the effects such obligations are 

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expectedto have on our liquidity and cash flows in future periods.
| **Contractual Obligations**    | ** ** | **Total** | ** ** | **Less than  one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  five years** | ** ** |
|-------------------------------------|------------|-----------|------------|-----------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------------|------------|
| Long term debt                      |       | $         | 7,675,000  |                              | $          | 7,675,000          |       | $                  | —     |                                | $          | — |   | $ | — |   |
| Operating lease  obligation         |       | 2,900,000 |       | 440,000                           |       | 1,120,000          |       | 1,186,000          |       | 154,000                             |       |
| Purchase obligations  (1)           |       | 648,000   |       | 648,000                           |       | —             |       | —             |       | —                              |       |
| License milestones (2)              |       | —    |       | —                            |       | —             |       | —             |       | —                              |       |
| Total contractual cash  obligations |       | $         | 11,223,000 |                              | $          | 8,763,000          |       | $                  | 1,120,000  |                                | $          | 1,186,000 |   | $ | 154,000 |   |

 

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(1)  InApril and June 2007, we placed binding purchase orders in the approximateamount of $648,000 with Schwarz Pharma for production of BiDil finished goodsduring the third and fourth quarters of 2007.

(2)  On February 9, 2007, we entered into aLicense Agreement with Elan, pursuant to which we may be obligated to paycertain milestone payments in the aggregate amount of $2,500,000, of which$250,000 has been paid to date.  We areuncertain as to the timing of any future payments pursuant to the terms of theLicense Agreement.

We believe that our existing cash, cash equivalentsand marketable securities, as well as cash expected to be generated from salesof BiDil, will be sufficient to fund the current business plan for at least thenext twelve months. We will require substantial additional funding in thefuture and may seek that funding through collaborative co-promotionarrangements and/or public or private financings. However, additional fundingmay not be available to us on acceptable terms, if at all. In addition,the terms of any financing may adversely affect the holdings or the rightsof our stockholders. For example, if we raise additional funds by issuingequity securities or convertible debt securities, further dilution to ourexisting stockholders may result. We also could be required to seek fundsthrough arrangements with collaborators or others that may require us torelinquish rights to some of our technologies, product candidates or products.If we are unable to obtain funding on a timely basis, we may be requiredto significantly curtail certain of our sales and marketing efforts, as well asour development efforts with respect to BiDil XR. In addition, we may berequired to limit, scale back or cease our operations.

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

·       the magnitude of productsales of BiDil;

·       the successfulcommercialization of BiDil;

·       the cost of manufacturing,marketing and selling BiDil;

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

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

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

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

·       the effect of competingtechnological and market developments;

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

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

**Critical Accounting Policies and Estimates**

Our discussion and analysis of our financial conditionand results of operations are based on our financial statements, which havebeen prepared in accordance with United States generally accepted accountingprinciples. The 

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preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting periods. Onan on-going basis, we evaluate our estimates and judgments, including thoserelated to revenue and related reserves, accounts receivable, inventories,accrued expenses and the factors used to estimate the fair value of our stockoptions using the Black-Scholes option pricing model. We base our estimates onhistorical experience, known trends and events and various other factors thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. There were no material changes in our judgments or estimates duringthe second quarter of 2007. For a detailed explanation of the judgments made inthese areas, refer to Management’s Discussion and Analysis of FinancialCondition and Results of Operations within our Annual Report on Form 10-Kfor the year ended December 31, 2006, which is on file with the SEC.

**Recently Issued Accounting Pronouncements**

In June 2006,the Financial Accounting Standards Board, or FASB, issued FASB InterpretationNo. 48,*Accounting for Uncertainty inIncome Taxes — an Interpretation of FASB Statement No. 109*, orFIN 48. FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with Statement of Financial AccountingStandards No. 109,*Accounting for IncomeTaxes.***FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006 (beginningwith our 2007 fiscal year). The adoption of FIN 48 had no material impact onour financial position or results of operations.

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements*, or SFAS 157,which defines fair value, establishes a framework for measuring fair valueunder GAAP and expands disclosures about fair value measurements. SFAS 157applies to other accounting pronouncements that require or permit fair valuemeasurements. The new guidance is effective for financial statements issued forfiscal years beginning after November 15, 2007 and for interim periodswithin those fiscal years. We are currently evaluating the requirements ofSFAS 157; however, we do not believe that the adoption will have amaterial effect on our consolidated financial statements.

