10-K

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

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

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(f) 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 incorporation or organization)	(IRS Employer Identification No.)
125 Spring Street, Lexington, Massachusetts	02421
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $.01 par value per share	NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x.

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

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

Large accelerated filer  o              Accelerated filer  x               Non-accelerated filer  o

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

The aggregate market value of the registrant’s common stock held by nonaffiliates of the registrant was approximately $102,706,000, based on the price at which the registrant’s common stock was last sold on June 30, 2006.

As of March 1, 2007, there were 37,259,870 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrant’s proxy statement for the annual meeting of stockholders to be held on May 25, 2007, which are to be filed pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2006, are incorporated by reference into Part III of this report.

NITROMED, INC.
ANNUAL REPORT
ON FORM 10-K

INDEX

		PAGE
PART I
Item 1.	Business		1
Item 1a.	Risk Factors		19
Item 1b.	Unresolved Staff Comments		39
Item 2.	Properties		39
Item 3.	Legal Proceedings		39
Item 4.	Submission of Matters to a Vote of Security Holders		39
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		40
Item 6.	Selected Financial Data		43
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		44
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		56
Item 8.	Financial Statements and Supplementary Data		57
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		88
Item 9A.	Controls and Procedures		88
Item 9B.	Other Information		91
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		91
Item 11.	Executive Compensation		92
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		92
Item 13.	Certain Relationships and Related Transactions, and Director Independence		92
Item 14.	Principal Accounting Fees and Services		92
PART IV
Item 15.	Exhibits, Financial Statement Schedules		92
SIGNATURES			93

PART I

This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, expenses, earnings or losses from operations, or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product development and commercialization timelines or outcomes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include risks that are described in “Item 1A—Risk Factors” and elsewhere in this annual report and that are otherwise described from time to time in our Securities and Exchange Commission reports filed after this report.

The forward-looking statements included in this annual report represent our estimates as of the date of this annual report. We specifically disclaim any obligation to update these forward-looking statements in the future, except as specifically required by law or the rules of the Securities and Exchange Commission. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this annual report.

ITEM 1.BUSINESS

Overview

We are an emerging pharmaceutical company with substantial expertise and intellectual property in nitric oxide-based drug development. We have devoted substantially all of our efforts towards the research and development of our product candidates and the commercialization of our currently marketed product, BiDil®.

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

In March 2006, we eliminated our discovery research program and terminated substantially all of the employees in our discovery research group in a restructuring of our company that was intended to better align costs with revenue and operating expectations. In October 2006, we implemented a revised strategy and business model in order to focus our resources on the accelerated development of an extended release formulation of BiDil, known as BiDil XR™. As part of this strategic shift, we eliminated our then-current sales force and replaced it with a small team of highly experienced senior cardiovascular specialists, resulting in a net reduction of approximately 120 in sales force headcount. In addition, we eliminated approximately 20% of our general and administrative personnel in connection with this restructuring program. Our restructured sales force will be comprised initially of a director of managed markets, six national account directors, two area business directors and twenty-one cardiovascular business managers. Our sales and marketing organization continues to be managed by our senior vice president of commercial operations and our vice president of marketing and business development. Our highly specialized field force is focused on regional and national thought-leader physicians, current BiDil prescribers, as well as key institutions in major metropolitan centers that treat, and influence the treatment of, large numbers of African-Americans diagnosed with heart failure. Additional non-personal marketing methods are being utilized to reach the broader number of existing and potential BiDil prescribers. We expect that this alternative strategy will employ a less costly approach to marketing the current immediate release

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formulation of BiDil, allowing us to conserve the cash required to pursue the accelerated development of BiDil XR. Preliminary clinical studies with BiDil XR have demonstrated proof of principle, and we continue to proceed with early-stage clinical development of the product.

In connection with our efforts to develop BiDil XR, on February 9, 2007, we entered into a license agreement with Elan Pharma International Limited, or Elan. Pursuant to the agreement, Elan granted to us an exclusive worldwide royalty-bearing license, with specified sublicense rights, to specified intellectual property of Elan, as well as any improvements to any of the foregoing developed by either party during the term of the agreement. Pursuant to the license, we may import, use, offer for sale and sell an oral capsule formulation incorporating specified technology owned or controlled by Elan and containing, as its sole active combination of ingredients, the combination of the active drug substances isosorbide dinitrate and hydralazine hydrochloride. In consideration for the grant of the license, we have agreed to pay Elan royalties that are calculated by reference to annual net sales parameters set forth in the agreement. In addition, we have also agreed to pay Elan specified amounts upon the achievement of specified development and commercialization milestone events set forth in the agreement. We have also generated significant intellectual property rights relating to our nitric-oxide enhancing technologies and we are seeking out-licensing and collaboration opportunities to further exploit these proprietary technologies. We do not have any current plans to conduct any further internal research with respect to these technologies.

We were incorporated in Delaware in 1992. Our office is currently located at 125 Spring Street, Lexington, Massachusetts 02421, and our telephone number is (781) 266-4000. On February 23, 2007, we entered into a lease for office space at 45-55 Hayden Avenue in Lexington, Massachusetts, and expect to move to our new office location in March 2007. Our Internet address is www.nitromed.com. The information on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered to be a part of this annual report. Our website address is included in this annual report on Form 10-K as an inactive technical reference only.

When used in this annual report on Form 10-K, the terms “NitroMed,” “we,” “our” and “us” refer to NitroMed, Inc., unless otherwise specified. We own the trademarks NitroMed®, BiDil® and NitroMed’s logo “N.” In addition, we have filed an application for BiDil XR™. Other trademarks and service marks appearing in this annual report on Form 10-K are the property of their respective holders.

BiDil: Treatment for Heart Failure in African Americans

Heart Failure in African Americans

Heart failure, also called congestive heart failure or dilated cardiomyopathy, is a progressively worsening condition that occurs when the heart muscle weakens and cannot pump blood efficiently enough to meet the metabolic needs of the body. The loss of pump function is usually caused by an underlying condition, such as hypertension or coronary artery disease, which weakens the heart muscle and increases a person’s risk of heart failure. The most common symptoms of heart failure include shortness of breath from congestion in the lungs, fatigue, sleeping problems due to the inability to lay flat, sudden awakening with shortness of breath and swelling in the feet, ankles and other parts of the body.

Heart failure affects approximately five million Americans and there is currently no cure for the disease. After a patient is diagnosed with heart failure, their prognosis is generally poor, with approximately 50 percent of patients dying within five years. Heart failure is the primary reason for hospitalizations among people over the age of 65 and is one of the most expensive diseases faced by Americans, costing more than all cancers combined.

An estimated 750,000 African Americans are currently diagnosed with heart failure. African Americans between the ages of 45 and 64 are 2.5 times more likely to die from heart failure than caucasians in the same age range. The African American community is also more likely to be subject to the

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disease at a younger age than their caucasian counterparts, resulting in earlier disability and higher rates of both hospitalization and premature death. In addition, some medicines approved for the treatment of heart failure appear to be less effective in controlling high blood pressure in African American patients. Ethnic disparities in the prevalence of heart failure have been attributed to a variety of factors, including access to medical care, disease management, socioeconomic factors, lifestyle habits and a higher incidence of diabetes, hypertension and metabolic syndrome.

African American Heart Failure Trial (A-HeFT)

In 2001, we partnered with the Association of Black Cardiologists, Inc. to conduct the African American Heart Failure Trial, or A-HeFT, the first trial conducted in a heart failure population in which all of the participants identified themselves as black. A retrospective analysis of an earlier study with a combination of isosorbide dinitrate and hydralazine hydrochloride had suggested a trend for improved survival in the subset of patients with mild to moderate heart failure who self-identified themselves as black. The randomized, double-blind, placebo-controlled A-HeFT study enrolled 1,050 self-identified black patients with New York Heart Association, or NYHA, class III or IV heart failure at 169 clinical research sites. The classification system means that patients had marked limitation of physical activity (class III) or were unable to carry out any physical activity without discomfort (class IV). Participants in A-HeFT were required to be stable while receiving standard heart failure therapy at the time of the beginning of the trial, per their physicians. The primary end point for the trial was a composite score made up of weighted values for death from any cause, a first hospitalization for heart failure, and change in the quality of life.

