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 June 30, 2008

Or

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

For the Transition Period from to

Commission File Number 000-50439

NitroMed, Inc.

(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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

NITROMED, INC.
CONDENSED BALANCE SHEETS

(in thousands, except par value amounts)

	June 30, 2008			December 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	11,904		$	8,167
Short-term marketable securities	6,849			23,233
Accounts receivable	1,796			1,929
Inventories	1,535			1,401
Prepaid expenses and other current assets	193			334
Total current assets	22,277			35,064
Property and equipment, net	167			312
Long-term marketable securities	1,598			—
Restricted cash	—			191

Total assets	$	24,042		$	35,567

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,132		$	3,235
Accrued expenses	3,616			6,379
Accrued restructuring	137			—
Current portion of long-term debt	—			3,728

Total current liabilities	4,885			13,342

Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.01 par value; 65,000 shares authorized; 46,042 and 45,381 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively	460			454
Additional paid-in capital	368,264			367,125
Accumulated deficit	(349,584		)	(345,382		)
Accumulated other comprehensive income	17			28
Total stockholders’ equity	19,157			22,225
Total liabilities and stockholders’ equity	$	24,042		$	35,567

See accompanying notes.

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NITROMED, INC.
CONDENSED STATEMENTS OF OPERATIONS

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenues:
Product sales	$	3,831		$	3,715		$	7,764		$	7,283

Cost and operating expenses:
Cost of product sales	536			637			1,515			1,591
Research and development (1)	509			2,931			2,139			5,938
Sales, general and administrative (1)	1,906			6,634			5,904			15,582
Restructuring charge	—			—			2,725			1,004
Total cost and operating expenses	2,951			10,202			12,283			24,115
Income (loss) from operations	880			(6,487		)	(4,519		)	(16,832		)
Non-operating income:
Interest expense	(18		)	(195		)	(86		)	(433		)
Interest income	156			446			455			915
Other expense	(36		)	—			(52		)	—
Total non-operating income	102			251			317			482

Net income (loss)	$	982		$	(6,236	)	$	(4,202	)	$	(16,350	)

Basic and diluted net income (loss) per common share	$	0.02		$	(0.16	)	$	(0.09	)	$	(0.42	)
Weighted average shares outstanding:
Basic	46,029			40,100			45,910			38,689
Diluted	46,033			40,100			45,910			38,689

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

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

See accompanying notes.

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NITROMED, INC.
CONDENSED STATEMENTS OF CASH FLOWS

(in thousands) (unaudited)

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

See accompanying notes.

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NITROMED, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

JUNE 30, 2008

(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, 2008. 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 for the fiscal year ended December 31, 2007, which was filed with the Securities and Exchange Commission (“SEC”) on March 6, 2008.

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

Based upon the Company’s determination that the successful commercialization of BiDil requires a magnitude of resources that it cannot currently allocate to the program, as well as the Company’s plans to conserve cash in order to pursue the development of an extended release formulation of BiDil, known as BiDil XR™, in January 2008 the Company discontinued active promotional efforts related to BiDil. The Company concurrently implemented a restructuring plan in which the Company immediately and significantly reduced its workforce. The Company is evaluating strategic alternatives to divest its current business in whole or in part in an effort to maximize the value of its operations and product development programs for its shareholders. The Company has engaged an investment bank to advise it in considering these potential strategic alternatives, which may include the sale, license or divestiture of certain of its assets, including its BiDil business, the assets relating to BiDil XR, and/or its nitric oxide technologies, the sale or merger of the Company, or other similar strategic transactions.

Although the Company has discontinued active promotional efforts related to BiDil, the Company continues to manufacture and sell BiDil and maintain the product on the market for patients through normal wholesale and retail channels. The Company is also conducting limited advertising in select medical publications, and utilizes a third-party marketing firm to contact healthcare professionals on the Company’s behalf, in each case in an effort to maintain a limited market presence for BiDil. The Company also expects to incur additional expenses related to the ongoing development of BiDil XR. If and for so long as the Company continues its current business and operations, the Company will require substantial additional funds, which it expects to generate through a combination of BiDil sales and one or more strategic transactions. The Company may not be able to successfully consummate a strategic transaction, and additional financing may not be available to the Company on acceptable terms, if at all. If the Company is unable to obtain funding on a timely basis, whether through a strategic divestiture, financing or borrowing arrangements or other capital-raising transaction, the Company may not be able to support continued prescriptions for BiDil, may be compelled to significantly curtail or delay its development efforts with respect to BiDil XR, and the Company could also be required to limit, scale back or cease its operations. Currently, the Company believes that its existing sources of liquidity and the cash expected to be generated from future sales of BiDil, together with the significant reduction in expenditures as a result of its January 2008 restructuring, will be sufficient to fund the Company’s operations for at least the next twelve months.

(2) Revenue Recognition

The Company’s principal source of revenue is the sale of BiDil, which the Company began shipping in July of 2005.

Product Sales/Deferred Revenue. The Company follows the provisions of SEC 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

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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 as the 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 sales 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, wholesaler 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, wholesaler allowances, rebates and cash and contract discounts. The Company determines the provisions for sales returns, allowances, rebates and discounts based primarily on historical experience, known trends and events, 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. During the first quarter of 2008, BiDil’s shelf life for newly produced commercial product was increased to 36 months from the date of manufacture. 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, and the remaining time to expiration of the Company’s product. At June 30, 2008 and December 31, 2007, the Company’s product return reserve was $0.9 million and $0.9 million, respectively. For the three months ended June 30, 2008 and 2007, the Company recorded a reduction to revenue for product returns of $0.3 million and $0.3 million, respectively. For the six months ended June 30, 2008 and 2007, the Company recorded a reduction to revenue for product returns of $0.7 million and $0.6 million, respectively. The return rate and associated reserve are 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. Based on the factors noted above, 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.