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*,or SFAS 159. SFAS 159 provides companies with an option to report selectedfinancial assets and liabilities at fair value. The objective of SFAS 159 is toreduce both complexity in accounting for financial instruments and thevolatility in earnings caused by measuring related assets and liabilitiesdifferently. Generally accepted accounting principles have required differentmeasurement attributes for different assets and liabilities that can createartificial volatility in earnings. FASB has indicated that it believes SFAS 159helps to mitigate this type of accounting-induced volatility by enablingcompanies to report related assets and liabilities at fair value, which wouldlikely reduce the need for companies to comply with detailed rules for hedgeaccounting. SFAS 159 also establishes presentation and disclosure requirementsdesigned to facilitate comparisons between companies that choose differentmeasurement attributes for similar types of assets and liabilities. Forexample, SFAS 159 requires companies to provide additional information thatwill help investors and other users of financial statements to more easilyunderstand the effect of a company’s choice to use fair value on its earnings.It also requires companies to display the fair value of those assets andliabilities for which a company has chosen to use fair value on the face of thebalance sheet. SFAS 159 does not eliminate disclosure requirements included inother accounting standards, including requirements for disclosures about fairvalue measurements included in SFAS 157 and Statement of FinancialAccounting Standards No. 107, *Disclosures about FairValue of Financial Instruments*. SFAS 159 is effective as of thebeginning of a company’s first fiscal year beginning after November 15,2007. Early adoption is permitted as of the beginning of the previous fiscalyear provided that the a company makes that choice in the first 120 days ofthat fiscal year and also elects to apply the provisions of SFAS 157.

In June 2007, theEmerging Issues Task Force issued EITF Issue 07-03, *Accountingfor Advance Payments for Goods or Services to Be Used in Future Research andDevelopment*, or EITF 07-03. EITF 07-03 addresses the diversity whichexists with respect to the accounting for the non-refundable portion of apayment made by a research and development entity for future research anddevelopment activities. Under EITF 07-03, an entity would defer and capitalizenon-refundable advance payments made for research and development activitiesuntil the related goods are delivered or the related services are performed.EITF 07-03 is effective for fiscal years beginning after December 15, 2007 andinterim periods within those 

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years. We do not expectthe adoption of EITF 07-03 to have a material impact on our financial positionor results of operations.

**Inflation**

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

**Off-BalanceSheet Arrangements**

We do not have any material off-balance sheetarrangements.

**Forward-Looking Statements**

This Quarterly Report on Form 10-Q includes forward-lookingstatements within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended, which we refer to as the Exchange Act. For thispurpose, any statements contained herein regarding our strategy, futureoperations, financial position, future revenues, projected costs, prospects,plans and objectives of management, other than statements of historical facts,are forward-looking statements. The words “anticipates,” “believes,” “estimates,”“expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similarexpressions are intended to identify forward-looking statements, although notall forward-looking statements contain these identifying words. We cannotguarantee that we actually will achieve the plans, intentions or expectationsdisclosed in our forward-looking statements. There are a number of importantfactors that could cause actual results or events to differ materially fromthose disclosed in the forward-looking statements we make. These importantfactors include the risk factors set forth below under Part II, Item 1A., “RiskFactors.” Although we may elect to update forward-looking statements inthe future, we specifically disclaim any obligation to do so, even if ourestimates change, except as specifically required by law or the rules ofthe 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.****   Quantitative and QualitativeDisclosures About Market Risk**

We are exposed to market risk related to changes ininterest rates. Our current investment policy is to maintain an investmentportfolio consisting mainly of U.S. money market and high-grade corporate andU.S. government-related securities, directly or through managed funds, withmaturities of two years or less. In addition, we hold auction rate securitiesthat reset monthly.  However, thematurities of the auction rate securities at June 30, 2007 range from 2007 to2045. Our cash is deposited in and invested through highly rated financialinstitutions in North America. Our marketable securities are subject tointerest rate risk and will fall in value if market interest rates increase. Ifmarket interest rates were to increase immediately and uniformly by 10% fromlevels at June 30, 2007, we estimate that the fair value of our investmentportfolio would decline by an immaterial amount. We have the ability to holdour fixed income investments until maturity, and therefore we do not expect ouroperating results or cash flows to be affected to any significant degree by theeffect of a change in market interest rates on our investments.

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

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour disclosure controls and procedures as of June 30, 2007. The term “disclosurecontrols and procedures,” as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, means controls and other procedures of acompany that are designed to ensure that information required to be disclosedby a company in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.Management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives, and management necessarily applies its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based on theevaluation of our disclosure controls and procedures as of June 30, 2007,our chief executive officer and chief financial officer concluded that, as ofsuch date, our disclosure controls and procedures were effective at thereasonable assurance level.

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No change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the fiscal quarter ended June 30, 2007, that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

**PART II.OTHER INFORMATION**

**Item 1A. Risk Factors**

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

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

**Risks Relating to ourBusiness**

**Our business is substantially dependent on thecommercial success of BiDil and our product candidate, BiDil XR, and if we donot successfully commercialize BiDil and maintain market presence of BiDilduring the planned development of BiDil XR, our business will be materiallyharmed and our stock price will decline.**

On June 23, 2005, the FDA approved BiDil for thetreatment of heart failure in self-identified black patients as an adjunct tocurrent standard therapy. We launched BiDil in July 2005 and thereforehave only recently begun to receive revenue from sales of BiDil. BiDil iscurrently our only commercial product, and we expect that it will account forall of our product sales and substantially all of our total revenues for thenear future. We face a number of significant risks relating to our ability tosuccessfully commercialize BiDil, including risks relating to:

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

·  the success of our revised salesand marketing strategies for BiDil;

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

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

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

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

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

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

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

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

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

We are also seeking to develop aonce-a-day extended release formulation of BiDil, referred to as BiDil XR. Ifwe do not maintain a market presence for BiDil in the near term, we willnot be able to successfully commercialize BiDil or build a sufficientcommercial foundation from which to launch BiDil XR and, as a result, ournear-term ability to generate product revenue, our reputation and our abilityto raise additional capital will be materially impaired, and the value of ourstock will decline.