After a unanimous recommendation from the independent A-HeFT Data and Safety Monitoring Board and Steering Committee in July 2004, A-HeFT was halted early due to a significant survival benefit seen with the drug. Patients taking BiDil in addition to current therapies experienced a significant 43% decrease in the risk of mortality (p=0.012) (absolute mortality rate: BiDil, 6.2% vs. placebo, 10.2%), a 39% reduction in the risk of first hospitalization for heart failure (p<0.001) (absolute first hospitalization rate: BiDil, 16.4% vs. placebo, 24.4%) and a statistically significant improvement at most time points in response to the Minnesota Living with Heart Failure Questionnaire, which is a self-report of the patient’s functional status, versus patients taking placebo in addition to current standard therapies. Adverse events reported in the trial included symptoms of headache and dizziness, which were significantly more frequent in the group given BiDil, and exacerbations of congestive heart failure, both moderate and severe, which were significantly more frequent in the placebo group.

BiDil: Commercialization Strategy

BiDil, an orally administered fixed-dose combination of isosorbide dinitrate and hydralazine hydrochloride, was approved by the FDA in June 2005 for the treatment of heart failure in self-identified black patients. BiDil is indicated for the treatment of heart failure as an adjunct to standard therapy in self-identified black patients to improve survival, to prolong time to hospitalization for heart failure, and to improve patient-reported functional status. There is little experience in patients with NYHA class IV heart failure. Most patients in the clinical trial supporting effectiveness, referred to as A-HeFT, received, in addition to BiDil or placebo, concomitant therapy with one or more of the following other heart failure medicines: a loop diuretic, an angiotensin converting enzyme inhibitor or an angiotensin receptor blocker, and a beta blocker. In addition, many patients also received a cardiac glycoside or an aldosterone antagonist. BiDil is a fixed-dose combination of isosorbide dinitrate, a vasodilator with effects on arteries and veins, and hydralazine hydrochloride, a predominantly arterial vasodilator. The mechanism of action underlying the beneficial effects of BiDil in the treatment of heart failure has not been established.

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Our current sales strategy for BiDil is focused on:

·concentrated sales efforts through a small team of highly experienced senior cardiovascular specialists targeting:

·leading heart failure academic institutions and specialized clinics,

·key opinion leaders in cardiology who influence the treatment of heart failure, and

·high prescibers of BiDil and other heart failure medications;

·ensuring patient access through:

·efforts to obtain public and private insurance coverage and to secure preferential reimbursement status among third-party payors,

·our patient assistance program, and

·coalition building with advocacy organizations; and

·creating physician awareness and demand through centralized promotional efforts.

With respect to manufacturing, we engaged Schwarz Pharma under a five-year exclusive manufacturing and supply agreement for the three times daily immediate release dosage formulation of BiDil. Under the supply agreement, we have the right to engage a backup manufacturer. As part of the manufacturing process, we order bulk materials of hydralazine hydrochloride from Flavine International, Inc., the U.S. representative of Sumitomo Corp., and isosorbide dinitrate from Dottikon ES Holding AG.

Our current efforts to expand patient access to BiDil focus on gaining improved insurance coverage. We estimate that approximately two-thirds of African American patients have access to BiDil at Tier II reimbursement, a term generally used to denote a preferential level of reimbursement at which patient co-pays range from approximately $15.00 to $30.00 per prescription. Our estimates are drawn from published databases, subscription databases and external consultants who have expertise in this area. Due to the fact that ethnicity data is not generally collected by commercial and Medicare Part D insurers, exact figures cannot be determined.

With respect to our coalition-building efforts, we have maintained a strategic alliance with the National Association for the Advancement of Colored People, or NAACP, to implement measures to narrow health care disparities that exist between African Americans and Caucasians in areas of access, affordability, quality, infrastructure and compliance. We have also developed coalitions with other advocacy and professional organizations as part of our efforts to address racial and ethnic disparities in cardiovascular disease, including the Association of Black Cardiologists, the Congressional Black Caucus and the National Minority Quality Forum.

Those clinicians whom we can not reach by direct personal methods will receive non-personal promotional efforts, driven centrally by our marketing department. These tactics include, but are not limited to:

·tele-detailing;

·e-detailing;

·direct mail;

·Internet advertising; and

·professional journal advertising.

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BiDil XR: Internal Development Strategy

The current formulation of BiDil is an immediate-release tablet that must be taken three times daily. We are currently pursuing the development of an extended release formulation of BiDil, known as BiDil XR, that is designed to be taken once a day. We believe that BiDil XR could enhance the BiDil market by facilitating greater compliance by patients with their medications schedule, an issue which is more pronounced in a patient population already on a substantial number of concomitant medications.

In connection with our efforts to develop BiDil XR, on February 9, 2007, we entered into a license agreement with Elan, which we refer to as Elan. Pursuant to the agreement, Elan granted to us an exclusive worldwide license, for the term of the agreement, to certain know-how, patents and technology, and any improvements to any of the foregoing developed by either party during the term of the agreement. Pursuant to this license, we have the right to import, use, offer for sale and sell the oral capsule formulation incorporating specified technology referred to in the agreement and containing, as its sole active combination of ingredients, the combination of the active drug substances isosorbide dinitrate and hydralazine hydrochloride, including BiDil XR.

Preliminary clinical studies with BiDil XR have demonstrated proof of principle, and we continue to proceed with early-stage clinical development of the product. Our current plan for seeking regulatory approval for BiDil XR, which will include the conduct of bioequivalence studies, if successful and accepted as part of the basis for approval, is expected to enable the development of BiDil XR as expeditiously as possible.

Nitric Oxide Enhancing Intellectual Property

In the 1980s, nitric oxide was identified as a significant molecule that regulates a wide range of important cellular functions. Professor Robert R. Furchgott, a member of our scientific advisory board until his retirement in 2005, and two other individuals were awarded the Nobel Prize in Physiology and Medicine in 1998 for this discovery. Recent research has shown that nitric oxide also plays important biochemical and physiological roles in many diseases or medical conditions, including cardiovascular disease, gastrointestinal and inflammatory disease, central nervous system disorders, sexual dysfunction and respiratory disease.

In the past, we have utilized our nitric oxide expertise and proprietary position to seek to develop product candidates for a variety of such medical conditions. Our previous efforts in these areas consisted of discovery and preclinical stage  research primarily directed to establishing our intellectual property position and, in certain  cases, validating our discoveries in preclinical studies.

Our previous discovery research efforts sought to produce nitric oxide-enhancing drug candidates by combining an existing, marketed medicine with a nitric oxide donor, which is a molecule capable of increasing nitric oxide levels in the body. The nitric oxide donor and the existing medicine can be combined together through either a chemical linkage to potentially create a proprietary new chemical entity or through the direct mixing of the medicine and the nitric oxide enhancing compound to potentially create a patentable new use and dosage form. We believe that the probability of clinical success for those drug candidates is increased because regulatory approvals have already been achieved for the existing medicines that we were seeking to improve. We also believe that the commercial risk associated with these drug candidates is mitigated because many of these existing medicines have already generated significant sales in their markets.

In March 2006, we eliminated our discovery research program in a restructuring of our company. In connection with our October 2006 restructuring of our sales force, we implemented a revised strategy and business model in a move intended to focus our resources on the accelerated development of BiDil XR. As a result of these restructurings, we have limited our internal development activities to the development of

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BiDil XR and we do not have any current plans to conduct any further discovery research efforts with respect to our product candidates. We are currently seeking out-licensing and collaboration opportunities for these product candidates, including NMI-3377, a pre-clinical cardio-renal compound. We have generated significant intellectual property rights related to our nitric oxide-enhancing technology and compounds to protect our interests and will continue to maintain and preserve those rights.

The following is a summary of the key nitric oxide programs we have previously pursued.