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 June 30, 2008 and 2007, the Company recorded sales discounts, rebates and other allowances of $1.6 million and $1.4 million, respectively. For the six month periods ended June 30, 2008 and 2007, the Company recorded sales discounts, rebates and other allowances of $3.0 million and $2.5 million, respectively.

(3) Fair Value Measurements

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

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

· Level 2 - Other inputs that are observable, directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.

· Level 3 - - Unobservable inputs used when little or no market data is available and require the Company to develop its own assumptions about how market participants would price the assets or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.

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In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

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

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

(1) The Company has recorded impairment charges of $52,000 for the six months ended June 30, 2008 related to these securities.

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

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

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

As of June 30, 2008, all marketable securities held by the Company have maturity dates that range from 2008 to 2045.

As of June 30, 2008, the Company held approximately $2.3 million of auction rate securities. These auction rate securities are comprised of approximately $0.7 million of securities backed by municipalities, approximately $1.3 million of preferred stock issued by closed-end funds and a $0.3 million security issued by a government-backed student loan organization. Auction rate securities are securities that are structured to allow for short-term interest rate resets, but with contractual maturity dates that can be well in excess of ten years. Auctions have historically provided a liquid market for these securities. However, beginning in February 2008, the majority of auction rate securities in the marketplace failed at auction due to sell orders exceeding buy orders. Such failures resulted in the interest rate on these securities resetting to predetermined rates within the underlying loan agreement, which might be higher or lower than the current market rate of interest. The Company’s ability to liquidate its auction rate securities and fully recover the carrying value of its investments in the near term may be limited or not exist. In the event that the Company needs to access its investments in these auction rate securities, the Company will not be able to do so until a future auction of these investments is successful, the issuer redeems the outstanding securities, a buyer is found outside the auction process, or the securities mature, which could be in as many as 37 years. As a result of these factors, the Company may be required to record additional impairment charges on these investments from time to time, as discussed below. For the three and six month periods ended June 30, 2008, the Company recorded impairment charges of $36,000 and $52,000, respectively.

As of June 30, 2008, approximately $0.7 million of the Company’s auction rate securities are classified as short-term marketable securities because management has determined that these securities may be liquidated within one year based on management’s experience with liquidating other similar auction rate securities, discussions with investment advisors knowledgeable of the auction rate securities market, the nature of the securities (which are primarily backed by various municipalities), and redemptions and calls subsequent to June 30, 2008. During the first quarter of 2008, the Company reclassified approximately $1.6 million of

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

For the six months ended June 30, 2008, the Company has recorded an other-than-temporary impairment of $16,000 on its government-backed student loan auction rate security and an other-than-temporary impairment of $36,000 on a preferred stock closed end fund. The Company believes that the municipality-backed securities are not significantly impaired, primarily due to its experience of selling such securities at par since the recent auction failures began, the redemption or calls of similar securities by their issuers at par since the auction failures began, redemptions and calls subsequent to June 30, 2008, and the credit worthiness of the issuers of the underlying securities.

The primary objective of the Company’s investment activities is to preserve principal while at the same time maximizing the income the Company receives from the Company’s investments without significantly increasing risk. To achieve this objective, the Company maintains its portfolio of cash equivalents and marketable securities in a variety of securities, including U.S. government agencies, municipal notes, certain securities which may have an auction reset feature, corporate notes and bonds, commercial paper, and money market funds. These securities are classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses, other than those determined to be other-than-temporary impairments, reported as a separate component of accumulated other comprehensive income (loss). If interest rates rise, the market value of the Company’s investments may decline, which could result in a realized loss if the Company is forced to sell an investment before its scheduled maturity. The Company does not utilize derivative financial instruments to manage its interest rate risks.

(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):

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

On a quarterly basis, the Company analyzes its current inventory 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. 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. For the three month period ended June 30, 2008, the Company did not record an inventory impairment charge. For the three month period ended June 30, 2007, the Company recorded an inventory impairment charge of $161,000. For the six month periods ended June 30, 2008 and 2007, the Company recorded inventory impairment charges of $347,000 and $545,000, 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, 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 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

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for cause. The forfeiture provision lapses as follows: 25% of the shares are no longer subject to forfeiture to the Company, or “vest,” on the date that is six months after the grant date; 25% vest on the 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 $64,000 and $263,000 of stock-based compensation expense related to this restricted common stock for the three month periods ended June 30, 2008 and 2007, respectively. The Company recognized $938,000 and $317,000 of stock-based compensation expense related to this restricted common stock for the six month periods ended June 30, 2008 and 2007, respectively. Included in the expense for the six months ended June 30, 2008 is $770,000 of expense for accelerated vesting related to involuntary terminations in connection with the Company’s January 2008 restructuring. On the accompanying balance sheets, the number of shares of the Company’s common stock outstanding as of June 30, 2008 does not include 45,025 shares of unvested restricted common stock.