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**We will require substantial additional amounts of cashto fund our operating plan, including commercializing BiDil and seeking todevelop and commercialize BiDil XR, and, if additional capital is notavailable, we may need to limit, scale back or cease our operations.**

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

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

·  the magnitude of product salesof BiDil;

·  the successful commercializationof BiDil;

·  the cost of manufacturing,marketing and selling BiDil;

·  the timing of when we receivesignificant revenue from BiDil, if at all;

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

·  our ability to establish andmaintain co-promotion, out-licensing and collaborative arrangements;

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

·  the effect of competingtechnological and market developments;

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

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

We will require substantial additional funding in thefuture and may seek such funding through collaborative co-promotionarrangements and/or public or private financings. Additional financingmay not be available to us on acceptable terms, if at all. In addition,the terms of any financing may adversely affect the holdings or the rightsof our stockholders. For example, if we raise additional funds by issuingequity securities, further dilution to our then-existing stockholders willresult. If we are unable to obtain funding on a timely basis, we may becompelled to significantly curtail our sales and marketing efforts for BiDiland/or our development efforts with respect to BiDil XR. We may also becompelled to seek funds through arrangements with collaborators or others thatmay require us to relinquish rights to some of our technologies, productcandidates or products. We could also be required to limit, scale back of ceaseour operations, any of which would have a material and adverse effect on ourbusiness, financial condition and results of operations.

**Poor performance by our sales force, or difficultiesarising from the restructuring and expansion of our sales organization, couldprevent us from achieving the results we need to maintain market presence ofBiDil.**

In October 2006, we initiated a restructuringprogram that included a reduction of our sales force and administrativeheadcount. As part of the restructuring program, we eliminated our existingsales force and replaced it with a small team of highly experienced seniorcardiovascular business managers focused on hospitals and key opinion leaders,resulting in a net reduction of approximately 120 in sales force headcount. Inaddition, we also eliminated approximately 20% of our general andadministrative personnel in connection with this restructuring program. InApril 2007, we began to implement a program designed to double our sales forcein specific geographic areas with a focus on selected prescriber targets. Ourcurrent sales organization is managed by our senior vice president ofcommercial operations and is comprised of approximately 50 people. Ournear-term revenue for BiDil will depend significantly upon the efforts andsuccess of our restructured and expanded sales organization.  If our expanded sales organization does notgenerate additional prescriptions, our ability to generate product revenue willbe harmed and the value of our stock will decline.

During the first quarter of 2006, we elected to reducethe number of sales territories in which we have sales representation. As aresult of our October 2006 restructuring, we significantly reduced thenumber of individuals in our sales organization who cover these territories.Even if we begin to expand our sales force in certain geographic areas, anyfailure to 

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adequately cover ourcurrent sales territories, or to cover through alternative marketing effortsthe territories in which we have elected not to have sales representation,will result in reduced sales force productivity and loss of revenuerelated to BiDil.

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

**If we do not successfully market and sell BiDil,either directly through our small, restructured sales force or indirectlythrough third-party co-promotion arrangements, our future revenue will belimited.**

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

The direct marketing efforts in which we will continueto engage through our expanded, specialized sales team will be focused onnational thought leaders, regional heart failure specialists and keyinstitutions that treat, and influence the treatment of, large numbers ofAfrican Americans who have been diagnosed with heart failure. Our approach isto educate those thought leaders and institutions on the value of BiDil, andthen leverage their influence to impact the broader base of prescribers. If weare unable to convince these thought leaders and institutions that BiDil issafe, effective and medically necessary, we will be unsuccessful in ourmarketing approach. In addition, even if we are successful in gainingacceptance of BiDil with these key targets, these thought leaders andinstitutions may not be willing or able to influence the prescribing activityof other physicians, or to do so within a timeframe that will impact BiDilprescriptions in the near term. Furthermore, our indirect marketing efforts maynot be successful in maintaining market awareness of BiDil with current andpotential prescribers.

If we decide to further expand our marketing reach forBiDil, we will likely pursue sales, marketing and distribution arrangementswith third parties, including co-promotion arrangements. We may not beable to successfully enter into sales, marketing and/or distribution agreementswith third parties on terms that are favorable to us, if at all. In addition,we may have limited or no control over the sales, marketing anddistribution activities of these third parties. If we decide to rely onthird-party entities for sales, marketing and distribution support, our futurerevenues for BiDil will depend heavily on the success of the efforts of thesethird parties.

