UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2007

Or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number 000-50439

NitroMed, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	22-3159793
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

45 Hayden Avenue, Suite 3000, Lexington, Massachusetts	02421
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (781) 266-4000

Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report

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 x No o

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

Large Accelerated Filer o

Accelerated Filer x

Non-Accelerated Filer o

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

As of October 29, 2007, the registrant had 45,773,801 shares of Common Stock, $0.01 par value per share, outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

NITROMED, INC.
CONDENSED BALANCE SHEETS

(in thousands, except par value amounts)

	September 30, 2007			December 31, 2006
Assets
Current assets:
Cash and cash equivalents	$	9,292		$	21,074
Marketable securities	28,932			21,079
Accounts receivable	1,515			1,370
Inventories	2,696			2,846
Prepaid expenses and other current assets	531			570
Total current assets	42,966			46,939
Property and equipment, net	350			963
Restricted cash	191			803
Total assets	$	43,507		$	48,705

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,558		$	1,923
Accrued expenses	7,405			6,545
Accrued restructuring	—			299
Deferred revenue	—			206
Current portion of long-term debt	5,525			6,925

Total current liabilities	15,488			15,898
Long-term debt	—			3,728

Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.01 par value; 65,000 shares authorized; 45,320 and 37,181 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively	453			372
Additional paid-in capital	366,052			342,528
Accumulated deficit	(338,512		)	(313,808		)
Accumulated other comprehensive income (loss)	26			(13		)
Total stockholders’ equity	28,019			29,079
Total liabilities and stockholders’ equity	$	43,507		$	48,705

See accompanying notes.

NITROMED, INC.
CONDENSED STATEMENTS OF OPERATIONS

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenues:
Product revenue	$	3,759		$	3,427		$	11,042		$	8,598

Costs and operating expenses:
Cost of product sales	560			1,310			2,151			2,827
Research and development (1)	3,807			4,074			9,745			14,590
Sales, general and administrative (1)	8,127			15,022			23,709			51,386
Restructuring charge	—			—			1,004			2,038
Total costs and operating expenses	12,494			20,406			36,609			70,841
Loss from operations	(8,735		)	(16,979		)	(25,567		)	(62,243		)
Non-operating income:
Interest expense	(152		)	(319		)	(585		)	(1,073		)
Interest income	533			778			1,448			2,592
	381			459			863			1,519

Net loss	$	(8,354	)	$	(16,520	)	$	(24,704	)	$	(60,724	)

Basic and diluted net loss per common share	$	(0.18	)	$	(0.45	)	$	(0.60	)	$	(1.68	)
Shares used in computing basic and diluted net loss per common share	45,180			37,090			40,877			36,146

(1) Includes stock-based compensation expense as follows:

Research and development		$	581		$	714		$	1,666		$	2,313
Sales, general and administrative		$	762		$	1,154		$	3,078		$	4,128

See accompanying notes.

NITROMED, INC.
CONDENSED STATEMENTS OF CASH FLOWS

(in thousands) (unaudited)

	Nine Months Ended September 30,
	2007			2006
Operating activities
Net loss	$	(24,704	)	$	(60,724	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	247			617
Non-cash restructuring charge	—			597
Stock-based compensation expense	4,744			6,441
Changes in operating assets and liabilities:
Accounts receivable	(145		)	1,028
Inventories	150			194
Prepaid expenses and other current assets	39			2,860
Deferred revenue	(206		)	(1,979		)
Accounts payable and accrued expenses	1,775			(11,052		)
Accrued restructuring charge	(299		)	350
Net cash used in operating activities	(18,399		)	(61,668		)
Investing activities
Purchase of property and equipment	(162		)	(104		)
Proceeds from sale of equipment	528			—
Purchases of marketable securities	(54,717		)	(122,349		)
Sales of marketable securities	46,903			142,425
Other assets	612			—
Net cash (used in) provided by investing activities	(6,836		)	19,972
Financing activities
Net proceeds from sale of common stock	18,240			58,505
Principal payments on long-term debt	(5,128		)	(4,644		)
Proceeds from employee stock plans	341			912
Net cash provided by financing activities	13,453			54,773
Net change in cash and cash equivalents	(11,782		)	13,077
Cash and cash equivalents at beginning of period	21,074			11,091
Cash and cash equivalents at end of period	$	9,292		$	24,168

See accompanying notes.

NITROMED, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(1) Operations and Basis of Presentation

The accompanying unaudited financial statements of NitroMed, Inc. (“NitroMed” or the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Interim results are not necessarily indicative of results to be expected for the entire fiscal year ending December 31, 2007. These unaudited financial statements should be read in conjunction with the Company’s latest annual audited financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on March 8, 2007.

The Company’s principal source of revenue is from the sale of BiDil^® (isosorbide dinitrate/hydralazine hydrochloride), the Company’s product for the treatment of heart failure in self-identified black patients as an adjunct to current standard therapies. The Company has used and will continue to require substantial funds to manufacture, market and sell BiDil during 2007 and beyond. The Company also expects to incur additional expenses related to the ongoing development of the planned extended release formulation of BiDil, known as BiDil XR™, for which the Company commenced clinical development in October 2006. The Company believes that its existing cash, cash equivalents and marketable securities, and cash it expects to generate from sales of BiDil, will be sufficient to fund its current business plan for at least the next twelve months. The Company will require substantial additional cash to fund its operations beyond the next twelve month period, and may seek to raise these funds through financings, including public or private equity offerings, debt financings, collaborative arrangements with corporate partners or a combination of any of the foregoing. There can be no assurance that funds will be available on terms acceptable to the Company, if at all. If adequate funds are not available, the Company will be required to scale back or eliminate some or all of its sales and marketing efforts for BiDil, as well as delay its development efforts with respect to BiDil XR. The Company may also be required to license to others the right to develop or commercialize products or technologies that the Company would otherwise seek to develop and commercialize on its own. The Company could also be required to limit, scale back or cease its operations, any of which would have a material and adverse effect on the Company.

(2) Revenue Recognition

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

Product Sales. The Company follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition, and recognizes revenue from product sales upon delivery of product to wholesalers or pharmacies, when persuasive evidence of an arrangement exists, the fee is fixed or determinable, title to product and associated risk of loss has passed to the wholesalers and pharmacies, and collectibility of the related receivable is reasonably assured. All revenues from product sales are recorded net of applicable allowances for sales returns, rebates, and discounts. For arrangements where the risk of loss has not passed to wholesalers or pharmacies, the Company defers the recognition of revenue until such time that risk of loss has passed. In addition, the Company evaluates the level of shipments to wholesalers and pharmacies on a quarterly basis compared to the estimated level of inventory in the channel, remaining shelf-life of the product shipped, weekly prescription data and quarterly forecasted sales.

Sales Returns, Allowances, Rebates and Discounts. The Company’s product sales are subject to returns, allowances, rebates, and cash and contract discounts that are customary in the pharmaceutical industry. A large portion of the Company’s product sales are made to pharmaceutical wholesalers for further distribution through pharmacies to patients, who are consumers of the product. All revenues from product sales are recorded net of applicable allowances for sales returns, allowances, rebates and cash and contract discounts. The Company determines the provisions for sales returns, allowances, rebates and discounts based primarily on estimates and contractual terms.

Product Returns. Consistent with industry practice, the Company offers contractual return rights that allow customers to return product only during the period that is six months prior to, and twelve months after, product expiration. Commercial product shipped during 2005 and the first half of 2006 had a shelf-life of twelve months from date of manufacture with expiration dates ranging from April 2006 to April 2007. During the third quarter of 2006, the Company began shipping commercial product with an expiration date of 18 months. During the first quarter of 2007, BiDil’s shelf life for newly produced finished goods was increased to 24 months. The Company began shipping product with an expiration date of 24 months in the second quarter of 2007. Factors that are considered in the Company’s estimate of future product returns include an analysis of the amount of product in the wholesaler and pharmacy channels, discussions with key wholesalers and other customers regarding inventory levels and shipment trends, review of consumer consumption data based on aggregate weekly and monthly prescription data derived from Source Projected Launchtrac provided by Wolters Kluwer Health, and the remaining time to expiration of the Company’s product. At September 30, 2007 and December 31, 2006, the Company’s product return reserve was $1.1 million and $1.3 million, respectively. This reserve is evaluated on a quarterly basis, assessing each of the factors described above, and adjusted accordingly. In developing a reasonable estimate for the reserve for product returns, the Company considers the factors in paragraph 8 of Statement of Financial Accounting Standards No. 48, Revenue Recognition When a Right of Return Exists. The Company believes it has developed a reasonable estimate of returns based on actual return data compared to product shipped. The Company will continue to monitor actual returns as the Company develops more sales experience with BiDil. Based on the factors noted above, among others, the Company believes its estimate of product returns is reasonable, and changes, if any, from this estimate would not have a material impact to the Company’s financial statements.

Sample Voucher and Co-Pay Programs. Beginning in the third quarter of 2005, the Company initiated a sample voucher program whereby the Company offers an incentive to patients in the form of a free 30-day trial, or approximately 100 tablets, of BiDil. The Company also initiated a co-pay program that offers incentives to patients for payment of co-pay costs insurance companies charge to purchase BiDil. The Company accounts for these programs in accordance with Emerging Issues Task Force Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer. These sample voucher and co-pay programs have a six month expiration date, such that each program is active for two quarters at a time. At the end of each quarter the Company estimates the amount of reimbursement claims based on those claims received for the sample vouchers and co-pay cards distributed during the quarter, and uses this information to estimate the usage for the next quarter. At the end of each semi-annual period the Company adjusts the estimated voucher and co-pay card usage to actual. The amount of reimbursement is recorded as a reduction to revenue. For the three month periods ended September 30, 2007 and 2006, the Company recorded a reduction to revenue of $45,000 and $111,000, respectively. For the nine month periods ended September 30, 2007 and 2006, the Company recorded a reduction to revenue of $79,000 and $467,000, respectively. The Company expects to continue to offer sample voucher and co-pay incentives in future periods.

Sales Discounts, Rebates and Allowances. Sales discounts, rebates and contractual allowances result primarily from sales under contracts with healthcare providers, wholesalers, Medicare and Medicaid programs and other governmental agencies. The Company estimates sales discounts, rebates and contractual allowances by considering the following factors: current contract prices, terms, sales volume, estimated customer and wholesaler inventory levels and current average rebate rates. For the three month periods ended September 30, 2007 and 2006, the Company recorded sales discounts, rebates and other allowances of $1.3 million and $0.2 million, respectively. For the nine month periods ended September 30, 2007 and 2006, the Company recorded sales discounts, rebates and other allowances of $3.8 million and $0.8 million, respectively.

(3) Accounts Receivable

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

(4) Inventories

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

	September 30, 2007		December 31, 2006
Raw materials	$	1,948	$	2,123
Finished goods	748		723
Total	$	2,696	$	2,846

On a quarterly basis, the Company analyzes its current inventory levels and future irrevocable inventory purchase commitments and writes down inventory that has become un-saleable or has a cost basis in excess of its expected net realizable value. The Company relies on Sumitomo Corp., which to the Company’s knowledge is the sole worldwide source, for the supply of hydralazine hydrochloride, one of the two active ingredients in BiDil. The Company currently has $1.9 million of hydralazine hydrochloride in inventory at September 30, 2007 which represents approximately 6 to 8 years supply. Following this inventory’s initial retest dates, which occur at various dates between January and June of 2008, the Company will retest the inventory for stability on a continuing basis. The Company believes that the retests will be successful and will continue to evaluate this raw material on an ongoing basis based on the results of stability retesting and industry practices. In addition, the Company evaluates its future irrevocable inventory purchase commitments compared to forecasted product sales, the current level of inventory and its related product dating. Expired inventory is disposed of, and the related costs are written off. For the three month periods ended September 30, 2007 and 2006, the Company recorded inventory impairment charges of $-0- and $0.8 million, respectively. For the nine month periods ended September 30, 2007 and 2006, the Company recorded inventory impairment charges of $0.5 million and $1.4 million, respectively.