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:

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

Volatility is determined exclusively using historical volatility 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 among 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 5.6% to all unvested options as of June 30, 2008. 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 June 30, 2008 and changes during the six month period then ended is presented below (in thousands, except weighted average data):

	Options Outstanding		Weighted- average Exercise Price		Weighted- average Remaining Contracted Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2007	4,748		$	6.28
Granted	385		$	1.01
Exercised	(102	)	$	0.72
Forfeited/Cancelled	(1,510	)	$	5.99
Outstanding at June 30, 2008	3,521		$	5.99	5.57	$	13
Vested or expected to vest at June 30, 2008	3,425		$	6.07	5.48	$	12
Exercisable at June 30, 2008	2,560		$	6.95	4.40	$	3

During the six months ended June 30, 2008 and 2007, the 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 $26,000 and $526,000, respectively, and the total amount of cash received from exercise of these options was $73,000 and $311,000, respectively. The total

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

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

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

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

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

(6) Restructuring

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

In the first quarter of 2008, the Company recorded restructuring charges of $2.7 million, which was comprised of severance benefits of $2.6 million and impairment charges of $0.1 million for disposed computer equipment. The severance benefits were recorded in accordance with Statement of Financial Accounting Standards No. 112, Employers’ Accounting for Postemployment Benefits for contractual termination benefits for certain executives and SFAS 146 for one-time termination benefits for the remainder of employees terminated. In conjunction with the January 2008 restructuring, the Company eliminated approximately 80 positions and discontinued active promotional activities related to BiDil.

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

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

(7) Accumulated Other Comprehensive Income/(Loss)

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

(8) Income (Loss) Per Share

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

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

Basic and diluted weighted average shares outstanding were as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007

Weighted average common shares	46,028,722	40,099,699	45,910,238	38,689,345

Dilutive common stock options	3,832	—	—	—

Weighted average common shares, assuming dilution	46,032,554	40,099,699	45,910,238	30,689,345

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

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

(9) 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 June 30, 2008	3	39	%	34	%	18	%
Three months ended June 30, 2007	3	36	%	34	%	18	%
Six months ended June 30, 2008	3	38	%	35	%	18	%
Six months ended June 30, 2007	3	36	%	36	%	18	%

The following table summarizes the number of customers 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 by Customer
	Customers	A		B		C
As of:
June 30, 2008	3	40	%	33	%	19	%
December 31, 2007	3	38	%	34	%	17	%

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

Overview

We are the maker of BiDil^®, which is indicated 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. The U.S. Food and Drug Administration, or FDA, approved BiDil in June 2005, and we commercially launched BiDil in July 2005. We are currently a party to an exclusive five-year manufacturing and supply agreement with Schwarz Pharma Manufacturing, Inc., or Schwarz Pharma, for the three times daily immediate release dosage formulation of BiDil.

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. Although we recorded net income of $982,000 in the quarter ended June 30, 2008, we have not been profitable in any prior quarter since our inception and we may incur losses in future periods. We have incurred an accumulated deficit of $349.6 million as of June 30, 2008.

Based upon our determination that the successful commercialization of BiDil requires a magnitude of resources that we cannot currently allocate to the program, as well as our plans to conserve cash in order to pursue the development of BiDil XR™, an extended release formulation of BiDil, in January 2008 we discontinued active promotional activities for BiDil. We concurrently implemented a restructuring plan that eliminated approximately 80 positions, reducing headcount to approximately 7 positions. Although we have discontinued active promotional efforts related to BiDil, we continue to manufacture and sell BiDil and maintain the product on the market for patients through normal wholesale and retail channels. We are also conducting limited advertising in select medical publications, and utilizing a third-party marketing firm to contact healthcare professionals on our behalf, in each case in an effort to maintain a limited market presence for BiDil. In conjunction with implementing our January 2008 restructuring plan, we intend to evaluate and pursue strategic alternatives for our business, which may include the divestiture of our BiDil and BiDil XR business and/or our nitric oxide patent portfolio, a merger or consolidation with another company, or other comparable arrangements.

BiDil is an orally-administered medicine that is presently dosed three times daily. We are seeking to develop BiDil XR as a once-daily formulation. 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 to 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 (which includes BiDil XR). In consideration for the grant of the license, we have agreed to pay Elan royalties that are calculated by reference to 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 December 2007, we met with the FDA to discuss our proposed development plan for BiDil XR. The FDA agreed that our clinical development plan to conduct bioequivalence and pharmacodynamic studies comparing BiDil XR to the current commercial

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immediate release formulation of BiDil is acceptable. Our proposed plan could support FDA approval to commercialize BiDil XR, if bioequivalence is demonstrated. The bioequivalence study design compares the pharmacokinetics of the BiDil XR formulation to the pharmacokinetics of BiDil. Pharmacokinetics refers to the manner in which the body absorbs, distributes, metabolizes and excretes the study drug. The adequacy of the results will ultimately be determined by the FDA during the regulatory review period. Our pilot clinical trials have tested several BiDil XR prototypes and compared their pharmacokinetic profile with BiDil tablets. In preliminary clinical studies in healthy volunteers, we have demonstrated our ability to delay the release of isosorbide dinitrate and hydralazine hydrochloride by varying the amount of coating and ratios of different polymers on beads in capsules. We will need to conduct additional formulation studies and trials in order to finalize the formulation prior to the commencement of bioequivalence trials.

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

· maintain sales of BiDil following our January 2008 discontinuation of active promotional efforts related to BiDil;

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

· successfully advance the development of BiDil XR.

Our January 2008 restructuring follows the elimination of our discovery research program in March 2006 and the replacement of our sales force with a small team of senior cardiovascular business managers in October 2006. The January 2008 restructuring also follows our efforts in August 2007 to deploy an expanded field organization designed to focus on selected prescriber targets.

As a result of the continued implementation of our January 2008 restructuring, we estimate that our operating expenses related to research and development and sales, general and administrative functions, excluding restructuring charges, for the year ending December 31, 2008 will be approximately $14 million to $16 million, excluding cost of product sales but including share-based compensation expense.