**If the government or third-party payors do notreimburse patients for BiDil, or do not reimburse for BiDil at favorablelevels, BiDil might not be used or purchased, and our revenues and profits willbe adversely affected.**

Our revenues and profits depend heavily upon theavailability of coverage and favorable reimbursement for the use of BiDil fromthird-party healthcare and state and federal government payors. Reimbursementby a third party payor may depend upon a number of factors, including thethird-party payor’s determination that use of a product is:

·  safe, effective and medicallynecessary;

·  appropriate for the specificpatient;

·  cost-effective; and

·  neither experimental norinvestigational.

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

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

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

**Physicians, third-party payors and patientsmay not be receptive to BiDil, which could prevent us from achievingprofitability.**

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

Factors that we believe will materially affect marketacceptance of BiDil include:

·  the availability of favorablegovernment and third-party payor reimbursement;

·  the ability to produce and sellBiDil at a competitive price;

·  the availability in generic formof the individual components that constitute BiDil and the perception thatthese generic components are equivalent to BiDil;

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

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·  the success of our promotionalprograms, which will be centralized in nature going forward;

·  the timing of our receipt ofmarketing approval, if any, for our next-generation BiDil product underdevelopment, BiDil XR, or for any expansion of our current label for BiDil,such as extended product dating or inclusion of new data;

·  the safety, efficacy and ease ofadministration of BiDil; and

·  the timing of our receipt of anymarketing approvals outside the U.S., the terms of any non-U.S. approval,including labeling requirements and/or limitations, and the countries in whichapprovals are obtained, if any.

**The availability of lower priced generic forms of thecomponents of BiDil may adversely affect our sales of BiDil and thepricing or reimbursement we are able to obtain for BiDil.**

BiDil is a fixed-dosed combination of two individualcomponents, both of which are available in generic form and are separatelymarketed (isosorbide dinitrate for angina and hydralazine hydrochloride forhypertension) at prices substantially below the prices we are charging forBiDil. Moreover, isosorbide dinitrate is available in the dosage that weinclude in BiDil. While neither of these two generic drugs is approved for thetreatment of heart failure, it is impracticable for us to prevent physiciansfrom prescribing a combination of these two, lower cost generic drugs as asubstitute for prescribing BiDil. We believe that a substantial number ofphysicians have prescribed the combinationof these generic drugs, rather than BiDil. If a substantial number ofphysicians continue to prescribe the combination of these two genericdrugs, rather than BiDil, we could fail to achieve the sales of BiDil necessaryfor successful commercialization which would severely limit our ability togenerate revenue from the sales of BiDil. Our ability to generate revenue couldalso be limited if:

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

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

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

**We do not have the internal technology tosuccessfully develop BiDil XR and our success will depend on our ability toco-develop such technology with a collaborative partner.**

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

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**We cannot be certain that clinical testing of BiDil XRwill be successful, nor can we be certain that we will be able to obtainregulatory approval for BiDil XR.**

In order to obtain regulatoryapprovals for the commercial sale of BiDil XR, we will be required to completeclinical studies and clinical trials in humans to demonstrate the safety andefficacy of BiDil XR. We may not be able to obtain authority from the FDA tocommence or complete these clinical trials. Clinical testing may not prove thatBiDil XR is safe and effective to the extent necessary to permit us to obtainmarketing approval. Moreover, positive results demonstrated in preclinicalstudies and clinical trials that we complete may not be indicative of resultsobtained in future clinical trials. Assuming we successfully complete therequired clinical testing, we will be required to submit a new drugapplication, or NDA, to the FDA. FDA approval of the NDA is required beforemarketing BiDil XR may begin in the United States. The FDA will undertake anextensive and lengthy review of the NDA. We can not provide any assurance thatBiDil XR will be approved, even if the FDA accepts our NDA submission.

We cannot predict whether the results of any clinicalstudies conducted with respect to BiDil XR will be successful. Furthermore, wecannot predict the number or the type of clinical trials that will be necessaryto adequately support regulatory approval for BiDil XR, nor can we predict theamount of time that will be required in order to complete those clinicaltrials. For example, depending on theresults of initial clinical studies, additional testing with alternateformulations of BiDil XR may also be required. The fact that BiDil is acombination of two active ingredients (isosorbide dinitrate and hydralazinehydrochloride) may further complicate the development of the extended releaseformulation. We could also experience delays or failures in clinical trials fora number of other reasons. For example:

·  the results from early clinicaltrials may not be statistically significant or predictive of results that willbe obtained from expanded, advanced clinical trials;

·  we may encounter difficulties ordelays in manufacturing sufficient quantities of BiDil XR used in any clinicaltrials;

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

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

·  we, along with our collaboratorsand subcontractors, may not employ, in any capacity, persons who have beendebarred from performing or assisting in such services. Employment of such adebarred person (even if inadvertently) may result in delays in FDA’s review orapproval of our products, or the rejection of data developed with theinvolvement of such person(s); and

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

Additionally, the FDA may conclude that the dataprovided from our studies of BiDil XR is insufficient and may require that weperform additional large-scale outcomes studies. We currently do not intend to pursue the clinical development ofBiDil XR if the FDA requires us to conduct large-scale outcomestudies as a condition to obtaining FDA approval. Moreover, if we experiencedelays in obtaining FDA approval, we may determine to not devote thesubstantial additional resources necessary to pursue the clinical developmentof BiDil XR. Even if our clinical testing of BiDil XR is successful, we stillmay not be able to obtain regulatory approval of BiDil XR if the FDA concludesthat the data does not support such request for approval. If we do notsuccessfully develop and commercialize this product, then our ability togenerate revenue from BiDil XR will be materially impaired and our stock pricemay decline.