(5) Stock-Based Compensation

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

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

In January 2007, the Company modified the terms of certain vested stock option awards previously granted to the Company’s former interim president and chief executive officer in order to extend the term of the exerciseability of the vested portion of the options from three months following the cessation of employment to five years following the cessation of employment. As a result of this modification in January 2007, the Company incurred a stock-based compensation charge in the amount of $459,000.

In May 2007, the Company entered into a Transition Agreement with L. Gordon Letts, Ph.D., the Company’s former Chief Scientific Officer and Senior Vice President of Research and Development. Pursuant to the terms of the Transition Agreement, options previously granted by the Company to Dr. Letts will continue to vest during a one-year transition period, during which time Dr. Letts will continue to be an employee of the Company. Pursuant to the terms of the Transition Agreement, the terms of stock option awards granted to Dr. Letts were modified in order to extend the term of the exerciseability of the options from three months following the cessation of employment to two years following the cessation of the one-year transition period. As a result of this modification, the Company incurred a stock-based compensation charge in the amount of $14,000 for the three month period ended September 30, 2007, and $160,000 for the nine month period ended September 30, 2007, and will continue to recognize additional amounts as the options vest.

In March and April 2007, the Company entered into restricted stock agreements with certain executive officers and employees of the Company, pursuant to which these individuals were granted an aggregate of 734,790 shares of the Company’s common stock under the Company’s Amended and Restated 2003 Stock Incentive Plan (the “2003 Plan”), which are subject to forfeiture to the Company prior to vesting under certain circumstances, including voluntary separation or

termination of employment for cause. The forfeiture provision lapses as follows: 25% of the shares are no longer subject to forfeiture to the Company, or “vest,” on the date that is six months after the grant date; 25% vest on the first anniversary of the grant date; and 50% vest on the second anniversary of the grant date. Upon a change in control of the Company or upon termination of the employee’s employment without cause, all unvested restricted shares shall immediately vest in full. The Company recognized $239,000 of stock-based compensation expense for the three months ended September 30, 2007 and $556,000 for the nine months ended September 30, 2007. On the accompanying balance sheets the number of shares of the Company’s common stock outstanding as of September 30, 2007 does not include 456,935 shares of unvested restricted common stock.

In connection with recording stock-based compensation expense related to non-employees, the Company recorded reversals of $8,600 and $29,000 for the three months ended September 30, 2007 and 2006, respectively. The Company recorded reversals of stock-based compensation expense related to non-employees of $13,000 and $205,000 for the nine months ended September 30, 2007 and 2006, respectively.

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

	Nine Months Ended September 30,
	2007			2006
Options granted (in thousands)	951			3,019
Weighted-average exercise price of stock options	$	2.63		$	7.86
Weighted-average grant date fair-value of stock options	$	1.61		$	4.83
Assumptions:
Volatility	76		%	76		%
Risk-free interest rate	4.8		%	4.7		%
Expected life (years)	5.0			5.8
Dividend	None			None

Volatility is determined exclusively using historical volatility data of the Company’s common stock based on the period of time since the Company’s common stock has been publicly traded. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. The expected life of stock options granted is based exclusively on historical data and represents the weighted average period of time that stock options granted are expected to be outstanding. The expected life is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior amongst its employee population.

The Company is using the straight-line attribution method to recognize stock-based compensation expense. The amount of stock-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. The Company has applied an annual forfeiture rate of 5.7% to all unvested options as of September 30, 2007. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest.

A summary of option activity under the Company’s 2003 Plan as of September 30, 2007, and changes during the nine month period then ended is presented below:

	Options Outstanding		Weighted- average Exercise Price		Weighted- average Remaining Contracted Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2006	4,935,932		$	6.90
Granted	951,000		$	2.63
Exercised	(273,050	)	$	1.14
Forfeited/Cancelled	(776,127	)	$	7.01
Outstanding at September 30, 2007	4,837,755		$	6.37	7.62	$	160,785
Vested or expected to vest at September 30, 2007	4,535,271		$	6.47	7.54	$	159,790
Exercisable at September 30, 2007	2,347,148		$	7.48	6.39	$	151,973

During the nine months ended September 30, 2007 and 2006, the total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid by the employee to exercise the options) was $526,000 and $1.9 million, respectively, and the total amount of cash received from exercise of these options was $311,000 and $661,000, respectively. The total grant-date fair value of stock options that vested during the nine months ended September 30, 2007 and 2006 was approximately $2.5 million and $2.4 million, respectively.

As of September 30, 2007, there was $8.7 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted average period of 2.6 years.

A summary of the Company’s restricted stock award activity as of September 30, 2007 and changes during the nine month period then ended is presented below:

	Restricted Shares Outstanding		Weighted- Average Grant Date Fair Value Per Share
Non-vested shares outstanding at December 31, 2006	—		$	—
Awards granted	734,790		$	3.22
Restrictions lapsed	(164,078	)	$	3.22
Awards forfeited	(113,777	)	$	3.22
Non-vested shares outstanding at September 30, 2007	456,935		$	3.22

As of September 30, 2007, there was $1.5 million of total unrecognized compensation cost related to unvested restricted shares. The total fair value of these share-based awards will be recognized over the remaining vesting term of 1.5 years.

(6) Restructuring

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

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

As a result of terminating these employees, the Company recorded an impairment charge for certain research laboratory equipment, computer equipment, and furniture and fixtures in an aggregate amount of $597,000 due to the fact that these assets would no longer be utilized. These assets were written down to their fair value utilizing a third party appraiser to estimate the fair value of the assets based on current market quotes and the current condition of the equipment, furniture and fixtures.

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

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

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

The following table summarizes the restructuring activity as of September 30, 2007 as part of the October 2006 restructuring plan:

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

In the first quarter of 2007, the Company recorded a restructuring charge of $1.0 million related to vacating its former headquarters location. The charge was recorded pursuant to SFAS 146. In March 2007, the Company entered into an Assignment of Lease and Assumption Agreement (the “Assignment Agreement”) with Shire Human Genetic Therapies, Inc. (“Shire”), pursuant to which the Company assigned its lease for office and laboratory space located at 125 Spring Street in Lexington, Massachusetts (the “Spring Street Lease”). Pursuant to the terms of the Assignment Agreement, the Company agreed to pay Shire the amount of approximately $1,160,000 as consideration for Shire’s assumption of the Spring Street Lease. In addition to this charge, the Company incurred $612,000 in expenses primarily related to real estate brokerage fees and clean-up costs. Offsetting these charges was a reversal of $768,000 in accrued rent related to the Spring Street Lease. All amounts were paid as of March 31, 2007, and the Company has no further obligations related to this lease.

(7) Accumulated Other Comprehensive Loss

The Company presents comprehensive loss in accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Accumulated other comprehensive loss is comprised entirely of net loss and unrealized gains and losses on available-for-sale marketable securities. For the three months ended September 30, 2007 and 2006, total comprehensive loss equaled $8,331,000 and $16,514,000, respectively. For the nine months ended September 30, 2007 and 2006, total comprehensive loss equaled $24,665,000 and $60,671,000, respectively.

(8) Sale of Common Stock

On May 30, 2007, the Company completed a direct offering of shares of the Company’s common stock previously registered under an effective shelf registration statement. Pursuant to this offering, the Company sold approximately 7.6 million shares of the Company’s common stock to selected institutional investors at a price of $2.60 per share. Proceeds to the Company from this registered direct offering, net of offering expenses and placement agency fees, totaled $18.2 million.

(9) Net Loss Per Share

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

As of September 30, 2007 and 2006, options to purchase 4,837,755 and 4,751,368 shares of common stock, respectively, were not included in the computation of diluted net loss per share since their inclusion would be anti-dilutive. In addition, 456,935 shares of restricted common stock are also not included.

(10) Single Source Suppliers

The Company currently obtains one of the key active pharmaceutical ingredients for its commercial requirements for BiDil from a single source. The Company also relies on the services of one manufacturing source to produce BiDil. The disruption or termination of the supply of the commercial requirement for BiDil or a significant increase in the cost of the key active pharmaceutical ingredient from this single source, or the disruption or termination of the manufacturing source, could have a material adverse effect on the Company’s business, financial position and results of operations.

(11) Concentration of Credit Risk

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

The following table summarizes the number of trade customers that individually comprise greater than 10% of total revenues and their respective percentage of the Company’s total revenues:

	Number of
	Significant	Percentage of Total Revenues by Customer
	Customers	A		B		C

Three months ended September 30, 2007	3	34	%	40	%	16	%
Three months ended September 30, 2006	3	39	%	33	%	16	%
Nine months ended September 30, 2007	3	35	%	37	%	17	%
Nine months ended September 30, 2006	3	35	%	33	%	18	%

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

	Number of
	Significant	Percentage of Total Accounts Receivable
	Customers	A		B		C
As of:
September 30, 2007	3	38	%	32	%	20	%
December 31, 2006	3	30	%	37	%	16	%

(12) Long Term Debt

On June 28, 2005, the Company borrowed (i) $10.0 million from Oxford Finance Corporation (“Oxford”), and (ii) $10.0 million from General Electric Capital Corporation (“GECC”) pursuant to the terms of Promissory Notes (the “Notes”). The Notes bear interest at a fixed rate of 9.95% per annum and are payable in 36 consecutive monthly installments of principal and accrued interest, beginning on July 1, 2005. Also on June 28, 2005, the Company entered into Master Security Agreements with both Oxford and GECC (the “Agreements”). Under the terms of these Agreements, the Company granted to both Oxford and GECC a security interest in and against all of the property of the Company and in and against all additions, attachments, accessories and accessions to such property, all substitutions, replacements or exchanges, and all insurance and/or other proceeds (the “Collateral”). The Collateral comprises all of the Company’s personal property and

fixtures including, but not limited to, all inventory, equipment, fixtures, accounts, deposit accounts, documents, investment property, instruments, general intangibles, chattel paper and any and all proceeds (but excluding intellectual property). The Collateral does not include any intellectual property or products (or interests in any intellectual property or products (including any royalties)) acquired, whether by purchase, license or otherwise, on or after the execution of the Agreements (collectively, “New Property”), nor do the Agreements limit any indebtedness secured by any New Property provided that debt or non-cash equity (e.g., stock) is used to acquire New Property. In the event that the Company uses cash to purchase New Property, Oxford’s and GECC’s existing liens will extend to such New Property.

The Agreements also contain a material adverse change clause with both Oxford and GECC. Under this clause, if Oxford or GECC reasonably determines that the Company’s ability to repay the Notes has been materially impaired, the Company would be considered in default. As of September 30, 2007, the Company was in compliance with this clause.