Nitric Oxide Enhancing Medicines for the Treatment of Cardiovascular Disease

We previously initiated several new and novel cardiovascular drug discovery programs based on the therapeutic potential of nitric oxide-enhancing drugs in the treatment of diseases associated with endothelial dysfunction. Endothelial dysfunction is recognized as one of the common denominators underlying many cardiovascular diseases including atherosclerosis, hypertension, heart failure, diabetes, pulmonary hypertension and metabolic syndrome. Abnormal function of the endothelium, which is the layer of cells that lines blood vessels, precedes vascular morphological changes in the early stages of cardiovascular disease. Nitric oxide has many important roles in maintaining the function of normal endothelium. These include vasodilatation, inhibition of adhesion of a type of red blood cell called platelets and activation, inhibition of smooth muscle growth, inhibition of white blood cell adhesion and a reduction in chemotactic factor expression. Loss of nitric oxide therefore is a primary feature of endothelial dysfunction. Restoration of nitric oxide from the endothelium has been clinically demonstrated to reduce cardiovascular risk in many disease states. Our prior discovery research efforts utilized our nitric oxide expertise and proprietary patent position to add nitric oxide-donating capacity to existing classes of drugs which have been shown to have clinical utility in the treatment of cardiovascular diseases where endothelial dysfunction plays a critical role.

Nitric Oxide-Based Medicines for Acute Renal Failure

Acute renal failure is characterized as a sudden deterioration in kidney function and affects about 5% of all hospitalized patients. The condition is often associated with trauma, burns, systemic infections and shock. It is a serious and life threatening condition from which more than half of the affected patients die. Currently, there are no effective drug therapies for acute renal failure. Disease management is costly and includes kidney dialysis and transplantation. Nitric oxide plays a pivotal role in kidney homeostasis at the level of the renal vasculature, glomerulus, and renal tubule. All three subtypes of nitric oxide synthase (endothelial, neuronal and inducible) are expressed in various kidney structures and participate in the control of glomerular and medullary hemodynamics, tubuloglomerular feedback responses, the renin-angiotensin system, and electrolyte/fluid balance through endogenous generation of nitric oxide.

In February 2004, we signed a licensing and commercialization agreement with the University of Edinburgh and the University of St. Andrews in Scotland to research nitric oxide-based medicines with the goal of identifying treatment of acute renal failure. Our agreement with the universities supports a healthcare innovations technology transfer program funded by the Wellcome Trust, which is focused on the development of early stage projects to a point where they can be further developed by the commercial sector.

Other Nitric Oxide-Based Programs

Set forth below is a list of additional classes of nitric oxide-enhancing medicines where we have created intellectual property rights and where we believe nitric oxide-enhancing drugs may offer a clinical benefit compared to existing FDA-approved medicines. Our previous efforts in these areas consisted of discovery-stage research primarily directed to establishing our intellectual property position.

·Nitric oxide-enhancing nonsteroidal anti-inflammatory drugs;

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·Nitric oxide-enhancing phosphodiesterase inhibitors;

·Nitric oxide-enhancing steroids;

·Nitric oxide-enhancing gastrointestinal protectants;

·Nitric oxide-enhancing arginines; and

·Nitric oxide-enhancing antibiotics.

Boston Scientific Agreement

In November 2001, we entered into a research, development and license agreement with Boston Scientific in the field of restenosis. In accordance with the terms of the agreement, we granted Boston Scientific an exclusive worldwide license to develop and commercialize nitric oxide-enhancing cardiovascular stents based on certain of our technologies. We also granted to Boston Scientific a right of first refusal to obtain an exclusive license under our nitric oxide technologies to commercialize products for restenosis, which right of first refusal is for a period of three years after the end of the research term. The research term of the Boston Scientific agreement expired on December 31, 2005, although certain rights extend beyond this term.

Boston Scientific made an up-front license payment of $1.5 million to us in 2001, and made an additional payment of $3.0 million in December 2003 in connection with the extension of the research and development collaboration. Boston Scientific also made a $3.5 million equity investment in our stock in 2001. In August 2003, in connection with a private placement, Boston Scientific made an additional $500,000 equity investment in our stock.

Our Strategy

In October 2006, we implemented a revised strategy and business model in order to focus our resources on the accelerated development of BiDil XR. Key elements of our revised strategy include:

Maintenance of BiDil Market Presence.   As part of this strategic shift, we eliminated our then-current sales force and replaced it with a small team of highly experienced senior cardiovascular specialists, resulting in a net reduction of approximately 120 in sales force headcount. This highly specialized team is focused on regional and national thought-leader physicians, current BiDil prescribers, as well as key institutions in major metropolitan centers that treat, and influence the treatment of, large numbers of African-Americans diagnosed with heart failure. Additional non-personal marketing methods are being utilized to reach the broader number of existing and potential BiDil prescribers. We expect that this alternative strategy will employ a less costly approach to marketing the current immediate release formulation of BiDil, allowing us to conserve the cash required to pursue the development of BiDil XR as expeditiously as possible.

In addition, as part of our revised strategy and business model we are developing an internal team of six account directors to be lead by a director of managed markets whose focus will be ensuring patient access through targeted efforts to obtain public and private insurance coverage and to secure preferential reimbursement status among third-party payors. We believe that the documented efficacy and cost-effectiveness of BiDil will bolster these continuing efforts to expand the level of favorable reimbursement treatment received by BiDil both from public and private payors. Our failure to achieve broad preferential reimbursement treatment for BiDil in the near term could significantly hinder market acceptance of BiDil by physicians and patients.

Conservation of Resources and Accelerated Development of BiDil XR.   We expect that this alternative strategy will employ a less costly approach to marketing the current immediate release formulation of BiDil, allowing us to conserve the cash required to pursue the development of BiDil XR as expeditiously as

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possible. Preliminary clinical studies with BiDil XR have demonstrated proof of principle, and we continue to proceed in early-stage clinical development of the product.

Continuing to Protect our Product-Specific and Nitric Oxide Intellectual Property Rights and Focusing on Potential Collaborations.   Through our previous discovery research efforts, we have developed an extensive patent portfolio in nitric-oxide enhancing technology.  Because of the value of this portfolio and its critical role in our on-going product development efforts, we intend to aggressively pursue the protection of our intellectual property. We believe that many pharmaceutical companies have currently marketed drugs and products that could benefit from the therapeutic attributes and the potential patent protection of our nitric oxide-enhancing technology.

We will continue to entertain opportunities for collaboration with other businesses that may offer incremental value to our commercial portfolio or though which our product candidates will benefit from the marketing reach, clinical expertise and technology of the partner.

Research and Development

During the fiscal years ended December 31, 2006, 2005 and 2004, our total company-sponsored research and development expenses were $17.0 million, $29.0 million, and $22.4 million, respectively, and that our collaborator-sponsored research and development expenses were $-0- million, $2.3 million and $5.0 million, respectively.

In March 2006, we eliminated our discovery research program in a restructuring of our company. In connection with our October 2006 restructuring of our sales force, we implemented a revised strategy and business model in order to focus our resources on the accelerated development of BiDil XR. As a result of these restructurings, we have limited our internal development activities to the continued development of BiDil XR, and we do not have any current plans to conduct any further discovery research efforts with respect to our product candidates. We are currently seeking out-licensing and collaboration opportunities for these product candidates, including NMI-3377, a pre-clinical cardio-renal compound. We have generated significant intellectual property rights related to our nitric oxide-enhancing technology and compounds to protect our interests and will continue to maintain and preserve those rights.

Proprietary Rights and Licensing

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

As of December 31, 2006, we have 87 issued U.S. patents and 53 pending U.S. patent applications. We also have 79 issued patents and 163 pending patent applications in certain major industrial countries, including Canada, the major European market countries, Australia and Japan. Our issued U.S. and foreign patents expire on various dates between 2007 and 2025.

BiDil.   We have three U.S. patents, one expiring in April 2007 and the other two in 2020, and one Canadian patent expiring in 2008, which relate to co-administration of the components of BiDil. The first U.S. patent and the Canadian patent cover methods for reducing mortality associated with chronic congestive heart failure. We are currently pursuing an extension of this patent with the United States Patent and Trademark Office, or PTO, and the FDA. We have filed for an interim extension of one year during the processing of the extension application, but have not yet received a response from the PTO regarding the disposition of this interim extension. We have no assurance that we will be able to obtain an extension of this patent and our inability to do so would result in the loss of the protections afforded by this

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

Nitric Oxide Stents.   We have seven U.S. patents expiring on dates between 2013 and 2021 which cover the coating of medical devices with nitric oxide compounds, prevention of adverse effects associated with the use of a medical device, treatment of a damaged vessel or treatment of a damaged vascular surface in a patient by administration of a nitric oxide compound. We have five pending U.S. patent applications which, if issued, will have expiration dates between 2021 and 2025 and which cover the composition of matter of specific nitric oxide donors or nitric oxide-linked compounds and their methods of use for the treatment of restenosis. We have filed additional patent applications worldwide. We have been issued one Australian patent, one European patent, and one Canadian patent, all of which expire in 2014.

