UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|(Mark One)                                                       |                                                                                         
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2004                     
|OR                                                              
|o                                                                | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                to

Commission file number 000-50439

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NITROMED, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation or organization)              |  | 22-3159793(IRS Employer Identification No.)
|----------------------------------------------------------------------------------- |  | -------------------------------------------
|125 Spring Street, Lexington, Massachusetts(Address of principal executive offices) |  | 02421(Zip Code)                            
|Registrant's telephone number, including area code:(781) 266-4000                  

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Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:Common Stock, $.01 par value per share
(Title of class)

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Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. YES ý    NO o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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

The aggregate market value of the registrant's common stock held by nonaffiliates of the registrant was approximately $68,263,373, based on the price at which the
registrant's common stock was last sold on June 30, 2004.

As
of March 7, 2005, there were 30,258,187 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrant's proxy statement for the annual meeting of stockholders to be held on May 16, 2005, which are to be filed pursuant to
Regulation 14A within 120 days after the end of the registrant's fiscal year ended December 31, 2004 are incorporated by reference into Item 5 of Part II and
Part III of this report.



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NITROMED, INC.    ANNUAL REPORT    ON FORM 10-K

INDEX

|           |          |    |                                                                                                              | PAGE
|---------- | -------- | -- | ------------------------------------------------------------------------------------------------------------ | ----
|PART I     |          |    |                                                                                                              |     
|           | Item 1.  |    | Business                                                                                                     |     
|           | Item 2.  |    | Properties                                                                                                   |     
|           | Item 3.  |    | Legal Proceedings                                                                                            |     
|           | Item 4.  |    | Submission of Matters to a Vote of Security Holders                                                          |     
|PART II    |          |    |                                                                                                              |     
|           | Item 5.  |    | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |     
|           | Item 6.  |    | Selected Financial Data                                                                                      |     
|           | Item 7.  |    | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |     
|           | Item 7A. |    | Quantitative and Qualitative Disclosures About Market Risk                                                   |     
|           | Item 8.  |    | Financial Statements and Supplementary Data                                                                  |     
|           | Item 9.  |    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |     
|           | Item 9A. |    | Controls and Procedures                                                                                      |     
|           | Item 9B. |    | Other Information                                                                                            |     
|PART III   |          |    |                                                                                                              |     
|           | Item 10. |    | Directors and Executive Officers of the Registrant                                                           |     
|           | Item 11. |    | Executive Compensation                                                                                       |     
|           | Item 12. |    | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |     
|           | Item 13. |    | Certain Relationships and Related Transactions                                                               |     
|           | Item 14. |    | Principal Accountant Fees and Services                                                                       |     
|PART IV    |          |    |                                                                                                              |     
|           | Item 15. |    | Exhibits and Financial Statement Schedules                                                                   |     
|SIGNATURES |          | 75

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PART I

This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause the results of NitroMed to differ materially from those expressed or implied by such forward-looking statements. All
statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, expenses, earnings or losses from operations,
or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product research, development and commercialization
timelines; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include risks that are
described in "BusinessFactors That May Affect Future Results" and elsewhere in this annual report and that are otherwise described from time to time in our Securities and Exchange
Commission reports filed after this report.

The forward-looking statements included in this annual report represent our estimates as of the date of this annual report. We specifically disclaim any
obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the
date of this annual report.

ITEM 1. BUSINESS

Overview

NitroMed is an emerging pharmaceutical company with substantial expertise and intellectual property in nitric oxide-based drug development which was incorporated
in Delaware in 1992. Our goal is to become a leading, multi-product pharmaceutical company by developing innovative nitric oxide products and by building on our BiDil development experience and
commercialization infrastructure to identify and market additional products for cardiovascular and metabolic diseases. We are developing
our lead nitric oxide-enhancing drug candidate, BiDil, to treat African Americans diagnosed with heart failure. We recently concluded a phase III confirmatory clinical trial of BiDil, the results of
which were presented at the annual meeting of the American Heart Association on November 8, 2004. Data from this trial presented at the American Heart Association annual meeting in
November 2004, and published in the New England Journal of Medicine the same week, showed that African American patients with heart failure experienced a 43% improvement in survival after
taking BiDil in addition to standard heart failure therapy, as compared to patients in a placebo group who received only standard heart failure therapy. The trial was halted in July 2004 due to
significant survival benefits seen with BiDil. On December 23, 2004, we resubmitted a new drug application for BiDil to the Food and Drug Administration, or FDA. On February 3, 2005, the
FDA accepted our new drug application resubmission as a complete class 2 resubmission, which means that under the Prescription Drug User Fee Act, FDA review of our resubmission is expected to
be completed within six months of the date the resubmission was received, or June 23, 2005.

We
plan to directly market BiDil, if approved, to physicians who treat African Americans with heart failure. Accordingly, we have hired a senior vice president of sales and marketing, a
vice president of marketing, three regional sales directors and twenty-one district sales managers. In addition, we recently entered into an agreement with Publicis Selling
Solutions Inc., or Publicis, pursuant to which Publicis has employed a specialized field sales force of 195 representatives exclusively dedicated to the sale of our products. In addition, on
February 16, 2005, we entered into a supply agreement with Schwarz Pharma Manufacturing, Inc., or Schwarz Pharma, pursuant to which we have engaged Schwarz Pharma to exclusively
manufacture and supply BiDil. We expect to have available by the end of the first quarter of 2005 both the sales force and the quantities of finished product required to support the subsequent launch
of BiDil, subject to FDA approval.

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We
are also applying our nitric oxide technology to develop novel pharmaceuticals, as well as safer and more effective versions of existing drugs, to target significant diseases and
major commercial markets. Our nitric oxide development strategy involves the internal development of proprietary nitric oxide-enhancing drug candidates, such as BiDil, the co-development
of nitric oxide-enhancing drugs with partners and the out-licensing of our nitric oxide-enhancing technology in exchange for potential milestone payments and royalties on sales. We have
entered into corporate collaboration agreements with Boston Scientific Corporation, or Boston Scientific, to jointly develop nitric oxide-enhanced paclitaxel-coated stents, and with Merck Frosst
Canada & Co., a Merck & Co. Inc. subsidiary, or Merck, to jointly develop nitric oxide-enhancing COX-2 inhibitors. The Boston Scientific collaboration is
ongoing at the pre-clinical stage. On September 30, 2004, Merck voluntarily withdrew its marketed COX-2 inhibitor, Vioxx®, from worldwide markets and halted
the phase II trial of our lead candidate in nitric oxide-enhancing COX-2 inhibitors. As a result, we agreed with Merck to terminate this collaboration in November 2004, and we have
retained all rights to our technology in the field of nitric oxide-enhancing COX-2 inhibitors.

Our Nitric Oxide-Enhancing Medicines

Nitric oxide is a naturally-occurring compound that is synthesized in cells to regulate a broad range of cellular reactions. Many disease states are associated
with a deficiency in nitric oxide and might benefit from nitric oxide-enhancing medicines. For example, depleted levels of nitric oxide have been implicated in diseases such as heart failure,
pulmonary hypertension and sexual dysfunction. Additionally, nitric oxide-enhancing medicines have been shown to reduce side effects associated with a variety of medications, including a broad range
of anti-inflammatory medications. We generally choose drugs for nitric oxide enhancement from among those marketed medicines whose safety and efficacy we believe can be improved by
increased nitric oxide levels in the body.

We
seek to produce our next generation nitric oxide-enhancing drug candidates by combining an existing, marketed medicine with a nitric oxide donor, which is a molecule capable of
increasing nitric oxide levels in the body. The nitric oxide donor and the existing medicine can be combined together through either a chemical linkage to potentially create a proprietary new chemical
entity or through the direct mixing of the medicine and the nitric oxide donor to potentially create a patentable new use and dosage form. We believe that the probability of clinical success for our
next generation drug candidates is increased because regulatory approvals have already been achieved for the existing medicines that we are seeking to improve. We also believe that the commercial risk
associated with these drug candidates is mitigated because many of these existing medicines have already generated significant sales in their markets. We have generated significant intellectual
property rights for our nitric oxide technology and compounds to protect our interests and support our discovery and development of additional product candidates.

BiDiltreatment for heart failure in African Americans

Heart failure, or end-stage cardiovascular disease, affects approximately five million Americans. There is no cure for this disease, and more than 50%
of patients who have this disease die within five years of diagnosis. Studies indicate that African Americans suffer a disproportionate incidence of cardiovascular disease with respect to heart
failure, and that they are more likely to die from it at a younger age. This dramatic ethnic difference in health outcomes has been attributed to a variety of factors, including access to medical
care, management of heart failure and socioeconomic factors. Recent analyses of heart failure clinical trials, however, show that the mortality rate and the hospitalization rate for African Americans
is significantly higher than for non-African Americans, even after adjustment for such factors. Based on data from the U.S. census bureau and the Centers for Disease Control, we estimate
that approximately 750,000 African Americans have been diagnosed with heart failure, and we expect this number to grow to approximately 900,000 persons by 2010.

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Our
lead product candidate, BiDil, is an orally-administered nitric oxide-enhancing medicine. BiDil is a fixed dose combination of two drugs, isosorbide dinitrate and hydralazine.
Isosorbide dinitrate is a nitric oxide donor. Hydralazine is an antioxidant and vasodilator agent, which means it protects the nitric oxide formed by isosorbide dinitrate and dilates blood vessels.
Through these properties, BiDil is intended to provide a number of beneficial effects for African American heart failure patients, including increasing levels of nitric oxide in the body. Because
heart failure is a chronic disease, we expect that, if approved, BiDil, like other medicines taken for chronic heart disease, will be taken for the duration of the patient's life.

The
African American Heart Failure Trial was a double-blind, placebo controlled study, meaning that neither the patients nor the investigators were informed during the trial which
patients were receiving placebo, which is a pill that looks the same as the drug but has no active ingredients. The trial, which was co-sponsored by the Association of Black Cardiologists
and enrolled 1,050 patients at 169 sites in the United States, was halted in July 2004 on the unanimous recommendation of the independent Data and Safety Monitoring Board and the steering
committee for the trial due to the significant survival benefit seen in patients taking the drug. BiDil is also the subject of a new drug application previously filed with the FDA. The
previously-filed new drug application received a non-approvable letter after it failed to satisfy statistical significance requirements in analyses of the effectiveness in the general
heart failure population. Our work in the field of nitric oxide-enhancing medicines led us to believe that BiDil may enhance nitric oxide levels in the body and protect nitric oxide after it is
formed. A retrospective analysis of the African American patients in the prior BiDil clinical studies suggested that BiDil might preferentially reduce mortality and hospitalization and improve quality
of life in African Americans. We therefore obtained the rights to the previously submitted new drug application and supplemented it with the results of these ethnicity-based analyses. In response to
this data, we received a letter from the FDA stating that, in addition to the data already submitted to the agency, a clearly positive, prospective clinical trial of BiDil in African Americans with
heart failure could, together with the satisfaction of other conditions, including the FDA's approval of our manufacturing processes and marketing materials, provide a basis for the approval of BiDil.

The
results of the BiDil trial were presented at the annual meeting of the American Heart Association on November 8, 2004. The trial enrolled a total of 1,050 African American
patients who had New York Heart Association class III or IV heart failure with dilated ventricles, constituting moderately severe and severe levels of heart failure. The primary end point for
the trial was a composite score made up of weighted values for death from any cause, a first hospitalization for heart failure, and change in the quality of life. The study was halted early owing to a
significantly higher mortality rate in the placebo group than in the group given BiDil. A 10.2 percent death rate was shown in the placebo group compared to a 6.2 percent death rate in
the BiDil group, P=0.02, which represents a two in one hundred probability that the result is due to chance, and where P is a generally accepted measure of statistical significance. The mean composite
score for the primary endpoint was significantly better in the group given BiDil than in the placebo group, P=0.01, as were its individual components: a 43 percent reduction in the rate of
death from any cause, P=0.01, a 33 percent relative reduction in the rate of first hospitalization for heart failure, P=0.001, and a statistically significant improvement in quality of life,
P=0.02, measured by the Minnesota Living with Heart Failure questionnaire. Adverse events reported in the trial included symptoms of headache and dizziness, which were significantly more frequent in
the group given BiDil, and exacerbations of congestive heart failure (both moderate and severe), which were significantly more frequent in the placebo group. Based upon these results, on
December 23, 2004, we resubmitted a new drug application for BiDil to the FDA. On February 3, 2005, the FDA accepted our new drug application resubmission as a complete class 2
resubmission, which means that under the Prescription Drug User Fee Act, FDA review of our resubmission is expected to be completed within six months of the date the resubmission was received, or
June 23, 2005.

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Corporate Collaborations

Nitric Oxide Stents for the Treatment of Restenosis.

Balloon angioplasty is a procedure to widen blocked arteries that have resulted from certain conditions such as high cholesterol. It is increasingly common during
angioplasty to place a stent, or mesh medical device, into the diseased artery to help maintain the artery width and prevent its re-closure, or restenosis. Several cardiovascular device
companies are developing and commercializing stents coated with chemotherapeutic agents or other therapeutic agents designed to help reduce the risk of restenosis. We have demonstrated that a stent
coated with a nitric oxide donor can significantly reduce restenosis in a variety of animal studies.

In
November 2001, we entered into a research, development and license agreement with Boston Scientific pursuant to which we granted Boston Scientific an exclusive worldwide
license to develop and
commercialize nitric oxide-enhanced restenosis products. In December 2003, we agreed to extend the research collaboration to develop nitric oxide-enhanced paclitaxel-coated stents until
December 31, 2005.

Nitric Oxide-Enhancing COX-2 Inhibitors for the Treatment of Pain and Inflammation.

COX-2 inhibitors are a class of medicines that are effective in treating pain and inflammation. Inflammation is caused by the body's local response to
injury and is part of the healing mechanism. However, the body sometimes overcompensates to cause acute and chronic problems of pain, swelling and loss of function. COX-2 inhibitors are
prescribed for conditions such as arthritis, mild to moderate pain, migraine and fever. We have created several series of proprietary nitric oxide-enhancing COX-2 inhibitors that we
believe could improve the safety and efficacy of this drug class. COX-2 inhibitors have demonstrated decreased gastrointestinal side effects compared to aspirin and other commonly
prescribed non-steroidal, anti-inflammatory drugs. In our laboratories, nitric oxide has been shown in animal studies to further decrease the gastrointestinal side effects of
COX-2 inhibitors when combined with low-dose aspirin.

In
December 2002, we entered into an exclusive, worldwide research collaboration and licensing agreement that granted Merck marketing and sales rights to our technology for nitric
oxide-enhancing COX-2 inhibitors. The research portion of the agreement was for three years ending in December 2005. On September 30, 2004, Merck voluntarily withdrew its
marketed COX-2 inhibitor, Vioxx, from worldwide markets and halted the phase II trial of our lead candidate in nitric oxide-enhancing COX-2 inhibitors, which was composed of a
derivative of rofecoxib, the active ingredient in Vioxx. In November 2004, we agreed with Merck to terminate the collaboration agreement. Merck paid us a lump sum of $1.8 million,
representing the full amount of the research funding owed to us for 2005, but is not required to provide us with any further funding. We retain all rights to our technology in the field of nitric
oxide-enhancing COX-2 inhibitors and intend to evaluate the continued development of this technology in collaboration with other potential partners.

Internal Development Programs

We are utilizing our nitric oxide expertise and proprietary position to develop product candidates for a variety of additional medical conditions. The following
table highlights those classes of nitric oxide-enhancing medicines where we have created, or are seeking to create, intellectual property rights and where we believe we may offer a clinical benefit
compared to existing FDA-approved medicines. Our efforts in these areas primarily consist of discovery-stage research primarily directed to establishing

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our
intellectual property position. In the table below, NSAID refers to non-steroidal anti-inflammatory drug and PDE refers to phosphodiesterase.

|Product Candidate and Therapeutic Area              |                                                                | Potential Clinical Benefit
|--------------------------------------------------- | -------------------------------------------------------------- | --------------------------
|Nitric Oxide-Enhancing NSAID's                     
|                                                   | Pain, inflammation, cancer and central nervous system diseases |                           
|Nitric Oxide-Enhancing PDE Inhibitors              
|                                                   | Asthma                                                         |                           
|                                                   | Male erectile dysfunction                                      |                           
|                                                   | Pulmonary hypertension                                         |                           
|                                                   | Chronic obstructive airway disease                             |                           
|Nitric Oxide-Enhancing Cardiovascular Medicines    
|                                                   | Hypertension                                                   |                           
|                                                   | Heart failure                                                  |                           
|Nitric Oxide-Enhancing Gastrointestinal Protectants
|                                                   | Peptic ulcer                                                   |                           
|Nitric Oxide-Enhancing Arginines                   
|                                                   | Kidney failure                                                 |                           

Our Strategy

Our goal is to become a leading, multi-product pharmaceutical company by developing additional innovative nitric oxide products and by building on our BiDil
development experience and commercialization infrastructure to identify and market additional products for cardiovascular and metabolic diseases. Key elements of our strategy include:

Successfully commercializing BiDil.We are developing an internal marketing and sales infrastructure to promote BiDil for the
treatment of heart failure in African Americans. Based on the number of physicians serving the African American heart failure market, we believe we can successfully promote BiDil with 195 sales
representatives. Because BiDil, if approved, will be the only heart failure treatment specifically indicated to treat African Americans with heart failure, we believe that we will be able to achieve
significant penetration in this population.

Successfully leveraging our BiDil sales force.Our sales force will target high prescribing physicians who treat African
Americans with cardiovascular and metabolic diseases. We believe the African American
community is an underserved patient population and suffers a disproportionate incidence of cardiovascular and other diseases. We believe that we can in-license or otherwise acquire rights
to drugs and drug candidates to serve this population.

Capitalizing on our clinical development expertise.We believe the experience we gained in designing and executing our BiDil
clinical trial program makes us an attractive clinical development partner for companies developing product candidates in the cardiovascular field.

Focusing our internal development projects and corporate collaborations on nitric oxide-enhancing versions of existing
medicines.We believe that many pharmaceutical companies have currently marketed drugs and products that can benefit from the therapeutic attributes and the
potential patent

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protection
of our nitric oxide-enhancing technology. We are currently conducting research and development on several drug classes and have consolidated an intellectual property position from which we
believe we can generate significant value. We intend to continue to enter into collaborations with leading health care companies where our product candidates will benefit from the marketing reach,
clinical expertise and technology of the partner. Our research and development collaboration with Boston Scientific for drug-coated stents is an example of our ability to enter into
collaborations with leading companies.