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

(13) Commitments and Contingencies

In connection with the Company’s efforts to obtain the approval of BiDil from the FDA, the Company contracted with the law firm of FoxKiser LLC (“FoxKiser”) for services related to the regulatory approval process for BiDil. The agreement provided for payment of legal consulting fees upon receipt of written FDA approval of BiDil. On June 23, 2005, the Company received written FDA approval of BiDil, and in July 2005 the Company paid FoxKiser $2.4 million pursuant to the terms of this agreement. In addition, the agreement requires the Company to pay royalties to FoxKiser on commercial sales of BiDil. The royalty term ends six months after the date of market introduction of an FDA-approved generic version of BiDil. During the third quarter of 2005, the Company entered into a separate consulting agreement with FoxKiser following the approval by the FDA of BiDil, which ceased to be effective in the third quarter of 2006. During the three month periods ended September 30, 2007 and 2006, the Company recorded expenses of $0.0 and $0.2 million, respectively, pertaining to the legal consulting fees related to these agreements. During the nine month periods ended September 30, 2007 and 2006, the Company recorded expenses of $0.0 and $0.9 million, respectively, pertaining to the legal consulting fees related to these agreements. During the three month periods ended September 30, 2007 and 2006, the Company also paid royalties to FoxKiser in the amounts of $0.1 million and $0.1 million, respectively. During the nine month periods ended September 30, 2007 and 2006, the Company also paid royalties to FoxKiser in the amounts of $0.3 million and $0.3 million, respectively.

In February 2005, the Company engaged Schwarz Pharma Manufacturing, Inc. under a five-year exclusive manufacturing and supply agreement solely for the three times daily immediate release dosage formulation of BiDil. Under the supply agreement, the Company has the right to engage a backup manufacturer, but to date has not elected to use this right. In connection with this supply agreement, the Company has outstanding binding purchase orders of $648,000 for production of BiDil finished goods to occur during the fourth quarter of 2007.

(14) License Agreement

In February 2007, in connection with the Company’s efforts to develop BiDil XR, the Company entered into a license agreement with Elan Pharma International Limited (“Elan”). Pursuant to the agreement, Elan granted to the Company an exclusive worldwide license, for the term of the agreement, to certain know-how, patents and technology, and any improvements to any of the foregoing developed by either party during the term of the agreement. Pursuant to this license, the Company has the right to import, use, offer for sale and sell the oral capsule formulation incorporating specified technology referred to in the agreement and containing, as its sole active combination of ingredients, the combination of the active drug substances isosorbide dinitrate and hydralazine hydrochloride, including BiDil XR. In consideration for the grant of the license, the Company has agreed to pay Elan royalties that are calculated by reference to annual net sales parameters set forth in the agreement. In addition, the Company has also agreed to pay Elan specified amounts upon the achievement of specified development and commercialization milestone events of up to $2.5 million, of which $250,000 has been expensed and paid to date.

The term of the agreement runs in the United States from the effective date of the agreement until the later of (a) the 20th anniversary of the date of the first sale of the product by the Company or a permitted sublicensee to an unaffiliated third party, which is referred to in the agreement as the first in market sale, or (b) the expiration of the last-to-expire patent for the product listed in the FDA’s “Orange Book.” Elsewhere in the world, the term will run on a country by country basis from the effective date of the agreement until the later of (a) the 20th anniversary of the date of the first in market sale of the product in the country concerned or (b) the expiration of the life of the last to expire patent included in the Elan intellectual property in that country. Following the expiration of the initial term, the agreement shall continue automatically for rolling three year periods thereafter, unless the agreement has been terminated by either of the parties by serving written notice to the other party one year prior to the end of the initial term or any such additional three year period. Either Elan or the Company may terminate the agreement in the event of a material, uncured breach by the other party, or if the other party goes into liquidation or becomes bankrupt or insolvent. In addition, the Company may terminate the agreement in the event of a technical failure, which is defined as the inability to achieve a pharmacokinetic profile for the product consistent with that of BiDil administered three times daily. Elan may terminate the agreement with respect to a particular country in the territory in the event that the Company does not meet certain obligations set forth in the agreement with respect to such country, provided that Elan must first consult with the Company and, if applicable, provide the Company with an opportunity to meet such obligations prior to exercising Elan’s termination rights.

(15) Operating Lease

In February 2007, the Company entered into a lease for 19,815 square feet of office space at 45 Hayden Avenue in Lexington, Massachusetts (the “Hayden Avenue Lease”). The term of the Hayden Avenue Lease is for sixty-six months beginning on April 1, 2007. The expected minimum rental commitments under the Hayden Avenue Lease are $101,000 for the remainder of 2007, $510,000 in 2008, $560,000 in 2009, $580,000 in 2010, $592,000 in 2011 and $456,000 for the nine month period ending September 2012.

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

(16) Subsequent Event

On October 15, 2007, the Company entered into a License Agreement with a privately held company, pursuant to which the Company granted the licensee a non-exclusive license under certain non-strategic patent rights owned and/or licensed by the Company. Pursuant to the terms of the License Agreement, the licensee paid the Company an upfront license fee in the amount of $750,000.

(17) New Accounting Standards

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company is currently evaluating the requirements of SFAS 157; however, the Company does not believe that the adoption will have a material effect on its consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. The FASB has indicated that it believes SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. For example, SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of a company’s choice to use fair value on its earnings. SFAS 159 also requires companies to display the fair value of those assets

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

Overview

We are an emerging pharmaceutical company with substantial intellectual property in nitric oxide-based drug development. We have devoted substantially all of our efforts towards the research and development of our product candidates and the commercialization of our currently marketed product, BiDil^®. We have also applied our nitric oxide technology to develop novel pharmaceuticals, as well as safer and more effective versions of existing drugs, and to target significant diseases that are characterized by a deficiency in nitric oxide. Since our inception, we have mainly funded our operations through the sale of equity securities, debt financings, license fees, research and development funding, milestone payments from our collaborative partners, and more recently, sales of BiDil. We have never been profitable and have incurred an accumulated deficit of $338.5 million as of September 30, 2007.

In June 2005, the U.S. Food and Drug Administration, or FDA, approved our product, BiDil, for the treatment of heart failure in self-identified black patients as an adjunct to current standard therapies. BiDil is an orally administered fixed-dose combination of isosorbide dinitrate and hydralazine hydrochloride. We commercially launched BiDil in July 2005. We engaged Schwarz Pharma Manufacturing Inc., or Schwarz Pharma, under a five-year manufacturing and supply agreement exclusively for the three times daily immediate release dosage formulation of BiDil.

In March 2006, we eliminated our discovery research program and terminated substantially all of the employees in our discovery research group in a restructuring of our company that was intended to better align costs with revenue and operating expectations. In connection with our restructuring in March 2006, we determined to limit our future internal development activities to the continued development of an extended release formulation of BiDil designed to be taken once per day, known as BiDil XR™, as well as efforts to out-license our nitric oxide-enhancing technology in exchange for potential milestone payments and royalties on sales.

In October 2006, we implemented a revised strategy and business model in order to focus our resources on the development of BiDil XR as expeditiously as possible. As part of this strategic shift, we eliminated our sales force and replaced it with a small team of senior cardiovascular business managers focused on hospitals and key opinion leaders, resulting in a net reduction of approximately 120 in sales force headcount. In addition, we also eliminated approximately 20% of our general and administrative personnel in connection with this restructuring program. In August 2007, we began to deploy an expanded field organization designed to double our sales force in specific geographic areas with a focus on selected prescriber targets. Our current field sales organization is managed by our senior vice president of commercial operations and is comprised of approximately 60 people.

Our sales force continues to focus on regional and national thought-leader physicians, current and past BiDil prescribers and key institutions that treat, and influence the treatment of, large numbers of African-Americans diagnosed with heart failure. We also continue to explore additional marketing methods that can be utilized to reach the broader number of existing and potential BiDil prescribers. We believe that this strategy allows us to focus our marketing and prescription pull-through efforts with respect to the current BiDil formulation as we continue our development efforts with respect to BiDil XR. Based on our preclinical studies with BiDil XR, we commenced clinical development of BiDil XR in October 2006. We have scheduled a meeting with the FDA, to be held in December 2007, to discuss the available pharmacokinetic study results and development plan for BiDil XR.

In connection with our efforts to develop BiDil XR, in February 2007 we entered into a license agreement with Elan Pharma International Limited, or Elan, pursuant to which Elan granted to us an exclusive worldwide royalty-bearing license, with specified sublicense rights, to specified intellectual property of Elan, as well as any improvements to any of the foregoing developed by either party during the term of the agreement. Pursuant to the license, we may import, use, offer for sale and sell an oral capsule formulation incorporating specified technology owned or controlled by Elan and containing, as its sole active combination of ingredients, the combination of the active drug substances isosorbide dinitrate and hydralazine hydrochloride. In consideration for the grant of the license, we have agreed to pay Elan royalties that are calculated by reference to annual net sales parameters set forth in the agreement. In addition, we have also agreed to pay Elan specified amounts upon the achievement of specified development and commercialization milestone events set forth in the agreement.

In addition, we continue to pursue opportunities for our BiDil franchise in non-U.S. markets, particularly in the European Union. We are engaged in discussions with the European Medicines Agency and are preparing a Marketing Authorization Application with respect to BiDil for submission to that agency.

In the near-term, a key driver of our success will be our ability to successfully commercialize and sustain market penetration of BiDil with our expanded, restructured sales force and to expeditiously develop, and obtain regulatory approval for the commercial sale of, BiDil XR. Since we commercially launched BiDil in July 2005, we have generated approximately $27.6 million in product sales, including product sales of $3.8 million in the three month period ending September 30, 2007. We will need to generate significant revenues from sales of BiDil and, if approved, BiDil XR, to achieve profitability. At the present time, we are unable to estimate the level of revenues that we will realize from the sales of BiDil or, if approved, BiDil XR. We are therefore unable to estimate when we will achieve profitability, if at all.

As a result of our restructurings in March and October 2006, we expect that research, development and commercialization expenses will decline in 2007 as compared to 2006, due primarily to a decrease in headcount and research and commercialization activities, partially offset by an increase in ongoing development expenses for BiDil XR and increased expenses associated with our expanded sales organization. We estimate that our operating expenses related to research and development and sales, general and administrative functions for the year ended December 31, 2007 will be approximately $50 million, excluding cost of product sales but including share-based compensation expense related to Statement of Financial Accounting Standards No. 123R.

At September 30, 2007, our principal source of liquidity was $38.2 million of cash and cash equivalents and marketable securities. We believe that our existing cash, cash equivalents and marketable securities, as well as cash expected to be generated from sales of BiDil, will be sufficient to fund our current business plan for at least the next twelve months. We have used and will continue to require substantial funds to manufacture, market and sell BiDil during 2007 and beyond. We also expect to incur additional expenses relating to the ongoing development of BiDil XR. Accordingly, we will require substantial additional cash to fund our operations beyond the next twelve month period. We may seek to raise these funds through financings, including public or private equity offerings, debt financings, collaborative arrangements with corporate partners or a combination of any of the foregoing. Even if we are able to raise additional capital, there can be no assurance that funds will be available on terms that are acceptable to us, if at all. If adequate funds are not available, we will be required to scale back or eliminate some or all of our sales and marketing efforts for BiDil, as well as delay our development efforts with respect to BiDil XR. We may also be required to license to others the right to develop or commercialize products or technologies that we would otherwise seek to develop and commercialize on our own. We could also be required to limit, scale back or cease our operations, any of which would have a material and adverse effect on our business, financial condition and results of operations.

Financial Operations Overview

Revenue. Our first commercial product, BiDil, was launched in July 2005, and generated product sales of $3.8 million in the third quarter of 2007. Prior to the launch of BiDil, all of our revenue had been derived from license fees, research and development payments and milestone payments that we received from our corporate collaborators. In future years, we will seek to generate revenue from a combination of product sales, license fees, and milestone and royalty payments in connection with collaborative or strategic relationships, as well as royalties resulting from the license of our intellectual property. We expect that any collaborative 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, as well as the timing and amount of revenue we recognize for 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, product development costs, costs of facilities and BiDil medical support costs.