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

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

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

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

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

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

At the end of the first quarter of 2006, we scaledback our research and development staff in a restructuring of our company andhave limited our internal research and development activities to the continueddevelopment of BiDil XR. We are currently seeking out-licensing andcollaboration opportunities for our other potential product candidates based onour proprietary nitric oxide technology, including NMI-3377, apre-clinical cardio-renal compound. The application of our proprietary nitricoxide technology is unproven in humans and, as a result, we may not beable to successfully out-license any products based on this technology. Our productcandidates include nitric oxide enhancements of existing drugs; in these cases,we are modifying compounds whose chemical and pharmacological profiles arewell-documented and understood. Many of our potential product candidates,however, are new molecules with chemical and pharmacological profiles thatdiffer from that of the existing drugs. These compounds may not demonstrate inpatients the chemical and pharmacological properties shown in laboratorystudies, and they may interact with human biological systems inunforeseen, ineffective or harmful ways. In addition, it is possible thatexisting drugs or newly-discovered drugs may not benefit from theapplication of our nitric oxide technology. We may not be able to secureout-licensing or collaboration partners for these potential product candidates.Even if we are successful in entering into out-licensing or collaborativearrangements with respect to our potential product candidates, we have noassurance that we will be able to secure such arrangements on terms completelyfavorable to us. If our out-licensing or collaboration arrangements includeunfavorable financial terms, our ability to generate revenue from ourtechnology portfolio will be severely limited.

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

·       our future licensingpartners or collaborators may be pursuing alternative technologies ordeveloping alternative product candidates, either on their own or incollaboration with others, that may be competitive with the product 

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             candidate which they have licensed from usor will be collaborating with us and which could affect their commitment to ourfuture collaboration;

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

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

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

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

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

We have experienced significant operating losses sinceour inception in 1992. For the quarter ended June 30, 2007, we had a netloss of $6.2 million. As of June 30, 2007, we had an accumulateddeficit of $330.2 million. We expect that we will continue to incursubstantial losses and that our cumulative losses will increase as ourcommercialization efforts continue. We expect that the losses that we incurwill fluctuate from quarter to quarter and that these fluctuations may besubstantial.

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

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

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

We do not manufacture BiDil and have no plans to doso. We engaged Schwarz Pharma under a five-year exclusive manufacturing andsupply agreement solely for the three times daily immediate release dosageformulation of BiDil. Under the supply agreement, we have the right to engage abackup manufacturer but do not currently have any backup manufacturingagreement in place. The terms of the supply agreement provide that itmay be terminated by either us or Schwarz Pharma under specifiedcircumstances, including a material breach of the supply agreement by eitherparty, the occurrence of a payment default by us, our material impairment ofthe manufacturing licenses we have granted to Schwarz Pharma or a failure ofSchwarz Pharma to supply conforming products. In addition, either partymay 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 encounter difficulties in production. These problemsmay include, but are not limited to:

·       difficulties withproduction costs and yields;

·       quality control andassurance;

·       difficulties obtainingingredients for our products;

·       shortages of qualifiedpersonnel;

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

·       lack of capital funding.

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

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

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

We rely on Sumitomo Corp. for our supply ofhydralazine hydrochloride, one of the two active ingredients in BiDil. Sumitomois currently the only supplier of hydralazine hydrochloride worldwide. We donot have any agreement with Sumitomo regarding the supply of hydralazinehydrochloride. If Sumitomo stops manufacturing or is unable to manufacture hydralazinehydrochloride, or if we are unable to procure hydralazine hydrochloride fromSumitomo on commercially favorable terms, we may be unable to continue tosell BiDil on commercially viable terms, if at all. Furthermore, becauseSumitomo is currently the sole supplier of hydralazine hydrochloride, Sumitomohas unilateral control over the price of hydralazine hydrochloride. Anyincrease in the price for hydralazine hydrochloride may reduce our grossmargins and adversely affect our ability to achieve profitability.

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

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

·       the severity of thedisease;

·       the quality of theregulatory submission;

·       the drug’s clinicalefficacy and safety;

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

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

·       the availability ofalternative treatments;

·       the risks and benefitsdemonstrated in clinical trials; and

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

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

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

Our marketing approval for BiDil is limited to theUnited States. Until we or our potential strategic collaborators obtain therequired regulatory approvals for BiDil or any potential product candidates inany specific foreign country, neither we nor our collaborators will be able tosell these products in that country. International regulatory authorities haveimposed numerous and varying regulatory requirements, and the approvalprocedures could involve testing in addition to that required by the FDA.Furthermore, approval by one regulatory authority does not ensure approval byany other regulatory authority. In addition, if we enter into collaborativepartnerships in order to obtain foreign regulatory approval for BiDil or any ofour product candidates, such as BiDil XR, we may be dependent upon thesecollaborators to conduct clinical or other testing and to obtain suchregulatory approvals. We or our collaborators may not be able to obtainfinal regulatory approvals for BiDil or for any of our other potential productcandidates in foreign countries. Any failure to obtain the necessarygovernmental approvals or failure to obtain approvals of the scope requestedcould delay, or even preclude, us or our licensees or other collaboratorsfrom marketing BiDil or our product candidates, or limit the commercial use ofBiDil or our product candidates in these foreign jurisdictions. Alternatively,foreign regulatory approvals may entail limitations on the indicated usesof BiDil or our product candidates and impose labeling requirements whichmay also adversely impact our ability to market BiDil or our productcandidates.