Continuing to protect and enhance our product-specific and nitric oxide intellectual property rights and
capabilities.Because of its critical role in our on-going product development efforts, we intend to aggressively pursue the protection of our
intellectual property. In order to protect and expand our current intellectual property position, we intend to invest significantly in nitric oxide-related research and development efforts, including
attracting and retaining highly talented and experienced personnel.

BiDil Commercialization Plan

We are establishing a marketing organization and sales force to launch and commercialize BiDil, if approved, to physicians who treat African Americans diagnosed
with heart failure. We have hired a senior vice president of sales and marketing, a vice president of marketing, three regional sales directors and twenty-one district sales managers in
order to manage a 195-person sales team. We have entered into an agreement with Publicis pursuant to which Publicis has employed and is training a specialized sales force of 195 sales
representatives focused on cardiologists and primary care physicians located in those geographic areas that we believe constitute approximately 90% of the African American heart failure market in the
United States. Under this agreement, we have the right to hire some or all of the Publicis representatives directly at any time upon the payment to Publicis of an agreed upon fee. Under a separate
agreement, Publicis
has agreed to recruit, hire and train eight account executives who will assist us in gaining formulary access for BiDil, if approved, and to hire ten medical science liaisons to report into our
clinical/regulatory group. We also intend to support our sales with other professionals who are intended to help meet the specific medical needs of our physician audience.

We
have engaged Schwarz Pharma under a five-year exclusive manufacturing and supply agreement solely for the three times daily immediate release dosage formulation of our
BiDil product candidate. Under the supply agreement, we will have the right to engage a backup manufacturer. We order bulk materials from the same suppliers that were used for the clinical trial
batches of BiDil: hydralazine from Flavine, the U.S. representative of Sumitomo, and isosorbide dinitrate from EMS-Dottikon, and have them delivered directly to Schwarz Pharma for
manufacturing. We expect to have available by the end of the first quarter of 2005 both the sales force and quantities of finished product required to support the subsequent launch of BiDil, subject
to FDA approval.

Corporate Collaborations

As part of our strategy to accelerate our product development efforts, we have established collaborations with Boston Scientific in the area of nitric
oxide-enhanced paclitaxel-coated stents to reduce restenosis and with Merck in the area of nitric oxide-enhancing COX-2 inhibitors for use in the treatment of various diseases. In
November 2004, we agreed to terminate our collaboration with Merck. These collaborations were designed to provide us with capital and research, development and marketing capabilities. We intend
to pursue other collaborations as appropriate. Since inception, all of our revenue has been derived from our collaborations with third parties. For the fiscal year ended December 31, 2004, our
collaborations with Boston Scientific and Merck accounted for all of our $16.5 million of revenue.

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Boston Scientific Agreement

In November 2001, we entered into a research, development and license agreement with Boston Scientific in the field of restenosis. We granted Boston
Scientific an exclusive worldwide license to develop and commercialize nitric oxide-enhanced cardiovascular stents. We also granted to Boston Scientific a right of first refusal to obtain an exclusive
license under our nitric oxide technologies to commercialize products for restenosis, which right of first refusal is for a period of three years after the end of the research term. In
December 2003, we agreed to extend the agreement to continue the research and development collaboration through December 2005.

Boston
Scientific made an up-front license payment of $1.5 million to us in 2001, and made an additional payment of $3.0 million in December 2003 in
connection with the extension of the research and development collaboration. In the event that specified research, development and commercialization milestones are achieved, Boston Scientific is
obligated to make milestone payments to us. Boston Scientific also is obligated to pay royalties to us on the sale of any products resulting from the collaboration. Boston Scientific made a
$3.5 million equity investment in our stock in 2001. In August 2003, in connection with a private placement, Boston Scientific made an additional $500,000 equity investment in our stock.

Boston
Scientific has the right to terminate our research program at any time upon 30 days' written notice. Boston Scientific may also terminate the agreement at any time upon
60 days' written notice in the event of an uncured material breach by us, in which event Boston Scientific may elect whether the licenses we have granted shall continue in effect. Unless
earlier terminated, the agreement will remain in effect until the expiration of the obligation of Boston Scientific to pay royalties under the agreement. Boston Scientific also has a right of first
refusal with respect to other nitric oxide-releasing compounds we may develop for delivery through the use of implantable medical devices or via specialty catheters.

Merck Agreement

In December 2002, we entered into a research, development and license agreement with Merck to jointly develop pharmaceutical products containing nitric
oxide-enhancing COX-2 inhibitors. Under the terms of the agreement, we granted Merck an exclusive worldwide, royalty-bearing license to develop, make and sell nitric oxide-enhancing
COX-2 inhibitors for use in the treatment or prevention of various diseases, conditions or disorders.

Merck
paid an up-front license fee of $10.0 million under the agreement and also made research and development payments over the three-year term of the
research program totaling $7.2 million. In 2003, Merck made two payments, each of $5.0 million, for achieving the first two milestones.

On
September 30, 2004, Merck halted the phase II trial of our lead candidate in nitric oxide-enhancing COX-2 inhibitors. This lead nitric-oxide candidate is composed
of a derivative of rofecoxib. Rofecoxib is the active ingredient in Vioxx, a COX-2 inhibitor which Merck voluntarily withdrew from worldwide markets on September 30, 2004. In
November 2004, we agreed with Merck to terminate the collaboration agreement. Merck paid us a lump sum of $1.8 million, representing the full amount of the research funding owed to us
for 2005, but is not required to provide us with any further funding. We retain all rights to our technology in the field of nitric oxide-enhancing COX-2 inhibitors, and intend to evaluate
the continued development of this technology in collaboration with other potential partners.

Nitric Oxide's Role in Cellular Function and Disease

In the 1980s, nitric oxide was identified as a significant molecule that regulates a wide range of important cellular functions. Professor Robert R. Furchgott, a
member of our scientific advisory board,

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and
two other individuals were awarded the 1998 Nobel Prize in Physiology and Medicine for this discovery.

Recent
research has shown that nitric oxide also plays important biochemical and physiological roles in many diseases or medical conditions, including the following:

Cardiovascular Disease.The formation of nitric oxide in the cells that line the inner walls of blood vessels, referred to as
the endothelium, has been found to play a crucial role in maintaining the dilation of the blood vessels, a process essential for the regulation of blood pressure. Nitric oxide produced by the
endothelium also inhibits the clumping of platelets, which are cells in the blood that promote clotting, and the adhesion of platelets and white blood cells to the blood vessels' inner walls, thereby
significantly reducing the obstruction of blood vessels that is associated with blood clots and stroke. Numerous other cardiovascular actions of nitric oxide have been reported, including maintaining
sufficient blood flow to the heart muscle and regulation of the contraction of the heart muscle. Cardiovascular diseases associated with nitric oxide imbalance include atherosclerosis, high
cholesterol levels, high blood pressure, pulmonary hypertension and heart failure.

Gastrointestinal and Inflammatory Disease.Nitric oxide is capable of influencing many of the biochemical and physiological
reactions that are key to preventing or repairing injury to the gastrointestinal tract, such as stimulating mucus secretion from the mucus membrane lining the stomach and intestines and regulating the
blood flow feeding the wall of the gastrointestinal tract and the mucus membrane. Nitric oxide can control inflammatory cell activation and is active on other chemical mediators in the inflammatory
process. Gastrointestinal diseases in which nitric oxide has potential beneficial actions include NSAID-induced gastric injury, inflammatory bowel disease, and peptic ulcer.

Central Nervous System Disorders.Nitric oxide is also synthesized in nerve cells, or neurons, of the central nervous system,
where it performs many physiological functions, including the formation of memory and the modulation of pain. Nitric oxide-based therapies for diseases such as epilepsy, stroke, neuroinflammatory
disorders and trauma may be able to provide protection to neurons.

Sexual Dysfunction.In the peripheral nervous system, nitric oxide is now known to play a role in regulating some forms of
vasodilation and certain gastrointestinal, respiratory and genito-urinary functions. For example, male penile erection is dependent upon nitric oxide-relaxation of genital smooth muscles, and drugs
like Viagra enhance the nitric oxide-signaling pathway.

Respiratory Disease.Nitric oxide inhalation reduces pulmonary hypertension and improves oxygenation, the absorption of
oxygen by the lungs. In inflammatory pulmonary diseases, such as asthma and chronic obstructive pulmonary disease, nitric oxide has potential to promote airway dilation and reduce inflammation, thus
reducing airway sensitivity to airborne irritants and allergens.

Research and Development

As of December 31, 2004, our research and development group consisted of 41 employees, representing 18 biologists, 11 medicinal chemists, 6 persons engaged
in clinical development and 6 persons engaged in patent and other research and development-related functions. Our research and development group is focusing on the continuous improvement of our core
technology, the development of new materials and platforms, complementary products and new initiatives aimed at leveraging our core technology in new market areas.

During
the years ended December 31, 2004, 2003 and 2002, we estimate that our total company-sponsored research and development expenses were $23.0 million,
$15.1 million, $14.7 million, respectively, and that our collaborator-sponsored research and development expenses were $5.0 million, $3.8 million, $1.4 million,
respectively.

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Proprietary Rights and Licensing

Our policy is to prosecute and enforce our patents and proprietary technology. We intend to continue to file United States and foreign patent applications to
protect technology, inventions and improvements that are considered important to the development of our business. We will be able to protect our proprietary technologies from unauthorized use by third
parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.

As
of December 31, 2004, we have 81 issued U.S. patents and 48 pending U.S. patent applications. We also have 48 issued patents and 121 pending patent applications in certain
major industrial countries, including Canada, the major European market countries, Australia and Japan. Our issued U.S. and foreign patents expire on various dates between 2007 and 2024.

BiDil.We have three U.S. patents, one expiring in 2007 and the other two in 2020, and one Canadian patent expiring in 2008,
which relate to co-administration of the components of BiDil. The first U.S. patent and the Canadian patent cover methods for reducing mortality associated with chronic congestive heart
failure. The second U.S. patent covers methods for reducing mortality associated with chronic congestive heart failure, for improving the quality of life, for improving oxygen consumption or improving
exercise tolerance in African American patients. The third U.S. patent covers additional claims to specific indications and dosing ranges for the treatment of heart failure and other conditions in
African American patients. In addition, we have filed seven additional U.S. patent applications and corresponding foreign patent applications that could provide additional patent protection for BiDil.
We have not filed any patent applications outside of the United States and Canada for BiDil, as pertains to the patent expiring in 2007. We have filed applications claiming priority relative to the
patents expiring in 2020 in Canada and Europe.

Nitric Oxide Stents.We have six U.S. patents expiring on dates between 2013 and 2018 which cover the coating of medical
devices with nitric oxide compounds, prevention of adverse effects associated with the use of a medical device, treatment of a damaged vessel or treatment of a damaged vascular surface in a patient by
administration of a nitric oxide compound. We have four pending U.S. patent applications which, if issued, will have expiration dates between 2021 and 2023 and which cover the composition of matter of
specific nitric oxide donors or nitric oxide-linked compounds and their
methods of use for the treatment of restenosis. We have filed additional patent applications worldwide, have been issued one Australian patent that expires in 2014 and have one issued European patent
which expires in 2014.

Nitric Oxide-Enhancing COX-2 Inhibitors and Nitric Oxide-Enhancing NSAID's for Inflammation.We have three issued
and six pending U.S. patent applications, which, if issued, will have expiration dates between 2020 and 2023 and which disclose and claim novel nitric oxide-enhancing COX-2 inhibitors.
These applications also disclose kits and methods of use for the treatment of pain, inflammation and fever, gastrointestinal disorders, disorders resulting from elevated levels of COX-2
inhibitors, for reducing renal and respiratory toxicity, for facilitating wound healing and for improving the cardiovascular profile of COX-2 inhibitors. We have also filed additional
foreign patent applications relating to this technology. We have three U.S. patents expiring in 2015, two U.S. patents expiring in 2018, and one patent application which, if issued, will expire in
2018, which cover different compositions of matter and methods of use for the treatment of pain, inflammation, fever and gastrointestinal disorders with novel nitric oxide-enhancing NSAID's. One
pending patent application, which, if issued, will expire in 2023, discloses specific composition of matter and methods of use for the treatment of pain, inflammation and gastrointestinal disorders of
novel nitric oxide-enhancing NSAID's.

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We
have filed additional patent applications worldwide and have been issued four Australian patents, three of which expire in 2016 and one in 2019, and one issued Canadian patent, which
expires in 2016.

Other Development Programs.We also have a U.S. patent and a pending U.S. patent application, both of which expire in 2019,
which disclose the methods of use of N-hydroxyguanidine compounds in the treatment of renal failure. We have also filed additional foreign patent applications covering this technology.

License and Royalty Agreements

Dr. Jay N. Cohn.In January 1999, as subsequently amended, we entered into a collaboration and license
agreement with Dr. Jay N. Cohn. Under the agreement, Dr. Cohn licensed to us exclusive worldwide royalty-bearing rights to technology and inventions owned or controlled by
Dr. Cohn and that relate to BiDil for the treatment of cardiovascular disease. We have agreed to make milestone payments to Dr. Cohn upon FDA approval and upon first commercial sale of
products, if any, arising out of the agreement. The agreement imposes upon us an obligation to use reasonable best efforts to develop
and, upon receipt of regulatory approval, manufacture, market and commercialize products based upon the licensed rights. If we fail to meet this obligation, Dr. Cohn has the right to terminate
the agreement and the license granted to us under the agreement. Dr. Cohn also has the right to terminate the agreement if we materially breach the agreement and fail to remedy the breach
within 30 days. We have the right to terminate the agreement at any time upon 30 days' prior written notice. Unless earlier terminated, the agreement continues in perpetuity. Pursuant to
the agreement, Dr. Cohn was appointed to our scientific advisory board, entered into a consulting agreement with us and was granted an option to purchase 10,000 shares of our common stock.

The Brigham and Women's Hospital.In August 1992, as subsequently amended, we entered into a research and license
agreement with The Brigham and Women's Hospital, Inc., or BWH. Under the agreement, we sponsored a research program at BWH for a period of approximately two years relating to the diagnostic,
therapeutic and prophylactic use of nitric oxide and related compounds. Under the agreement, in exchange for our sponsored research funding, BWH granted us exclusive worldwide royalty-bearing rights
to technology and inventions owned at the effective time of, or developed in the course of, the sponsored research program. We are applying the patents, patent applications and other intellectual
property rights licensed to us by the BWH in our nitric oxide stent program. The agreement imposes on us due diligence obligations with respect to the research, development and commercialization of
products based upon the licensed rights. If we fail to meet these obligations, then upon written notice the license will become non-exclusive. BWH has the right to terminate the agreement
if we materially breach the agreement and fail to remedy the breach within 60 days.

Boston University.In June 1993, as subsequently amended, we entered into a research and license agreement with the
Trustees of Boston University, or BU. Under the agreement, we have agreed to sponsor a multi-year research program at BU in the area of nitric oxide-enhancing medicines. Under the
agreement, in exchange for our sponsored research funding, BU has granted us exclusive worldwide royalty-bearing rights to technology and inventions owned by BU and/or for the principal investigator
named in the research proposal at the effective time of, or developed in the course of, the sponsored research program. We have agreed to pay royalties to BU on all products sold or distributed by us
or our affiliates which incorporate or utilize inventions, material or information specified in the agreement. The agreement imposes on us due diligence obligations with respect to the development and
commercialization of products based upon the licensed rights. If we fail to meet these obligations, then upon notice by BU, the parties are required to enter into good faith negotiations, and if the
parties cannot reach resolution, the license will become non-exclusive without the right to sublicense. BU has the right to terminate the agreement if we materially breach the agreement
and fail to remedy

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the
breach within 60 days. We may terminate funding of any sponsored research program on three months' prior written notice.

FoxKiser.In April 2001, we entered into an agreement with the law firm of FoxKiser LLC under which FoxKiser agreed to
provide strategic counsel, including assistance in seeking FDA approval of BiDil. We and FoxKiser agreed that the fees owed by us to FoxKiser, including consulting services, would be
deferred by us and would be paid in full within 45 days after the date on which we received written FDA approval, if any, for the first BiDil product. In further consideration for FoxKiser's
services, we also agreed to pay FoxKiser a royalty on the sale of BiDil by us or a third-party licensee. Our obligation to make royalty payments to FoxKiser on BiDil ends six months after the date of
market introduction of an FDA-approved generic version of BiDil. The agreement continues in effect in perpetuity, unless either we or FoxKiser terminates the agreement in the event of a
material breach by the other party that remains uncured for 60 days and unless renegotiation of the agreement is triggered by its terms in the event that we enter into a license or other
business arrangement with a third party on terms that impose certain limitations on the royalties payable to us on sales of BiDil.

Dr. John D. Folts.In March 1995, as amended in November 1996 and December 1998, we entered into
an agreement with Dr. John D. Folts, a member of our scientific advisory board, pursuant to which Dr. Folts assigned to us his rights to any pending patent applications and issued
patents relating to the use of nitric oxide adducts in exchange for a royalty on any products, methods or services sold or distributed by us or our licensees that are covered by the assigned patents.
These patents cover technologies being used in our nitric oxide-coated stent development programs with Boston Scientific.

Trademarks, Trade Secrets and Other Proprietary Information

We also currently own the following U.S. trademarks:



In
addition, we depend upon trade secrets, know-how and continuing technological improvements to develop and maintain our competitive position. To maintain the
confidentiality of trade secrets and proprietary information, we require our employees, scientific advisors, consultants and
collaborators, upon commencement of a relationship with us, to execute confidentiality agreements and, in the case of parties other than our research and development collaborators, to agree to assign
their inventions to us. These agreements are designed to protect our proprietary information and to grant us ownership of technologies that are developed in connection with their relationship with us.
These agreements may not, however, provide protection for our trade secrets in the event of unauthorized disclosure of such information.