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

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

• BiDil XR. The current formulation of BiDil is an immediate-release tablet that must be taken three times daily. We are currently pursuing the development of BiDil XR, an extended release formulation of BiDil, that could be taken once a day. To date, we have incurred approximately $8.4 million in connection with the development of BiDil XR. Based on our

preclinical studies with BiDil XR, we commenced clinical development of BiDil XR during October 2006. Because of its stage of development, and the uncertainties inherent in pharmaceutical development generally, we may not be able to successfully develop and commercialize BiDil XR. Moreover, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to complete the development of, or the period in which material cash inflows are expected to commence, if at all, for BiDil XR.

• Nitric Oxide-Enhancing Cardiovascular Compounds. We have utilized our nitric oxide expertise and proprietary position to develop a proprietary nitric oxide-enhancing cardio-renal compound, referred to as NMI-3377. We have retained all commercial rights to this product candidate and are currently seeking out-licensing and collaboration opportunities for this compound. Currently, we do not intend to incur additional internal research and development expenses related to NMI-3377. Because this compound has not been developed beyond the pre-clinical stage, the successful development of this product candidate is highly uncertain. In addition, we cannot be certain if we will be able to secure an out-licensing or collaboration partner for this compound on favorable terms, if at all. As such, we are not able to estimate when material cash inflows from product sales, milestones and royalties could commence, if at all.

• Other Discovery Research. We have used our know-how and expertise in nitric oxide to develop drug candidates that are nitric oxide-enhancing versions of existing medicines in the areas of cardiovascular, gastrointestinal/anti-inflammatory and pulmonary medicine. These studies have not progressed beyond the discovery stage of testing, and it remains speculative whether the addition of nitric oxide will result in an improved clinical profile of these medicines. We are currently seeking out-licensing and collaboration opportunities for these product candidates, and are not presently engaging in any internal research and development activities with respect to these drugs. We cannot be certain if we will be able to secure out-licensing or collaboration partners for these product candidates on favorable terms, if at all. As such, we are not able to estimate when material cash inflows from product sales, milestones and royalties could commence, if ever.

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

Non-Operating Income. Interest income includes interest earned on our cash, cash equivalents and marketable securities, and interest expense associated with our long-term debt.

Results of Operations

Three Months Ended September 30, 2007 and 2006

Revenue. Total revenue for the three months ended September 30, 2007 was $3.8 million compared to $3.4 million for the three months ended September 30, 2006. The $0.4 million, or 10% increase in revenues in the current period is due to increased shipments of BiDil during the third quarter of 2007. Product sales of BiDil accounted for all of the revenue for both the three month periods ended September 30, 2007 and 2006.

Cost of Product Sales. Cost of product sales was $0.6 million for the three month period ended September 30, 2007 and $1.3 million for the three month period ended September 30, 2006. For the three month periods ended September 30, 2007 and 2006, we recorded inventory impairment charges of $-0- and $0.8 million, respectively. These inventory impairment charges were related to commercial trade and patient sample inventory product in excess of expected future inventory requirements and future purchase commitments, based on our current sales forecast.

Research and Development. Research and development expense for the three months ended September 30, 2007 was $3.8 million compared to $4.1 million for the three months ended September 30, 2006. The $0.3 million, or 7%, decrease in research and development expenses in the current period was primarily due to $0.4 million in reduced headcount expenses and a $1.0 million decrease in medical expenditures supporting the commercial launch of BiDil. These decreases are offset by a $1.0 million increase in spending related to the development of BiDil XR.

The following table summarizes the primary components of our research and development expense for our principal research and development programs for the three month periods ended September 30, 2007 and 2006:

	Three Months Ended September 30,
	2007		2006
Research and Development Program (in millions)
BiDil	$	1.7	$	2.5
BiDil XR	2.1		0.9
Other discovery research	—		0.3
Nitric oxide-enhancing cardiovascular compounds	—		0.4
Total research and development expense	$	3.8	$	4.1

Sales, General and Administrative. Sales, general and administrative expense for the three months ended September 30, 2007 was $8.1 million compared to $15.0 million for the three months ended September 30, 2006. The $6.9 million, or 46%, decrease in sales, general and administrative expense was primarily due to a decrease of $4.7 million related to a reduction in headcount due to the restructuring action in October 2006, a decrease of $0.4 million in expenses related to our former contract sales force agreement with Publicis, and a $1.6 million decrease in advertising expenses.

Stock-based Compensation Expense. We account for share-based payments to employees under Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123R. As such, we recognize compensation cost based on (a) the requirement of SFAS 123R for all share-based payments granted after December 31, 2005 and (b) the requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, for all awards granted to employees prior to December 31, 2005 that were unvested on that date. We recognized $1.3 million and $1.9 million in stock-based compensation expense for the three months ended September 30, 2007 and 2006, respectively.

Non-Operating Income. Non-operating income for the three months ended September 30, 2007 was $381,000 compared to $459,000 for the three months ended September 30, 2006. The $78,000, or 17%, decrease was primarily due to lower fund balances available for investment, and a $167,000 reduction in interest expense due to a lower long-term debt balance in 2007.

Nine Months Ended September 30, 2007 and 2006

Revenue. Total revenue for the nine months ended September 30, 2007 was $11.0 million compared to $8.6 million for the nine months ended September 30, 2006. The $2.4 million, or 28%, increase in revenues in the current period is due to increased shipments of BiDil during the nine months ended September 30, 2007. Product sales of BiDil accounted for all of the revenue for both nine month periods ended September 30, 2007 and 2006.

Cost of Product Sales. Cost of product sales was $2.2 million for the nine month period ended September 30, 2007 and $2.8 million for the nine month period ended September 30, 2006. For the nine month periods ended September 30, 2007 and 2006, we recorded inventory impairment charges of $0.5 million and $1.4 million, respectively. These inventory impairment charges were related to commercial trade and patient sample inventory product in excess of expected future inventory requirements and future purchase commitments, based on our current sales forecast.

Research and Development. Research and development expense for the nine months ended September 30, 2007 was $9.7 million compared to $14.6 million for the nine months ended September 30, 2006. The $4.9 million, or 33%, decrease in research and development expenses in the current period was primarily due to $2.3 million in reduced headcount expenses as a result of our restructuring actions in March 2006 and October 2006 and a $6.0 million decrease in medical expenditures supporting the commercial launch of BiDil and other discovery research. These decreases are offset by a $3.3 million increase in spending related to the development of BiDil XR.

The following table summarizes the primary components of our research and development expense for our principal research and development programs for the nine month periods ended September 30, 2007 and 2006:

	Nine Months Ended September 30,
	2007		2006
Research and Development Program (in millions)
BiDil	$	4.0	$	7.8
BiDil XR	5.6		2.1
Other discovery research	0.1		1.9
Nitric oxide-enhancing cardiovascular compounds	—		2.6
Nitric oxide-enhanced stents	—		0.2
Total research and development expense	$	9.7	$	14.6

Sales, General and Administrative. Sales, general and administrative expense for the nine months ended September 30, 2007 was $23.7 million compared to $51.4 million for the nine months ended September 30, 2006. The $27.7 million, or 54%, decrease in sales, general and administrative expense was primarily due to a decrease of $10.8 million in expenses related to our former contract sales force agreement with Publicis, $7.8 million in decreased payroll and related expenses due to a decrease in headcount related to the October 2006 restructuring action, $5.9 million in decreased advertising expenses and $0.7 million of severance benefits related to the cessation of service on March 20, 2006 of our then-president and chief executive officer and our then-chief financial officer, chief business officer and treasurer.

Restructuring Charge. On March 31, 2006, we recorded charges of $2.0 million for a restructuring of our discovery research operations that was intended to better align costs with revenue and operating expectations. The restructuring charges pertain to employee severance benefits and impairment of assets. The restructuring charges were recorded in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or SFAS 146, and Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In connection with the restructuring plan, we terminated 30 employees from our discovery research group, or approximately 30% of our workforce, resulting in a charge of $1.4 million. None of these employees remained employed as of March 31, 2006, and all amounts were paid by March 31, 2007. As a result of terminating these employees we recorded an impairment charge for certain research laboratory equipment, computer equipment, and furniture and fixtures aggregating $597,000. These assets were written down to their fair value utilizing a third party appraiser to estimate fair value based on current market quotes and the current condition of the equipment, furniture and fixtures.

In the first quarter of 2007, we recorded a restructuring charge of $1.0 million related to vacating our former headquarters location. The charge was recorded pursuant to SFAS 146. In March 2007, we entered into an Assignment of Lease and Assumption Agreement, which we refer to as the Assignment Agreement, with Shire Human Genetic Therapies, Inc., or Shire, pursuant to which we assigned our lease for office and laboratory space located at 125 Spring Street in Lexington, Massachusetts, which we refer to as the Spring Street Lease. Pursuant to the terms of the Assignment Agreement, we agreed to pay Shire the amount of approximately $1,160,000 as consideration for Shire’s assumption of the Spring Street Lease. In addition to this charge, we incurred $612,000 in expenses primarily related to real estate brokerage fees and clean-up costs. Offsetting these charges was a reversal of $768,000 in accrued rent related to the Spring Street Lease. All amounts were paid as of June 30, 2007.

Stock-based Compensation Expense. We recognized $4.7 million and $6.4 million in stock-based compensation expense for the nine months ended September 30, 2007 and 2006, respectively. As of September 30, 2007, the total unrecognized compensation cost related to unvested option awards was approximately $8.7 million, which will be recognized over a weighted average period of 2.6 years. As of September 30, 2007, the total unrecognized compensation cost related to unvested restricted shares was approximately $1.5 million, which will be recognized over the remaining vesting period of 1.5 years.

Non-Operating Income. Non-operating income for the nine months ended September 30, 2007 was $0.9 million compared to $1.5 million for the nine months ended September 30, 2006. The $0.6 million, or 43%, decrease was primarily due to lower fund balances available for investment, and a $488,000 reduction in interest expense due to lower long-term debt balances in 2007.

Liquidity and Capital Resources

Since our inception, we have primarily funded our operations through the sale of equity securities, debt financings, license fees, research and development funding, milestone payments from our collaborative partners and, more recently, sales of BiDil. As of September 30, 2007, we have received net proceeds of $321.0 million from the issuance of equity securities, primarily as the result of the sale of $99.1 million of our redeemable convertible preferred stock, net proceeds of $60.1 million from our initial public offering in November 2003, net proceeds of $81.8 million from our follow-on public offering in December 2004, net proceeds of $58.5 million from our registered direct offering in January 2006, and net proceeds of $18.2 million from our registered direct offering in May 2007. At September 30, 2007, we had $38.2 million in cash, cash equivalents and marketable securities.

During the nine months ended September 30, 2007, operating activities used cash of $18.4 million, primarily due to

a net loss of $24.7 million and decreases in deferred revenue of $0.2 million, accrued restructuring charges of $0.3 million and inventory of $0.2 million, offset by increases in accounts payable and accrued expenses of $1.8 million, stock-based compensation expense of $4.7 million and an increase in accounts receivable of $0.1 million.

During the nine months ended September 30, 2007, investing activities used cash of $6.8 million primarily due to net purchases of marketable securities of $7.8 million, offset by proceeds from the sale of $0.5 million of equipment and a reduction of restricted cash in the amount of $0.6 million due to terminating our former headquarters lease.

During the nine months ended September 30, 2007, financing activities provided cash of $13.5 million due to $18.2 million in proceeds from the sale of common stock and $0.3 million from employee stock purchases, offset by $5.1 million in long-term debt payments.

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

The agreements that we entered into with each of Oxford and GECC in connection with the notes also contain a material adverse change clause with both Oxford and GECC. Under this clause, if Oxford or GECC reasonably determine that our ability to repay the notes has been materially impaired, we would be considered in default. As of September 30, 2007, we were in compliance with this clause. As of September 30, 2007, we had paid aggregate principal in the amount of $14.5 million.