Nitric Oxide-Enhancing COX-2 Inhibitors and Nitric Oxide-Enhancing Nonsteroidal Anti-Inflammatory Drugs.   We have four issued and nine pending U.S. patent applications, which, if issued, will have expiration dates between 2020 and 2026 and which disclose and claim novel nitric oxide-enhancing COX-2 inhibitors. These applications also disclose kits and methods of use for the treatment of pain, inflammation and fever, gastrointestinal disorders, disorders resulting from elevated levels of COX-2 inhibitors, for reducing renal and respiratory toxicity, for facilitating wound healing and for improving the cardiovascular profile of COX-2 inhibitors. We have also filed additional foreign patent applications relating to this technology. We have three U.S. patents expiring in 2015, two U.S. patents expiring in 2018, and one patent application which, if issued, will expire in 2018, which cover different compositions of matter and methods of use for the treatment of pain, inflammation, fever and gastrointestinal disorders with novel nitric oxide-enhancing NSAID’s. One pending patent application, which, if issued, will expire in 2023, discloses specific composition of matter and methods of use for the treatment of pain, inflammation and gastrointestinal disorders of novel nitric oxide-enhancing nonsteroidal anti-inflammatory drugs.

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

Nitric Oxide Enhancing Cardiovascular Compounds.   We have nine pending U.S. patent applications and five pending Patent Cooperation Treaty, or PCT, patent applications, which if issued, will have expiration dates between 2024 and 2026 and which disclose and claim novel nitric oxide-enhancing cardiovascular compounds. These applications also disclose kits and methods of use for the treatment of several diseases and disorders.

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

Corporate Collaborations and Business Arrangements

Elan.   In February 2007, in connection with our efforts to develop BiDil XR, we entered into a license agreement with Elan. Pursuant to the agreement, Elan granted to us an exclusive worldwide license, for the term of the agreement, to certain know-how, patents and technology, and any improvements to any of the foregoing developed by either party during the term of the agreement.

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Pursuant to this license, we have the right to import, use, offer for sale and sell the oral capsule formulation incorporating specified technology referred to in the agreement and containing, as its sole active combination of ingredients, the combination of the active drug substances isosorbide dinitrate and hydralazine hydrochloride, including BiDil XR. In consideration for the grant of the license, 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.

The term of the agreement runs in the United States from the effective date of the agreement until the later of (a) the 20th anniversary of the date of the first sale of the product by us or a permitted sublicensee to an unaffiliated third party, which is referred to in the agreement as the first in market sale, or (b) the expiration of the last-to-expire patent for the product listed in the FDA’s “Orange Book.”  Elsewhere in the world, the term will run on a country by country basis from the effective date of the agreement until the later of (a) the 20th anniversary of the date of the first in market sale of the product in the country concerned or (b) the expiration of the life of the last to expire patent included in the Elan intellectual property in that country. Following the expiration of the initial term, the agreement shall continue automatically for rolling 3 year periods thereafter, unless the agreement has been terminated by either of the parties by serving 1 year’s written notice on the other party immediately prior to the end of the initial term or any such additional 3 year period. Either Elan or we may terminate the agreement in the event of a material, uncured breach by the other party, or if the other party goes into liquidation or becomes bankrupt or insolvent. In addition, we may terminate the agreement in the event of a technical failure, which is defined as the inability to achieve a pharmacokinetic profile for the product consistent with that of BiDil administered three times daily (at 6 hour intervals). Elan may terminate the agreement with respect to a particular country in the territory in the event that we do not meet certain obligations set forth in the agreement with respect to such country, provided that Elan must first consult with us and, if applicable, provide us with an opportunity to meet such obligations prior to exercising Elan’s termination rights.

Schwarz Pharma Manufacturing, Inc.   In February 2005, we entered into a five-year exclusive manufacturing and supply agreement with Schwarz Pharma 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 agreement renews automatically upon the expiration of the then-current term for successive one year terms unless either party provides written notice of termination at least six months prior to the expiration of the then-current term. The agreement is also terminable upon the occurrence of certain specified events.

Cardinal Health PTC, LLC.   In June 2005, we entered into a three-year exclusive distribution agreement with Cardinal Health for the distribution of BiDil in all formulations. We are obligated to pay Cardinal Health fees for the services provided under the agreement. Pursuant to the terms of the agreement, Cardinal Health has the right of first negotiation for any new pharmaceutical product to be sold by us during the term. The agreement renews automatically unless either party provides written notice of termination at least ninety days prior to the expiration of the then-current term. The agreement may be terminated without cause upon 120-days notice. However, we are obligated to pay certain fees if we exercise this termination right during the initial term of the agreement. The agreement is also terminable upon the occurrence of certain specified events.

Dr. Jay N. Cohn.   In January 1999, as amended in January 2001 and March 2002, we entered into a collaboration and license agreement with Dr. Jay N. Cohn. Under the agreement, Dr. Cohn licensed to us exclusive worldwide royalty-bearing rights to technology and inventions owned or controlled by Dr. Cohn and that relate to BiDil for the treatment of cardiovascular disease. We have made milestone payments and are currently making royalty payments to Dr. Cohn upon sales of BiDil. During the years ended December 31, 2006, and 2005, we incurred royalties to Dr. Cohn in the approximate amounts of $364,000,

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and $134,000, respectively. The agreement imposes upon us an obligation to use reasonable best efforts to develop and, upon receipt of regulatory approval, manufacture, market and commercialize products based upon the licensed rights. If we fail to meet this obligation, Dr. Cohn has the right to terminate the agreement and the license granted to us under the agreement. Dr. Cohn also has the right to terminate the agreement if we materially breach the agreement and fail to remedy the breach within 30 days. We have the right to terminate the agreement at any time upon 30 days’ prior written notice. Unless earlier terminated, the agreement continues in perpetuity. Pursuant to the agreement, Dr. Cohn was appointed to our then-current scientific advisory board, entered into a consulting agreement with us and was granted an option to purchase 10,000 shares of our common stock.

Boston Scientific.   As part of our strategy to accelerate our product development efforts, in the past we have established collaborations with several large pharmaceutical companies. These collaborations have been designed to provide us with capital and research, development and marketing capabilities. We entered into one such arrangement with Boston Scientific Corporation in the area of nitric oxide-enhancing paclitaxel-coated stents to reduce restenosis. On December 31, 2005, the research term under our agreement with Boston Scientific expired, although certain rights extend beyond this term.

The Brigham and Women’s Hospital.   In August 1992, as amended in November 1996, we entered into a research and license agreement with The Brigham and Women’s Hospital, Inc., which we refer to as BWH. Under the agreement, we sponsored a research program at BWH for a period of approximately two years relating to the diagnostic, therapeutic and prophylactic use of nitric oxide and related compounds. Under the agreement, in exchange for our sponsored research funding, BWH granted us exclusive worldwide royalty-bearing rights to technology and inventions owned at the effective time of, or developed in the course of, the sponsored research program. We were applying the patents, patent applications and other intellectual property rights licensed to us by the BWH in our former nitric oxide-stent program. The agreement imposes on us due diligence obligations with respect to the research, development and commercialization of products based upon the licensed rights. If we fail to meet these obligations, then upon written notice the license will become non-exclusive. BWH has the right to terminate the agreement if we materially breach the agreement and fail to remedy the breach within 60 days.