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**Even if we or ourplanned strategic partners obtain regulatory approvals, our marketed products,including BiDil, will be subject to ongoing regulatory review and oversight. Ifwe, or our planned strategic partners, fail to comply with continuing UnitedStates and foreign regulations, we could lose our approvals to market BiDil,our strategic partners could lose approvals to market our out-licensed productsbased on our proprietary nitric oxide technology, and our business would beseriously harmed.**

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

For example, because BiDil is specifically approvedfor use by self-identified black patients, we may not promote BiDil foruse in other patient populations. We must submit copies of our advertisementsand promotional labeling for BiDil, including, for example, professionaljournal advertisements, website pages, professional direct mailers, direct-to-consumeradvertisements, convention booth panels and handouts, to the FDA at the time ofinitial publication or dissemination. If the FDA believes these materials orstatements made by our sales representatives or other company officials promoteour products for unapproved indications orotherwise fail to comply with the FDA’s promotional labeling or advertisingregulations, the FDA could allege that our promotional activitiesmisbrand our products or cause our productsto violate new drug approval requirements. Based on such allegations,the FDA could issue an untitled letter or warning letter, which requests, amongother things, that we cease such promotional activities, includingdisseminating the advertisements and promotional labeling, and that we issuecorrective advertisements and labeling, including sending letters to healthcareproviders. The FDA also could take enforcement action including seizure ofallegedly violative product, or could seek an injunction or criminalprosecution against us and our officers or employees. If we repeatedly ordeliberately fail to submit such advertisements and labeling to the agency, theFDA could withdraw our approvals. The FDA also monitors manufacturers’ supportof continuing medical education, or CME, programs where the programs involvethe manufacturers’ or a competitor’s products to ensure that manufacturers donot influence the CME content as a means of promoting their products foroff-label uses. In addition, the Department of Justice enforces lawsprohibiting kickbacks to healthcare providers and false claims in connectionwith government-funded reimbursement programs for drug purchases, such asMedicare and Medicaid, and any 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.

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

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**If we, ourthird-party manufacturers or our service providers fail to comply withapplicable laws and regulations, we or they could be subject to enforcementactions, which could affect our ability to develop, market and sell BiDil, orany potential product candidates, and harm our reputation.**

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

·       product seizures;

·       voluntary or mandatoryrecalls;

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

·       withdrawal of productapprovals;

·       restrictions on, orprohibitions against, marketing our products;

·       operating restrictions;

·       fines;

·       restrictions on importationor exportation of our products;

·       injunctions;

·       debarments;

·       civil and criminalpenalties; and

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

**If the clinicaltrials for any product candidates our planned strategic partners advance intoclinical testing are not successful, these partners may not be able tosuccessfully develop and commercialize our potential product candidates.**

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

The successful completion of our strategic partners’clinical trials will depend on, among other things, the rate of patientenrollment. Patient enrollment is a function of many factors, including thesize of the patient population, the nature of the clinical protocol, theavailability of alternative treatments, the proximity of patients to clinicalsites and the eligibility criteria for the study. Our strategic partnersmay be unable to enroll the number of patients we need to complete a trialon a 

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timely basis, if at all.Moreover, delays in planned patient enrollment for clinical trialsmay cause our strategic partners to incur increased costs and delaycommercialization. Because we will need to rely on third parties for the developmentof our product candidates, we will have less control over the timing and otheraspects of these clinical trials than if we conducted them on our own. Thesethird parties may not complete activities on schedule, or may not conductclinical trials in accordance with regulatory requirements or the trial design.

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

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

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

**RisksRelating to our Intellectual Property Rights**

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

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

We may not be able to enforce our method-of-usepatents to prevent physicians from prescribing isosorbide dinitrate andhydralazine hydrochloride separately for the treatment of heart failure inblack patients, even though neither drug is approved for such use. We alsomay 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, manufacturersof generic drugs will have an incentive to challenge our patent position. Thecombination therapy of isosorbide dinitrate and hydralazine hydrochloride foruse in heart failure was developed through lengthy, publicly-sponsored clinicaltrials conducted during the 1980s, prior to the filing of the patentapplication that resulted in the 2007 patent. The U.S. Patent and TrademarkOffice considered published reports on these clinical trials and concluded thatthey did not constitute prior art that would prevent the issuance of the 2007patent. The U.S. patent office also considered the question of whether the 2007patent constituted prior art with respect to the 2020 patents, and determinedthat the claims of the 2020 patents were non-obvious and patentable. A courtconsidering the validity of the 2020 patents with respect to questions of priorart might be 

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presented with otheralleged prior art or might reach conclusions different than those reached bythe U.S. patent office. If the 2020 patents were to be invalidated or ifphysicians were to prescribe isosorbide dinitrate and hydralazine hydrochlorideseparately for heart failure in black patients, our BiDil revenue could besignificantly reduced, we could fail to recover the cost of developing BiDiland BiDil might not be a viable commercial product.