In February 2007, in connection with (i) our assignment to Shire of certain office furniture, laboratory equipment and other personal property related to the assignment to Shire of the lease for our former office and laboratory space located at 125 Spring Street in Lexington, Massachusetts and (ii) the sale of certain laboratory equipment previously used by our discovery research group, we entered into a release of collateral with both Oxford and GECC. Pursuant to the terms of each release, GECC and Oxford released any and all security interests or liens that either GECC or Oxford had in all laboratory equipment, office furniture and leasehold improvements and fixtures then located at 125 Spring Street in Lexington, Massachusetts as of the date of the release. In addition, GECC and Oxford each released any and all security interests or liens that either GECC or Oxford may have had in any and all computer and electronic equipment, wherever located, to the extent that such computer and electronic equipment was acquired by us prior to the date of the release.

On August 3, 2005, we filed a registration statement utilizing a “shelf” registration process with the Securities and Exchange Commission, or SEC. Under this shelf process, we may sell from time to time, in one or more offerings of common stock and debt securities up to a total dollar amount of $250 million. This shelf registration is more fully detailed in a Registration Statement on Form S-3 we filed with the SEC on August 3, 2005. On May 30, 2007, we completed a direct offering of shares of our common stock previously registered under our effective shelf registration statement. Pursuant to this offering, we sold approximately 7.6 million shares of our common stock to selected institutional investors at a price of $2.60 per share. Proceeds to us from this registered direct offering, net of offering expenses and placement agency fees, totaled $18.2 million.

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2007, and the effects such obligations are expected to have on our liquidity and cash flows in future periods.

Contractual Obligations	Total		Less than one year		1-3 years		3-5 years		More than five years
Long term debt	$	5,756,000	$	5,756,000	$	—	$	—	$	—
Operating lease obligation	2,798,000		475,000		1,129,000		1,194,000		—
Purchase obligations (1)	648,000		648,000		—		—		—
License milestones (2)	—		—		—		—		—
Total contractual cash obligations	$	9,202,000	$	6,879,000	$	1,129,000	$	1,194,000	$	—

(1) In April and June of 2007, we placed binding purchase orders totaling the approximate amount of $648,000 with Schwarz Pharma for production of BiDil finished goods during the fourth quarter of 2007.

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

We believe that our existing cash, cash equivalents and marketable securities, as well as cash expected to be generated from sales of BiDil, will be sufficient to fund the current business plan for at least the next twelve months. We will require substantial additional funding in the future and may seek that funding through collaborative co-promotion arrangements and/or public or private financings. However, additional funding may not be available to us on acceptable terms, if at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or convertible debt securities, further dilution to our existing stockholders may result. 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. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail certain of our sales and marketing efforts, as well as our development efforts with respect to BiDil XR. In addition, we may be required to limit, scale back or cease our operations.

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:

• the magnitude of product sales of BiDil;

• the successful commercialization of BiDil;

• the cost of manufacturing, marketing and selling BiDil;

• the timing of when we receive significant revenue from BiDil, if at all;

• the time and costs involved in completing the clinical trials and further development of, and obtaining regulatory approvals for, BiDil XR, if at all;

• our ability to establish and maintain co-promotion, out-licensing and collaborative arrangements;

• the timing, receipt and amount of royalties, milestone and other payments, if any, from potential collaborators;

• the effect of competing technological and market developments;

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

• the cost of obtaining and maintaining licenses to use patented technologies.

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 United States generally accepted accounting principles. 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 and related reserves, accounts receivable, inventories, accrued expenses and the factors used to estimate the fair value of our stock options using the Black-Scholes option pricing model. 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. There were no material changes in our judgments or estimates during the third quarter of 2007. For a detailed

explanation of the judgments made in these areas, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations within our Annual Report on Form 10-K for the year ended December 31, 2006, which is on file with the SEC.

Recently Issued Accounting Pronouncements

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

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. FASB has indicated that it believes SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. For example, SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of a company’s choice to use fair value on its earnings. It also requires companies to display the fair value of those assets and liabilities for which a company has chosen to use fair value on the face of the balance sheet. SFAS 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157 and Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective as of the beginning of a company’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the a company makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157.

In June 2007, the Emerging Issues Task Force issued EITF Issue 07-03, Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development, or EITF 07-03. EITF 07-03 addresses the diversity which exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities. Under EITF 07-03, an entity would defer and capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the related services are performed. EITF 07-03 is effective for fiscal years beginning after December 15, 2007 and interim periods within those years. We do not expect the adoption of EITF 07-03 to have a material impact on our financial position or results of operations.

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.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our

forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those disclosed in the forward-looking statements we make. These important factors include the risk factors set forth below under Part II, Item 1A., “Risk Factors.” Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, except as specifically required by law or the rules of the SEC, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report.

Item 3. 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. In addition, we hold auction rate securities that reset monthly. However, the maturities of the auction rate securities at September 30, 2007 range from 2007 to 2045. 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 September 30, 2007, 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.

Item 4. 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 September 30, 2007. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under 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 September 30, 2007, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

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

PART II. OTHER INFORMATION

Item 1A. Risk Factors

You should carefully consider the following risk factors, in addition to other information included in this Quarterly Report on Form 10-Q, 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.

The following risk factors restate and supersede the risk factors previously disclosed in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2006.

Risks Relating to our Business

Our business is substantially dependent on the commercial success of BiDil and our product candidate, BiDil XR, and if we do not successfully commercialize BiDil and maintain market presence of BiDil during the planned development of BiDil XR, our business will be materially harmed and our stock price will decline.

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

• our ability to successfully market and sell BiDil with our small sales force and centralized marketing efforts;

• the success of our revised sales and marketing strategies for BiDil;

• our ability to recruit and train our sales force and the effectiveness of our sales force in influencing prescribing behavior with heart failure specialists and key institutions;

• our ability to successfully secure preferable reimbursement treatment from government and third-party insurers for BiDil;

• our ability to successfully enter into a co-promotion agreement for BiDil on favorable terms, if at all;

• our ability to gain market acceptance of BiDil as safe, effective and medically necessary;

• the availability of substantial amounts of cash to fund our BiDil commercialization plans;

• competitive factors, including competition resulting from physicians prescribing the two lower cost generically available components of BiDil (isosorbide dinitrate and hydralazine hydrochloride) as a substitute for BiDil, and adverse effects on pricing or reimbursement resulting from this substitution;

• our ability to effectively develop and/or contract for adequate marketing, manufacturing, and distribution capabilities;

• our ability to maintain the necessary patent protection, licenses and regulatory approvals required to market and sell BiDil; and

• the various other factors discussed in detail throughout this section titled “Risk Factors.”

We are also seeking to develop a once-a-day extended release formulation of BiDil, referred to as BiDil XR. If we do not maintain a market presence for BiDil in the near term, we will not be able to successfully commercialize BiDil or build a sufficient commercial foundation from which to launch BiDil XR and, as a result, 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 our stock will decline.

We will require substantial additional amounts of cash to fund our operating plan, including commercializing BiDil and seeking to develop and commercialize BiDil XR, 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 manufacture, market and sell BiDil during 2007 and beyond. We also expect to incur additional expenses relating to the ongoing development of BiDil XR, which commenced clinical development during October 2006. We believe that our existing cash, cash equivalents and marketable securities, as well as cash expected to be generated from sales of BiDil, will be sufficient to fund the current business plan for at least the next twelve months.

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

• the magnitude of product sales of BiDil;

• the successful commercialization of BiDil;

• the cost of manufacturing, marketing and selling BiDil;

• the timing of when we receive significant revenue from BiDil, if at all;

• the time and costs involved in completing the clinical trials and further development of, and obtaining regulatory approvals for, BiDil XR, if at all;

• our ability to establish and maintain co-promotion, out-licensing and collaborative arrangements;

• the timing, receipt and amount of royalties, milestone and other payments, if any, from potential collaborators;

• the effect of competing technological and market developments;

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

• the cost of obtaining and maintaining licenses to use patented technologies.

We will require substantial additional funding in the future and may seek such funding through collaborative co-promotion arrangements and/or public or private financings. Additional financing may not be available to us on acceptable terms, if at all. In addition, the terms of any financing may adversely affect the holdings or the 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 compelled to significantly curtail our sales and marketing efforts for BiDil and/or our development efforts with respect to BiDil XR. We may also be compelled 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. We could also be required to limit, scale back or cease our operations, any of which would have a material and adverse effect on our business, financial condition and results of operations.

Poor performance by our sales force, or difficulties arising from the restructuring and expansion of our sales organization, could prevent us from achieving the results we need to maintain market presence of BiDil.

In October 2006, we initiated a restructuring program that included a reduction of our sales force and administrative headcount. As part of the restructuring program, we eliminated our existing sales force and replaced it with a small team of senior cardiovascular business managers focused on hospitals and key opinion leaders, resulting in a net reduction of approximately 120 in sales force headcount. In addition, we also eliminated approximately 20% of our general and administrative personnel in connection with this restructuring program. In August 2007, we began to deploy an expanded field organization designed to double our sales force in specific geographic areas with a focus on selected prescriber targets. Our current sales organization is managed by our senior vice president of commercial operations and is comprised of approximately 60 people. Our near-term revenue for BiDil will depend significantly upon the efforts and success of our restructured and expanded sales organization. If our expanded sales organization does not generate additional prescriptions, our ability to generate product revenue will be harmed and the value of our stock will decline.

During the first quarter of 2006, we elected to reduce the number of sales territories in which we have sales representation. As a result of our October 2006 restructuring, we significantly reduced the number of individuals in our sales organization who cover these territories. Even as we expand our sales force in certain geographic areas, any failure to adequately cover our current sales territories, or to cover through alternative marketing efforts the territories in which we have elected not to have sales representation, will result in reduced sales force productivity and loss of revenue related to BiDil.

The success of our revised selling strategy will also depend on our ability to recruit the caliber of representatives necessary to implement our new strategy. Since launching BiDil, we have dramatically reduced our sales force representation through various territory realignments and restructurings, which could significantly limit our ability to successfully recruit and retain highly qualified sales personnel. In addition, we are seeking sales representatives with a very high level of technical, selling and institutional experience to fill our cardiovascular business manager and cardiovascular specialist positions. These are highly specialized skills and we may not be able to hire sales personnel who meet these qualifications. Any delay in our ability to recruit the required number of individuals to cover our revised sales territories, or any failure to attract and retain qualified personnel, could significantly delay or hinder the success of our revised selling strategy.

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

We launched BiDil in the United States ourselves, using a contract sales force. We transitioned to the use of a smaller sales force during the first quarter of 2006, we internalized this sales force during the second quarter of 2006, and in October 2006 we replaced this sales force with a small team of senior cardiovascular business managers. In August 2007, we began to deploy an expanded field organization designed to double our sales force in specific geographic areas. The transition to and expansion of this specialized sales force could prove ineffective in increasing the sales of BiDil, which would adversely affect our financial position and depress the value of our stock.

The direct marketing efforts in which we will continue to engage through our expanded, specialized sales team will be focused on national thought leaders, regional heart failure specialists and key institutions that treat, and influence the treatment of, large numbers of African Americans who have been diagnosed with heart failure. Our approach is to educate those thought leaders and institutions on the value of BiDil, and then leverage their influence to impact the broader base of prescribers. If we are unable to convince these thought leaders and institutions that BiDil is safe, effective and medically necessary, we will be unsuccessful in our marketing approach. In addition, even if we are successful in gaining acceptance of BiDil with these key targets, these thought leaders and institutions may not be willing or able to influence the prescribing activity of other physicians, or to do so within a timeframe that will impact BiDil prescriptions in the near term. Furthermore, our indirect marketing efforts may not be successful in maintaining market awareness of BiDil with current and potential prescribers.