At June 30, 2008, our principal source of liquidity was $18.8 million of cash, cash equivalents and short-term marketable securities, which excludes $1.6 million of auction rate securities classified as long-term marketable securities due to liquidity constraints. We believe that our existing sources of liquidity and the cash expected to be generated from future sales of BiDil, together with the significant reduction in expenditures as a result of our January 2008 restructuring, will be sufficient to fund our operations for at least the next twelve months. We expect to incur operating expenses going forward primarily related to our continued development of BiDil XR and to keeping BiDil available on the market. We expect to fund a substantial portion of our operating expenses through ongoing BiDil sales. However, the elimination of our sales force and discontinuation of our active promotional efforts related to BiDil could result in a decline in BiDil prescriptions by healthcare providers and could also adversely affect third party payors’ willingness to provide reimbursement at favorable levels. If physicians do not continue to prescribe BiDil in sufficient quantities, and/or if managed care providers remove BiDil from a preferential reimbursement tier on their plan formularies, then our future revenue from sales of BiDil will decline significantly, and we may not achieve sufficient working capital to fund our continued operations, including with respect to our planned development of BiDil XR. As we evaluate strategic options intended to maximize shareholder value for our company, we intend to execute on our business strategy of ceasing active promotional efforts for BiDil while devoting substantially all of our resources to supporting ongoing BiDil prescriptions and the continued development of BiDil XR. If we are unable to successfully consummate one or more strategic transactions relating to our business, we may not have sufficient capital to execute on our current business plan and could be required to further curtail or cease our 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 second quarter of 2008. 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. We discontinued active promotion of BiDil in January 2008.

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.

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· 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 expenses of approximately $10.8 million in connection with the development of BiDil XR. Preliminary clinical studies of BiDil XR demonstrated proof of principle, and we commenced clinical development of BiDil XR in October 2006. We will need to conduct additional formulation studies and trials in order to finalize the formulation prior to the commencement of bioequivalence trials. We anticipate that we will finalize the BiDil XR formulation in 2009. Assuming that the BiDil XR formulation is successfully finalized, we anticipate initiating pivotal bioequivalence trials and then filing the new drug application in 2010 or 2011. 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.

· 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 a 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 continue to seek out-licensing 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 arrangements 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 have historically consisted primarily of salaries and other related costs for personnel in sales and marketing, executive, finance, investor relations, accounting, business development 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 arrangements with a contract sales organization.

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

Results of Operations

Three Months Ended June 30, 2008 and 2007

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

Cost of Product Sales. Cost of product sales was $536,000 for the three month period ended June 30, 2008, compared to $637,000 for the three month period ended June 30, 2007. The decrease in cost of product sales in the 2008 period is due to the sale of previously reserved inventory. There were no inventory impairment charges in the three month period ended June 30, 2008, compared to $161,000 in inventory impairment charges in the three month period ended June 30, 2007. The inventory impairment charges in the 2007 period were related to commercial trade, patient sample inventory product and raw materials in excess of expected future inventory requirements and future purchase commitments, based on current sales forecasts. The decrease in inventory impairment charges in the 2008 period is due to a reduction in charges related to commercial trade resulting from the extension of BiDil’s shelf life.

Research and Development. Research and development expense for the three months ended June 30, 2008 was $0.5 million, compared to $2.9 million for the three months ended June 30, 2007. The $2.4 million, or 83%, decrease in research and development expenses in the current period was primarily due to a $1.5 million decrease in headcount and related compensation expenses as a result of our January 2008 restructuring, a $0.5 million decrease in medical expenditures supporting the commercialization of BiDil and a $0.4 million decrease 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 June 30, 2008 and 2007:

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

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

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

In the first quarter of 2008, we recorded restructuring charges of $2.7 million, which was comprised of severance benefits of $2.6 million related to the reduction of our employee headcount from approximately 90 to approximately 7 positions, and impairment charges of $0.1 million for disposal of computer equipment. The severance benefit charges were recorded in accordance with Statement of Financial Accounting Standards No. 112, Employers’ Accounting for Postemployment Benefits, or SFAS 112, for contractual termination benefits for certain executives and SFAS 146 for one-time termination benefits for the remainder of employees terminated. As of June 30, 2008, we owed $0.1 million for salary continuation payments. As a result of the continued implementation of this restructuring, we estimate that our operating expenses related to research and development and sales, general and administrative functions, excluding restructuring charges, for the year ending December 31, 2008 will be approximately $14 million to $16 million, excluding cost of product sales but including share-based compensation expense.

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

Stock-based Compensation Expense. We reversed $0.1 million and recognized $1.4 million in stock-based compensation expense for the three months ended June 30, 2008 and 2007, respectively. As of June 30, 2008, the total unrecognized compensation cost related to unvested awards was approximately $2.7 million, which will be recognized over a weighted average period of 2.1 years.

Non-Operating Income. Non-operating income was $102,000 for the three months ended June 30, 2008, compared to $251,000 for the three months ended June 30, 2007. The $149,000 decrease for the three month period ended June 30, 2008 compared to the three month period ended June 30, 2007 is primarily due to lower fund balances available for investment, offset by a $177,000 reduction in interest expense incurred on long-term debt and an impairment charge of $36,000 related to auction rate securities.

Six Months Ended June 30, 2008 and 2007

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

Cost of Product Sales. Cost of product sales was $1.5 million for the six month period ended June 30, 2008, compared to $1.6 million for the six month period ended June 30, 2007. For the six month periods ended June 30, 2008 and 2007, we recorded

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

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

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

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

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

In the first quarter of 2008, we recorded restructuring charges of $2.7 million, which was comprised of severance benefits of $2.6 million related to the reduction of our employee headcount from approximately 90 to approximately 7 positions, and impairment charges of $0.1 million for disposal of computer equipment. The severance benefit charges were recorded in accordance with SFAS 112 for contractual termination benefits for certain executives and SFAS 146 for one-time termination benefits for the remainder of employees terminated. As of June 30, 2008, we owed $0.1 million for salary continuation payments. As a result of the continued implementation of this restructuring, we estimate that our operating expenses related to research and development and sales, general and administrative functions, excluding restructuring charges, for the year ending December 31, 2008 will be approximately $14 million to $16 million, excluding cost of product sales but including share-based compensation expense.