Boston University.   In June 1993, as amended in July 1997, January 1999, December 2002 and February 2005, we entered into a research and license agreement with the Trustees of Boston University, which we refer to as BU. Under the agreement, we have agreed to sponsor a multi-year research program at BU in the area of nitric oxide-enhancing medicines. Under the agreement, in exchange for our sponsored research funding, BU has granted us exclusive worldwide royalty-bearing rights to technology and inventions owned by BU and/or for the principal investigator named in the research proposal at the effective time of, or developed in the course of, the sponsored research program. We have agreed to pay royalties to BU on all products sold or distributed by us or our affiliates which incorporate or utilize inventions, material or information specified in the agreement. The agreement imposes on us due diligence obligations with respect to the development and commercialization of products based upon the licensed rights. If we fail to meet these obligations, then upon notice by BU, the parties are required to enter into good faith negotiations, and if the parties cannot reach resolution, the license will become non-exclusive without the right to sublicense. BU has the right to terminate the agreement if we materially breach the agreement and fail to remedy the breach within 60 days. We may terminate funding of any sponsored research program on three months’ prior written notice.

FoxKiser.   In connection with our efforts to obtain the approval of BiDil from the FDA, we entered into an agreement with the law firm of FoxKiser LLC, which we refer to as FoxKiser, for services related to the regulatory approval process for BiDil. The agreement provided for payment of legal consulting fees upon receipt of written FDA approval of BiDil. On June 23, 2005, we received written FDA approval of BiDil, and in July 2005, we paid $2.4 million pursuant to the terms of this agreement. In addition, the agreement requires us to pay royalties to FoxKiser on commercial sales of BiDil. The royalty term ends six

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months after the date of market introduction of an FDA-approved generic version of BiDil. During the third quarter of 2005, we entered into a separate consulting agreement with FoxKiser following the approval by the FDA of BiDil, which ceased to be effective during the third quarter of 2006. During the years ended December 31, 2006, 2005 and 2004, we recorded charges of $0.9 million, $1.6 million, and $1.9 million, respectively, pertaining to the legal consulting fees related to these agreements. During the years ended December 31, 2006, and 2005, we incurred royalties to FoxKiser in the approximate amounts of $364,000, and $134,000, respectively.

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

Trademarks, Trade Secrets and Other Proprietary Information

We own the following U.S. trademarks:

·BiDil;

·NitroMed; and

·NitroMed “N” logo.

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

Competition

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

We believe that competition for BiDil and BiDil XR, if it is successfully developed, will initially come from companies currently marketing and selling therapeutics to treat heart failure in the general population. These competitors include GlaxoSmithKline, plc, Merck & Co., Inc., Pfizer Inc. and AstraZeneca plc.

We compete with these companies on the basis of BiDil’s strong label and documented efficacy and cost-effectiveness, our intellectual property portfolio and the expertise of our marketing and sales personnel. Principal competitive factors in our industry include:

·improved patient outcomes;

·cost-effectiveness;

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·acceptance by patients, physicians, other health care providers and third-party public and private payors;

·the quality and breadth of an organization’s technology;

·the skill of an organization’s employees and its ability to recruit and retain skilled employees;

·an organization’s intellectual property protection;

·development, sales and marketing capabilities; and

·the availability of substantial capital resources to fund development and commercialization activities.

Many of the companies competing against us have financial and other resources substantially greater than our own. In addition, many of our competitors have significantly greater experience in marketing and selling pharmaceutical products, including cardiovascular medicines, testing pharmaceutical and other therapeutic products, and obtaining FDA and other regulatory approvals of products for use in health care. In addition, we also compete with these companies with respect to manufacturing efficiency and marketing capabilities with respect to BiDil, our only approved product. We have no internal manufacturing capabilities, and our marketing and sales resources may be significantly more limited than those of our competitors.

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

Government Regulation and Reimbursement

FDA Requirements for New Drug Compounds

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

·product seizures;

·voluntary or mandatory product recalls;

·voluntary or mandatory patient or physician notification;

·withdrawal of product approvals;

·clinical holds;

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

·warning letters from the FDA;

·fines;

·restrictions on importation of our products;

·total or partial suspension of our operations;

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·injunctions;

·debarment;

·civil penalties or criminal prosecution; and

·suspension of review by the FDA or refusal by the FDA to approve pending applications.

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

Pre-clinical tests include laboratory evaluation of product chemistry and formulation, as well as animal trials to assess the potential safety and efficacy of the product. The conduct of the pre-clinical tests and formulation of compounds for testing must comply with federal regulations and requirements. Preclinical testing may not be completed successfully within any specified time period, if at all, and successful completion of pre-clinical trials does not assure success in clinical (human) trials. The results of pre-clinical testing are submitted to the FDA as part of an IND.

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

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

Clinical trials to support an NDA for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess safety, including side effects associated with increasing

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doses, metabolism, pharmacokinetics and pharmacological actions. Phase II usually involves trials in a limited patient population, to determine dosage tolerance and optimum dosage, identify possible adverse effects and safety risks, and provide preliminary support for the efficacy of the drug in the indication being studied.

If a compound demonstrates evidence of effectiveness and an acceptable safety profile in phase II evaluations, phase III trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population, typically at geographically dispersed clinical trial sites. Phase I, phase II or phase III testing of any product candidate may not be completed successfully within any specified time period, if at all. The FDA closely monitors the progress of each of the three phases of clinical trials that are conducted in the United States and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA, an IRB, or a clinical trial sponsor may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The FDA can also request additional clinical trials be conducted as a condition to product approval.

After successful completion of the required clinical testing, generally an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the United States. The NDA must include the results of extensive pre-clinical, clinical and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA is substantial. Under federal law, the submission of NDAs are additionally subject to substantial application user fees, currently approximately $900,000, and the manufacturer and/or sponsor under an approved application are also subject to annual product and establishment user fees, currently approximately $50,000 per product and $300,000 per establishment. Additional user fees exceeding $400,000 apply for NDA supplements containing clinical data. These fees are typically increased annually.

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

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

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complete response letters. Complete response letters would describe all specific deficiencies in an NDA but would not characterize the application as approvable or not.

Once the NDA is approved, a product will be subject to certain post-approval requirements, including requirements for adverse event reporting and submission of periodic reports and/or supplemental NDAs for approval of changes to the originally approved prescribing information, product formulation, and manufacturing and testing requirements. Following approval, drug products are required to be manufactured and tested for compliance with NDA and/or compendial specifications prior to release for commercial distribution. The manufacture and testing must be performed in approved manufacturing and testing sites complying with current Good Manufacturing Practice, or cGMP, requirements and subject to FDA inspection authority. Drug manufacturers and their subcontractors are required to register their facilities with the FDA and are subject to periodic unannounced inspections by the FDA to assess compliance with cGMPs. Accordingly, after approval manufacturers must continue to expend time, money and effort in the area of production and quality control, and employee training, to maintain compliance with cGMPs and other aspects of regulatory compliance.

The FDA strictly regulates the promotional claims that may be made about prescription drug products. Approved drug products must be promoted in a manner which is consistent with their terms and conditions of approval. In particular, a drug may not be promoted for uses that are not approved by the FDA as reflected in the drug’s approved labeling. Moreover, the Department of Justice can bring civil or criminal actions against companies that promote drugs for unapproved uses, based on the False Claims Act and other federal laws governing reimbursement for drugs under the Medicare, Medicaid and other federally supported healthcare programs. Monetary penalties in such cases have often been in excess of $100 million. Civil penalties can include costly mandatory compliance programs and exclusion from federal healthcare programs. In addition, the FDA requires substantiation of any claims of superiority of one product over another including, in many cases, requirements that such claims be proven by adequate and well-controlled head-to-head clinical trials. To the extent that market acceptance of our product candidates may depend on their superiority over existing therapies, any restriction on our ability to advertise or otherwise promote claims of superiority, or requirements to conduct additional expensive clinical trials to provide proof of such claims, could negatively affect the sales of our products and/or our expenses.

If the FDA’s evaluation of the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter. A not approvable letter outlines the deficiencies in the submission and often requires additional testing or information in order for the FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. With limited exceptions, the FDA may withhold approval of an NDA regardless of prior advice it may have provided or commitments it may have made to the sponsor.