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

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

Prior to the restructuring of our research anddevelopment activities, our intellectual property strategy depended on ourability to rapidly identify and seek patent protection for our discoveries.This process is expensive and time consuming, and we may not be able 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 informationthat we regard as proprietary. The mere issuance of a patent does not guaranteethat it is valid or enforceable; even if we have obtained patents, theymay not be valid or enforceable against third parties.

The issued patents and patent applications for ourproduct candidates and nitric oxide technology include claims with respect toboth the composition of specific products or compounds and specific methods ofusing these products or compounds in therapeutic areas. In some cases, likeBiDil, our only patent protection is with respect to the method of using aproduct or compound. Method-of-use patents may provide less protection forour product candidates and products. If another company gains FDA approval foran indication separate from the one claimed in our method-of-use patents,physicians may be able to prescribe that product for use in the approvedindication.  In addition, physicians mayprescribe a product for which we or our potential strategic partners haveobtained approval for an unapproved indication for that product. As a practicalmatter, we or our potential strategic partners may not be able to enforceour method-of-use patents against physicians prescribing products for suchoff-label use. Off-label use and any resulting off-label sales could make itmore difficult to obtain the price we or our potential strategic partners wouldotherwise wish to achieve for, or to successfully commercialize, our products.In addition, in those situations where we have only method-of-use patentcoverage for a product candidate, it may be more difficult to find apharmaceutical company partner to license or support development of our productcandidate.

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

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

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

A third party may sue us or our potentialstrategic partners for infringing on its patent rights. Likewise, we or ourpotential strategic partners may need to resort to litigation to enforce apatent issued to us or to 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, 

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and the litigation woulddivert management efforts. Some of our competitors may be able to sustainthe costs of complex patent litigation more effectively than we can becausethey have substantially greater resources. In addition, our strategy of providingnitric oxide-enhancing versions of existing products could lead to more patentlitigation due to the fact that the markets for these existing products arevery large and competitive. Uncertainties resulting from litigation could limitour ability to continue our operations. For example, we filed an opposition inthe European Patent Office, or EPO, to revoke NicOx S.A.’s European PatentNo. 904 110, which we refer to as EP ’110. This patent is directed tothe use of organic compounds containing a nitrate group or inorganic compoundscontaining a nitric oxide group to reduce the toxicity caused by certain drugs,including non-steroidal anti-inflammatory drugs. The basis for our opposition,in part, is that the claims in EP ’110 are anticipated and thereforeinvalid if they are construed to cover a single compound chemically linked to anitrate moiety. In March 2007, the three-member EPO Opposition Divisioninvalidated all of the claims of EP ‘110, and the official written decisionrevoking EP ‘110 was issued on June 19, 2007. Pursuant to the rules of the EPO,NicOx may file an appeal regarding this invalidation decision.  While we believe that the invalidationdecision will be upheld, we cannot predict with certainty the outcome of theappeal. If the EPO overrules the invalidation and finds that there are validclaims in EP ’110 that cover compounds chemically linked to nitrates, wemay be adversely affected in our ability to market our product candidatesfor reducing gastrointestinal toxicity without first obtaining a license fromNicOx, which may not be available on favorable terms, if at all.

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

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

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

**RisksRelating to our Industry**

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

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

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In addition, we could become subject to false claimslitigation under federal statutes, which can lead to treble damages based onthe reimbursements by federal healthcare programs, civil money penalties(including penalties levied on a per false claim basis), restitution, criminalfines and imprisonment, and exclusion from participation in Medicare, Medicaidand other federal and state healthcare programs. These false claims statutesinclude the False Claims Act, which allows any person to bring suit on behalfof the federal government alleging the submission of false or fraudulentclaims, or causing to present such false or fraudulent claims, under federalprograms or contracts claims or other violations of the statute and to share inany amounts paid by the entity to the government in fines or settlement. Thesesuits against 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 may resultin others commercializing products more successfully than ours.**

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

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

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

·                                          commercializecompeting products before our partners can launch any products developed fromour product candidates;

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

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

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

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

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

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

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

Our business exposes us to the risk of productliability claims that is inherent in the clinical testing, manufacturing andmarketing of human therapeutic products. Our clinical trial and commercialproduct liability insurance is subject to deductibles and coverage limitations.We may not be able to obtain or maintain insurance on acceptable terms, ifat all. 

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Moreover, any insurancethat we do obtain may not provide adequate protection against potentialliabilities, and our capital resources could be depleted as a result.