Competition

We and our corporate collaborators face intense competition from a wide range of pharmaceutical and life science companies, as well as academic and research
institutions and government agencies. These competitors include organizations that are pursuing the same or similar technologies to those which constitute our technology platform and organizations
that are developing and commercializing pharmaceutical products that are competitive with our product candidates.

We
believe that competition for our BiDil product candidate and other nitric oxide-enhancing cardiovascular medicines that we and our corporate collaborators may develop will initially
come from companies currently marketing and selling therapeutics to treat heart failure in the general population.

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These
competitors include GlaxoSmithKline, plc, Merck & Co., Inc., Pfizer Inc. and AstraZeneca plc. In the field of stents, we believe that competition will come from Cordis
Corporation, a Johnson & Johnson Company, Guidant Corporation and Medtronic, Inc.

We
also face competition from other companies that are active in or entering into the area of nitric oxide-based therapeutics. We are aware of six companies working in the area of
nitric-oxide therapeutics: Angiogenix, Inc., GB Therapeutics, NicOx S.A., OxoN Medica, RenoPharm and Vasopharm BIOTECH GmbH.

We
intend to compete with these companies on the basis of our intellectual property portfolio, the expertise of our scientific personnel and our nitric oxide technologies. Principal
competitive factors in our industry include:



Many
of the companies competing against us have financial and other resources substantially greater than our own. In addition, many of our competitors have significantly greater
experience in testing pharmaceutical and other therapeutic products, obtaining FDA and other regulatory approvals of products for use in health care, and marketing and selling those products.
Accordingly, our competitors may succeed more rapidly than we will in obtaining FDA approval for products and achieving widespread market acceptance. If we obtain necessary regulatory approval and
commence significant commercial sales of our products, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have limited or no experience.

Regulatory Matters

FDA Requirements for New Drug Compounds

The research, testing, manufacture and marketing of drug products are extensively regulated by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug, and Cosmetic Act, and other federal and state statutes and regulations, govern, among
other things, the research, development, testing, manufacture, storage, recordkeeping, labeling, promotion and marketing and distribution of pharmaceutical products. Failure to comply with applicable
regulatory requirements may subject a company to a variety of enforcement actions, including:



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The
steps ordinarily required before a new pharmaceutical product may be marketed in the United States include pre-clinical laboratory tests, animal tests and formulation
studies, the submission to the FDA of a notice of claimed investigational exemption or an investigational new drug application, which must become effective before clinical testing may commence, and
adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for each indication for which FDA approval is sought. Satisfaction of FDA
pre-market approval requirements typically takes several years, and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.
Government regulation may delay or prevent marketing of potential candidates for a considerable period of time and impose costly procedures upon a manufacturer's activities. Success in early stage
clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could
delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product or
even complete withdrawal of the product from the market.

Pre-clinical
tests include laboratory evaluation of product chemistry and formulation, as well as animal trials to assess the potential safety and efficacy of the product.
The conduct of the pre-clinical tests and formulation of compounds for testing must comply with federal regulations and requirements. The results of pre-clinical testing are
submitted to the FDA as part of an investigational new drug application.

A
30-day waiting period after the filing of each investigational new drug application is required prior to the commencement of clinical testing in humans. If the FDA has not
commented on or questioned the investigational new drug application within this 30-day period, clinical trials may begin. If the FDA has comments or questions, the questions must be
answered to the satisfaction of the FDA before initial clinical testing can begin. In addition, the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a
clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the investigational new drug application
process can result in substantial delay and expense.

Clinical
trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be
conducted in compliance with federal regulations and requirements, under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria
to be evaluated. Each protocol involving testing on U.S. subjects must be submitted to the FDA as part of the investigational new drug application. The study protocol and informed consent information
for patients in clinical trials must be submitted to institutional review boards for approval.

Clinical
trials to support new drug applications for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In phase I, the initial
introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated
with increasing doses. Phase II usually involves trials in a limited patient population, to determine dosage tolerance and optimum

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dosage,
identify possible adverse effects and safety risks, and provide preliminary support for the efficacy of the drug in the indication being studied.

If
a compound demonstrates evidence of effectiveness and an acceptable safety profile in phase II evaluations, phase III trials are undertaken to further evaluate clinical efficacy and
to further test for safety within an expanded patient population, typically at geographically dispersed clinical trial sites. Phase I, phase II or phase III testing of any product candidate may not be
completed successfully within any specified time period, if at all.

After
successful completion of the required clinical testing, generally a new drug application is prepared and submitted to the FDA. FDA approval of the new drug application is required
before marketing of the product may begin in the United States. The new drug application must include the results of extensive clinical and other testing and a compilation of data relating to the
product's pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting a new drug application is substantial. Under Federal law, the submission of new drug applications are
additionally subject to substantial application user fees, currently exceeding $500,000, and the manufacturer and/or sponsor under an approved application are also subject to annual product and
establishment user fees,
currently exceeding $30,000 per product and $200,000 per establishment. These fees are typically increased annually.

The
FDA has 60 days from its receipt of an new drug application to determine whether the application will be accepted for filing based on the agency's threshold determination that
the new drug application is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review of the new drug application.
Under federal law, the FDA has agreed to certain performance goals in the review of new drug applications. Most such applications for non-priority drug products are reviewed within ten
months. The review process is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. The FDA may also refer
applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts,
for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee.

If
FDA evaluations of the new drug application and the manufacturing facilities are favorable, the FDA may issue an approval letter, or, in some cases, an approvable letter followed by
an approval letter. An approvable letter generally contains a statement of specific conditions that must be met in order to secure final approval of the new drug application. If and when those
conditions have been met to the FDA's satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing
information for specific indications. As a condition of new drug application approval, the FDA may require post approval testing and surveillance to monitor the drug's safety or efficacy and may
impose other conditions, including labeling restrictions which can materially impact the potential market and profitability of the drug. Once granted, product approvals may be withdrawn if compliance
with regulatory standards is not maintained or problems are identified following initial marketing. On July 20, 2004, the FDA issued a proposed rule that would replace not approvable and
approvable letters with complete response letters. Complete response letters would describe all specific deficiencies in an new drug application but would not characterize the application as
approvable or not.

Once
the new drug application is approved, a product will be subject to certain post-approval requirements, including requirements for adverse event reporting and submission
of periodic reports and/or supplemental new drug applications for approval of changes to the originally approved prescribing information, product formulation, and manufacturing and testing
requirements. Following approval, drug products are required to be manufactured and tested for compliance with new drug

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application
and/or compendial specifications prior to release for commercial distributions. The manufacture and testing must be performed in approved manufacturing and testing sites complying with
current Good Manufacturing Practice requirements and subject to FDA inspection authority.

Approved
drug products must be promoted in a manner which is consistent with their terms and conditions of approval. In addition, the FDA requires substantiation of any claims of
superiority of one product over another including, in many cases, requirements that such claims be proven by adequate and well controlled head-to-head clinical trials. To the
extent that market acceptance of our product candidates may depend on their superiority over existing therapies, any restriction on our ability to advertise or otherwise promote claims of superiority,
or requirements to conduct additional expensive clinical trials to provide proof of such claims, could negatively affect the sales of our products and/or our expenses.

If
the FDA's evaluation of the new drug application submission or manufacturing facilities is not favorable, the FDA may refuse to approve the new drug application or issue a not
approvable letter.

A
not approvable letter outlines the deficiencies in the submission and often requires additional testing or information in order for the FDA to reconsider the application. Even with
submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. With limited exceptions, the FDA may withhold
approval of a new drug application regardless of prior advice it may have provided or commitments it may have made to the sponsor.

Once
a new drug application is approved, the product covered thereby becomes a "listed drug" which can, in turn, be cited by potential competitors in support of approval of an
abbreviated new drug application. An abbreviated new drug application provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed
drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. There is no requirement, other than the requirement for bioequivalence testing, for an
abbreviated new drug application applicant to conduct or submit results of pre-clinical or clinical tests to prove the safety or efficacy of its drug product. Drugs approved in this way
are commonly referred to as "generic equivalents" to the listed drug, are listed as such by the FDA, and can often be substituted by pharmacists under prescriptions written for the original listed
drug.

Federal
law provides for a period of three years of exclusivity following approval of a listed drug that contains previously approved active ingredients but is approved in a new dosage,
dosage form, route of administration or combination, or for a new use, the approval of which was required to be supported by new clinical trials conducted by or for the sponsor. During this three year
period, the FDA cannot grant effective approval of an abbreviated new drug application based on that listed drug. Federal law also provides a period of five years following approval of a drug
containing no previously approved active ingredients, during which abbreviated new drug applications for generic versions of those drugs cannot be submitted unless the submission accompanies a
challenge to a listed patent, in which case the submission may be made four years following the original product approval. Additionally, in the event that the sponsor of the listed drug has properly
informed the FDA of patents covering its listed drug, applicants submitting an abbreviated new drug application referencing that drug are required to certify whether they intend to market their
generic products prior to expiration of those patents. If an abbreviated new drug application applicant certifies that it believes all listed patents are invalid or not infringed, it is required to
provide notice of its filing to the new drug application sponsor and the patent holder. If the patent holder then initiates a suit for patent infringement against the abbreviated new drug application
sponsor within 45 days of receipt of the notice, the FDA cannot grant effective approval of the abbreviated new drug application until either 30 months has passed or there has been an
appellate court decision holding that the patents in question are invalid or not infringed. If the abbreviated new drug application applicant certifies that it does not intend to market its generic

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product
before some or all listed patents on the listed drug expire, then the FDA cannot grant effective approval of the abbreviated new drug application until those patents expire. The first
abbreviated new drug applicant(s) submitting substantially complete applications certifying that all listed patents for a particular product are invalid or not infringed may qualify for a period of
180 days against other generics after a final court decision of invalidity or non-infringement or after its begins marketing its product, whichever occurs first, during which
subsequently submitted abbreviated new drug applications cannot be granted effective approval.

From
time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug
products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency or the courts in ways that may significantly affect our business and our products candidates. It is
impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.

FDA Requirements For Medical Devices

Drugs that are incorporated into medical devices, such as drug-eluting stents, are potentially subject to regulatory requirements applicable to
medical devices as well as those applicable to drugs. For review purposes, applications for approval of drug-eluting stents have been assigned by the FDA primarily to the FDA Center for
Devices and Radiological Health, which consults with the FDA Center for Drug Evaluation and Research on issues relating to the drug component of the product. The FDA has recently established an Office
of Combination Products within the office of
the FDA Commissioner and has published revised regulations implementing statutory requirements directed at ensuring prompt and consistent regulation of drug/device combination products. However,
because of the limited experience with combination product review, the manner in which review procedures and requirements may be modified and applied in the future to similar or different types of
products is unpredictable. This uncertainty, and the complexity inherent in the testing and review of combination drug/device products, may lead to significant delays and additional costs in the
process of developing and seeking approval to market such products.

Medical
devices are regulated by the FDA according to their classification. The FDA classifies a medical device into one of three categories based on the device's risk, the disease
condition it is intended to treat, prevent or diagnose, and what is known about the device. The three categories are as follows:

Class I
devices are generally lower risk products for which sufficient information exists establishing that general regulatory controls provide reasonable assurance of safety and
efficacy. Most class I devices are exempt from the requirement for premarket notification under section 510(k) of the Federal Food, Drug, and Cosmetic Act. FDA clearance of a premarket
notification is necessary prior to marketing a non-exempt class I device in the United States.

Class II
devices are devices for which general regulatory controls are insufficient to provide reasonable assurance of safety and efficacy and for which there is sufficient
information to establish special controls, such as guidance documents or performance standards, to provide a reasonable assurance of safety and efficacy. Clearance of 510(k) notification is necessary
prior to marketing a non-exempt class II device in the United States.

Class III
devices are devices for which there is insufficient information demonstrating that general and special controls will provide a reasonable assurance of safety and
efficacy. Typical class III devices are life-sustaining, life-supporting or implantable devices, or devices posing substantial risk. Unless a device is a preamendments
device that is not subject to a regulation requiring a premarket approval application, the FDA generally must approve a premarket approval application prior to the marketing of a class III
device in the United States. Under current law and regulations, we expect that

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drug-eluting
stents will be treated as class III devices, to the extent that they are regulated as devices, and that approval of a device premarket approval application will be
required to obtain authorization to market such products.

The
premarket approval application process is expensive and uncertain and includes the imposition at the time of submission of a significant device user fee. A premarket approval
application must be supported by valid scientific evidence, which typically includes extensive data, including
pre-clinical data and clinical data from well-controlled or partially controlled clinical trials, to demonstrate the safety and efficacy of the device. Product and
manufacturing and controls specifications and information must also be provided. The FDA may refuse to accept a premarket approval application for filing and often will require additional clinical
trial data or other information before approval. Obtaining approval can take several years, and approval may be conditioned on, among other things, the conduct of postmarket clinical studies or
surveillance. Reduced device user fees also apply to most premarket approval supplements. Any subsequent change to an approved device that affects the safety or effectiveness of the device will
require approval of a supplemental premarket approval application. We cannot be sure that approval of a premarket approval application or premarket approval application supplement will be granted on a
timely basis, if at all, or that the FDA's approval process will not involve costs and delays that will adversely affect our, and/or our corporate collaborator's, ability to commercialize our
products. In the case of a combination drug/device product such as a drug-eluting stent, the need for consultation with drug reviewers and the potential application of drug standards as
well as device standards to different aspects of the product, its manufacturing process, and the associated FDA review processes may significantly increase the complexity, costs and potential delays
involved in obtaining marketing approval.

Whether
or not a product is required to be approved before marketing, we must comply with strict FDA requirements applicable to devices, including quality system requirements pertaining
to all aspects of our product design and manufacturing process, such as requirements for packaging, labeling, record keeping, including complaint files, and corrective and preventive action related to
product or process deficiencies. The FDA enforces its quality system requirements through periodic inspections of medical device manufacturing facilities. In addition, medical device reports must be
submitted to the FDA to report device-related deaths or serious injuries, and malfunctions, the recurrence of which would likely cause serious injury or death. Medical device reports can result in
agency action such as inspection, recalls, and patient/physician notifications, and are often the basis for agency enforcement actions. Because the reports are publicly available, they can also become
the basis for private tort suits, including class actions and unfavorable publicity.

As
with drugs, the promotion of medical devices is regulated by the FDA, and violations of FDA policies and regulations with respect to promotional activities may result in significant
administrative and court sanctions.

Foreign Regulation of Medical Devices and New Drug Compounds

Approval of a product by comparable regulatory authorities may be necessary in foreign countries prior to the commencement of marketing of the product in those
countries, whether or not FDA approval has been obtained. The approval procedure varies among countries and can involve requirements for additional testing. The time required may differ from that
required for FDA approval. Although there are some procedures for unified filings for some European countries with the sponsorship of the country which first granted marketing approval, in general
each country has its own procedures and requirements, many of which are time consuming and expensive. Thus, there can be substantial delays in obtaining required approvals from foreign regulatory
authorities after the relevant applications are filed.

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In
Europe, marketing authorizations may be submitted at a centralized, a decentralized or a national level. The centralized procedure is mandatory for the approval of biotechnology
products and provides for the grant of a single marketing authorization which is valid in all European Union member states. As of January 1995, a mutual recognition procedure is available at
the request of the applicant for all medicinal products which are not subject to the centralized procedure. We will choose the appropriate route of European regulatory filing to accomplish the most
rapid regulatory approvals. However, our chosen regulatory strategy may not secure regulatory approvals on a timely basis or at all.

Hazardous Materials

Our research and development processes involve the controlled use of hazardous materials, chemicals and radioactive materials and produce waste products. We are
subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. We do not expect the cost of
complying with these laws and regulations to be material.

Scientific Advisors

We seek advice from a number of leading scientists and physicians on scientific and medical matters. Our scientific advisory board is chaired by our founder and
member of our board of directors, Joseph Loscalzo, M.D., Ph.D., and meets regularly to assess:



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The
current members of our scientific advisory board are:

|Name                         |  | Position/Institutional Affiliation                                                                                                                                                                                     
|---------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Joseph Loscalzo, M.D., Ph.D. |  | Chairman, Department of Medicine, Boston University School of Medicine; Physician in Chief, Boston Medical Center; member, NitroMed board of directors                                                                 
|Jay N. Cohn, M.D.            |  | Professor of Medicine, Cardiovascular Division, University of Minnesota Medical School                                                                                                                                 
|Martin Feelisch, Ph.D.       |  | Professor of Medicine, Boston University School of Medicine                                                                                                                                                            
|John D. Folts, Ph.D.         |  | Director, Coronary Thrombosis Research and Prevention Laboratory, Department of Medicine, University of Wisconsin-Madison and Professor of Medicine and Nutritional Science, University of Wisconsin School of
Medicine
|Robert F. Furchgott, Ph.D.   |  | Professor of Pharmacology, Medical University of South Carolina and Nobel Laureate for his work on nitric oxide                                                                                                        
|Michael A. Marletta, Ph.D.   |  | Professor of Biochemistry and Molecular Biology, University of California, Berkeley                                                                                                                                    
|Kevin McIntyre, M.D., J.D.   |  | Associate Clinical Professor of Medicine, Harvard Medical School                                                                                                                                                       
|Ínigo Saenz de Tejada, M.D.  |  | President, Fundación para la Investigación y el Desarrollo en Andrología, Madrid, Spain                                                                                                                                

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Employees

As of December 31, 2004, we had 80 full-time employees, 29 of whom were engaged in sales and marketing, 41 of whom were engaged in research and
development and 10 of whom were engaged in management, administration and finance. Of our employees, 26 hold M.D. or Ph.D. degrees. None of our employees are represented by a labor union or covered by
a collective bargaining agreement, nor have we experienced work stoppages. We believe that relations with our employees are good.

Factors That May Affect Future Results

You should carefully consider the following risk factors, in addition to other information included in this annual report, in evaluating NitroMed and our
business. If any of the following risks occur, our business, financial condition and operating results could be materially adversely affected.