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

Stock-based Compensation Expense. We recognized $0.9 million and $3.4 million in stock-based compensation expense for the six months ended June 30, 2008 and 2007, respectively. As of June 30, 2008, the total unrecognized compensation cost related to unvested awards was approximately $2.7 million, which will be recognized over a weighted average period of 2.1 years.

Non-Operating Income. Non-operating income was $0.3 million for the six months ended June 30, 2008, compared to $0.5 million for the six months ended June 30, 2007. The $0.2 million decrease for the six month period ended June 30, 2008 compared to

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

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 June 30, 2008, we have received net proceeds of $321.2 million from the issuance of equity securities, including net proceeds of $18.2 million from our registered direct offering in May 2007.

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

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

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

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

On June 28, 2005, we borrowed (i) $10.0 million from Oxford Finance Corporation, or Oxford, and (ii) $10.0 million from General Electric Capital Corporation, or GECC, pursuant to the terms of promissory notes made by us with both Oxford and GECC, respectively. The notes bore interest at a fixed rate of 9.95% per annum and were payable in 36 consecutive monthly installments of principal and accrued interest, beginning July 1, 2005. The notes were 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. As of June 30, 2008, the promissory notes had been paid in full.

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

As of June 30, 2008, we held approximately $2.3 million of auction rate securities. These auction rate securities are comprised of approximately $0.7 million of securities backed by municipalities, approximately $1.3 million of preferred stock issued by closed-end funds and a $0.3 million security issued by a government-backed student loan organization. Auction rate securities are securities that are structured to allow for short-term interest rate resets, but with contractual maturity dates that can be well in excess of ten years. Auctions have historically provided a liquid market for these securities. However, beginning in February 2008, the majority of auction rate securities in the marketplace failed at auction due to sell orders exceeding buy orders. Such failures resulted in the interest rate on these securities resetting to predetermined rates within the underlying loan agreement, which might be higher or lower than the current market rate of interest. Our ability to liquidate our auction rate securities and fully recover the carrying value of our investments in the near term may be limited or not exist. In the event that we need to access our investments in these auction rate securities, we will not be able to do so until a future auction of these investments is successful, the issuer redeems the outstanding securities, a buyer is found outside the auction process, or the securities mature, which could be in as many as 37 years. As a result of these factors, we may be required to record additional impairment charges on these investments from time to time and, as discussed below, we recorded impairment charges of $36,000 and $52,000 for the three and six months ended June 30, 2008, respectively.

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

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

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

Contractual Obligations

The following table summarizes our contractual obligations at June 30, 2008, 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
Operating lease (1)	$	18,000	$	18,000	$	—	$	—	$	—
Purchase obligations (2)	216,000		216,000		—		—		—
License milestones (3)	—		—		—		—		—
Total	$	234,000	$	234,000	$	—	$	—	$	—

(1) In May 2008, we entered into a sublease with Cubist, pursuant to which we agreed to sublease approximately 4,000 square feet of office space at a rate of approximately $9,200 per month in advance. The term of this sublease is for three months beginning on June 1, 2008. Upon the expiration of the initial term, we have the right to extend the sublease, without notice, on a month-to-month basis.

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

(3) In February 2007, we entered into a License Agreement with Elan, pursuant to which we may be obligated to pay certain milestone payments in the aggregate amount of $2.5 million, of which $250,000 was paid in the first quarter of 2007. We are uncertain as to the timing of future payments, if any, pursuant to the terms of the License Agreement.

In January 2008, we ceased actively promoting sales of BiDil, which is our only significant source of revenue. We intend to continue incurring costs related to supporting ongoing prescriptions for BiDil, and we also expect to incur additional expenses relating to the ongoing development of BiDil XR. We believe that our existing sources of liquidity and the cash expected to be generated from future sales of BiDil, together with the significant reduction in expenditures as a result of our January 2008 restructuring, will be sufficient to fund our operations 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 due to a number of factors, including the following:

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

· the amount of future product sales of BiDil;

· the cost of manufacturing and selling BiDil;

· the timing of collections related to sales of BiDil;

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

· the effect of competing technological and market developments;

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

· the cost of maintaining licenses to use patented technologies.

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

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

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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, the net realizable value of inventory, accrued expenses and the factors used to determine the fair value assigned to our stock options. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There were no material changes in our judgments or estimates during the second quarter of 2008. 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, 2007, which is on file with the Securities and Exchange Commission, or SEC.

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 fact, are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-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 maturity dates of two years or less. In addition, we hold auction rate securities that reset monthly. However, the maturity dates of these securities at June 30, 2008 range from 2008 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 June 30, 2008, 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.

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and marketable securities in a variety of securities, including U.S. government agencies, municipal notes which may have an auction reset feature, corporate notes and bonds, commercial paper, and money market funds. These securities are classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss). If interest rates rise, the market value of our investments may

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

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

As of June 30, 2008, we held approximately $2.3 million of auction rate securities. These auction rate securities are comprised of approximately $0.7 million of securities backed by municipalities, $1.3 million of preferred stock issued by closed-end funds and a $0.3 million security issued by a government-backed student loan organization. Auctions have historically provided a liquid market for these securities. However, beginning in February 2008, the majority of auction rate securities in the marketplace failed at auction due to sell orders exceeding buy orders. Our ability to liquidate our auction rate securities and fully recover the carrying value of our investments in the near term may be limited or not exist. In the event that we need to access our investments in these auction rate securities, we will not be able to do so until a future auction of these investments is successful, the issuer redeems the outstanding securities, a buyer is found outside the auction process, or the securities mature, which could be in as many as 37 years. As a result of these factors, we may be required to record additional impairment charges on these investments from time to time and, as discussed below, we recorded impairment charges of $36,000 and $52,000 for the three and six months ended June 30, 2008, respectively.