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

If the government or third-party payors do not reimburse patients for BiDil, or do not reimburse for BiDil at favorable levels, BiDil might not be used or purchased, and our revenues and profits will be adversely affected.

Our revenues and profits depend heavily upon the availability of coverage and favorable reimbursement for the use of BiDil from third-party healthcare and state and federal government payors. 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:

• safe, effective and medically necessary;

• appropriate for the specific patient;

• cost-effective; and

• neither experimental nor investigational.

Since reimbursement approval for a product is required from third-party and government payors in order for patients to be reimbursed for the cost of a product, 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 conduct clinical reviews of pharmaceutical products to determine whether a product is safe, effective and medically necessary. These third-party payors may find that BiDil is not sufficiently effective to justify reimbursement approval or that the effectiveness of BiDil does not justify its cost. In addition, third-party payors may require cost-benefit analysis data from us in order to demonstrate the cost-effectiveness of BiDil. 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, if at all. Furthermore, some third-party payors may consider the generically available individual components of BiDil to be substitutable for, or therapeutically equivalent to, BiDil, despite the lack of FDA approval for the use of those individual components in the treatment of heart failure. To the extent that third-party payors consider the generically equivalent individual components of BiDil to be substitutable for, or therapeutically equivalent to, BiDil, we may be limited in our ability or unable to obtain preferential reimbursement from those third-party payors.

Even after 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. In addition, legislative or regulatory efforts to control or reduce healthcare costs or reform government

healthcare programs could result in lower prices or rejection of BiDil. Changes in coverage and reimbursement policies or healthcare cost containment initiatives that limit or restrict reimbursement for BiDil may cause our revenues to decline. Any failure by us to obtain reimbursement for BiDil, or to secure a preferred form of reimbursement that reduces costs to patients, may negatively impact market acceptance of BiDil and adversely affect our ability to generate revenues from sales.

A number of private insurers and Medicare Part D plans that cover BiDil cover the product at the Tier III level. Tier level is a term generally used to denote the level of reimbursement and, consequently, the level of patient co-pay, for a product that is approved by a third-party payor. At Tier III, patient co-pays are at a significantly higher level than they would be at Tier II, ranging from approximately $30.00 to $50.00 per prescription. Tier II reimbursement denotes a preferential level of reimbursement at which patient co-pays range from approximately $15.00 to $30.00 per prescription. We may not be able to obtain reimbursement coverage for BiDil from many private insurers or Medicare Part D plans or, even if we obtain such coverage, we may not be able to obtain preferential reimbursement treatment. Any failure by us to secure such coverage, or to secure it at preferential levels, would have a substantially negative effect on sales of BiDil, market acceptance of BiDil would be negatively impacted and our ability to generate revenues from sales would be significantly impaired. Although we have been added to preferred formularies covering a substantial majority of insured African Americans over the age of 45, we have not achieved preferential reimbursement on all plans. Furthermore, we cannot know if BiDil will continue to be listed on any of these plans at a preferential reimbursement level, if at all. In addition, although preferential reimbursement for BiDil removes a financial barrier to accessing the product, it does not require or guarantee that physicians will prescribe the drug. Accordingly, we cannot assess the impact that the current listing of BiDil on any given plan will have on our future revenues, if any.

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

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

Factors that we believe will materially affect market acceptance of BiDil include:

• the availability of favorable government and third-party payor reimbursement;

• the ability to produce and sell BiDil at a competitive price;

• the availability in generic form of the individual components that constitute BiDil and the perception that these generic components are equivalent to BiDil;

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

• the success of our promotional programs, which will be centralized in nature going forward;

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

• the safety, efficacy and ease of administration of BiDil; and

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

The availability of lower priced generic forms of the components of BiDil may adversely affect our sales of BiDil and the pricing or reimbursement we are able to obtain for BiDil.

BiDil is a fixed-dosed combination of two individual components, both of which are available in generic form and are separately marketed (isosorbide dinitrate for angina and hydralazine hydrochloride for hypertension) at prices substantially below the prices we are charging for BiDil. Moreover, isosorbide dinitrate is available in the dosage that we include in BiDil. While neither of these two generic drugs is approved for the treatment of heart failure, it is impracticable for

us to prevent physicians from prescribing a combination of these two, lower cost generic drugs as a substitute for prescribing BiDil. We believe that a number of physicians have prescribed the combination of these generic drugs, rather than BiDil. If these and other physicians continue to prescribe the combination of these two generic drugs, rather than BiDil, our ability to generate revenue from the sales of BiDil could be limited. Our ability to generate revenue could also be limited if:

• potential large purchasers of BiDil, such as hospitals or health maintenance organizations, require substitution of these generic drugs for BiDil;

• state formularies, other government agencies or private payors that approve reimbursement for drugs require substitution of these generic drugs for BiDil; or

• the availability of these generic drugs reduces the price or reimbursement amounts we are able to achieve for BiDil.

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

Although we intend to pursue the development of BiDil XR as expeditiously as possible, we do not currently have the internal technology to pursue this development on our own. The technology underlying extended release formulations of pharmaceutical products is highly proprietary and would take years and the expenditure of significant amounts of capital for us to develop. We have entered into a license agreement with Elan, pursuant to which we have licensed proprietary extended release technology which we believe is compatible for use with BiDil. We have done extensive preclinical development with Elan, but we cannot be sure that our development efforts will result in a successful extended release formulation of BiDil.

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

In order to obtain regulatory approvals for the commercial sale of BiDil XR, we will be required to complete clinical studies and clinical trials in humans to demonstrate the safety and efficacy of BiDil XR. We may not be able to obtain the authority from the FDA to commence or complete these clinical trials. Clinical testing may not prove that BiDil XR is safe and effective to the extent necessary to permit us to obtain marketing approval. Moreover, positive results demonstrated in preclinical studies and clinical trials that we complete may not be indicative of results obtained in future clinical trials. Assuming we successfully complete the required clinical testing, we will be required to submit a new drug application, or NDA, to the FDA. FDA approval of the NDA is required before marketing BiDil XR may begin in the United States. The FDA will undertake an extensive and lengthy review of the NDA. We can not provide any assurance that BiDil XR will be approved, even if the FDA accepts our NDA submission.

We cannot predict whether the results of any clinical studies conducted with respect to BiDil XR will be successful. Furthermore, we cannot predict the number or the type of clinical trials that will be necessary to adequately support regulatory approval for BiDil XR, nor can we predict the amount of time that will be required in order to complete those clinical trials. For example, depending on the results of initial clinical studies, additional testing with alternate formulations of BiDil XR may also be required. The fact that BiDil is a combination of two active ingredients (isosorbide dinitrate and hydralazine hydrochloride) may further complicate the development of the extended release formulation. We could also experience delays or failures in clinical trials for a number of other reasons. For example:

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

• we may encounter difficulties or delays in manufacturing sufficient quantities of BiDil XR used in any clinical trials;

• the timing and completion of clinical trials of BiDil XR depend on, among other factors, the number of patients we will be required to enroll in the clinical trials and the rate at which those patients are enrolled and any increase in the required number of patients, decrease in recruitment rates or difficulties retaining study participants may result in increased costs, program delays or program termination;

• BiDil XR may prove to have undesirable or unintended side effects, toxicities or other characteristics that may prevent or limit its commercial use;

• we, along with our collaborators and subcontractors, may not employ, in any capacity, persons who have been debarred from performing or assisting in such services. Employment of such a debarred person (even if inadvertently) may result in delays in FDA’s review or approval of our products, or the rejection of data developed with the involvement of such person(s); and

• institutional review boards or regulators, including the FDA, or our collaborators may hold, suspend or terminate our clinical research or the clinical trials of BiDil XR for various reasons, including failure to achieve established success criteria, noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks.

Additionally, the FDA may conclude that the data provided from our studies of BiDil XR is insufficient and may require that we perform additional large-scale outcomes studies. We currently do not intend to pursue the clinical development of BiDil XR if the FDA requires us to conduct large-scale outcome studies as a condition to obtaining FDA approval. Moreover, if we experience delays in obtaining FDA approval, we may determine to not devote the substantial additional resources necessary to pursue the clinical development of BiDil XR. Even if our clinical testing of BiDil XR is successful, we still may not be able to obtain regulatory approval of BiDil XR if the FDA concludes that the data does not support such request for approval. If we do not successfully develop and commercialize this product, then our ability to generate revenue from BiDil XR will be materially impaired and our stock price may decline.

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

We do not have manufacturing capabilities for BiDil XR and have no current plans to develop any such capacity in the future. In order to continue to develop BiDil XR, apply for regulatory approvals and commercialize this product, we plan to rely on our collaborative licensor, Elan, for the production of clinical and commercial quantities of BiDil XR. Although we are in the process of negotiating a manufacturing and supply agreement with Elan, we may not be able to finalize an agreement on commercially favorable terms, if at all. In addition, contract manufacturers are subject to ongoing periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with current Good Manufacturing Practices, or cGMP, and other governmental regulations and corresponding foreign standards. The cGMP requirements govern, among other things, quality control of the manufacturing process and documentation of policies and procedures. Other than through contract, we do not have control over compliance by our contract manufacturers with these regulations and standards. Our present or future contract manufacturers may not be able to comply with cGMP and other FDA requirements or similar regulatory requirements outside the United States. Any failure by our contract manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidate, delays, suspension or withdrawal of approvals, seizures or recalls of such product candidate, operating restrictions, and criminal prosecutions, any of which could significantly and adversely affect our business. We will depend upon these third parties to perform their obligations in a timely manner and in accordance with applicable laws and regulations, including those related to quality control and quality assurance. 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 may not be able to initiate or continue clinical trials of BiDil XR;

• we may be delayed in submitting applications for regulatory approvals for BiDil XR; and

• even if we successfully commercialize BiDil XR, we may be required to cease distribution and/or recall some or all batches of the product and we may not be able to meet commercial demands for our products or achieve profitability.

Currently, we are engaging in limited internal research and development activities and, accordingly, our ability to generate future revenue from our nitric oxide technology portfolio is completely dependent on our ability to enter into scientifically and commercially successful out-licensing or collaborative arrangements with third parties.

At the end of the first quarter of 2006, we scaled back our research and development staff in a restructuring of our company and have limited our internal research and development activities to the continued development of BiDil XR. We are currently seeking out-licensing and collaboration opportunities for our other potential product candidates based on our proprietary nitric oxide technology, including NMI-3377, a pre-clinical cardio-renal compound. The application of our

proprietary nitric oxide technology is unproven in humans and, as a result, we may not be able to successfully out-license any products based on this technology. Our product candidates include nitric oxide enhancements of existing drugs; in these cases, we are modifying compounds whose chemical and pharmacological profiles are well-documented and understood. Many of our potential product candidates, however, 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 shown 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. We may not be able to secure out-licensing or collaboration partners for these potential product candidates. Even if we are successful in entering into out-licensing or collaborative arrangements with respect to our potential product candidates, we have no assurance that we will be able to secure such arrangements on terms completely favorable to us. If our out-licensing or collaboration arrangements include unfavorable financial terms, our ability to generate revenue from our technology portfolio will be severely limited.

Additional factors that may affect the success of our potential future collaborations include the following:

• our future licensing partners or collaborators may be pursuing alternative technologies or developing alternative product candidates, either on their own or in collaboration with others, that may be competitive with the product candidate which they have licensed from us or will be collaborating with us and which could affect their commitment to our future collaboration;

• future reductions in marketing or sales efforts or a discontinuation of marketing or sales of our products by our licensing partners or collaborators would reduce our revenues, which could be based on a percentage of net sales by the partner or collaborator;

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

• our future licensing partners or collaborators may pursue higher-priority programs or change the focus of their development programs, which could affect a partner’s or collaborator’s commitment to us.