Risks Relating to our Business

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

We have experienced significant operating losses since our inception in 1992. For the year ended December 31, 2004, we had a net loss of
$29.8 million. As of December 31, 2004, we had an accumulated deficit of approximately $136.6 million. We expect that we will continue to incur substantial losses and that our
cumulative losses will increase as our research, development and commercialization efforts expand. We expect that the losses that we incur will fluctuate from quarter to quarter and that these
fluctuations may be substantial. To date, we have not recorded any revenue from the sale of products, and we will not be able to do so unless and until one of our product candidates completes clinical
trials and receives regulatory approval. BiDil is our only product candidate that has advanced into
late-stage clinical trials, and we do not anticipate receiving revenues from BiDil until at least 2005, if ever. All of our other product candidates are in research or
pre-clinical development, will require significant additional testing prior to submission of any regulatory applications and, as such, are not expected to be commercially available for
many years, if at all.

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

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

Our financial, operational and management resources are primarily dedicated to our most advanced drug candidate, BiDil, which has not been approved by the FDA. In
July 2004, we halted our phase III confirmatory clinical trial of BiDil on the recommendation of the independent Data and Safety Monitoring Board and the trial's steering committee due to a
significant survival benefit seen in African American patients taking the drug. The FDA accepted our new drug application resubmission in early February 2005 as a complete class 2
resubmission. Under the Prescription Drug User Fee Act, FDA review of our class 2 resubmission is expected to be completed by June 23, 2005. We will need to

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receive
FDA approval of our resubmitted new drug application before we can market and sell BiDil in the United States. We cannot predict whether or when we may receive FDA approval of BiDil. In
particular, while we expect to have available by the end of first quarter of 2005 the sales force and quantities of finished product required to support the launch of BiDil, we do not expect that the
FDA will act on our application by that time. Even if we obtain FDA approval, we may not be able to launch BiDil prior to the end of 2005, if at all.

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

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

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

We have used and will continue to require substantial funds to conduct research and development, including pre-clinical testing and clinical trials of
our product candidates, and to market and manufacture any products that are approved for commercial sale. For example, we estimate that we will incur significant expenses during 2005 as we develop
sales and marketing capabilities and prepare for the anticipated 2005 launch of BiDil, assuming FDA approval. Moreover, we may incur significant additional expenditures to conduct
pre-clinical testing of our early-stage development programs. Because the successful development of these programs is uncertain, we are unable to estimate the actual funds we will require
to complete research and development of our product candidates and commercialization of our products. We believe that our existing cash and marketable securities will be sufficient to support our
current operating plan for at least the next eighteen months.

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



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

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

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

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



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

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

We have entered into an agreement with Publicis, a contract sales organization, pursuant to which, on our behalf, Publicis has employed and is training a
specialty sales force of 195 sales representatives

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to
sell BiDil to our target prescriber markets. Under a separate agreement, Publicis has agreed to recruit, hire and train eight account executives who will assist us in gaining formulary access for
BiDil, if approved, and to hire ten medical science liaisons to report into the Clinical/Regulatory group. If BiDil is approved, our near-term revenue for BiDil, if any, will depend
heavily upon the success and efforts of Publicis. If Publicis does not devote the resources, time and training required to establish an effective and qualified sales force, our ability to achieve
revenue from sales of BiDil will be harmed.

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

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

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



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

A component of our strategy is to seek to improve existing medicines with our proprietary nitric oxide technology. Our product candidates include nitric oxide
enhancements of existing drugs. Thus, we are modifying compounds whose chemical and pharmacological profiles are well-documented and understood. However, many of our potential product
candidates are new molecules with chemical and pharmacological profiles that differ from that of the existing drugs. These compounds may not demonstrate in patients the chemical and pharmacological
properties ascribed to them in laboratory studies, and they may interact with human biological systems in unforeseen, ineffective or harmful ways. In addition, it is possible that existing drugs or
newly-discovered drugs may not benefit from the application of our nitric oxide technology. If we are not able to successfully develop and commercialize drugs based upon our technological approaches,
we will not generate revenue based on these drugs, and the value of our stock will decline.

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

In order to obtain regulatory approvals for the commercial sale of our product candidates, we or our collaborators will be required to complete extensive clinical
trials in humans to demonstrate the safety and efficacy of our product candidates. We may not be able to obtain authority from the FDA or other regulatory agencies to commence or complete these
clinical trials. If permitted, such clinical testing may not prove that our drug candidates are safe and effective to the extent necessary to permit

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us
to obtain marketing approvals from regulatory authorities. Moreover, positive results demonstrated in pre-clinical studies and clinical trials that we complete may not be indicative of
results obtained in future clinical trials. Furthermore, we, one of our collaborators, institutional review boards or regulatory agencies may suspend clinical trials at any time if it is believed that
the subjects or patients participating in such trials are being exposed to unacceptable health risks. Adverse or inconclusive clinical trial results concerning any of our drug candidates could require
us to conduct additional clinical trials, result in increased costs and significantly delay the filing for marketing approval for those drug candidates with the FDA or result in a filing for a
narrower indication than was originally sought or result in a decision to discontinue development of those drug candidates.

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

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

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

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

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

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

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

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



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

We do not manufacture BiDil and have no plans to do so. We have engaged Schwarz Pharma Manufacturing, Inc. under a five-year exclusive
manufacture and supply agreement solely for the three times daily immediate release dosage formulation of our BiDil product candidate. Under the supply agreement, we will have the right to engage a
backup manufacturer. The terms of the supply agreement provide that it may be terminated by either us or Schwarz Pharma under specified circumstances, including a material breach of the supply
agreement by either party, the occurrence of a
payment default by us, our material impairment of the manufacturing licenses we have granted to Schwarz Pharma or a failure of Schwarz Pharma to supply conforming products. In addition, either party
may terminate the supply agreement in the event the FDA takes any action, the result of which is to permanently prohibit the manufacture, sale or use of the product. Schwarz Pharma may not perform as
agreed or may terminate its engagement with us, which would adversely impact our ability to produce and sell BiDil. If we are unable to maintain a commercially reasonable manufacturing agreement for
the production of BiDil, if approved, with Schwarz Pharma, we may not be able to successfully develop and commercialize BiDil and our stock price will decline.

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



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

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

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

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



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

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

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

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

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

We are relying on Boston Scientific to fund the development of and to commercialize nitric oxide-enhancing stents using our technology to prevent the
re-closure of arteries, or restenosis, following balloon angioplasty, a treatment to widen blocked arteries. In addition, Merck has funded the development of products based upon our nitric
oxide-enhancing COX-2 inhibitor technologies. All of our $16.5 million of revenues for 2004 were derived from licensing, research and development and milestone payments paid to us
by Boston Scientific and Merck. We and Merck terminated our collaboration on nitric oxide-enhancing COX-2 inhibitor technologies. Please see "Risk FactorsThe termination of
our collaboration agreement with Merck, stemming from Merck's recent decision to withdraw its COX-2 inhibitor, Vioxx, from worldwide markets, will result in the loss of potential milestone
and royalty based revenue from the collaboration and may indicate that the development of nitric oxide-enhancing COX-2 inhibitors is not viable." for additional risks relating to our
agreement with Merck.

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

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



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

As part of our strategy, we intend to acquire, develop and market additional drugs and drug candidates for cardiovascular and metabolic diseases. The success of
this strategy depends upon our ability to identify, select and acquire appropriate pharmaceutical drug candidates and drugs.

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

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

Risks Relating to our Intellectual Property Rights

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

We have no composition of matter patent covering our lead product candidate, BiDil, which we intend to market for the treatment of heart failure in African
Americans. BiDil is a fixed-dose combination of two generic drugs, isosorbide dinitrate and hydralazine, which are approved and separately marketed, in dosages similar to those we include
in BiDil, for indications other than heart failure, at prices below the prices we expect to charge for BiDil. We have three issued method-of-use patents, one of which covers
the use of the combination of isosorbide dinitrate and hydralazine to reduce the incidence of mortality associated with chronic congestive heart failure, expiring in 2007, and the others covering the
treatment of heart failure in black patients, expiring in 2020. As a practical matter, we may not be able to enforce these method-of-use patents to prevent physicians from
prescribing isosorbide dinitrate and hydralazine separately for the treatment of heart failure in African Americans, even though neither drug is approved for such use.

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

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

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

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

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

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

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

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

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

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

If
any parties are able to successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages,
potentially including treble damages, if we are found to have willfully infringed on such parties' patent rights. In addition to any damages we might have to pay, a court could require us to stop the
infringing activity or obtain a license on unfavorable terms. Moreover, any legal action against us or our partners claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our partners to obtain a license in order to continue to manufacture or market the
affected products and processes. Any license required under any patent may not be made available on commercially-acceptable terms, if at all. In addition, some licenses may be
non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may
be unable to effectively market some of our technology and product candidates, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating
revenue sufficient to sustain our operations. In addition, a number of our collaborations provide that royalties payable to us for licenses to our intellectual property may be offset by amounts paid
by our collaboration partners to third parties who have competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenues from
products developed through collaborations.

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

We are a party to a number of licenses that give us rights to third-party intellectual property that is necessary for our business. In particular, we have
obtained the exclusive right to develop and

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

Risks Relating to our Industry

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

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

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

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

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

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

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

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

Our revenues and profits depend heavily upon the availability of coverage and reimbursement for the use of BiDil, and any of our product candidates that are
approved for marketing, from third-party

31

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healthcare
and state and federal government payors, both in the United States and in foreign markets. Reimbursement by a third-party payor may depend upon a number of factors, including the
third-party payor's determination that use of a product is:



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

Risks Relating to our Common Stock

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

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

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

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

On
July 20, 2004, the Market Regulation Department of the National Association of Securities Dealers, Inc., or NASD, advised us that it initiated a review of trading
activity in our common stock surrounding our July 19, 2004 announcement that we had halted our phase III confirmatory clinical

32

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trial
of BiDil due to the significant survival benefit seen with BiDil. The NASD is reviewing, among other things, information on relationships between our officers, directors and service providers
and individuals and institutions who may have traded in our common stock prior to the July 19, 2004 announcement. We have cooperated with this review and have identified certain persons on the
list provided to us by the NASD as having a relationship with our chief executive officer and others at NitroMed. We have established a special committee of our board of directors to oversee our
response to this review.

The
Securities and Exchange Commission, or SEC, or other securities regulators may investigate trading activity of insiders and others around events that result in stock price
volatility, such as our July 19, 2004 announcement, and we may incur substantial costs in connection with any such government investigation or related action. A stockholder lawsuit, SEC or
other investigation or action could also damage our reputation or that of our officers or directors and divert their time and attention away from management of NitroMed.

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

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the
holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of December 31, 2004, we had outstanding 30,123,905 shares of common stock.
Substantially all of these shares may also be resold in the public market at any time. In addition, we have a significant number of shares that are subject to outstanding options. The exercise of
these options and the subsequent sale of the underlying common stock could cause a further decline in our stock price. These sales also might make it difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate.

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

As of December 31, 2004, our directors, executive officers and principal stockholders, together with their affiliates, own, in the aggregate, approximately
48% of our outstanding common stock. As a result, these stockholders, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval, including
the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, if acting together, may have the ability to control
the management and affairs of our company. Accordingly, this concentration of ownership may harm the market price of our common stock by:



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

Provisions of our restated certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that
stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions

33

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may
prevent or frustrate attempts by stockholders to replace or remove our current management. These provisions include:



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

ITEM 2. PROPERTIES

We lease a facility that contains approximately 52,000 square feet of laboratory and office space in Lexington, Massachusetts. The lease has a term ending in
2014. We believe that our current facilities are adequate for our needs for the foreseeable future and that, should it be needed, suitable additional space will be available to accommodate expansion
of our operations on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

We are currently not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders of our company, through solicitations of proxies or otherwise, during the quarter ended
December 31, 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



Our common stock is traded on the NASDAQ National Market under the symbol "NTMD". Trading of our common stock commenced following our initial public offering on
November 6, 2003. The following table sets forth the high and low sale prices per share of our common stock as reported on the NASDAQ National Market for the periods indicated.

Common Stock PriceHigh

LowFiscal year ended December 31, 2004First quarter

$
9.65

$
6.90Second quarter

$
8.15

$
5.75Third quarter

$
25.78

$
5.70Fourth quarter

$
27.30

$
19.14Fiscal year ended December 31, 2003Fourth quarter (from November 6 to December 31)

$
11.55

$
6.90


On
March 7, 2005, the reported last sale price of our common stock on the NASDAQ National Market was $20.45 per share, and we had approximately 58 holders of record of our common
stock.

We
have never paid or declared any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the growth and development of our business, and we do
not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors.



None.



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

The
aggregate price of the offering amount registered on our behalf was $66.0 million. In connection with the offering, we paid approximately $4.6 million in underwriting
discounts and commissions to the underwriters and incurred an estimated $1.3 million in other offering expenses. None of the underwriting discounts and commissions or offering expenses were
incurred or paid to directors or officers of ours or their associates or to persons owning 10 percent or more of our common stock or to any affiliates of ours. After deducting the underwriting
discounts and commissions and offering expenses, we received net proceeds from the offering of approximately $60.1 million.

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ITEM 6. SELECTED FINANCIAL DATA

You should read carefully the financial statements included in this report, including the notes to the financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected financial data in this section are not intended to replace the financial statements.

We
derived the statement of operations data for the years ended December 31, 2004, 2003 and 2002 and the balance sheet data as of December 31, 2004 and 2003 from our
audited financial statements, which are included elsewhere in this report. We derived the statement of operations data for the years ended December 31, 2001 and 2000 and the balance sheet data
as of December 31, 2002, 2001 and 2000 from our audited financial statements which are not included herein. Historical results are not necessarily indicative of future results. See the notes to
the financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net loss per common share.

|                                                                                                     |                            | Year Ended December 31, |        
|---------------------------------------------------------------------------------------------------- | -------------------------- | ----------------------- | -------
|
|
|Statement of Operations Data:                                                                        |                            |                         |        
|Research and development revenues                                                                    |                            | $                       | 16,458 
|Operating expenses:                                                                                  |                            |                         |        
|                                                                                                     | Research and development   |                         |        
|                                                                                                     | General and administrative |                         |        
|                                                                                                     |                            |                         |        
|Total operating expenses                                                                             |                            |                         | 47,586 
|                                                                                                     |                            |                         |        
|Loss from operations                                                                                 |                            |                         | (31,128
|Other income, net                                                                                    |                            |                         | 1,355  
|                                                                                                     |                            |                         |        
|Net loss                                                                                             |                            |                         | (29,773
|Deemed dividends related to beneficial conversion features of redeemable convertible preferred stock |                            |                         |       
|Accretion of dividends and redemption value                                                          |                            |                         |       
|                                                                                                     |                            |                         |        
|Net loss attributable to common stockholders                                                         |                            | $                       | (29,773
|                                                                                                     |                            |                         |        
|Net loss per common share:                                                                           |                            |                         |        
|Basic and diluted                                                                                    |                            | $                       | (1.14  
|Weighted average basic and diluted common shares outstanding                                         |                            |                         | 26,152 

|                                                 |  | As of December 31, |         
|------------------------------------------------ |  | ------------------ | --------
|
|
|Balance Sheet Data:                              |  |                    |         
|Cash, cash equivalents and marketable
securities |  | $                  | 142,367 
|Working capital                                  |  |                    | 133,238 
|Total assets                                     |  |                    | 149,357 
|Long-term debt                                   |  |                    |        
|Redeemable convertible preferred stock           |  |                    |        
|Accumulated deficit                              |  |                    | (136,619
|Total stockholders' equity (deficit)             |  | $                  | 137,012 

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are an emerging pharmaceutical company that discovers, develops and seeks to commercialize proprietary pharmaceuticals. We have devoted substantially all of
our efforts towards the research and development of our product candidates. Since our inception, we have had no revenue from product sales and have funded our operations through the sale of equity
securities, debt financings, license fees, research and development funding and milestone payments from our collaborative partners. We have never been profitable and have incurred an accumulated
deficit of $136.6 million as of December 31, 2004.

Research,
development and commercialization expenses relating to our product candidates and to enhancing our core technologies will continue to increase in the near term and may vary
significantly from our current estimates. In particular, we expect to incur increased costs during the first quarter of 2005 as we seek regulatory approval for BiDil, our lead product in development
for the treatment of African Americans diagnosed with heart failure. BiDil is an orally administered nitric oxide-enhancing medicine, which combines isosorbide dinitrate and hydralazine. We recently
concluded a phase III confirmatory clinical trial of BiDil which was designed to evaluate the efficacy of BiDil, when taken daily in addition to current heart failure therapies. The trial demonstrated
that African American patients with heart failure experienced a 43% improvement in survival after taking BiDil in addition to standard heart failure therapies, as compared to patients in a placebo
group who received only standard heart failure therapies. In July 2004, following the recommendation of the independent Data and Safety Monitoring Board and the clinical trial's steering
committee, we halted this clinical trial because of the significant survival benefit seen in the preliminary trial results for patients taking the drug. On December 23, 2004, we resubmitted a
new drug application for BiDil to the FDA. On February 3, 2005, the FDA accepted our new drug application resubmission as a complete class 2 resubmission, which means that under the
Prescription Drug User Fee Act, FDA review of our resubmission is expected to be completed within six months of the date the resubmission was received, or June 23, 2005.

General
and administrative costs will increase as we prepare for the potential commercialization of BiDil in 2005. As a result of our decision to halt the BiDil trial and resubmit a new
drug application to the FDA earlier than initially planned, we expect to incur operating expenses in excess of our previous estimates relating to the development of our sales and marketing
capabilities, pre-launch related expenses and manufacturing costs in connection with the procurement of commercial supplies of BiDil. In addition, we currently estimate that our existing
cash and marketable securities will be sufficient to support our operating plan, including increased operating expenses in preparation for the potential launch of BiDil, for at least the next eighteen
months.

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

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

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Financial Operations Overview

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

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

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



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

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

Non Operating Income (Expense).Interest income includes interest earned on our cash, cash equivalents and marketable
securities. Rental income was derived from a sublease of a portion of our facilities in 2003.

Boston Scientific Collaboration.In November 2001, we entered into a development and license agreement with Boston
Scientific to develop cardiovascular stents coated with nitric oxide-releasing compounds. We have granted Boston Scientific an exclusive worldwide license to develop and commercialize products for
restenosis incorporating two nitric oxide-releasing compounds. In consideration of this license, Boston Scientific made an upfront non-refundable license payment of $1.5 million,
which is being recognized over the estimated time period of our contractual obligation to provide research and development services. In the event that specified research, development and
commercialization milestones are achieved, Boston Scientific is obligated to make milestone payments to us. Boston Scientific is also obligated to pay royalties to us on the sale of any products
resulting from the collaboration. In December 2003, we agreed to extend the research and development collaboration through December 2005, and we received an additional
$3.0 million, which is being

39

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recognized
ratably over the research and development collaboration term. Boston Scientific made a $3.5 million equity investment in our stock in 2001 and made an additional $500,000 equity
investment in our stock in August 2003.