Item 4. Controls and Procedures

Our chief executive officer and interim chief financial officer evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2008. 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 June 30, 2008, our chief executive officer and interim chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at 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 June 30, 2008, 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, 2007.

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Risks Relating to our Business, Strategy and Financial Condition

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

Based upon our determination that the successful commercialization of BiDil requires a magnitude of resources that we cannot currently allocate to the program, as well as our plans to conserve cash in order to pursue the development of BiDil XR, in January 2008 we discontinued active promotional activities for BiDil. We concurrently implemented a restructuring plan that eliminated approximately 80 positions, reducing headcount to approximately 7 positions. Although we have discontinued our promotional activities for BiDil, we continue to manufacture and sell BiDil and maintain the product on the market for patients through normal wholesale and retail channels. We are also conducting limited advertising in select medical publications, and utilizing a third-party marketing firm to contact healthcare professionals on our behalf, in each case in an effort to maintain a limited market presence for BiDil.

We expect to incur operating expenses going forward primarily related to our continued development of BiDil XR and to keeping BiDil available on the market. We expect to fund a substantial portion of these operating expenses through ongoing BiDil sales. We expect that the elimination of our sales force and discontinuation of our active promotional efforts related to BiDil could result in a decline in BiDil prescriptions by healthcare providers and could also adversely affect third party payors’ willingness to provide reimbursement at favorable levels. If physicians do not continue to prescribe BiDil in sufficient quantities, and/or if managed care providers remove BiDil from a preferential reimbursement tier on their plan formularies, then our future revenue from sales of BiDil will decline significantly, and we may not generate sufficient capital to fund our continued operations, including with respect to our planned development of BiDil XR.

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

In conjunction with our January 2008 restructuring plan, in which we ceased active promotion of BiDil and significantly reduced our workforce, we are evaluating strategic alternatives to divest our current business in whole or in part in our effort to maximize the value of our commercial organization and product development programs for our shareholders. We have engaged an investment bank to advise us in considering these potential strategic alternatives, which may include the sale, license or divestiture of certain of our assets, including our BiDil business, the assets relating to BiDil XR and/or our nitric oxide technologies, the sale or merger of our company, or other similar strategic transactions. We do not know whether or not our evaluation of strategic alternatives will result in one or more such transactions being successfully consummated or, if successful, that any such transaction would achieve our goal of maximizing the value of our organization and programs for our stockholders. As we evaluate strategic options intended to maximize shareholder value for our company, we intend to execute on our business strategy of ceasing active promotional efforts for BiDil while devoting substantially all of our resources to supporting ongoing BiDil prescriptions and the continued development of BiDil XR. If we are unable to successfully consummate one or more strategic transactions relating to our business, we may not have sufficient capital to execute on our current business plan and could be required to further curtail or cease our operations, either of which would have a material and adverse effect on our business, financial condition and results of operations.

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

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

In January 2008, we ceased actively promoting sales of BiDil, which is our only significant source of revenue. We intend to continue incurring costs relating to supporting ongoing BiDil prescriptions, and we also expect to incur additional expenses relating to the ongoing development of BiDil XR. We believe that our existing sources of liquidity and the cash expected to be generated from future sales of BiDil, together with the significant reduction in expenditures as a result of our January 2008 restructuring, will be sufficient to fund our operations 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 due to a number of factors, including the following:

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

· the amount of future product sales of BiDil;

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· the cost of manufacturing and selling BiDil;

· the timing of collections related to sales of BiDil;

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

· the effect of competing technological and market developments;

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

· the cost of maintaining licenses to use patented technologies.

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

A significant portion of our investment portfolio is invested in auction rate securities which have faced recent market failures. Failures in these auctions have and may continue to affect our liquidity.

As of June 30, 2008, we held approximately $2.3 million of investments in auction rate securities. These securities are structured to allow for short-term interest rate resets, but with contractual maturity dates that can be well in excess of ten years. Auctions have historically provided a liquid market for these securities. However, beginning in early February 2008, the majority of auction rate securities in the marketplace failed at auction due to sell orders exceeding buy orders. Our ability to liquidate our auction rate securities and fully recover the carrying value of our investment in the near term may be limited or not exist. In the event that we need to access our investments in these types of securities, we will not be able to do so until a future auction on these investments is successful, the issuer redeems the outstanding securities, a buyer is found outside the auction process, or the securities mature, which could be in as many as 37 years. During the first quarter of 2008, we reclassified $1.6 million of our total amount of auction rate securities from short-term to long-term marketable securities. For the six months ended June 30, 2008, we have recorded an other-than-temporary impairment of $16,000 on a government-backed student loan auction rate security and an other-than-temporary impairment of $36,000 on a preferred stock closed end fund, reflecting management’s determination that these securities may not be liquidated within one year due to the auction failures described above. In the future, should we experience additional auction failures and/or determine that these auction rate securities have experienced other than temporary declines in fair value, we would recognize a loss in our statement of operations, which could be material. In addition, any future failed auctions may adversely impact the liquidity of our investments.