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

Federal law provides for a period of three years of exclusivity following approval of a listed drug that contains previously approved active ingredients but is approved in a new dosage, dosage form, route of

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administration or combination, or for a new use, if the FDA deems that the approval of the drug was required to be supported by new clinical trials that were conducted by or for the sponsor. During this three-year period, the FDA cannot grant final approval of an ANDA based on that listed drug. Federal law also provides a period of five years following approval of a drug containing no previously approved active ingredients, during which ANDAs for generic versions of those drugs cannot be submitted unless the submission accompanies a challenge to a listed patent, in which case the submission may be made four years following the original product approval. Additionally, in the event that the sponsor of the listed drug has properly informed the FDA of patents covering its listed drug, applicants submitting an ANDA referencing that drug are required to certify whether they intend to market their generic products prior to expiration of those patents. If an ANDA applicant certifies that it believes all listed patents are invalid or not infringed, it is required to provide notice of its filing to the NDA sponsor and the patent holder. If the patent holder then initiates a suit for patent infringement against the ANDA sponsor within 45 days of receipt of the notice, the FDA cannot grant effective approval of the ANDA until either 30 months has passed or there has been a court decision holding that the patents in question are invalid, unenforceable or not infringed. If the ANDA applicant certifies that it does not intend to market its generic product before some or all listed patents on the listed drug expire, then the FDA cannot grant effective approval of the ANDA until those patents expire. The first abbreviated new drug applicant(s) submitting substantially complete applications certifying that one or more listed patents for a particular product are invalid or not infringed may qualify for a period of 180 days against other generics after a final court decision of invalidity or non-infringement or after it begins marketing its product, whichever occurs first, during which subsequently submitted ANDAs cannot be granted effective approval.

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

Foreign Regulation of New Drug Compounds

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

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

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Hazardous Materials

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

Reimbursement

In both the United States and foreign markets, our ability to successfully commercialize BiDil and any future products successfully depends in part on the extent to which reimbursement for the costs of such products will be available from government health administration authorities, private health insurers and other third-party payors. Significant uncertainty exists as to the reimbursement status of newly-approved health care products, products used for indications not approved by the FDA and products which have competitors for their approved indications. If we are unable to achieve preferential reimbursement treatment for BiDil, or any of our other product candidates, from government and other third-party payors, our ability to sell our products may be limited or our ability to establish acceptable pricing schemes for our products may be impaired, thereby reducing our revenue.

Employees

As of December 31, 2006, we had 50 full-time employees, 23 of whom were engaged in sales and marketing and 27 of whom were engaged in management, administration, finance, and research and development. Our success depends in part on our ability to recruit and retain talented and trained scientific personnel and senior management. We have been successful to date in obtaining and retaining such personnel, but may not be successful in the future. None of our employees are represented by a labor union or covered by a collective bargaining agreement, nor have we experienced work stoppages. We believe that relations with our employees are good.

Product Liability Insurance

The administration of our products to humans, whether in clinical trials or after marketing approvals are obtained and the product is in use commercially, may expose us to liability claims. These claims might be made by customers, including corporate partners, clinical trial subjects, patients, pharmaceutical companies or others. We maintain product liability insurance coverage for claims arising from the use of our products, whether in clinical trials or approved commercial usage. However, coverage is becoming increasingly expensive, and our insurance may not provide sufficient coverage to fully protect us against liability. If we are unable to maintain sufficient levels of insurance due to increased costs or if our insurance does not provide sufficient coverage against liability claims, a finding of liability could deplete our resources and reduce the assets available for our daily operations.

Significant Customers

In 2006, McKesson Corporation, Cardinal Health and AmerisourceBergen Corporation accounted for approximately 34%, 36% and 18%, respectively, of our product sales. In 2005, McKesson, Cardinal Health and AmerisourceBergen accounted for approximately 44%, 21% and 14%, respectively, of our product sales. We received no research and development revenue in 2006. In 2005, Boston Scientific accounted for 100% of our research and development revenues and in 2004, a prior collaborator, Merck Frosst Canada & Co., a subsididary of Merck & Co., Inc., accounted for 90% of our research and development revenue. No other company accounted for more than 10% of our total revenues in fiscal 2006, 2005 or 2004.

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Raw Materials

We order bulk materials from the same suppliers that were used for the clinical trial batches of BiDil: hydralazine hydrochloride from Flavine International, Inc., the U.S. representative of Sumitomo Corp., and isosorbide dinitrate from Dottikon ES Holding AG, and have them delivered directly to Schwarz Pharma for manufacturing. Sumitomo is currently the only supplier of hydralazine hydrochloride worldwide. We do not have any agreement with Sumitomo regarding the supply of hydralazine hydrochloride.

Available Information

Our internet website address is http://www.nitromed.com. Through our website, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, proxy and registration statements, and all of our insider Section 16 reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. These SEC reports can be accessed through the “Investors” section of our website. We also make available on our website our corporate governance guidelines, the charters for our audit committee, compensation committee, and nominating and corporate governance committee, our stock option granting policies and our code of business conduct and ethics, and such information is available in print to any stockholder of NitroMed who requests it. In addition, we intend to disclose on our website any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the Securities and Exchange Commission and the NASDAQ Global Market. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC.

For additional information regarding our segment reporting, please refer to Note 2 of Notes to Financial Statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of this annual report on Form 10-K.

ITEM 1A.RISK FACTORS

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

Risks Relating to our Business

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

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

·our ability to successfully market and sell BiDil with our significantly reduced sales force and centralized marketing efforts;

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

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

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

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

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

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

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

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

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

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

In order for us to successfully commercialize BiDil, we must maintain our market presence of BiDil in the near term and must build a sufficient commercial foundation from which to launch BiDil XR in the future. If we fail to sustain market awareness of BiDil, our near-term ability to generate product revenue, our reputation and our ability to raise additional capital will be materially impaired, and the value of our stock will decline.

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

In October 2006, we initiated a restructuring program that included a reduction of our sales force and administrative headcount. As part of the restructuring program, we eliminated our existing sales force and replaced it with a small team of highly experienced senior cardiovascular specialists, resulting in a net reduction of approximately 120 in sales force headcount. In addition, we also eliminated approximately 20% of our general and administrative personnel in connection with this restructuring program. Our restructured sales force is expected to be comprised initially of a director of managed markets, six national account directors, two area business directors and twenty-one cardiovascular business managers. Our near-term revenue for BiDil will depend significantly upon the efforts and success of our restructured sales organization.

In addition, during the first quarter of 2006, we elected to reduce the number of sales territories in which we have sales representation. As a result of our October 2006 restructuring, we significantly reduced the number of individuals in our sales organization who cover these territories. Any failure to adequately cover our current sales territories, or to cover through alternative marketing efforts the territories in which we have elected not to have sales representation, will result in reduced sales productivity and loss of revenue related to BiDil.

The success of our revised selling strategy will also depend on our ability to recruit the caliber of representatives necessary to implement our new strategy. Since launching BiDil, we have reduced our sales force representation from 195 to the current plan of 21 through various territory realignments and

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restructurings, which could significantly limit our ability to successfully recruit and retain highly qualified sales representatives. In addition, we are seeking sales representatives with a very high level of technical, selling and institutional experience to fill our newly created cardiovascular business manager positions. These are highly specialized skills and we may not be able to hire sales representatives who meet these qualifications. Any delay in our ability to recruit the required number of individuals to cover our revised sales territories, or any failure to attract and retain qualified personnel, could significantly delay or hinder the success of our revised selling strategy.

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

We launched BiDil in the United States ourselves, using a contract sales force. We transitioned to the use of a smaller sales force during the first quarter of 2006, we internalized this sales force during the second quarter of 2006, and in October 2006 we replaced this sales force with a small team of highly experienced senior cardiovascular specialists. The transition to this specialized sales force could adversely affect our marketing of BiDil and depress the value of our stock.