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

Results of Operations

Years Ended December 31, 2004, 2003 and 2002

Revenue.Revenue for the year ended December 31, 2004 was $16.5 million, compared to $12.8 million in
2003 and $750,000 in 2002. The $3.7 million, or 29% increase in revenue in 2004 compared to 2003 is primarily attributable to our collaboration agreement with Merck, which was terminated in
November 2004. In 2004 we recognized $14.9 million in revenue under this agreement, which included all amounts previously deferred. Due to the termination of this collaboration
agreement, we no longer have any future performance obligations, and accordingly, we recognized previously deferred license revenue of $5.3 million. In addition, we recognized
$1.8 million that was originally scheduled to be paid to us during 2005 for research and development funding, but was instead paid to us in 2004 when the agreement was terminated. We also
recognized an additional $1.2 million in revenue for 2004 over 2003 relating to the December 2003 extension of our agreement with Boston Scientific. Revenue for the year ended
December 31, 2003 was $12.8 million, compared to $750,000 in 2002. The $12.0 million, or 1603% increase in revenue in 2003 compared to 2002 was attributable to our collaboration
agreement with Merck, which we entered into in December 2002. During 2003 we received $15.0 million of payments from Merck that were deferred and were to be recognized as revenue ratably
over the contractual research and development term. In addition we recognized revenue in 2003 for a $5.0 million milestone when Merck advanced a lead nitric-oxide enhancing COX-2
inhibitor into human testing and $3.0 million of research and development funding.

Research and Development.Research and development expense for the year ended December 31, 2004 was
$28.0 million, compared to $18.9 million in 2003 and $16.1 million in 2002. The $9.1 million, or 48% increase in research and development expenses in 2004 compared with
2003, is primarily the result of an additional $2.8 million of expenses associated with the BiDil trial, including costs associated with the halt of the trial, ongoing clinical trial-related
expenses, and the preparation and resubmission of a new drug application with the FDA. We also incurred increased research and development expenses in 2004 of $2.0 million related to
compensation-related expenses due to additional headcount and non-cash stock-based compensation related expense; $1.2 million related to preparation of contract

40

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manufacturing
capabilities relating to the potential BiDil product line; $1.0 million pertaining to milestone payments under a collaboration and license agreement for BiDil; increased outside
consulting costs of $0.8 million; and additional supplies costs of $0.2 million. Research and development expense for the year ended December 31, 2003 was $18.9 million,
compared to $16.1 million in 2002. The $2.8 million, or 17% increase in research and development expenses in 2003 compared with 2002, was primarily the result of an additional
$1.2 million of expenses associated with the BiDil trial, reflecting the addition of new sites and additional patients and an additional $1.1 million of compensation-related expenses due
to additional headcount and non-cash stock-based compensation related expenses.

The
following table summarizes the primary components of our research and development expense for our principal research and development programs for the fiscal years ended
December 31, 2004, 2003 and 2002.

|                                        |  | December 31,
|--------------------------------------- |  | ------------
|
|
|BiDil                                   |  | $           
|Nitric oxide-enhancing COX-2 inhibitors |  |             
|Nitric oxide stents                     |  |             
|Other                                   |  |             
|                                        |  |             
|Total research and development expense  |  | $           
|                                        |  |             

General and Administrative.General and administrative expense for the year ended December 31, 2004 was
$19.6 million, compared to $3.1 million in 2003 and $2.5 million in 2002. The $16.5 million, or 529% increase in general and administrative expense in 2004 compared to 2003
was primarily due to $10.2 million for the preparation for the potential launch of BiDil, including costs relating to the hiring of contract sales personnel; hiring of sales and marketing
management personnel; public relations services; and advertising and promotion services. We also incurred higher general and administrative expense in 2004 due to increased costs of
$1.9 million associated with the accrual of business development and milestone payment expenses pertaining to the approval process for BiDil; $1.2 million pertaining to additional legal
and consulting expenses; $1.0 million related to the hiring of executive management and additional administrative personnel; an increase in insurance costs of $.7 million due to
operating as a public company; and higher infrastructure related growth of $.7 million, including moving to a new facility. General and administrative expense for the year ended
December 31, 2003 was $3.1 million, compared to $2.5 million in 2002. The $583,000, or 23% increase in general and administrative expenses in 2003 compared to 2002 was primarily
due to the fact that during the year ended December 31, 2003, we incurred additional costs in connection with evaluating and developing plans to commercialize BiDil of $479,000 and public
company reporting related costs of $148,000.

Non-Operating Income (Expense).Non-operating income (expense) increased to $1.4 million in
2004 compared to $477,000 in 2003 and $572,000 in 2002. The $878,000, or 184% increase in non-operating income (expense) in 2004 compared to 2003 was primarily related to higher average
fund balances available for investment and higher interest rates due to investing in longer maturity securities. The $95,000, or 17% decrease in non-operating income (expense) in 2003
compared to 2002 was primarily related to lower rental income due to our sublease agreement ending at our previous facility.

Liquidity and Capital Resources

We have financed our operations since inception through the sale of equity, debt and payments from collaborative partners for licenses, research and development
and achievement of milestones. As of December 31, 2004, we have received net proceeds of $242.0 million from the issuance of equity securities, primarily as the result of the sale of
$99.1 of our redeemable convertible preferred stock; net proceeds of $60.1 million from our initial public offering in November 2003; and net proceeds of

41

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$81.8 million
from our follow-on public offering in December 2004, which is described below. At December 31, 2004, we had $142.4 million in cash, cash
equivalents and marketable securities.

In
December 2004, we closed a follow-on public offering of our common stock at a price to the public of $24.46 per share. We sold an aggregate of 3,579,476 shares of our
common stock resulting in gross proceeds of $87.6 million. In connection with the offering we paid approximately $5.3 million in underwriting discounts and commissions and incurred
$.5 million in other offering expenses. After deducting the underwriting discounts and commissions and offering expenses, we received net proceeds from the offering of approximately
$81.8 million.

In
November 2003, we closed our initial public offering of our common stock at a price to the public of $11.00 per share. We sold 6,000,000 shares of our common stock resulting in gross
proceeds of $66.0 million. In connection with the offering, we paid approximately $4.6 million in underwriting discounts and commissions and incurred $1.3 million in other
offering expenses. After deducting the underwriting discounts and commissions and offering expenses, we received net proceeds from the offering of approximately $60.1 million.

In
August 2003, we sold 2,776,347 shares of our series E redeemable convertible preferred stock for net proceeds of $19.9 million to existing preferred stockholders. These
shares contained a beneficial conversion feature based on the fair value of our common stock at the date of such sale compared to the series E redeemable convertible preferred stock share
price. The total value of the beneficial conversion feature of approximately $8.3 million was recognized as a dividend in the three month period ended September 30, 2003. In addition, we
recognized a dividend of approximately $11.0 million in the three month period ended December 31, 2003 as a result of an increase to the conversion ratio of the series E
redeemable convertible preferred stock in connection with our initial public offering in November 2003.

During
the year ended December 31, 2004, operating activities used cash of $33.8 million primarily due to a net loss of $29.8 million, a decrease in deferred revenue
of $12.9 million, and an increase in prepaid and other current assets of $1.9 million, offset by adjustments for non-cash charges for stock-based compensation and
depreciation and amortization of $2.9 million and an increase in accounts
payable and accrued expenses of $7.9 million. The decrease in deferred revenue was partially due to the termination of the collaboration agreement with Merck resulting in the recognition of
$5.3 million of deferred license revenue.

During
the year ended December 31, 2004, investing activities used cash of $80.7 million due to the net purchase of marketable securities of $77.3 million and
purchases of computer and lab equipment of $2.7 million due to an increase in personnel and the build-out for our new facility. We expect to invest approximately $2.0 to
$2.5 million for capital expenditures in 2005, principally related to the purchase of laboratory equipment and computer equipment to support headcount growth.

During
the year ended December 31, 2004, financing activities provided cash of $82.8 million primarily as a result of the sale of common stock in a follow-on
public offering which yielded net proceeds of $81.8 million.

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The
following table summarizes our contractual obligations at December 31, 2004 and the effects such obligations are expected to have on our liquidity and cash flows in future
periods.

Payments Due by Period

|Contractual Obligations            |  | Total |            | Less than
one year |   | 1-3 years  |  | 3-5 years |            | More than
five years
|---------------------------------- |  | ----- | ---------- | ------------------ | - | ---------- |  | --------- | ---------- | --------------------
|Operating lease obligation         |  | $     | 14,968,000 |                    | $ | 1,089,000  |  | $         | 2,930,000  |                     
|Purchase obligations(1)            |  | $     | 67,083,000 |                    | $ | 33,954,000 |  | $         | 33,129,000 |                     
|                                   |  |       |            |                    |   |            |  |           |            |                     
|Total contractual cash obligations |  | $     | 82,051,000 |                    | $ | 35,043,000 |  | $         | 36,059,000 |                     
|                                   |  |       |            |                    |   |            |  |           |            |                     

---

We
believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our planned operations, including increases in spending for our BiDil clinical
program, for at least eighteen months from the date of this report. However, we may require significant additional funds earlier than we currently expect to obtain regulatory approvals necessary to
launch BiDil, and to develop our other product candidates.

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

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



43

---







Critical Accounting Policies and Estimates

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

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

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

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

Stock-Based Compensation.We have elected to follow Accounting Principles Board, or APB, Opinion No. 25, "Accounting
for Stock Issued to Employees," or APB 25, and related interpretations, in accounting for our stock-based compensation plans, rather than the alternative fair value method provided for under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," or FAS 123. In 2003 and 2002, certain grants of stock options were made at exercise prices less than
the fair value of our common stock and, as a result, we recorded deferred stock compensation expense. In the notes to our financial statements, we provide pro forma disclosures in accordance with
FAS 123. We account for transactions in which services are received from

44

---



non-employees
in exchange for equity instruments based on the fair value of such services received or of the equity instruments issued, whichever is more reliably measured, in accordance
with FAS 123 and the Emerging Issues Task Force, or EITF, Issue 96-18, "Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services," or EITF 96-18.

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

Prior
to our initial public offering, the fair value of our common stock was determined by our board of directors contemporaneously with the grant. In the absence of a public trading
market for our common stock, our board of directors considered numerous objective and subjective factors in determining the fair value of our common stock. At the time of option grants and other stock
issuances, our board of directors considered the liquidation preferences, dividend rights, voting control and anti-dilution protection attributable to our then-outstanding
redeemable convertible preferred stock, the status of private and public financial markets, valuations of comparable
private and public companies, the likelihood of achieving a liquidity event such as an initial public offering, our existing financial resources, our anticipated continuing operating losses and
increased spending levels required to complete our clinical trials, dilution to common stockholders from anticipated future financings and a general assessment of future business risks.

Inflation

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

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Recently Issued Accounting Pronouncement

On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004),
referred to as FAS 123R, "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." FAS 123R supersedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," or APB 25, and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in FAS 123R is similar to the
approach described in SFAS 123, detailed below. However, FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the
statement of operations based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. FAS 123R must be adopted in fiscal periods beginning after
June 15, 2005. Early adoption will be permitted in periods in which financial statements have not

45

---



yet
been issued. We expect to adopt FAS 123R on July 1, 2005, the commencement of our third quarter of fiscal 2005.

FAS 123R
permits public companies to adopt its requirements using one of two methods. A "modified prospective" method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of FAS 123R for all share-based payments granted after the effective date
and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of FAS 123R that remain unvested on the effective date. A "modified
retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under
SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We have yet to determine which method
to use in adopting FAS 123R.

As
permitted by SFAS 123, we currently account for share-based payments to employees using APB 25's intrinsic value method and, as such, generally recognize no compensation cost
for employee stock options. Accordingly, the adoption of FAS 123R's fair value method may have a significant impact on our result of operations, although it will have no impact on our overall
financial position. The impact of adoption of FAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted
FAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and net loss per share in
Note 2 to our financial statements. We are currently evaluating the impact of the adoption of FAS 123R on our financial position and results of operations, including the valuation
methods and support for the assumptions that underlie the valuation of the awards.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates. Our current investment policy is to maintain an investment portfolio consisting mainly of U.S.
money market and high-grade corporate and U.S. government-related securities, directly or through managed funds, with maturities of two years or less. Our cash is deposited in and invested
through highly rated financial institutions in North America. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10% from levels at December 31, 2004, we estimate that the fair value of our investment portfolio would decline by an immaterial amount. We
have the ability to hold our fixed income investments until maturity, and therefore we do not expect our operating results or cash flows to be affected to any significant degree by the effect of a
change in market interest rates on our investments.

46

---





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                              |  | Page
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Ernst & Young LLP, Independent Registered Public Accounting Firm                                                                    |  | 48  
|Financial Statements:                                                                                                                         |  |     
|Balance Sheets as of December 31, 2004 and 2003                                                                                               |  | 49  
|Statements of Operations for the Years Ended December 31, 2004, 2003, and 2002                                                                |  | 50  
|Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) for the Years Ended December 31, 2004, 2003, and 2002 |  | 51  
|Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002                                                                |  | 54  
|Notes to Financial Statements                                                                                                                 |  | 55  

47

---





Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
NitroMed, Inc.

We
have audited the accompanying balance sheets of NitroMed, Inc. as of December 31, 2004 and 2003, and the related statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NitroMed, Inc. at December 31, 2004 and 2003,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.



Boston,
Massachusetts
February 9, 2005

48

---





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

|                                                                                                                                                              |                            | December 31,                               |         
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | --------
|
|ASSETS                                                                                                                                                        |                            |                                            |         
|Current Assets:                                                                                                                                               |                            |                                            |         
|Cash and cash equivalents                                                                                                                                     |                            | $                                          | 35,882  
|Marketable securities                                                                                                                                         |                            |                                            | 106,485 
|Prepaid expenses and other current assets                                                                                                                     |                            |                                            | 3,216   
|                                                                                                                                                              |                            |                                            |         
|                                                                                                                                                              | Total current assets       |                                            |         
|Property and equipment, net                                                                                                                                   |                            |                                            | 2,963   
|Other assets                                                                                                                                                  |                            |                                            | 811     
|                                                                                                                                                              |                            |                                            |         
|                                                                                                                                                              | Total assets               |                                            | $       
|                                                                                                                                                              |                            |                                            |         
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                          |                            |                                            |         
|Current Liabilities:                                                                                                                                          |                            |                                            |         
|Notes payable                                                                                                                                                 |                            | $                                          |        
|Accounts payable                                                                                                                                              |                            |                                            | 2,662   
|Accrued expenses                                                                                                                                              |                            |                                            | 8,091   
|Deferred revenue                                                                                                                                              |                            |                                            | 1,592   
|                                                                                                                                                              |                            |                                            |         
|                                                                                                                                                              | Total current liabilities  |                                            |         
|Deferred revenue, long term                                                                                                                                   |                            |                                            |        
|                                                                                                                                                              |                            |                                            |         
|                                                                                                                                                              | Total liabilities          |                                            |         
|Commitments and contingencies                                                                                                                                 |                            |                                            |         
|Stockholders' equity:                                                                                                                                         |                            |                                            |         
|Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued or outstanding                                                                    |                            |                                            |        
|Common stock, $.01 par value; authorized 65,000 shares; issued and outstanding 30,124 shares and 25,601 shares as of December 31, 2004 and 2003, respectively |                            |                                            | 301     
|Additional paid-in capital                                                                                                                                    |                            |                                            | 275,727 
|Deferred stock compensation                                                                                                                                   |                            |                                            | (2,095  
|Accumulated deficit                                                                                                                                           |                            |                                            | (136,619
|Accumulated other comprehensive income (loss)                                                                                                                 |                            |                                            | (302    
|                                                                                                                                                              |                            |                                            |         
|                                                                                                                                                              | Total stockholders' equity |                                            |         
|                                                                                                                                                              |                            |                                            |         
|                                                                                                                                                              |                            | Total liabilities and stockholders' equity |         
|                                                                                                                                                              |                            |                                            |         

The
accompanying notes are an integral part of the financial statements.

49

---





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

|                                                                                                         |                                 | Year Ended December 31,  |        
|-------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------ | -------
|
|Research and development revenues                                                                        |                                 | $                        | 16,458 
|Operating expenses:                                                                                      |                                 |                          |        
|                                                                                                         | Research and development        |                          |        
|                                                                                                         | General and administrative      |                          |        
|                                                                                                         |                                 |                          |        
|                                                                                                         |                                 | Total operating expenses |        
|                                                                                                         |                                 |                          |        
|Loss from operations                                                                                     |                                 |                          | (31,128
|Non-operating income (expense):                                                                          |                                 |                          |        
|                                                                                                         | Interest expense                |                          |        
|                                                                                                         | Interest income                 |                          |        
|                                                                                                         | Rental and miscellaneous income |                          |        
|                                                                                                         |                                 |                          |        
|                                                                                                         |                                 |                          | 1,355  
|                                                                                                         |                                 |                          |        
|Net loss                                                                                                 |                                 |                          | (29,773
|Deemed dividends related to beneficial conversion features of redeemable convertible preferred stock     |                                 |                          |       
|Dividends and accretion to redemption value of redeemable convertible preferred stock                    |                                 |                          |       
|                                                                                                         |                                 |                          |        
|Net loss attributable to common stockholders                                                             |                                 | $                        | (29,773
|                                                                                                         |                                 |                          |        
|Basic and diluted net loss attributable to common stockholders per common share                          |                                 | $                        | (1.14  
|                                                                                                         |                                 |                          |        
|Shares used in computing basic and diluted net loss attributable to common stockholders per common share |                                 |                          | 26,152 
|                                                                                                         |                                 |                          |        

The
accompanying notes are an integral part of the financial statements.