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

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

We have experienced significant operating losses since our inception in 1992. For the quarter ended September 30, 2007, we had a net loss of $8.4 million. As of September 30, 2007, we had an accumulated deficit of $338.5 million. We expect that we will continue to incur substantial losses and that our cumulative losses will increase as our commercialization efforts continue. We expect that the losses that we incur will fluctuate from quarter to quarter and that these fluctuations may be substantial.

A large portion of our expenses is fixed, including expenses related to facilities, equipment and personnel. We have spent significant amounts to launch our first product, BiDil, and we expect to incur significant operating expenses in connection with our ongoing commercialization activities related to BiDil. We received approval for BiDil from the FDA on June 23, 2005, and launched commercial sales of BiDil in July 2005. We have also spent significant amounts to fund research, development and commercialization of our product candidates and to enhance our core technologies. Currently, our research and development activities are limited to the continued development of BiDil XR. We are not engaging in any internal research and development activities with respect to other potential product candidates and, therefore, do not expect to incur substantial research and development expenses in the near term. Although we currently estimate that our operating expenses will decrease in fiscal year 2007, we will still need to generate significant revenue to achieve profitability. We are currently unable to estimate the level of revenues that we will realize from the commercialization of 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 or continue our operations.

Our BiDil product revenues have been and will continue to be subject to considerable variation due to the significant reduction in our direct sales force, volatility in prescription volume, the manner in which we account for product sales considering product returns rates, level of discounts incurred, the level of purchases by individual customers and other matters related to the commercialization of this product. We have experienced and are likely to continue to experience significant revenue deferrals and product returns, as well as additional charges and expenses associated with stocking incentives, rebates, discounts, and other promotional incentives, and other matters related to the commercialization of this product. Significant inventory adjustments may also occur due to sales forecast variances or other factors. Any deferrals, returns or adjustments that negatively impact revenue, or our failure, for this or any other reason, to generate significant near-term revenue growth, would reduce our stock price and adversely affect our ability to raise capital.

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, which could cause the price of our common stock to decline.

We do not manufacture BiDil and have no plans to do so. We engaged Schwarz Pharma under a five-year exclusive manufacturing and supply agreement solely for the three times daily immediate release dosage formulation of BiDil. Under the supply agreement, we have the right to engage a backup manufacturer but do not currently have any backup manufacturing agreement in place. 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.

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

• difficulties with production costs and yields;

• quality control and assurance;

• difficulties obtaining ingredients for our products;

• shortages of qualified personnel;

• compliance with strictly enforced federal, state and foreign regulations; and

• lack of capital funding.

If we are unable to maintain a commercially reasonable manufacturing agreement for the production of BiDil with Schwarz Pharma, we have no back-up manufacturing facility and thus we would not be able to manufacture and sell BiDil until another facility was qualified. The number of third-party manufacturers with the manufacturing and regulatory expertise and facilities necessary to manufacture finished 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 alternative manufacturing on acceptable terms, if at all.

If we are unable to successfully contract for third-party manufacturing, or 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, all of which could cause the price of our common stock to decline.

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 Corp. for our supply of hydralazine hydrochloride, one of the two active ingredients in BiDil. To the best of our knowledge, Sumitomo is currently the only supplier of hydralazine hydrochloride worldwide. We do not have any agreement with Sumitomo regarding the supply of hydralazine hydrochloride. If Sumitomo stops manufacturing or is unable to manufacture hydralazine hydrochloride, or if we are unable to procure hydralazine hydrochloride 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 hydrochloride, Sumitomo has unilateral control over the price of hydralazine hydrochloride. Any increase in the price for hydralazine hydrochloride may reduce our gross margins and adversely affect our ability to achieve profitability.

If our planned collaborative partners do not obtain and maintain the regulatory approvals required to market and sell our potential nitric-oxide based product candidates in the United States, then our business may be unsuccessful, and the market price of our stock may substantially decline.

We are currently seeking out-licensing and collaboration opportunities for our potential product candidates based on our proprietary nitric oxide technology, including NMI-3377, a pre-clinical cardio-renal compound. Our partners will not be able to market any of our potential nitric-oxide based product candidates in the United States without marketing approval from the FDA. The process of obtaining FDA approval of pharmaceutical products is costly, complex and time consuming. Any new pharmaceutical product must undergo rigorous pre-clinical and clinical testing and an extensive regulatory approval process mandated by the FDA. Such regulatory review includes the determination of manufacturing capability and product performance. The drug approval process is affected by such factors as:

• the severity of the disease;

• the quality of the regulatory submission;

• the drug’s clinical efficacy and safety;

• the strength of the chemistry and manufacturing control of the process;

• the manufacturing facility’s compliance with cGMP requirements and other applicable regulatory requirements;

• the availability of alternative treatments;

• the risks and benefits demonstrated in clinical trials; and

• the patent status and marketing exclusivity rights of certain innovative products.

The regulatory process to obtain market approval for a new drug takes many years and requires substantial expenditures. There can be no assurance that our strategic partners will be successful in obtaining FDA approval for our potential nitric-oxide based product candidates. If our strategic partners do not receive the required regulatory approval or clearance to market any of our potential product candidates, these partners will not be able to develop and commercialize these product candidates, which will significantly impair our ability to realize revenue from these product candidates and which will likely affect our ability to achieve profitability and cause the market price of our common stock to substantially decline.

We or our potential strategic collaborators may not be able to obtain the necessary regulatory approvals in order to market and sell BiDil, or our product candidates, such as BiDil XR, in foreign countries.

Our marketing approval for BiDil is limited to the United States. Until we or our potential strategic collaborators obtain the required regulatory approvals for BiDil or any potential product candidates in any specific foreign country, neither we nor our collaborators will be able to sell these products in that country. International regulatory authorities have imposed numerous and varying regulatory requirements, and the approval procedures could involve testing in addition to that required by the FDA. Furthermore, approval by one regulatory authority does not ensure approval by any other regulatory authority. In addition, if we enter into collaborative partnerships in order to obtain foreign regulatory approval for BiDil or any of our product candidates, such as BiDil XR, we may be dependent upon these collaborators to conduct clinical or other testing and to obtain such regulatory approvals. We or our collaborators may not be able to obtain final regulatory approvals for BiDil or for any of our other potential product candidates in foreign countries. Any failure to obtain the necessary governmental approvals or failure to obtain approvals of the scope requested could delay, or even preclude, us or our licensees or other collaborators from marketing BiDil or our product candidates, or limit the commercial use of BiDil or our product candidates in these foreign jurisdictions. Alternatively, foreign regulatory approvals may entail limitations on the indicated uses of BiDil or our product candidates and impose labeling requirements which may also adversely impact our ability to market BiDil or our product candidates. We are preparing a Marketing Authorization Application for BiDil for submission to the

European Medicines Agency. We cannot be certain when we will file this submission and, once filed, whether the submission will be successful.

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

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

For example, because BiDil is specifically approved for use by self-identified black patients, we may not promote BiDil for use in other patient populations. We must submit copies of our advertisements and promotional labeling for BiDil, including, for example, professional journal advertisements, website pages, professional direct mailers, direct-to-consumer advertisements, convention booth panels and handouts, to the FDA at the time of initial publication or dissemination. If the FDA believes these materials or statements made by our sales representatives or other company officials promote our products for unapproved indications or otherwise fail to comply with the FDA’s promotional labeling or advertising regulations, the FDA could allege that our promotional activities misbrand our products or cause our products to violate new drug approval requirements. Based on such allegations, the FDA could issue an untitled letter or warning letter, which requests, among other things, that we cease such promotional activities, including disseminating the advertisements and promotional labeling, and that we issue corrective advertisements and labeling, including sending letters to healthcare providers. The FDA also could take enforcement action including seizure of allegedly violative product, or could seek an injunction or criminal prosecution against us and our officers or employees. If we repeatedly or deliberately fail to submit such advertisements and labeling to the agency, the FDA could withdraw our approvals. The FDA also monitors manufacturers’ support of continuing medical education, or CME, programs where the programs involve the manufacturers’ or a competitor’s products to ensure that manufacturers do not influence the CME content as a means of promoting their products for off-label uses. In addition, the Department of Justice enforces laws prohibiting kickbacks to healthcare providers and false claims in connection with government-funded reimbursement programs for drug purchases, such as Medicare and Medicaid, and any off-label marketing of BiDil could subject us to civil or criminal prosecution, for which the government could seek to recover substantial monetary penalties, the imposition of restrictions on our marketing activities, and the exclusion of BiDil from eligibility for government reimbursement programs.

In addition, the manufacturer and the manufacturing facilities we use to produce BiDil, or that our potential strategic partners may use to produce product candidates based on our nitric oxide technology, are subject to periodic review and inspection by the FDA. We or our potential strategic partners are required to report any serious and unexpected adverse experiences and certain quality problems with BiDil or the respective product candidate and make other periodic reports to the FDA. The discovery of any previously unknown problems with a product, manufacturer or facility may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. Certain changes to an approved product, including the way it is manufactured or promoted, often require prior FDA approval before the product as modified may be marketed. If we or our potential strategic partners fail to comply with applicable continuing regulatory requirements, we or our potential strategic partners may be subject to fines, untitled letters, warning letters, civil penalties, suspension or withdrawal of regulatory approvals, product recalls and seizures, injunctions, operating restrictions and/or criminal prosecutions and penalties.

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 develop, market and sell BiDil, or any potential product candidates, 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 or they could be subject to enforcement actions which could affect our ability to develop, market and sell BiDil, or any potential product candidates, successfully and could harm our reputation and lead to lower acceptance of BiDil, or any potential product candidates, by the market. These enforcement actions include:

• product seizures;

• voluntary or mandatory recalls;

• patient or physician notifications, including letters to healthcare professionals and corrective advertising;

• withdrawal of product approvals;

• restrictions on, or prohibitions against, marketing our products;

• operating restrictions;

• fines;

• restrictions on importation or exportation of our products;

• injunctions;

• debarments;

• civil and criminal penalties; and

• suspension of review of, or refusal to approve, pending applications.

If the clinical trials for any product candidates our planned strategic partners advance into clinical testing are not successful, these partners may not be able to successfully develop and commercialize our potential product candidates.

In order to obtain regulatory approvals for the commercial sale of product candidates that we successfully out-license, our collaborators will be required to complete extensive clinical trials in humans to demonstrate the safety and efficacy of our product candidates. Our strategic partners may not be able to obtain authority from the FDA or other regulatory agencies to commence or complete these clinical trials. Even if permitted, such clinical testing may not prove that our product candidates are sufficiently safe and effective to permit our strategic partners to obtain marketing approvals from regulatory authorities. Moreover, positive results demonstrated in pre-clinical studies and early clinical trials that our strategic partners complete may not be indicative of results obtained in future clinical trials. Furthermore, our collaborators, institutional review boards or regulatory agencies may suspend, hold or terminate clinical trials at any time for various reasons, including failure to achieve established success criteria, noncompliance with regulatory requirements or if it is believed that the patients participating in such trials are being exposed to unacceptable health risks. Adverse or inconclusive clinical trial results concerning any of our product candidates could require our strategic partners to conduct additional clinical trials, result in increased costs and significantly delay the filing for marketing approval for those product candidates with the FDA, result in a filing for a narrower indication than was originally sought or result in a decision to discontinue development of those product candidates.