As part of our October 2006 restructuring, we revised our marketing strategy to reduce the level of our direct face-to-face marketing efforts and adopted a more centralized approach to marketing that will involve various non-personal methods of contacting current and potential prescribers. The direct marketing efforts in which we will continue to engage through our small, specialized sales team will be focused on national thought leaders, regional heart failure specialists and key institutions in major metropolitan centers that treat, and influence the treatment of, large numbers of African Americans who have been diagnosed with heart failure. Our approach is to educate those thought leaders and institutions on the value of BiDil, and then leverage their influence to impact the broader base of prescribers. If we are unable to convince these thought leaders and institutions that BiDil is safe, effective and medically necessary, we will be unsuccessful in our marketing approach. In addition, even if we are successful in gaining acceptance of BiDil with these key targets, these thought leaders and institutions may not be willing or able to influence the prescribing activity of other physicians, or to do so within a timeframe that will impact BiDil prescriptions in the near term. Furthermore, our indirect marketing efforts may not be successful in maintaining market awareness of BiDil with current and potential prescribers.

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

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

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

·safe, effective and medically necessary;

·appropriate for the specific patient;

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·cost-effective; and

·neither experimental nor investigational.

Since reimbursement approval for a product is required from third-party and government payors in order for patients to be reimbursed for the cost of a product, seeking this approval, particularly when seeking approval for a preferred form of reimbursement over other competitive products, is a time-consuming and costly process. Third-party payors conduct clinical reviews of pharmaceutical products to determine whether a product is safe, effective and medically necessary. These third-party payors may find that BiDil is not sufficiently effective to justify reimbursement approval or that the effectiveness of BiDil does not justify its cost. In addition, third-party payors may require cost-benefit analysis data from us in order to demonstrate the cost-effectiveness of BiDil. For any individual third-party payor, we may not be able to provide data sufficient to gain reimbursement on a similar or preferred basis to competitive products, if at all. Furthermore, some third-party payors may consider the generically available individual components of BiDil to be substitutable for, or therapeutically equivalent to, BiDil, despite the lack of FDA approval for the use of those individual components in the treatment of heart failure. This misconception among third-party payors may further limit our ability to obtain preferential reimbursement, if at all, from those third-party payors.

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

Many private insurers, and many of the Medicare Part D plans that cover BiDil, cover the product at the Tier III level. Tier level is a term generally used to denote the level of reimbursement and, consequently, the level of patient co-pay, for a product that is approved by a third-party payor. At Tier III, patient co-pays are at a significantly higher level than they would be at Tier II, ranging from approximately $30.00 to $50.00 per prescription. Tier II reimbursement denotes a preferential level of reimbursement at which patient co-pays range from approximately $15.00 to $30.00 per prescription. We may not be able to obtain reimbursement coverage for BiDil from many private insurers or Medicare Part D plans or, even if we obtain such coverage, we may not be able to obtain preferential reimbursement treatment. Any failure by us to secure such coverage, or to secure it at preferential levels, would have a substantially negative effect on sales of BiDil, market acceptance of BiDil would be negatively impacted and our ability to generate revenues from sales would be significantly impaired. Although we have been added to preferred formularies covering approximately 50% of insured African Americans over the age of 45, we have not achieved preferential reimbursement on all plans. Furthermore, we cannot know if BiDil will continue to be listed on any of these plans at a preferential reimbursement level, if at all. In addition, although preferential reimbursement for BiDil removes a financial barrier to accessing the product, it does not require or guarantee that physicians will prescribe the drug. Accordingly, we cannot assess the impact that the current listing of BiDil on any given plan will have on our future revenues, if any.

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

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

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

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

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

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

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

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

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

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

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

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

BiDil is a fixed-dosed combination of two individual components, both of which are available in generic form and are separately marketed (isosorbide dinitrate for angina and hydralazine hydrochloride for hypertension), in dosages similar to those we include in BiDil, at prices substantially below the prices we are charging for BiDil. While neither of these two generic drugs is approved for the treatment of heart failure, as a practical matter it may be impossible for us to prevent physicians from prescribing a combination of these two, lower cost generic drugs as a substitute for prescribing BiDil. If substantial numbers of physicians prescribe the combination of these two generic drugs, rather than BiDil, we could fail to achieve the sales of BiDil necessary for successful commercialization which would severely limit our ability to generate revenue from the sales of BiDil. Our ability to generate revenue could also be limited if:

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

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

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

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We will require substantial additional amounts of cash to fund our operating plan, including commercializing BiDil and seeking to develop and commercialize BiDil XR, and, if additional capital is not available, we may need to limit, scale back or cease our operations.

We have used and will continue to require substantial funds to manufacture, market and sell BiDil during 2007 and beyond. We also expect to incur additional expenses relating to the ongoing development of BiDil XR, which is currently commencing clinical development. We believe that our existing sources of liquidity and cash expected to be generated from future operations will be sufficient to fund the current business plan for at least the next twelve months.

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

·the magnitude of product sales of BiDil;

·the successful commercialization of BiDil;

·the cost of manufacturing, marketing and selling BiDil;

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

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

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

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

·the effect of competing technological and market developments;

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

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

We will require additional funding in the future and may seek to do so through collaborative co-promotion arrangements and/or public or private financings. Additional financing may not be available to us on acceptable terms, if at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities, further dilution to our then-existing stockholders will result. If we are unable to obtain funding on a timely basis, we may be compelled to significantly curtail our marketing efforts for BiDil and/or our development efforts with respect to BiDil XR. We may also be compelled to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products.

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

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

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

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

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

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

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

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

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

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

In addition, even if clinical testing of BiDil XR is successful, we still may not be able to obtain regulatory approval for BiDil XR. The FDA may conclude that the data provided is insufficient and may require that we perform additional studies. If we are ultimately unable to produce a formulation of BiDil XR that meets regulatory requirements, if we are delayed in our efforts to obtain regulatory approval for BiDil XR, or if we are required by the FDA to conduct large-scale outcomes studies, we may not be able to successfully develop and commercialize this product and our ability to generate revenue from BiDil XR will be materially impaired.

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

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commercialize this product, we plan to rely on our collaborative licensor, Elan, for the production of clinical and commercial quantities of BiDil XR. Although we are in the process of negotiating a manufacturing and supply agreement with Elan, we may not be able to finalize an agreement on commercially favorable terms, if at all. In addition, contract manufacturers are subject to ongoing periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with current Good Manufacturing Practices, or cGMP, and other governmental regulations and corresponding foreign standards. The cGMP requirements govern, among other things, quality control of the manufacturing process and documentation of policies and procedures. Other than through contract, we do not have control over compliance by our contract manufacturers with these regulations and standards. Our present or future contract manufacturers may not be able to comply with cGMP and other FDA requirements or similar regulatory requirements outside the United States. Any failure by our contract manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidate, delays, suspension or withdrawal of approvals, seizures or recalls of such product candidate, operating restrictions, and criminal prosecutions, any of which could significantly and adversely affect our business. We will depend upon these third parties to perform their obligations in a timely manner and in accordance with applicable laws and regulations, including those related to quality control and quality assurance. To the extent that third-party manufacturers with whom we contract fail to perform their obligations in accordance with applicable laws and regulations, we may be adversely affected in a number of ways, including:

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

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

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

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

At the end of the first quarter of 2006, we scaled back our research and development staff in a restructuring of our company and have limited our internal research and development activities to the continued development of BiDil XR. We are currently seeking out-licensing and collaboration opportunities for our other potential product candidates based on our proprietary nitric oxide technology, including NMI-3377, a pre-clinical cardio-renal compound. The application of our proprietary nitric oxide technology is unproven in humans and, as a result, we may not be able to successfully out-license any products based on this technology. Our product candidates include nitric oxide enhancements of existing drugs; in these cases, we are modifying compounds whose chemical and pharmacological profiles are well-documented and understood. Many of our potential product candidates, however, are new molecules with chemical and pharmacological profiles that differ from that of the existing drugs. These compounds may not demonstrate in patients the chemical and pharmacological properties shown in laboratory studies, and they may interact with human biological systems in unforeseen, ineffective or harmful ways. In addition, it is possible that existing drugs or newly-discovered drugs may not benefit from the application of our nitric oxide technology. We may not be able to secure out-licensing or collaboration partners for these potential product candidates. Even if we are successful in entering into out-licensing or collaborative arrangements with respect to our potential product candidates, we have no assurance that we will be able to secure such arrangements on terms completely favorable to us. If our out-licensing or collaboration

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arrangements include unfavorable financial terms, our ability to generate revenue from our technology portfolio will be severely limited.