50

---



NITROMED, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except per share amounts)

|                                                                                                                 |  |        |  |   |        |  |     |  |   |    |  | Note
Receivable
from
Stock
Purchase
Agreement |       |  |   |      |   |   |      |   |  
|---------------------------------------------------------------------------------------------------------------- |  | ------ |  | - | ------ |  | --- |  | - | -- |  | --------------------------------------------- | ----- |  | - | ---- | - | - | ---- | - | -
|
|
|
|
|Balance at December 31, 2001                                                                                     |  | 30,770 |  | $ | 80,187 |  | 963 |  | $ | 10 |  | $                                             | 1,854 |  | $ | (252 | ) |   |      |   | $
|Exercise of stock options                                                                                        |  |        |  |   |        |  | 22  |  |   |   |  |                                               | 23    |  |   |      |   |   |      |   |  
|Compensation expense associated with and forgiveness of note receivable from stock purchase agreement            |  |        |  |   |        |  |     |  |   |    |  |                                               | 392   |  |   | 252  |   |   |      |   |  
|Deferred stock compensation expense associated with stock options                                                |  |        |  |   |        |  |     |  |   |    |  |                                               | 566   |  |   |      |   | $ | (566 | ) |  
|Amortization of deferred stock compensation                                                                      |  |        |  |   |        |  |     |  |   |    |  |                                               |       |  |   |      |   |   | 39   |   |  
|Compensation expense associated with options issued to non-employees and performance options issued to employees |  |        |  |   |        |  |     |  |   |    |  |                                               | 255   |  |   |      |   |   |      |   |  
|Accretion of Series E dividends                                                                                  |  |        |  |   | 2,473  |  |     |  |   |    |  |                                               |       |  |   |      |   |   |      |   |  
|Accretion of preferred stock to redemption value                                                                 |  |        |  |   | 224    |  |     |  |   |    |  |                                               |       |  |   |      |   |   |      |   |  
|Net loss                                                                                                         |  |        |  |   |        |  |     |  |   |    |  |                                               |       |  |   |      |   |   |      |   |  
|                                                                                                                 |  |        |  |   |        |  |     |  |   |    |  |                                               |       |  |   |      |   |   |      |   |  
|Balance at December 31, 2002                                                                                     |  | 30,770 |  | $ | 82,884 |  | 985 |  | $ | 10 |  | $                                             | 3,090 |  | $ |     |   | $ | (527 | ) | $

The accompanying notes are an integral part of the financial statements.

51

---



NITROMED, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except per share amounts)

|                                                                                                                 |  |         |   |   |          |   |        |  |   |     |  | Note
Receivable
from
Stock
Purchase
Agreement |         |  |   |   |  |   |        |   |  
|---------------------------------------------------------------------------------------------------------------- |  | ------- | - | - | -------- | - | ------ |  | - | --- |  | --------------------------------------------- | ------- |  | - | - |  | - | ------ | - | -
|
|
|
|
|Balance at December 31, 2002                                                                                     |  | 30,770  |   | $ | 82,884   |   | 985    |  | $ | 10  |  | $                                             | 3,090   |  | $ |  |  | $ | (527   | ) | $
|Exercise of stock options                                                                                        |  |         |   |   |          |   | 217    |  |   | 2   |  |                                               | 131     |  |   |   |  |   |        |   |  
|Deferred stock compensation expense associated with stock options                                                |  |         |   |   |          |   |        |  |   |     |  |                                               | 3,317   |  |   |   |  |   | (3,317 | ) |  
|Amortization of deferred stock compensation                                                                      |  |         |   |   |          |   |        |  |   |     |  |                                               |         |  |   |   |  |   | 604    |   |  
|Compensation expense associated with options issued to non-employees and performance options issued to employees |  |         |   |   |          |   |        |  |   |     |  |                                               | 303     |  |   |   |  |   |        |   |  
|Accretion of Series E dividends                                                                                  |  |         |   |   | 2,469    |   |        |  |   |     |  |                                               |         |  |   |   |  |   |        |   |  
|Accretion of preferred stock to redemption value                                                                 |  |         |   |   | 325      |   |        |  |   |     |  |                                               |         |  |   |   |  |   |        |   |  
|Beneficial conversion features of Series E                                                                       |  |         |   |   |          |   |        |  |   |     |  |                                               | 19,320  |  |   |   |  |   |        |   |  
|Beneficial conversion features of Series F                                                                       |  |         |   |   |          |   |        |  |   |     |  |                                               | 37      |  |   |   |  |   |        |   |  
|Issuance of Series E preferred stock in August 2003 at $7.20 per share for cash (net of issuance costs of $100)  |  | 2,776   |   |   | 19,900   |   |        |  |   |     |  |                                               |         |  |   |   |  |   |        |   |  
|Issuance of common stock from initial public offering ("IPO") (net of issuance costs of $5,928)                  |  |         |   |   |          |   | 6,000  |  |   | 60  |  |                                               | 60,012  |  |   |   |  |   |        |   |  
|Conversion of preferred stock to common stock at IPO                                                             |  | (33,546 | ) |   | (105,578 | ) | 18,399 |  |   | 184 |  |                                               | 105,394 |  |   |   |  |   |        |   |  
|Unrealized gains on cash equivalents and marketable securities                                                   |  |         |   |   |          |   |        |  |   |     |  |                                               |         |  |   |   |  |   |        |   |  
|Net loss                                                                                                         |  |         |   |   |          |   |        |  |   |     |  |                                               |         |  |   |   |  |   |        |   |  
|                                                                                                                 |  |         |   |   |          |   |        |  |   |     |  |                                               |         |  |   |   |  |   |        |   |  
|Comprehensive loss                                                                                               |  |         |   |   |          |   |        |  |   |     |  |                                               |         |  |   |   |  |   |        |   |  
|                                                                                                                 |  |         |   |   |          |   |        |  |   |     |  |                                               |         |  |   |   |  |   |        |   |  
|Balance at December 31, 2003                                                                                     |  |        |   | $ |         |   | 25,601 |  | $ | 256 |  | $                                             | 191,604 |  | $ |  |  | $ | (3,240 | ) | $

The accompanying notes are an integral part of the financial statements.

52

---



NITROMED, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except per share amounts)

|                                                                                                                 |  |   |  |   |   |  |        |  |   |     |  | Note
Receivable
from
Stock
Purchase
Agreement |         |   |   |   |  |   |        |   |  
|---------------------------------------------------------------------------------------------------------------- |  | - |  | - | - |  | ------ |  | - | --- |  | --------------------------------------------- | ------- | - | - | - |  | - | ------ | - | -
|
|
|
|
|Balance at December 31, 2003                                                                                     |  |  |  | $ |  |  | 25,601 |  | $ | 256 |  | $                                             | 191,604 |   | $ |  |  | $ | (3,240 | ) | $
|Exercise of stock options                                                                                        |  |   |  |   |   |  | 676    |  |   | 7   |  |                                               | 871     |   |   |   |  |   |        |   |  
|Exercise of warrants                                                                                             |  |   |  |   |   |  | 237    |  |   | 2   |  |                                               | (2      | ) |   |   |  |   |        |   |  
|Amortization of deferred stock compensation                                                                      |  |   |  |   |   |  |        |  |   |     |  |                                               |         |   |   |   |  |   | 982    |   |  
|Compensation expense associated with options issued to non-employees and performance options issued to employees |  |   |  |   |   |  |        |  |   |     |  |                                               | 1,540   |   |   |   |  |   |        |   |  
|Issuance of stock under employee stock purchase plan                                                             |  |   |  |   |   |  | 30     |  |   |    |  |                                               | 155     |   |   |   |  |   |        |   |  
|Issuance of common stock from public offering (net of issuance costs of $5,796)                                  |  |   |  |   |   |  | 3,580  |  |   | 36  |  |                                               | 81,722  |   |   |   |  |   |        |   |  
|Cancellation of compensatory stock options                                                                       |  |   |  |   |   |  |        |  |   |     |  |                                               | (163    | ) |   |   |  |   | 163    |   |  
|Unrealized losses on marketable securities                                                                       |  |   |  |   |   |  |        |  |   |     |  |                                               |         |   |   |   |  |   |        |   |  
|Net loss                                                                                                         |  |   |  |   |   |  |        |  |   |     |  |                                               |         |   |   |   |  |   |        |   |  
|                                                                                                                 |  |   |  |   |   |  |        |  |   |     |  |                                               |         |   |   |   |  |   |        |   |  
|Comprehensive loss                                                                                               |  |   |  |   |   |  |        |  |   |     |  |                                               |         |   |   |   |  |   |        |   |  
|                                                                                                                 |  |   |  |   |   |  |        |  |   |     |  |                                               |         |   |   |   |  |   |        |   |  
|Balance at December 31, 2004                                                                                     |  |  |  | $ |  |  | 30,124 |  | $ | 301 |  | $                                             | 275,727 |   | $ |  |  | $ | (2,095 | ) | $
|                                                                                                                 |  |   |  |   |   |  |        |  |   |     |  |                                               |         |   |   |   |  |   |        |   |  

The accompanying notes are an integral part of the financial statements.

53

---





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

|                                                     |                                                                                           | Year Ended December 31,                                      |                                                    
|---------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------
|
|Cash flows from operating activities:                |                                                                                           |                                                              |                                                    
|                                                     | Net loss                                                                                  |                                                              | $                                                  
|                                                     | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                              |                                                    
|                                                     |                                                                                           | Depreciation and amortization                                |                                                    
|                                                     |                                                                                           | Forgiveness of note receivable from stock purchase agreement |                                                    
|                                                     |                                                                                           | Stock-based compensation expense                             |                                                    
|                                                     |                                                                                           | Changes in operating assets and liabilities:                 |                                                    
|                                                     |                                                                                           |                                                              | Prepaid expenses and other current assets          
|                                                     |                                                                                           |                                                              | Accounts payable and accrued expenses              
|                                                     |                                                                                           |                                                              | Deferred revenue                                   
|                                                     |                                                                                           |                                                              |                                                    
|                                                     |                                                                                           |                                                              |                                                    
|                                                     |                                                                                           |                                                              |                                                    
|Cash flows from investing activities:                |                                                                                           |                                                              |                                                    
|                                                     | Purchases of marketable securities                                                        |                                                              |                                                    
|                                                     | Sales of marketable securities                                                            |                                                              |                                                    
|                                                     | Capital expenditures                                                                      |                                                              |                                                    
|                                                     | Other assets                                                                              |                                                              |                                                    
|                                                     |                                                                                           |                                                              |                                                    
|                                                     |                                                                                           |                                                              | Net cash (used in) provided by investing activities
|                                                     |                                                                                           |                                                              |                                                    
|Cash flows from financing activities:                |                                                                                           |                                                              |                                                    
|                                                     | Net proceeds from sale of common stock in public offering                                 |                                                              |                                                    
|                                                     | Proceeds from employee stock plans                                                        |                                                              |                                                    
|                                                     | Principal payments on notes payable                                                       |                                                              |                                                    
|                                                     | Net proceeds from sale of redeemable convertible preferred stock                          |                                                              |                                                    
|                                                     |                                                                                           |                                                              |                                                    
|                                                     |                                                                                           |                                                              | Net cash provided by (used in) financing activities
|                                                     |                                                                                           |                                                              |                                                    
|Net (decrease) increase in cash and cash equivalents |                                                                                           |                                                              | (31,732                                            
|Cash and cash equivalents, beginning balance         |                                                                                           |                                                              | 67,614                                             
|                                                     |                                                                                           |                                                              |                                                    
|Cash and cash equivalents, ending balance            |                                                                                           | $                                                            | 35,882                                             
|                                                     |                                                                                           |                                                              |                                                    
|Supplemental disclosure:                             |                                                                                           |                                                              |                                                    
|Cash paid during the year for interest               |                                                                                           | $                                                            | 1                                                  
|                                                     |                                                                                           |                                                              |                                                    

The
accompanying notes are an integral part of the financial statements.

54

---





NITROMED, INC.        NOTES TO FINANCIAL STATEMENTS        (all tabular amounts in thousands except per share amounts)

1. The Company

NitroMed is an emerging pharmaceutical company focused on the research, development and commercialization of proprietary pharmaceuticals based on the therapeutic
benefits of nitric oxide. The Company is currently developing it's lead nitric oxide-enhancing drug candidate, BiDil, to treat African Americans diagnosed with heart failure. The Company's goal is to
become a leading, multi-product pharmaceutical company by developing additional innovative nitric oxide products and by building on the Company's BiDil development experience and infrastructure to
identify and market additional products for cardiovascular and metabolic diseases for the African American population.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentrations of Credit Risk

The financial instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash, cash equivalents and marketable
securities. The majority of the Company's cash and cash equivalents and marketable securities are maintained with well-known, established financial institutions.

Cash Equivalents and Marketable Securities

Cash equivalents are short-term, highly liquid investments with maturities of three months or less at the time of acquisition. Investments with
maturities in excess of three months at the time of acquisition are classified as marketable securities and designated as available-for-sale. Cash equivalents consist of
institutional money market funds. Available-for-sale securities are carried at fair market value, as reported by the custodian, and unrealized gains and losses are reported as
a separate component of accumulated other comprehensive income within stockholders' equity. Realized gains and losses were not material for the years ended December 31, 2004, 2003 and 2002.

Fair Value of Financial Instruments

Financial instruments mainly consist of cash and cash equivalents and marketable securities. The carrying amounts of these instruments approximate their fair
values.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which range between
three to five years. Leasehold improvements are amortized based upon the lesser of the term of the lease or the useful life of the asset. The Company reviews its property and equipment for impairment
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable and recognizes an impairment

55

---



loss
when the estimated undiscounted cash flows are less than the carrying value of the asset. The asset is written down to its fair value determined by either a quoted market price or by a discounted
cash flow technique.

Research and Development Expenses

Research and development expenses primarily consist of salaries and related expenses for personnel, fees paid to consultants and outside service providers and
materials used in clinical trials and research and development. The Company charges research and development expenses, including costs associated with acquiring patents, to operations as incurred.

The
Company enters into contracts with professional service providers to conduct clinical trials and related services. These professional service providers render services over an
extended period of time, generally one to three years. Typically, the Company enters into two types of vendor contracts, patient-based or time-based. Under a patient-based contract, the
Company first determines an appropriate per patient cost using critical factors contained within the contract, which include the estimated number of patients, the cost assigned to each patient based
on a patient's number of visits and the total dollar value of the contract. The Company then records expense based upon the total number of patients enrolled during the period and the status of each
patient. Under a time based contract, using critical factors contained within the contract such as the stated duration of the contract and the timing of services provided, the Company records the
contractual expense for each service provided ratably over the period during which the Company estimates the service will be performed. On a monthly basis, the Company reviews both the timetable of
services to be rendered and the timing of services actually received based on regular communications with its vendors in order to gauge the reasonableness of its estimates. Based upon this review,
revisions may be made to the forecasted timetable or the extent of services performed, or both, in order to reflect the Company's most current estimate of the contract.

Revenue Recognition

Revenue is deemed earned when all of the following have occurred: all obligations of the Company relating to the revenue have been met and the earnings process is
complete; the monies received or receivable are not refundable irrespective of research results; and there are neither future obligations or milestones to be met by the Company with respect to such
revenue. The Company recognizes revenue from nonrefundable, up-front licenses and related payments, not specifically tied to a separate earnings process, ratably over the period that the
Company is obligated to participate on a continuing and substantial basis in the research and development activities outlined in each contract. When payments are specifically tied to a separate
earnings process, revenue is recognized when the specific performance obligation associated with the payment has been satisfied. Performance obligations typically consist of contracted services or
development milestones. Revenue from services performed under collaborative research agreements is recognized as reimbursable costs are incurred. Revenue from significant milestones in the development
lifecycle of the related technology, including initiation of clinical trials or filing for and obtaining approvals with regulatory agencies are considered earned when the payor acknowledges the
milestone achievement, which is generally by payment of amounts due.

56

---



Stock-Based Compensation

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

FAS 123
requires pro forma information regarding net loss and net loss per share as if the Company had accounted for its stock-based awards to employees under the fair value
method of FAS 123. The fair value of the Company's stock options used to compute pro forma net loss is the estimated fair value at the grant date using the Black-Scholes option-pricing model
with the following weighted-average assumptions:

December 31,2004

2003

2002Risk-free interest rate

3.6%

2.8%

3.5%Expected volatility

94%

80%

80%Expected lives

4 years

4 years

4 yearsExpected dividend








The
per-share, weighted-average grant date fair value of options granted during the years ended December 31, 2004, 2003 and 2002 were $9.66, $6.49 and $3.28,
respectively.

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

57

---



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

Years Ended December 31,2004

2003

2002Net loss attributable to common stockholders as reported

$
(29,773
)
$
(30,920
)
$
(20,039
)Add: Stock-based employee compensation expense included in reported net loss


1,512


722


522Deduct: Stock-based employee compensation expense determined under fair value based method


(2,645
)

(850
)

(319
)FAS 123 Pro forma net loss

$
(30,906
)
$
(31,048
)
$
(19,836
)Basic and diluted net loss per shareAs reported

$
(1.14
)
$
(6.95
)
$
(20.66
)FAS 123 Pro forma

$
(1.18
)
$
(6.98
)
$
(20.45
)


Accumulated Other Comprehensive Income (Loss)

The Company presents comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 130,Reporting
Comprehensive Income. Accumulated other comprehensive income is comprised entirely of unrealized gains and losses on available-for-sale marketable
securities.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities, as well as
net operating loss carryforwards and tax credits, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

Net Loss Per Share

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

58

---



Segment Information

During the three years ended December 31, 2004, the Company operated in one reportable business segment, developing nitric oxide enhancing medicines, under
the management approach of Statement of Financial Accounting Standards No. 131,Disclosures about Segments of an Enterprise and Related
Information.

New Accounting Standard

On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004)
("FAS 123R"),Share-Based Payment, which is a revision of SFAS No. 123,Accounting for Stock-Based
Compensation. FAS 123R supersedes Accounting
Principles Board Opinion No. 25,Accounting for Stock Issued to Employees("APB 25"), and amends SFAS No. 95, Statement of Cash Flows. Generally,
the approach in FAS 123R is similar to the approach described in SFAS 123, detailed below. However,
FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant.
Pro forma disclosure is no longer an alternative. FAS 123R must be adopted in fiscal periods beginning after June 15, 2005. Early adoption will be permitted in periods in which financial
statements have not yet been issued. The Company expects to adopt FAS 123R on July 1, 2005, the commencement of its third quarter of fiscal 2005.