**RisksRelating to our Common Stock**

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

The stock markethas from time to time experienced significant price and volume fluctuationsthat may be unrelated to the operating performance of particularcompanies. In particular, the market price of our common stock, like that ofthe securities of other biopharmaceutical companies, has been and may continueto be highly volatile. During the period from January 1, 2005 toJune 30, 2007, our stock price has ranged from a low of $2.04 per share(on October 13, 2006) to a high of $27.99 per share (on February 2,2005). The following factors, among others, may affect the price of ourcommon stock:

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

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

·                                          generalmarket conditions;

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

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

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

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

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

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

·                                          issuancesof securities in equity, debt or other financings;

·                                          salesof common stock by existing stockholders; and

·                                          theperception that such issuances or sales could occur.

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

As of July 27,2007, our directors, executive officers and principal stockholders, togetherwith their affiliates, owned, in the aggregate, approximately 33.9% of ouroutstanding common stock. As a result, these stockholders, if acting together,may have the ability to determine the outcome of matters submitted to ourstockholders for approval, including the election and removal of directors andany merger, consolidation or sale of all or substantially all of our assets. Inaddition, these persons, if acting together, will have the ability to controlthe management and affairs of our company. Accordingly, this concentration of ownershipmay 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

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

·                                          aprohibition on stockholder action through written consent;

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

·                                          advancenotice requirements for stockholder proposals and nominations;

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

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

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

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

Sales of a substantial number of shares of our commonstock in the public market could occur at any time. These sales, or theperception in the market that the holders of a large number of shares intend tosell shares, could reduce the market price of our common stock. As ofJuly 27, 2007, there were 45,823,426 shares of common stock outstanding.Substantially all of these shares may also be resold in the public marketat any time. In addition, we have a significant number of shares that aresubject to outstanding options and restricted stock awards. The sale of thecommon stock underlying these options and pursuant to these restricted stockawards after such time as the options and restricted stock awards have vestedand become exerciseable or free from forfeiture, as the case may be, couldcause a further decline in our stock price. These sales also might make itdifficult for us to sell equity securities in the future at a time and at aprice that we deem appropriate.

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

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

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**Item 4.**          Submission of Matters to a Vote of SecurityHolders.

Our Annual Meeting of Stockholders was held on May 25,2007. At the Annual Meeting, the following matters were voted upon by holdersof 82.4% of the total outstanding shares of our common stock entitled to voteat the Annual Meeting:

1.                                       Toelect the following ten directors:
|                                | ** ** | **VOTES  FOR** | ** ** | **VOTES  WITHHELD** | ** ** |
|--------------------------------|------------|----------------|------------|---------------------|------------|
| Argeris  Karabelas, Ph.D.      |       | 30,745,886     |       | 726,062             |       |
| Kenneth M. Bate                |       | 30,746,621     |       | 725,327             |       |
| Robert S. Cohen                |       | 30,596,541     |       | 875,407             |       |
| Frank L.  Douglas, M.D., Ph.D. |       | 30,746,721     |       | 725,227             |       |
| Zola Horovitz,  Ph.D.          |       | 30,121,666     |       | 1,350,282           |       |
| Mark Leschly                   |       | 30,534,664     |       | 937,284             |       |
| John W.  Littlechild           |       | 30,728,318     |       | 743,630             |       |
| Joseph Loscalzo,  M.D., Ph.D.  |       | 29,651,127     |       | 1,820,821           |       |
| Davey Scoon                    |       | 30,595,751     |       | 876,197             |       |
| Christopher J. Sobecki         |       | 30,745,821     |       | 726,127             |       |

 

Each of the above namedindividuals was elected as a director.

2.                                       Toratify the selection of Ernst & Young LLP as our independent registeredpublic accounting firm for the fiscal year ending December 31, 2007:
| VOTES FOR | ** ** | **VOTES AGAINST** | ** ** | **ABSTENTIONS** | ** ** | **BROKER  NON-VOTES** | ** ** |
|----------------|------------|------------------------|------------|-----------------|------------|-----------------------|------------|
| 30,941,305     |       | 428,138                |       | 102,504         |       | —                |       |

 

The foregoing proposalwas 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 the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                           | NITROMED, INC. |
|---------------------------|---------------------|
|                      |                |   |
|                      |                |   |
|                      | By:                 | /s/ JAMES G. HAM, III |
|                      |                | James G. Ham, III |
|                      |                | Vice President, Chief Financial Officer, Treasurer |
|                      |                | and Secretary*(Principal Financial  Officer and Principal   Accounting Officer)* |
| Date: August 1, 2007 |                |   |

 

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                    |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Transition Agreement, dated as of May 21, 2007,  between NitroMed, Inc. and L. Gordon Letts, Ph.D., filed as an  exhibit to NitroMed’s Current Report on Form 8-K (File  No. 000-50439) filed on May 22, 2007 and incorporated herein by  reference. |
| 31.1            |       | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities  Exchange Act of 1934, as amended                                                                                                                          |
| 31.2            |       | Certification of the Chief Financial Officer pursuant  to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act  of 1934, as amended                                                                                                                          |
| 32.1            |       | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                  |
| 32.2            |       | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                  |

 

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