The successful completion of our strategic partners’ 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. Our strategic partners may be unable to enroll the number of patients we need to complete a trial on a timely basis, if at all. Moreover, delays in planned patient enrollment for clinical trials may cause our strategic partners to incur increased costs and delay commercialization. Because we will need to rely on third parties for the development of our

product candidates, we will have less control over the timing and other aspects of these clinical trials than if we conducted them on our own. These third parties may not complete activities on schedule, or may not conduct clinical trials in accordance with regulatory requirements or the trial design.

As a result of these factors, third parties on whom we rely may not successfully begin or complete clinical trials on our potential product candidates in a timely manner, if at all. Moreover, if our strategic partners do not successfully develop, obtain the necessary regulatory approvals for, and commercialize our products, our future revenues may be materially impaired.

If the estimates we make and the assumptions on which we rely in preparing our financial statements prove inaccurate, our actual results may vary significantly.

Our financial statements 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 our assets, liabilities, revenues and expenses, the amounts of charges taken by us and related disclosure. Such estimates and judgments include revenue recognition, product returns, the carrying value of our accounts receivable, inventory and property and equipment, our estimates of accrued expenses and liabilities and our estimates of the fair value of equity instruments granted or sold by us. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. However, these estimates and judgments, or the assumptions underlying them, may prove to be incorrect. Accordingly, our actual financial results may vary significantly from the estimates contained in our financial statements. For a further discussion of the estimates and judgments that we make and the critical accounting policies that affect these estimates and judgments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” above.

Risks Relating to our Intellectual Property Rights

Our patent protection for BiDil, the individual components of which are available in generic form, is limited, and we may be subject to generic substitution or competition and resulting pricing pressure.

We have no composition of matter patent covering BiDil, our product for the treatment of heart failure in self-identified black patients as an adjunct to current standard therapy. BiDil is a fixed-dose combination of two individual components, isosorbide dinitrate and hydralazine hydrochloride, both of which are available in generic form, 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 are charging for BiDil. We have two issued method-of-use patents that expire in 2020. One patent covers the use of the combination of isosorbide dinitrate and hydralazine hydrochloride to reduce mortality associated with chronic congestive heart failure, for improving the oxygen consumption, for improving the quality of life or for improving exercise tolerance in a black patient. The other patent covers the use of the combination of isosorbide dinitrate and hydralazine hydrochloride in certain dosage amounts for reducing mortality associated with heart failure in a black patient. Our method of use patent that covered the use of the combination of isosorbide dinitrate and hydralazine hydrochloride to reduce the incidence of mortality associated with chronic congestive heart failure expired in accordance with its terms in April 2007.

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

Other factors may also adversely affect our patent protection for BiDil. If we are successful in marketing BiDil, manufacturers of generic drugs will have an incentive to challenge our patent position. The combination therapy of isosorbide dinitrate and hydralazine hydrochloride 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 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, and determined that the claims of the 2020 patents were non-obvious and patentable. A court considering the validity of the 2020 patents with respect to questions of prior art might be presented with other alleged prior art or might reach conclusions different than those reached by the U.S. patent office. If the 2020 patents were to be invalidated or if physicians were to prescribe isosorbide dinitrate and hydralazine hydrochloride separately for heart failure in black patients, our BiDil revenue could be significantly reduced, we could fail to recover the cost of developing BiDil and BiDil might not be a viable commercial product.

If we are not able to obtain and enforce patent protection for our discoveries, our ability to secure out-licensing or collaborative arrangements with respect to 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 developed 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 patent applications of others.

Prior to the restructuring of our research and development activities, our intellectual property strategy depended 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 prosecute all necessary or desirable patent applications or maintain all issued patents at a reasonable cost. 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; even if we have obtained 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 products or compounds and specific methods of using these products or compounds in therapeutic areas. In some cases, like BiDil, our only patent protection is with respect to the method of using a product or compound. Method-of-use patents may provide less protection for our product candidates and products. If another company gains FDA approval for an indication separate from the one claimed in our method-of-use patents, physicians may be able to prescribe that product for use in the approved indication. In addition, physicians may prescribe a product for which we or our potential strategic partners have obtained approval for an unapproved indication for that product. As a practical matter, we or our potential strategic partners may not be able to enforce our method-of-use patents against physicians prescribing products for such off-label use. Off-label use and any resulting off-label sales could make it more difficult to obtain the price we or our potential strategic partners would otherwise wish to achieve for, or to successfully commercialize, our products. 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 over time. 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.

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

A third party may sue us or our potential strategic partners for infringing on its patent rights. Likewise, we or our potential strategic partners may need to resort to litigation to enforce a patent issued to us or to seek a declaratory judgment on the scope and validity of third-party proprietary rights. The cost to us or our potential strategic partners of any litigation or other proceedings relating to intellectual property rights, even if resolved in our or our partner’s favor, could be substantial, and the litigation would divert management 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 products could lead to more patent litigation due to the fact that the markets for these existing products are very large and competitive. Uncertainties resulting from litigation could limit our ability to continue our operations. For example, we 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. 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 moiety. In March 2007, the three-member EPO Opposition Division invalidated all of the claims of EP ‘110, and the official written decision revoking EP ‘110 was issued on June 19, 2007. Pursuant to the rules of the EPO, NicOx had an opportunity to file an appeal regarding this invalidation decision. On October 5, 2007, we received notice from the EPO Opposition Division that no appeal had been submitted within the applicable time limit, and accordingly the opposition proceedings are finally terminated.

Nevertheless, if any parties are able to successfully claim that the development or use by us or our potential strategic partners of proprietary technologies infringes upon their intellectual property rights, we or our potential strategic partners might be forced to pay damages, potentially including treble damages, if we or our potential strategic partners are found to have willfully infringed on such parties’ patent rights. In addition to any damages we or our potential strategic partners might have to pay, a court could require us or our potential strategic partners to stop the infringing activity or obtain a license on terms that are unfavorable to us. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If we or our potential strategic partners fail to obtain a required license or are unable to design around a patent, we or our potential strategic partners 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 sufficient revenue to sustain our operations.

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 commercializing BiDil and out-licensing our other product candidates.

We are a party to a number of licenses that give us rights to third-party intellectual property that are necessary for our business. In particular, we have obtained the exclusive right to develop and 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. In addition, we may 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 could be negatively impacted by the application or enforcement of federal and state fraud and abuse laws, including anti-kickback laws and other federal and state anti-referral laws.

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

In addition, we could become subject to false claims litigation under federal statutes, which can lead to treble damages based on the reimbursements by federal healthcare programs, civil money penalties (including penalties levied on a per false claim basis), restitution, criminal fines and imprisonment, and exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs. These false claims statutes include the False Claims Act, which allows any person to bring suit on behalf of the federal government alleging the submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against pharmaceutical and biotechnology companies have increased significantly in recent years and have increased the risk that a healthcare company will have to defend a false claim action, pay fines or restitution, or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as a result of an investigation arising out of such action. It is possible that we could become

subject to such litigation and, if we are not successful in defending against it, such litigation would have a material adverse effect on our business, financial condition and results of operations. In addition, the cost of defending claims or allegations under the False Claims Act, even if successful, would also have a material adverse effect on our business, financial condition and results of operations.

We face significant competition, which may result in others commercializing products more successfully than ours.

The pharmaceutical industry is 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 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. Many of our competitors are more experienced than we are in pharmaceutical development and commercialization, obtaining regulatory approvals and product marketing and manufacturing. As a result, they may:

• develop and commercialize products that render BiDil obsolete or non-competitive or that cause our product candidates to be less desirable as a result of patent or non-patent exclusivity;

• develop product candidates and market products that are less expensive or more effective than BiDil;

• commercialize competing products before our partners can launch any products developed from our product candidates;

• initiate or withstand substantial price competition more successfully than we can;

• have greater success in recruiting skilled scientific workers from the limited pool of available talent;

• more effectively negotiate third-party licenses and strategic relationships; and

• take advantage of product acquisition or other opportunities more readily than we can.

There are a number of companies currently marketing and selling products to treat heart failure in the general population that will compete with BiDil. These include GlaxoSmithKline, plc, which currently markets Coreg®, Merck & Co., Inc., which currently markets Vasotec® 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 seven companies working in the area of nitric oxide based therapeutics. These companies are: Angiogenix Inc., GB Therapeutics, NicOx S.A., OxoN Medica, RenoPharm, Vasopharm BIOTECH GmbH and Nitrox LLC.

We may be exposed to product liability claims 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 clinical testing, manufacturing and marketing of human therapeutic products. Our clinical trial and commercial product liability insurance is subject to deductibles and coverage limitations. We may not be able to obtain or maintain insurance on acceptable terms, if at all. Moreover, any insurance that we do obtain may not provide adequate protection against potential liabilities, and our capital resources could be depleted as a result.

Risks Relating to our Common Stock

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

The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In particular, the market price of our common stock, like that of the securities of other biopharmaceutical companies, has been and may continue to be highly volatile. During the period from January 1, 2005 to September 30, 2007, our stock price has ranged from a low of $1.75 per share (on September 28, 2007) to

a high of $27.99 per share (on February 2, 2005). The following factors, among others, may affect the price of our common stock:

• fluctuations in our financial results, including with respect to sales of BiDil;

• announcements concerning fundamental or material corporate transactions, restructuring or the like;

• general market conditions;

• announcements of technological innovations or new commercial products by our competitors;

• announcements of actual or potential medical results relating to products under development by our potential strategic partners or our competitors’ products;

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

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

• public concern as to the safety of products developed by us, our potential strategic partners or other biotechnology and pharmaceutical companies;

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

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

• sales of common stock by existing stockholders; and

• the perception that such issuances or sales could occur.

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

As of October 29, 2007, our directors, executive officers and principal stockholders, together with their affiliates, owned, in the aggregate, approximately 33.8% 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, will 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:

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

• impeding a merger, consolidation, takeover or other business combination involving our company; or

• discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

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

• a prohibition on stockholder action through written consent;

• a requirement that special meetings of stockholders be called only by a majority of the board of directors, the chairman of the board or the chief executive officer;

• advance notice requirements for stockholder proposals and nominations;

• limitations on the ability of stockholders to amend, alter or repeal our certificate of incorporation or bylaws; and

• the authority of the board of directors to issue preferred stock with such terms as the board of directors may determine.

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.

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 October 29, 2007, there were 45,773,801 shares of common stock outstanding. 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 and restricted stock awards. The sale of the common stock underlying these options and pursuant to these restricted stock awards after such time as the options and restricted stock awards have vested and become exerciseable or free from forfeiture, as the case may be, 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.

We may incur significant costs and suffer management distraction and reputational damage from class action litigation.

Our stock price has been, and is likely to continue to be, volatile. 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.

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

The following table sets forth information concerning the purchase of our equity securities by us during the third quarter of 2007:

Period	Total Number of Shares Purchased (1)	Average Price Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
July 1, 2007 – July 31, 2007	—	—		—	—
August 1, 2007 – August 31, 2007	—	—		—	—
September 1, 2007 – September 30, 2007	37,350	$	2.05	—	—
Total	37,350			—	—

	NITROMED, INC.


	By:	/s/ JAMES G. HAM, III
		James G. Ham, III
		Vice President, Chief Financial Officer, Treasurer
		and Secretary (Principal Financial Officer and Principal Accounting Officer)
Date: October 31, 2007

Exhibit Number		Description
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Balance Sheets as of September 30, 2007 and December 31, 2006
	Condensed Statements of Operations for the three and nine months ended September 30, 2007 and 2006
	Condensed Statements of Cash Flows for the nine months ended September 30, 2007 and 2006
	Notes To Unaudited Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits
SIGNATURES
EXHIBIT INDEX