FAS 123R
permits public companies to adopt its requirements using one of two methods. A "modified prospective" method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of FAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all
awards granted to employees prior to the effective date of FAS 123R that remain unvested on the effective date. A "modified retrospective" method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of adoption. The Company has yet to determine which method to use in adopting FAS 123R.

As
permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25's intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of FAS 123R's fair value method may have a significant impact on the Company's result of operations, although it will
have no impact on the Company's overall financial position. The impact of adoption of FAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted FAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of
pro forma net loss and net loss per share in Note 2 to these financial statements. The Company is currently evaluating the impact of the adoption of FAS 123R on its financial position
and results of operations, including the valuation methods and support for the assumptions that underlie the valuation of the awards.

59

---





3. Cash Equivalents and Marketable Securities

The following is a summary of the fair market value of available-for-sale money market funds and marketable securities the Company held at
December 31, 2004 and 2003:

|December 31, 2004                                    |                           | Amortized Cost |         | Gross Unrealized
Gains |   | Gross Unrealized
Losses |   | Estimated Fair
Value
|---------------------------------------------------- | ------------------------- | -------------- | ------- | ---------------------- | - | ----------------------- | - | --------------------
|Cash and money market funds                          |                           | $              | 35,882  |                        |  |                         |   |                    
|Commercial paper                                     |                           |                | 11,962  |                        |  |                         |   |                    
|U.S. Government agencies                             |                           |                |         |                        |   |                         |   |                     
|                                                     | Due in one year or less   |                |         | 5,905                  |   |                        |   | $                   
|                                                     | Due in one to three years |                |         | 7,759                  |   |                        |   |                     
|Asset-backed securities                              |                           |                |         |                        |   |                         |   |                     
|                                                     | Due in one to three years |                |         | 8,243                  |   |                        |   |                     
|Taxable auction securities                           |                           |                |         |                        |   |                         |   |                     
|                                                     | Due in one to three years |                |         | 50,200                 |   |                        |   |                     
|Corporate notes                                      |                           |                |         |                        |   |                         |   |                     
|                                                     | Due in one year or less   |                |         | 9,384                  |   |                        |   |                     
|                                                     | Due in one to three years |                |         | 13,334                 |   |                        |   |                     
|                                                     |                           |                |         |                        |   |                         |   |                     
|Total                                                |                           |                | 142,669 |                        |  |                         |   | (302                
|Less amounts classified as cash and cash equivalents |                           |                | 35,882  |                        |  |                         |   |                    
|                                                     |                           |                |         |                        |   |                         |   |                     
|Total marketable securities                          |                           | $              | 106,787 |                        |  |                         | $ | (302                
|                                                     |                           |                |         |                        |   |                         |   |                     

|December 31, 2003                                    |                           | Amortized Cost |        | Gross Unrealized
Gains |   | Gross Unrealized
Losses |    | Estimated Fair
Value
|---------------------------------------------------- | ------------------------- | -------------- | ------ | ---------------------- | - | ----------------------- | -- | --------------------
|Cash and money market funds                          |                           | $              | 7,893  |                        |   |                        |    |                     
|Commercial paper                                     |                           |                | 58,712 |                        | $ | 9                       |    |                     
|U.S. Government agencies                             |                           |                |        |                        |   |                         |    |                     
|                                                     | Due in one year or less   |                |        | 7,150                  |   |                         | 3  |                     
|Asset-backed securities                              |                           |                |        |                        |   |                         |    |                     
|                                                     | Due in one year or less   |                |        | 2,262                  |   |                         |   |                     
|                                                     | Due in one to three years |                |        | 5,596                  |   |                         | 12 |                     
|Corporate notes                                      |                           |                |        |                        |   |                         |    |                     
|                                                     | Due in one year or less   |                |        | 12,866                 |   |                         | 2  |                     
|                                                     | Due in one to three years |                |        | 2,584                  |   |                         | 5  |                     
|                                                     |                           |                |        |                        |   |                         |    |                     
|Total                                                |                           |                | 97,063 |                        |   | 31                      |    |                     
|Less amounts classified as cash and cash equivalents |                           |                | 67,605 |                        |   | 9                       |    |                     
|                                                     |                           |                |        |                        |   |                         |    |                     
|Total marketable securities                          |                           | $              | 29,458 |                        | $ | 22                      |    | $                   
|                                                     |                           |                |        |                        |   |                         |    |                     

60

---



4. Note Receivable from Stock Purchase Agreement

On December 31, 1997, the Company executed a $252,000 loan to an officer that was used to purchase 350,000 shares of restricted common stock of the Company
at a purchase price of $0.72 per share. These shares were granted under the Company's 1993 Equity Incentive Plan. The loan was due and payable in full in September 2002, bore interest at a rate
of 6.02% per annum (which interest was forgiven) and was secured, pursuant to the terms of a Pledge Agreement, by the restricted shares. Twenty percent of the shares vested at the date of issuance and
an additional 20% of the shares vested annually each September. Based on the terms of the arrangement, the award was required to be accounted for as variable compensation. Accordingly, the Company
recorded noncash stock compensation charges for the year ended December 31, 2002 of $392,000. In addition, during September 2002, the Company forgave the loan and recorded an additional
noncash compensation charge of $252,000 for the year ended December 31, 2002.

5. Property and Equipment

Property and equipment consist of the following:

December 31,2004

2003Laboratory furniture, fixtures and equipment

$
2,538

$
1,021Office furniture, fixtures and equipment


1,144


438Leasehold improvements


362


9404,044


2,399Less accumulated depreciation and amortization


(1,081
)

(1,713
)$
2,963

$
686


6. Accrued Expenses

Accrued expenses consist of the following:

December 31,2004

2003Clinical trial and related costs

$
4,611

$
865Sales and marketing


1,722


Compensation, relocation and related benefits


861


759Other


897


443$
8,091

$
2,067


61

---



7. Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)

Redeemable Convertible Preferred Stock

Public Offerings

On November 10, 2003, the Company completed its initial public offering and sold 6,000,000 shares of common stock for $11.00 per share for net proceeds of
approximately $60.1 million. In connection with the initial public offering all of the outstanding shares of the Company's redeemable convertible preferred stock (Series A, B, C, D, E
and F), including accrued but unpaid Series E dividends of $6.4 million, converted into 18,398,496 shares of the Company's common stock based upon the conversion ratios then applicable.

On
December 20, 2004, the Company closed a second public offering and sold 3,579,476 shares of common stock, including the underwriters' over-allotment of 331,598
shares, for $24.46 per share for net proceeds of approximately $81.8 million.

Series E and F

On August 1, 2003, the Company completed the sale of 2,776,347 shares of Series E redeemable convertible preferred stock for net proceeds of
$19.9 million. These shares automatically converted to common stock upon the closing of the Company's initial public offering of common stock on November 10, 2003. These shares contained
a beneficial conversion feature based on the fair value of the common stock into which the shares were convertible. In accordance with EITF 98-5,Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,the value of such beneficial conversion feature of approximately
$8.3 million was recognized as a deemed dividend in the three month period ended September 30, 2003.

The
Series F conversion ratio provided for additional shares of common stock when the Company issued equity securities, as defined, for consideration of less than $14 per share,
the purchase price of Series F. As a result of the above sale of these Series E shares, the Series F conversion ratio was increased from 1:1 to 1:1.073364. The adjustment to the
Series F conversion ratio is a beneficial conversion feature. In accordance with EITF 00-27,Application of Issue 98-5 to Certain Convertible
Instruments,the value of such beneficial conversion feature of approximately $37,000 was recognized as a deemed dividend in the three month period ended September 30,
2003.

Subsequent
to the August 2003 sale of the Series E shares, the Series E stockholders and the Company agreed to increase the Series E conversion ratio from 1:1
to 1:1.1526 in consideration of the Series E stockholders waiving their rights to certain anti-dilution provisions. The adjustment to the conversion ratio, which was contingent on
the initial public offering, is a beneficial conversion feature. In accordance with EITF 00-27, the value of the Series E beneficial conversion feature of approximately
$11.0 million was recognized as a deemed dividend in the period of issuance, which occurred in the fourth quarter of 2003 as a result of the initial public offering. In addition, the conversion
of the Series E shares in the initial public offering caused the accrued but unpaid Series E dividends of approximately $6.4 million to become payable through the issuance of
513,033 shares of common stock at the time of the initial public offering.

62

---



Undesignated Preferred and Common Stock

On August 18 2003, the Board of Directors approved an Amendment to Certificate of Incorporation, which became effective on November 5, 2003 and
increased the Company's authorized shares of common stock to 35,000,000. On August 18, 2003, the Board of Directors also approved a Restated
Certificate of Incorporation, which became effective upon the consummation of the initial public offering on November 10, 2003 and increased the Company's authorized shares of common stock to
65,000,000 and authorized 5,000,000 shares of undesignated preferred stock, issuable in one or more series designated from time to time by the Board of Directors.

Stock Purchase Warrants

At December 31, 2004 and 2003, there were stock purchase warrants outstanding to purchase 13,861 and 151,347 shares, respectively, of the Company's common
stock at exercise prices of $.01 to $.08 per share, which expire in 2005 through 2007. In addition, stock purchase warrants to purchase 123,749 shares of common stock at an exercise price of $4.00 per
share were outstanding at December 31, 2003 and were exercised during 2004.

Stock Option Plans

The Company's Restated 1993 Equity Incentive Plan (the "1993 plan") provides for the grant of incentive stock options, nonstatutory stock options and restricted
stock awards to purchase up to 2,288,200 shares of common stock. Officers, employees, directors, consultants and advisors of the Company are eligible to be granted options under the 1993 plan at a
price not less than 100% (110% in the case of incentive stock options granted to 10% or greater stockholders) of the fair market value of such stock, as determined by the Board of Directors, at the
time the option is granted. In May 2003, the Company's stockholders approved the 2003 Stock Incentive Plan (the "2003 plan), under which 800,000 shares of common stock were authorized for
issuance. In October 2003, the stockholders approved an amended and restated plan which provided, among other things, for an increase of shares authorized for issuance under the 2003 plan to
2,500,000.

While
the Company may grant options to employees, which become exercisable at different times or within different periods, the Company generally has granted options to employees that are
exercisable in annual installments of 25% each on the first four anniversary dates of the grant.

63

---



Information
with respect to activity under the Plans is as follows:

Stock Option Activity

Number of Options

Weighted-Average
Exercise Price
Per ShareBalance at December 31, 2001

2,148

$
1.16Options granted

241


2.00Options canceled

(226
)

1.74Options exercised

(22
)

1.04Balance at December 31, 2002

2,141


1.19Options granted

978


5.30Options canceled

(3
)

1.95Options exercised

(217
)

0.61Balance at December 31, 2003

2,899


2.62Options granted

1,129


13.94Options canceled

(105
)

6.86Options exercised

(676
)

1.30Balance at December 31, 2004

3,247

$
6.70


The
following table summarizes information about options outstanding at December 31, 2004:

|              |  | Options Outstanding |  |   |       | Options Exercisable
|------------- |  | ------------------- |  | - | ----- | -------------------
|
|$0.08$2.47   |  | 1,676               |  | $ | 1.46  |                    
|$4.94$7.41   |  | 196                 |  |   | 6.40  |                    
|$7.42$9.88   |  | 736                 |  |   | 7.88  |                    
|$9.89$12.35  |  | 125                 |  |   | 10.21 |                    
|$17.29$19.76 |  | 229                 |  |   | 18.97 |                    
|$19.77$22.23 |  | 55                  |  |   | 20.77 |                    
|$22.24$24.70 |  | 230                 |  |   | 23.80 |                    
|              |  |                     |  |   |       |                    
|              |  | 3,247               |  | $ | 6.70  |                    
|              |  |                     |  |   |       |                    

There
were 1,526,761 and 1,531,468 options exercisable at December 31, 2003 and 2002, respectively. At December 31, 2004, the Company had 514,297 options available for
future grant.

During
1999 and 2000, the Company granted 75,100 and 100,000 performance-based options, respectively, with an exercise price of $1.30 to certain employees, which allow for acceleration
of the vesting period upon the occurrence of certain defined events. Of the 100,000 options granted, 5,000 options were forfeited in 2002. Based on the terms of the arrangements, the awards are
required to be accounted for as variable, and compensation expense is measured as the difference between the fair market value of the Company's common stock at the reporting period date and the
exercise price of

64

---



the
award. Compensation expense is recognized over the vesting period and totaled $529,000, $118,000 and $91,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Since
1999, the Company granted a total of 181,000 stock options to nonemployees at a weighted-average exercise price of $2.24 per share, of which 168,750 remained outstanding at
December 31, 2004. The Company has applied the recognition provisions of FAS 123 and EITF 96-18 related to these stock options and utilized the Black-Scholes option pricing
model to determine the fair value of these stock options at each reporting date. In connection with these awards, the Company recognized compensation expense of $1,011,000, $185,000 and $164,000 for
the years ended December 31, 2004, 2003 and 2002, respectively.

During
2003 and 2002, the Company granted 413,250 and 241,000 options, respectively, to employees at exercise prices below the fair value of the Company's common stock. The weighted
average exercise price of these options is $2.00 per share. The Company recorded deferred stock compensation expense related to these grants of $3,317,000 and $566,000 for the years ended
December 31, 2003 and 2002, respectively. These amounts are being recognized as stock-based compensation expense ratably over the vesting period of four years. Included in the results of
operations for the years ended December 31, 2004, 2003 and 2002 is compensation expense of $982,000, $604,000 and $39,000, respectively.

Employee Stock Purchase Plan

On August 18, 2003, the Board of Directors adopted the 2003 Employee Stock Purchase Plan (the "Stock Purchase Plan"), which provides for the sale of up to
75,000 shares of common stock to participating employees. Under the Stock Purchase Plan, eligible employees may purchase common stock at a price per share equal to 85% of the lower of the fair market
value of the common stock at the beginning or end of each offering period. Participation in the offering is limited to 10% of the employee's compensation or $25,000 in any calendar year. The first
offering period began on January 1, 2004 and ended on June 30, 2004, with 12,219 shares being purchased. The second offering period began on July 1, 2004 and ended on
December 31, 2004, with 18,123 shares being purchased. At December 31, 2004, there were 44,658 shares available for grant under the Stock Purchase Plan.

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8. Net Loss per Share

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

|                                                                                                          |  | Year Ended December 31, |        
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|
|Basic and Diluted:                                                                                        |  |                         |        
|Net loss                                                                                                  |  | $                       | (29,773
|Deemed dividends related to beneficial conversion features of redeemable convertible preferred stock      |  |                         |       
|Dividends and accretion to redemption value of redeemable convertible preferred stock prior to conversion |  |                         |       
|                                                                                                          |  |                         |        
|Net loss attributable to common stockholders                                                              |  | $                       | (29,773
|                                                                                                          |  |                         |        
|Weighted average common shares used to compute net loss per share                                         |  |                         | 26,152 
|                                                                                                          |  |                         |        
|Basic and diluted net loss per share                                                                      |  | $                       | (1.14  
|                                                                                                          |  |                         |        

Options
to purchase 3,246,631, 2,898,584 and 2,141,401 shares of common stock for the years ended December 31, 2004, 2003 and 2002, respectively, and warrants to purchase 13,861,
275,096 and 275,096 shares of common stock for the years ended December 31, 2004, 2003 and 2002, respectively, have been excluded from the computation of net loss per share as their effects
would have been antidilutive.

9. Operating Lease

The Company leased its previous research facilities under an operating lease that expired on September 30, 2004. The lease required payment of real estate
taxes and other common area maintenance expenses. Under the lease, a security deposit of $100,000 was required to be held in
escrow for the life of the lease. Annual rent expense was $532,000 for 2004 and $580,000 for 2003 and 2002. The Company sub-leased a portion of its premises and recognized rental income of
$82,000 and $195,000 in 2003 and 2002, respectively. The sublease agreement ended in 2003.

On
January 30, 2004, the Company executed a lease for approximately 52,000 square feet of laboratory and office space in Lexington, Massachusetts. The rent obligation for the
building commenced on August 7, 2004, which was 30 days after the date the Company commenced occupancy of the building. The lease is for a term of ten years with options that permit
renewals for additional five-year periods. The Company has the option to terminate the lease at the end of the fifth year for a fee of $4.2 million. The expected minimum rental
commitments under the lease agreement are $1,089,000, $1,425,000, $1,505,000, $1,505,000, and $1,566,000 for each year in the five calendar year period ending December 31, 2009, respectively,
and $7.9 million in total for the remainder of the lease term. In addition to the minimum lease commitment, the lease agreement requires the Company to pay its pro rata share of property taxes
and building operating expenses. Rent expense for 2004 under this lease was $610,000.

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10. Research, License and Consulting Agreements

The Company has entered into various research, license and consulting agreements to support its research and development activities.

Johnson & Johnson Agreements

Prior to 2001, the Company had two principal research and development collaboration agreements, both dated April 1997, in which the Company had licensed
its technology to Johnson & Johnson and affiliates in return for initial license fees, reimbursement of qualified research expenditures and the purchase of 3.0 million shares of
Series B for $3.0 million. The agreements contained provisions for future payments to the Company upon the achievement of certain research and development milestones and future royalties
to the Company on sales of products developed under the agreements. One of the agreements with affiliates of Johnson & Johnson was terminated in April 2000, and the other agreement was
terminated in September 2001.

With
respect to one of the Johnson & Johnson agreements noted above, during 2001, the Company reacquired the previously licensed technology in consideration of future payments
totaling $4.5 million. The Company is required to make payments to Johnson & Johnson contingent upon the occurrence of the following events: a portion of up-front and
milestone payments received in consideration for granting the rights to the technology; a percent of net sales revenue generated by the Company from product manufactured using the technology; and a
percentage of royalty payments received based upon the sale of products derived from the technology. Payments are only required upon the occurrence of such events. Through December 31, 2004,
the Company had paid $375,000 to Johnson & Johnson as a result of receiving payments for licensing the reacquired technology.