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

Our common stock is currently listed for quotation on the NASDAQ Global Market. We are required to meet specified financial requirements in order to maintain our listing on the NASDAQ Global Market. One such requirement is that we maintain a minimum closing bid price of at least $1.00 per share for our common stock. Our common stock has recently closed at prices below the minimum bid price requirement, and in February 2008 we received a deficiency notice from NASDAQ. Although we regained compliance with NASDAQ’s minimum bid price rule in March 2008, if the closing bid price of our stock price falls below $1.00 per share for 30 consecutive business days, we will again receive a deficiency notice from NASDAQ advising us that we have 180 days to regain compliance by maintaining a minimum closing bid price of at least $1.00 for a minimum of ten consecutive business days. Under certain circumstances, NASDAQ could require that the minimum closing bid price exceed $1.00 for more than ten consecutive days before determining that a company complies with its continued listing standards. If in the future we fail to satisfy the NASDAQ Global Market’s continued listing requirements, our common stock could be delisted from the NASDAQ Global Market, in which case we may transfer to the NASDAQ Capital Market, which generally has lower financial requirements for initial listing or, if we fail to meet its listing requirements, the OTC Bulletin Board. There are many factors that may adversely affect our minimum bid price,

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including those described throughout this section titled “Risk Factors.” Many of these factors are outside of our control. As a result, we may not be able to sustain compliance with the minimum bid price rule in the long term. Any potential delisting of our common stock from the NASDAQ Global Market would make it more difficult for our stockholders to sell our stock in the public market and would likely result in decreased liquidity and increased volatility for our common stock.

If we do not maintain an adequate level of revenue from sales of BiDil given our lack of promotional activities, the availability of cash to fund our planned development of BiDil XR will significantly decline, our BiDil XR development efforts may not be successful and our business may fail.

Our current strategy is to continue to advance the development of BiDil XR while simultaneously seeking strategic alternatives to divest all or substantially all of our current business. We will depend upon continued sales of BiDil to fund a substantial portion of our costs and expenses to develop BiDil XR. We have recently discontinued active promotional efforts related to BiDil, and we intend only to expend the resources necessary to maintain BiDil on the market for patients through normal wholesale and retail channels. As a result of our lack of active promotional efforts for BiDil, sales of BiDil may decline rapidly. Our inability to successfully generate further revenue from BiDil sales will adversely affect our ability to seek to advance the development of BiDil XR, in which case we may be required to further curtail or cease our operations.

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

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

· the unavailability of favorable government and third-party payor reimbursement;

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

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

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

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

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

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 would adversely affect our financial results and our ability to execute our business plan.

We do not physically manufacture BiDil and have no plans to do so. We have engaged Schwarz Pharma under a five-year exclusive manufacturing and supply agreement solely for the three times daily immediate release dosage formulation of 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;

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· 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 and would adversely affect our financial results and our ability to execute our business plan.

We rely on a single supplier for one of the two active ingredients in BiDil, and the loss of this supplier could prevent or interrupt the sale of 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. Sumitomo is currently the only supplier which is qualified to provide hydralazine hydrochloride for the manufacture of BiDil. 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 will need to identify, qualify, and obtain FDA approval of a New Drug Application, or NDA, supplement for an alternative manufacturer/supplier of hydralazine hydrochloride. If we are unable or delayed in doing this, we may be unable to continue to sell BiDil on commercially viable terms, if at all, or the supply of BiDil may be interrupted. Furthermore, because Sumitomo is currently the sole qualified supplier of hydralazine hydrochloride for the manufacture of BiDil, Sumitomo exercises control over the price of hydralazine hydrochloride that we purchase. Any increase in the price for hydralazine hydrochloride may reduce our gross margins and adversely affect our ability to sell BiDil at a favorable price, unless an alternative manufacturer/supplier can be identified and qualified, a NDA supplement for the use of this manufacturer/supplier can be approved by the FDA, and a favorable price can be negotiated.

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

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

The marketing claims we are permitted to make in labeling or advertising regarding our marketed products must comply with FDA laws and regulations and are limited to those specified in any FDA approval. Although we are not actively marketing BiDil, we could face liability for our previous marketing activities if the FDA believes that we have promoted our products for unapproved indications or otherwise failed to comply with the FDA’s promotional labeling or advertising regulations, or guidelines regarding company support for continuing medical education. Based on such allegations, the FDA could issue an untitled letter or warning letter, or take other enforcement action including seizure of allegedly violative product, injunctions or civil or criminal prosecution against us and our officers or employees. 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 prior 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.

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In addition, the manufacturer and the manufacturing facilities we use to produce BiDil are subject to periodic review and inspection by 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 often require prior FDA approval before the product, as modified, may be marketed.

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 successfully and could harm our reputation and lead to lower acceptance of BiDil 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.

Clinical testing of BiDil XR may not be successful, in which case we may be unable to commercialize BiDil XR and the value of our business will substantially decline.

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

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

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

· difficulty obtaining or maintaining IRB approval of studies;

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

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

· the number of patients required for our clinical trials may be larger than we anticipate, enrollment in our clinical trials may be slower than we currently anticipate, or participants may drop out of our clinical trials at a higher rate than we anticipate, any of which would result in significant delays and increased costs;

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

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

· regulators may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

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

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

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

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

· be delayed in obtaining marketing approval for BiDil XR;

· not be able to obtain marketing approval;

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

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

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether future clinical trials will begin as planned, will need to be redesigned or will be completed on schedule, if at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize BiDil XR, or allow our competitors to bring products to market before we do, which could impair our ability to commercialize BiDil XR and may harm our business and results of operations.

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

We do not independently conduct clinical trials for BiDil XR. We rely on a third party contract research organization to enroll qualified patients and conduct our clinical trials of BiDil XR. In addition, we rely on other third party entities to conduct testing activities related to these clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, any of these third parties may also have relationships with other entities, some of which may be our competitors. If any of these third party entities fail to successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials and related testing in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for BiDil XR and will not be able to, or may be delayed in our efforts to, successfully commercialize BiDil XR.

If we are not able to obtain required regulatory approvals, we will not be able to commercialize BiDil XR and our ability to generate revenue will be materially impaired.