Boston Scientific Corporation Agreement

In November 2001, the Company entered into a development and license agreement with Boston Scientific Corporation ("BSC") that granted a nonexclusive, nonroyalty
bearing right and license in certain technology, which had been reacquired from Johnson & Johnson as noted above. In consideration of the license, the Company received a nonrefundable
up-front license payment of $1.5 million. At the same time the Company sold to BSC 250,000 shares of Series F for $3.5 million. Under the agreement, the Company
planned to deliver two drug compounds, as defined in the agreement, to BSC during the two year research term. Accordingly, the Company was recognizing the $1.5 million license fee as revenue
ratably over the term of its contractual performance obligation. In January 2003, the Company informally agreed to an extension of the research term to May 2004. As a result, the Company
extended the period of revenue recognition for the unrecognized portion of the license payment at December 31, 2002 to May 31, 2004. In December 2003 the Company executed an
amendment to extend the research term to December 31, 2005 and received an additional $3.0 million. The Company is recognizing the $3.0 million extension fee and the remaining
deferred revenue related to the nonrefundable license payment of $1.5 million over the extension period. For the years ended December 31, 2004, 2003 and 2002, the Company recognized
revenue of $1,592,000, $442,000 and $750,000, respectively.

In
connection with the agreement, the Company may receive up to $8.3 million in milestone payments if certain development events are achieved by BSC. The Company may receive
additional milestone payments for commercial success of any products derived from the licensed technology by

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BSC.
The Company also has the right to receive milestone payments for any individual product that exceeds certain sales levels in any consecutive 12-month period. In addition, the Company
may receive royalty payments on net sales of products derived from the licensed technology. The royalty term, which is on a country by country basis, related to each product derived by the licensed
technology will generally be 12 years.

BiDil License Agreement

In connection with its development program for BiDil, the Company's lead product candidate, the Company entered into an agreement to license certain technology
from an individual who is on the Company's scientific advisory board. The Company also receives services from this individual in consideration of nominal payments and the grant of stock options. Upon
achieving certain development events, the Company is required to make milestone payments of up to $1 million in the aggregate. In addition, upon commercial sale of products developed from the
technology, the Company is required to make royalty payments on net sales, which will vary depending on sales volume. The royalty term expires upon the later of the expiration of the patent rights or
ten years from the first commercial sale. The agreement may be terminated by the Company at any time. During the year ended December 31,
2004, the Company recorded charges of $1.0 million to research and development expense related to this agreement.

Merck Agreement

In December of 2002, the Company executed a research collaboration and license agreement with Merck Frosst Canada & Co., a wholly-owned subsidiary of
Merck & Co. ("Merck"), in which the Company granted an exclusive, worldwide, royalty-bearing license to certain existing technology and any technology, pertaining to the licensed technology,
developed by the Company during a three-year period commencing January 1, 2003. In consideration of this license, the Company received $10 million in January of 2003. During
the three-year period, the Company was obligated to perform certain research and development activities in consideration of quarterly fees totaling $7.2 million. The Company was
recognizing the license fee as revenue ratably over the term of its contractual performance obligation of three years.

In
connection with this agreement, the Company could have received milestone payments associated with certain development and approval events and sales and marketing events. For the year
ended December 31, 2003, the Company recognized revenue of $12.3 million related to $15.0 million of license and milestone payments that had been deferred and were being
recognized as revenue ratably over the contractual research and development term, a $5.0 million milestone payment for advancing a lead nitric oxide enhancing COX-2 inhibitor into
Phase I human testing and $3.0 million of research and development funding.

In
November 2004, the Company agreed with Merck to terminate the collaboration agreement. Merck paid the Company a lump sum of $1.8 million, representing the full amount of the
research funding owed to the Company for 2005. The Company will not receive any commercialization milestones or royalty payments from Merck. As a result of the termination of this agreement, the
Company accelerated the recognition of deferred license revenue of $5.3 million, and recognized the lump sum payment of $1.8 million as revenue in the fourth quarter of 2004. For the
year ended

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December 31,
2004, the Company recognized revenue of $14.9 million under the collaboration agreement.

11. Income Taxes

A reconciliation of federal statutory income tax provision to the Company's actual provision is as follows:

Year Ended December 31,2004

2003

2002Benefit at federal statutory tax rate

$
(10,123
)
$
(2,982
)
$
(5,896
)Unbenefited operating losses


11,833


3,175


6,922State taxes, net of federal benefit


(1,867
)

(550
)

(1,087
)Non-deductible expenses


157


357


215Other








(154
)Income tax provision

$


$


$



The
significant components of the Company's deferred tax assets are as follows:

December 31,2004

2003Deferred tax assets:Net operating loss carryforwards

$
20,724

$
11,292Capitalized research costs, net of amortization


18,908


14,534Tax credit carryforwards


5,807


4,791Deferred revenue


641


4,369Depreciation


409


288Accrued expenses


1,600


202Other


31


2748,120


35,503Valuation allowance


(48,120
)

(35,503
)Net deferred tax assets

$


$



The
Company has increased its valuation allowance by $12,617,000 in 2004 to provide a full valuation allowance for deferred tax assets since the realization of these benefits is not
considered more likely than not. At December 31, 2004, the Company has unused net operating loss carryforwards of approximately $52,961,000 available to reduce federal taxable income expiring
in 2010 through 2024 and $43,333,000 available to reduce state taxable income expiring in 2005 through 2009. The Company also has federal and state research tax credits of approximately $6,781,000
available to offset federal and state income taxes, both of which expire beginning in 2010. The net operating losses and tax credit carryforwards may be subject to the annual limitation provisions of
Internal Revenue Code (IRC) Sections 382 and 383. No income tax payments were made in 2004, 2003 or 2002.

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12. Commitments and Contingencies

In connection with its pursuit of obtaining FDA approval of BiDil, the Company contracted with a consulting firm for services related to the development approval
process of BiDil. The agreement provides for payment of legal consulting fees if and when the Company receives written FDA approval of BiDil. In addition, the agreement requires the Company to pay
royalties on sales of BiDil product. The royalty term ends six months from the date of market introduction of an FDA approved generic version of the BiDil product. During the year ended
December 31, 2004 the Company recorded charges of approximately $1.9 million pertaining to fees and expenses related to this agreement. The Company has estimated that approximately
$2.8 million in fees will be paid out under this arrangement at the time of FDA approval.

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

On
July 20, 2004, the Market Regulation Department of the National Association of Securities Dealers, Inc. ("NASD") advised the Company that it initiated a review of
trading activity in the Company's common stock surrounding the Company's July 19, 2004 announcement that it had halted its phase III confirmatory clinical trial of BiDil due to the significant
survival benefit seen with BiDil. The NASD is reviewing, among other things, information on relationships between the Company's officers, directors and service providers and individuals and
institutions who may have traded in the Company's common stock prior to the July 19, 2004 announcement. The Company has cooperated with this review and has identified certain persons on the
list provided to the Company by the NASD as having a relationship with the Company's chief executive officer and others at the Company. The Company has established a special committee of its board of
directors to oversee the Company's response to this review. The Company is presently unable to predict the outcome of this matter or the timing of its resolution.

The
Company has engaged Schwarz Pharma under a five-year exclusive manufacturing and supply agreement solely for the three times daily immediate release dosage formulation of
NitroMed's BiDil product candidate. Under the Supply Agreement, NitroMed will have the right to engage a backup manufacturer. The Company orders bulk materials from the same suppliers that were used
for the clinical trial batches of BiDil: hydralazine from Flavine, the U.S. representative of Sumitomo, and isosorbide dinitrate from EMS-Dottikon, and has them delivered directly to
Schwarz Pharma for manufacturing. In connection with the Company's procurement of hydralazine from Flavine, the Company placed an irrevocable purchase order for $3,150,000 in November 2004, 25%
of which was paid prior to December 31, 2004 with the remaining 75% due upon shipment of the hydralazine.

On
October 3, 2004, the Company entered into an agreement with Publicis Selling Solutions, Inc. ("Publicis"), a contract sales organization, pursuant to which, on the Company's
behalf, Publicis has employed and is training a specialty sales force of 195 sales representatives to sell BiDil to the Company's target prescriber markets. The agreement is for a term of
24 months, with a Company option to continue the agreement beyond this term. Estimated year one costs are $31,592,000, excluding one-time start-up costs, and year two
costs are projected at $33,129,000. The Company has the right to terminate this agreement upon 90 days written notice to Publicis. If the Company

70

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terminates
this agreement during months one through twelve of the term of the agreement, the Company is required to pay a termination fee in the amount of $1.0 million. If the Company
terminates this agreement during months thirteen through eighteen, the termination fee will be $750,000. If the Company terminates the agreement after month eighteen, no termination fee will be
assessed.

13. Retirement Plan

The Company sponsors a 401(k) plan covering substantially all employees. The plan provides for salary deferral contributions by participants of up to 15% of
eligible wages not to exceed Federal requirements. Those employees over 50 years old are permitted to contribute an additional $4,000 per year. The Company does not currently match employee
contributions.

14. Related Party TransactionsBoston University

Dr. Loscalzo, a member of the Company's board of directors, is the Chairman of the Department of Medicine at Boston University Medical School,
Physician-in-Chief,
Boston Medical Center and Director of the Whitaker Cardiovascular Institute at the Boston Medical Center. Dr. Loscalzo has served as a consultant to the Company since 1992 and as the chair of
the Company's scientific advisory board since 1999. In October 2003, the Company entered into a consulting agreement with Dr. Loscalzo, as amended in April 2004, pursuant to which
the Company agreed to pay Dr. Loscalzo an annual retainer of $55,000 for his services. The agreement is for a period of ten years, subject to the Company's right to terminate the agreement at
any time on 30 days' notice. In 2004, the Company paid Dr. Loscalzo an aggregate of $74,750 in consulting fees and fees earned in conjunction with Dr. Loscalzo's service on the
Company's board of directors.

In
June 1993, as amended in July 1997, January 1999 and December 2002, the Company entered into a research and license agreement with the Trustees of Boston
University ("BU"). Under the agreement, the Company agreed to fund a multi-year research program under Dr. Loscalzo's direction at BU in the area of nitric oxide- enhancing
medicines. The Company's funding is principally for laboratory equipment and supplies as well as a portion of the salary of Martin Feelish, Ph.D., a professor of medicine at BU and a member of the
Company's scientific advisory board. The Company has also agreed to provide Dr. Feelish with access to the Company's research facilities at the BU School of Medicine. Under the agreement, in
exchange for the Company's sponsored research funding, BU has granted the Company exclusive worldwide royalty-bearing rights to technology and inventions owned by BU at the effective time of, or
developed in the course of, the sponsored research program. The Company has agreed to pay royalties to BU on all products sold or distributed by the Company or its affiliates that incorporate or
utilize inventions, material or information specified in the agreement. In 2004, the Company made payments to BU in the amount of $221,500 pursuant to this agreement, excluding the lease payments
described below.

In
May 2003, the Company entered into an oral agreement with BU pursuant to which the Company leases approximately 1,500 square feet of laboratory space from BU at its Evans
Biomedical Research Center in Boston, Massachusetts. The lease has a term of three years, and the Company makes annual rental payments of $60,000 pursuant to the lease. As provided above, the Company
has

71

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agreed
to make this space available to Dr. Feelish of BU. In 2004, the Company made payments to BU under this agreement in the amount of $60,000.

15. Quarterly Results of Operations (Unaudited)

The following table presents unaudited quarterly financial data of the Company.

|                                                                      |  | Year Ended December 31, 2004 |       
|--------------------------------------------------------------------- |  | ---------------------------- | ------
|
|Net revenues                                                          |  | $                            | 2,331 
|Net loss                                                              |  |                              | (4,556
|Net loss available to common stockholders                             |  |                              | (4,556
|Basic and diluted net loss available to common stockholders
per share |  | $                            | (0.18 
|Weighted average common shares used to compute net loss
per share     |  |                              | 25,601

|                                                                      |  | Year Ended December 31, 2003 |       
|--------------------------------------------------------------------- |  | ---------------------------- | ------
|
|Net revenues                                                          |  | $                            | 1,694 
|Net income (loss)                                                     |  |                              | (3,187
|Net loss available to common stockholders                             |  |                              | (3,861
|Basic and diluted net loss available to common stockholders
per share |  | $                            | (3.92 
|Weighted average common shares used to compute net loss
per share     |  |                              | 985   

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2004. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2004,
our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective.

No
change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

Information regarding our directors and executive officers may be found under the captions "Election of Directors" and "Executive Officers" in the Proxy Statement
for our 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Audit Committee

We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Additional information
regarding the Audit Committee may be found under the captions "Board of Directors Meetings and Committee Meetings" and "Report of the Audit Committee" in the Proxy Statement for our 2005 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.

Audit Committee Financial Expert

The Board of Directors has determined that it has at least one "Audit Committee Financial Expert" (as defined by Item 401(h)(2) of
Regulation S-K of the Exchange Act) on the Audit

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Committee
of the Board of Directors, Davey S. Scoon. The Board of Directors has further determined that Mr. Scoon is "independent" from management within the meaning of Item
7(d)(3)(iv) of Schedule 14A under the Exchange Act.

Section 16(a) Beneficial Ownership Reporting Compliance

Information regarding Section 16(a) Beneficial Ownership Reporting Compliance may be found under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement for our 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Code of Ethics

We have adopted a code of business conduct and ethics that applies to our directors, officers (including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing similar functions) as well as our employees. A copy of our Code of Business Conduct and Ethics is attached as an exhibit to
this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to this item may be found under the captions "Directors' Compensation," "Compensation Committee Interlocks and Insider Participation,"
"Executive Compensation," and "Employment Agreements," in the Proxy Statement for our 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  AND RELATED STOCKHOLDER MATTERS

Information with respect to this item may be found under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement for
our 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to this item may be found under the caption "Certain Relationships and Related Transactions" in the Proxy Statement for our 2005 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information with respect to this item may be found under the caption "Audit Fees" in the Proxy Statement for our 2005 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





NitroMed®,
NitRx®, BiDil® and NitroMed's logo "N" are trademarks of NitroMed, Inc. Other trademarks or service marks appearing in this Annual Report
are the property of their respective holders.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned.

|                     |  | NITROMED, INC.
|-------------------- |  | --------------
|Date: March 10, 2005 |  | By:           

Pursuant
to the requirements of the Securities Act of 1933, this report has been signed by the following persons in the capacities and on the dates indicated.

|Signature                                                     |  | Title                                                                                                  |  | Date          
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | --------------
|                                                              |  |                                                                                                        |  |               
|/s/MICHAEL D. LOBERG, PH.D.Michael D. Loberg, Ph.D.           |  | President and Chief Executive Officer and Director (Principal Executive Officer)                       |  | March 10, 2005
|/s/LAWRENCE E. BLOCH, M.D., J.D.Lawrence E. Bloch, M.D., J.D. |  | Chief Financial Officer, Chief Business Officer, Treasurer and Secretary (Principal Financial Officer) |  | March 10, 2005
|/s/JAMES G. HAM, IIIJames G. Ham, III                         |  | Vice President of Finance (Principal Accounting Officer)                                               |  | March 10, 2005
|/s/ROBERT S. COHENRobert S. Cohen                             |  | Director                                                                                               |  | March 10, 2005
|/s/ZOLA HOROVITZ, PH.D.Zola Horovitz, Ph.D.                   |  | Director                                                                                               |  | March 10, 2005
|/s/ARGERIS KARABELAS, PH.D.Argeris Karabelas, Ph.D.           |  | Director                                                                                               |  | March 10, 2005
|/s/MARK LESCHLYMark Leschly                                   |  | Director                                                                                               |  | March 10, 2005
|/s/JOHN W. LITTLECHILDJohn W. Littlechild                     |  | Director                                                                                               |  | March 10, 2005
|/s/JOSEPH LOSCALZO, M.D., PH.D.Joseph Loscalzo, M.D., Ph.D.   |  | Director                                                                                               |  | March 10, 2005
|/s/DAVEY S. SCOONDavey S. Scoon                               |  | Director                                                                                               |  | March 10, 2005

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EXHIBIT INDEX

|Exhibit No. |           | Description
|----------- | --------- | -----------
|            | 3.1(1)    |            
|            | 3.2(1)    |            
|*           | 10.1(1)   |            
|*           | 10.2(1)   |            
|*           | 10.3(1)   |            
|            | 10.4(1)  |            
|            | 10.5(1)  |            
|            | 10.6(1)  |            
|            | 10.7      |            
|            | 10.8(1)  |            
|            | 10.9(1)  |            
|            | 10.10(1) |            
|            | 10.11(1) |            
|*           | 10.12(1)  |            
|*           | 10.13(1)  |            
|*           | 10.14(1)  |            
|            | 10.15(1)  |            
|            | 10.16(1)  |            
|            | 10.17(2)  |            
|            | 10.18(2)  |            
|            | 10.19     |            
|            | 10.20(3) |            
|            |           |            

76

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|  | 10.21(3) |  | Letter Agreement between the Company and Merck Frosst Canada & Co. dated November 8, 2004                                                                                                      
|- | -------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 10.22    |  | Letter Agreement between the Company and James G. Ham, III dated September 3, 2004                                                                                                             
|* | 10.23    |  | Letter Agreement between the Company and Lawrence E. Bloch dated August 30, 2004                                                                                                               
|  | 10.24   |  | Supply Agreement between the Company and Schwarz Pharma Manufacturing, Inc. dated as of February 16, 2005                                                                                      
|  | 10.25    |  | Letter Agreement between the Company and Mark Pavao, dated June 30, 2004                                                                                                                       
|* | 10.26    |  | Compensation of Named Executive Officers of the Company                                                                                                                                        
|* | 10.27    |  | Compensation Program for Non-Employee Directors of the Company                                                                                                                                 
|* | 10.28    |  | Form of Incentive Stock Option Agreement Granted Under Amended and Restated 2003 Stock Incentive Plan                                                                                          
|* | 10.29    |  | Form of Nonstatutory Stock Option Agreement Granted Under Amended and Restated 2003 Stock Incentive Plan                                                                                       
|  | 14.1(2)  |  | Code of Business Conduct and Ethics                                                                                                                                                            
|  | 21.1     |  | Subsidiaries of the Company                                                                                                                                                                    
|  | 23.1     |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm                                                                                                                    
|  | 31.1     |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|  | 31.2     |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|  | 32.1     |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002                                         
|  | 32.2     |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                          

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