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

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

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

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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. 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 BiDil, 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.

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 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 solely to the continued development of BiDil XR. We are currently seeking out-licensing opportunities for our other potential product candidates based on our proprietary nitric oxide technology. 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 potential product candidates include nitric oxide enhancements of existing drugs; in these cases, we have sought to modify 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 arrangements for these potential product candidates. Even if we are successful in entering into out-licensing 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 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 out-licensing arrangements include the following:

· our future licensing partners 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 and which could affect their commitment to our program;

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

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

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

As a result of the foregoing factors, our potential strategic licensees may not be successful in developing and commercializing any products based on our proprietary nitric oxide technology. Any failure of such potential licensees 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.

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, or U.S. patent office, considered published reports on these clinical trials and concluded that they did not constitute prior art that would prevent the issuance of the 2007 patent. The U.S. patent office also considered the question of whether the 2007 patent constituted prior art with respect to the 2020 patents, 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 arrangements with respect to our potential product candidates will be harmed, and we may not be able to operate our business profitably.

Our success depends, in part, on our 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.

The process of seeking patent protection for our discoveries 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.

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The issued patents and patent applications for our potential 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 potential 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 potential product candidates.

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’s efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, our strategy of providing nitric oxide-enhancing versions of existing 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.

If a third party is 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.

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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. Moreover, because we have discontinued all promotional activities for BiDil and we have ceased all research and development related to our nitric oxide-based product candidates, our ability to effectively compete in the marketplace has been significantly adversely affected. Our principal competitors 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, our competitors may:

· develop and commercialize products that render BiDil and/or BiDil XR, if successfully developed and commercialized, obsolete or non-competitive or that cause BiDil 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;

· 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 compete on the basis of the availability in generic form and at substantially lower prices of the individual components that constitute BiDil (isosorbide dinitrate, which is separately marketed for angina, and hydralazine hydrochloride, which is separately marketed for hypertension). Although these generic components are not bioequivalent to BiDil, physicians have, and may in the future, prescribe them in lieu of prescribing BiDil.

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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 areas of nitric oxide based therapeutics which may overlap areas in which we have previously engaged in discovery research activities. These companies are: Angiogenix, Inc., Vernalis plc, NicOx S.A., Amulet Pharmaceuticals, Inc., RenoPharm, Vasopharm BIOTECH GmbH and N30 Pharmaceuticals, LLC.

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

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, 2006 to July 31, 2008, our stock price has ranged from a low of $0.80 per share on January 22, 2008 to a high of $14.90 per share on January 9, 2006. The following factors, among others, may affect the price of our common stock:

· fluctuations in our financial results, including with respect to 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 results relating to our BiDil XR development program;

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

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

· public concern as to the safety of products developed by us, 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 July 31, 2008, our directors and executive officers, together with their affiliates, owned, in the aggregate, approximately 33% 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

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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 July 31, 2008, there were 46,086,825 shares of common stock outstanding. Substantially all of these shares may also be resold in the public market 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 exercisable 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 second quarter of 2008:

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Period	Total Number of Shares Purchased (1)	Average Price Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
April 1, 2008 – April 30, 2008	13,621	$	1.22	—	—
May 1, 2008 – May 31, 2008	466	$	1.26	—	—
June 1, 2008 – June 30, 2008	—	$	—	—	—
Total	14,087			—	—

(1) The amount listed in this column represents shares of common stock surrendered by certain employees to us in satisfaction of tax withholding obligations incurred upon the lapse of restrictions on shares of common stock during the period in accordance with the terms of restricted stock agreements previously entered into between us and certain employees.

(2) We currently have no plan or program to repurchase our equity securities, aside from additional shares that will be surrendered to us in satisfaction of tax withholding obligations incurred upon the future lapse of restrictions on shares of common stock in accordance with the terms of restricted stock agreements entered into between us and certain employees.

Item 4. Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Stockholders was held on May 14, 2008. At the Annual Meeting, the following matters were voted upon by holders of 35,225,078, or approximately 76.4%, of the total outstanding shares of our common stock entitled to vote at the Annual Meeting:

1. To elect the following ten directors:

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

Each of the above named individuals was elected as a director.

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

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

The foregoing proposal was approved.

Item 6. Exhibits

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by this reference.

	NITROMED, INC.


	By:	/s/ KENNETH M. BATE
		Kenneth M. Bate
		President, Chief Executive Officer and Interim Chief Financial Officer
		(Principal Executive Officer and Principal Financial Officer)
Date: August 5, 2008

Exhibit Number		Description
10.1		Assignment of Lease and Assumption Agreement, dated as of May 29, 2008, by and between NitroMed, Inc. and Cubist Pharmaceuticals, Inc., filed as an exhibit to NitroMed’s Current Report on Form 8-K (File No. 000-50439) filed on June 3, 2008 and incorporated herein by reference.
10.2		Sublease, dated as of May 29, 2008, by and between NitroMed, Inc. and Cubist Pharmaceuticals, Inc., filed as an exhibit to NitroMed’s Current Report on Form 8-K (File No. 000-50439) filed on June 3, 2008 and incorporated herein by reference.
31.1		Certification of the Chief Executive Officer and Interim Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1		Certification of the Chief Executive Officer and Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Dated: August 5, 2008

	/s/ KENNETH M. BATE
	Kenneth M. Bate
	President, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

Dated: August 5, 2008

	/s/ KENNETH M. BATE
	Kenneth M. Bate
	President, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

(1) Operations and Basis of Presentation

(2) Revenue Recognition

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):

(5) Stock-Based Compensation

(8) Income (Loss) Per Share

(9) Concentration of Credit Risk

(10) Commitments and Contingencies

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

1. I have reviewed this Quarterly Report on Form 10-Q of NitroMed, Inc.;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

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