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

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

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

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

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

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

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

We have experienced significant operating losses since our inception in 1992. For the year ended December 31, 2006, we had a net loss of $71.3 million. As of December 31, 2006, we had an accumulated deficit of $313.8 million. We expect that we will continue to incur substantial losses and that our cumulative losses will increase as our commercialization efforts continue. We expect that the losses that we incur will fluctuate from quarter to quarter and that these fluctuations may be substantial.

A large portion of our expenses is fixed, including expenses related to facilities, equipment and personnel. We have spent significant amounts to launch our first product, BiDil, and we expect to incur significant operating expenses in connection with our ongoing commercialization activities related to BiDil. We received approval for BiDil from the FDA on June 23, 2005, and launched commercial sales of BiDil in July 2005. We have also spent significant amounts to fund research, development and commercialization of our product candidates and to enhance our core technologies. Currently, our research and development activities are limited to the continued development of BiDil XR. We are not engaging in any internal research and development activities with respect to other potential product candidates and, therefore, do not expect to incur substantial research and development expenses in the near term. Although we currently estimate that our operating expenses will decrease in fiscal year 2007, we will still need to generate significant revenue to achieve profitability. We are currently unable to estimate the level of revenues that we will realize from the commercialization of BiDil. We are therefore unable to estimate when we will achieve profitability, if at all. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable could depress the market price of our common stock and could impair our ability to raise capital or continue our operations.

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

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

We do not manufacture BiDil and have no plans to do so. We engaged Schwarz Pharma under a five-year exclusive manufacturing and supply agreement solely for the three times daily immediate release dosage formulation of BiDil. Under the supply agreement, we have the right to engage a backup manufacturer but do not currently have any backup manufacturing agreement in place. The terms of the supply agreement provide that it may be terminated by either us or Schwarz Pharma under specified circumstances, including a material breach of the supply agreement by either party, the occurrence of a payment default by us, our material impairment of the manufacturing licenses we have granted to Schwarz Pharma or a failure of Schwarz Pharma to supply conforming products. In addition, either party may terminate the supply agreement in the event the FDA takes any action, the result of which is to permanently prohibit the manufacture, sale or use of the product.

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

·difficulties with production costs and yields;

·quality control and assurance;

·difficulties obtaining ingredients for our products;

·shortages of qualified personnel;

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

·lack of capital funding.

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

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

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

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

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

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

·the severity of the disease;

·the quality of the regulatory submission;

·the drug’s clinical efficacy and safety;

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

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

·the availability of alternative treatments;

·the risks and benefits demonstrated in clinical trials; and

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

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

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

Our marketing approval for BiDil is limited to the United States. Until we or our potential strategic collaborators obtain the required regulatory approvals for BiDil or any potential product candidates in any

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

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

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

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

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imposition of restrictions on our marketing activities, and the exclusion of BiDil from eligibility for government reimbursement programs.

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

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

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

·product seizures;

·voluntary or mandatory recalls;

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

·withdrawal of product approvals;

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

·operating restrictions;

·fines;

·restrictions on importation or exportation of our products;

·injunctions;

·debarments;

·civil and criminal penalties; and

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

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

In order to obtain regulatory approvals for the commercial sale of product candidates that we out-license, our collaborators will be required to complete extensive clinical trials in humans to demonstrate

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

The successful completion of our strategic partners’ clinical trials will depend on, among other things, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the clinical protocol, the availability of alternative treatments, the proximity of patients to clinical sites and the eligibility criteria for the study. Our strategic partners may be unable to enroll the number of patients we need to complete a trial on a timely basis, if at all. Moreover, delays in planned patient enrollment for clinical trials may cause our strategic partners to incur increased costs and delay commercialization. Because we will need to rely on third parties for the development of our product candidates, we will have less control over the timing and other aspects of these clinical trials than if we conducted them on our own. These third parties may not complete activities on schedule, or may not conduct clinical trials in accordance with regulatory requirements or the trial design.

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

The expiration of the research term under our collaboration agreement with Boston Scientific has resulted in the loss of potential royalty-based revenue from the collaboration and may indicate that the development of nitric oxide-enhancing stents is not viable.

In November 2001, we entered into a research, development and license agreement with Boston Scientific pursuant to which we granted Boston Scientific an exclusive worldwide license to develop and commercialize certain of our nitric oxide-enhancing compounds for use with their stents or specialty catheters in the area of restenosis. In December 2003, we extended the research collaboration to develop nitric oxide-enhancing paclitaxel-coated stents until December 31, 2005. The research term of this agreement expired on December 31, 2005, although certain rights extend beyond this term. We intend to seek out-licensing and collaboration opportunities for this technology, subject to the terms of our agreement with Boston Scientific and pending resolution of the ongoing rights of the parties with respect to this technology. If we are not able to out-license the technology developed under this agreement, or if we are unable to resolve the ongoing rights of the parties with respect to this technology in a manner favorable to us, we may lose any investment made in the development of, and any potential revenue that may have resulted from, the development, sale or licensing of nitric oxide-enhancing stents.

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

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates

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

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 three issued method-of-use patents, one of which covers the use of the combination of isosorbide dinitrate and hydralazine hydrochloride to reduce the incidence of mortality associated with chronic congestive heart failure, expiring in 2007, and the others covering the treatment of heart failure in black patients, expiring in 2020. As a practical matter, we may not be able to enforce these method-of-use patents to prevent physicians from prescribing isosorbide dinitrate and hydralazine 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 2007 or 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 2007 or 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.

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If we are not able to obtain and enforce patent protection for our discoveries, our ability to secure out-licensing or collaborative arrangements with respect to our product candidates will be harmed, and we may not be able to operate our business profitably.

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

Prior to the restructuring of our research and development activities, our intellectual property strategy depended on our ability to rapidly identify and seek patent protection for our discoveries. This process is expensive and time consuming, and we may not be able to prosecute all necessary or desirable patent applications or maintain all issued patents at a reasonable cost. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary. The mere issuance of a patent does not guarantee that it is valid or enforceable; even if we have obtained patents, they may not be valid or enforceable against third parties.

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

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

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. If any trade secret, know-how or other technology not protected by a

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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 determine the scope and validity of third-party proprietary rights. The cost to us or our potential strategic partners of any litigation or other proceedings relating to intellectual property rights, even if resolved in our or our partner’s favor, could be substantial, and the litigation would divert management efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, our strategy of providing nitric oxide-enhancing versions of existing products could lead to more patent litigation due to the fact that the markets for these existing products are very large and competitive. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations. For example, we have filed an opposition in the European Patent Office, or EPO, to revoke NicOx S.A.’s European Patent No. 904 110, which we refer to as EP ’110. This patent is directed to the use of organic compounds containing a nitrate group or inorganic compounds containing a nitric oxide group to reduce the toxicity caused by certain drugs, including non-steroidal anti-inflammatory drugs. The basis for our opposition, in part, is that the claims in EP ’110 are anticipated and therefore invalid if they are construed to cover a single compound chemically linked to a nitrate moiety. While we believe that the claims in EP ’110 will be invalidated, or be narrowed, we cannot predict with certainty the outcome of the opposition. If the EPO finds that there are valid claims in EP ’110 that cover compounds chemically linked to nitrates, we may be adversely affected in our ability to market our product candidates for reducing gastrointestinal toxicity without first obtaining a license from NicOx, which may not be available on favorable terms, if at all.

If any parties are able to successfully claim that the creation 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,

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diligence, and other obligations on us. If we breach these obligations, the licensor may have the right to terminate the license or render the license non-exclusive, which would result in us being unable to develop, manufacture and sell products that are covered by the licensed technology.

Risks Relating to our Industry

We could be negatively impacted by the application or enforcement of federal and state fraud and abuse laws, including anti-kickback laws and other federal and state anti-referral laws.

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

In addition, we could become subject to false claims litigation under federal statutes, which can lead to treble damages based on the reimbursements by federal healthcare programs, civil money penalties (including penalties levied on a per false claim basis), restitution, criminal fines and imprisonment, and exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs. These false claims statutes include the False Claims Act, which allows any person to bring suit on behalf of the federal government alleging the submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against biotechnology companies have increased significantly in recent years and have increased the risk that a healthcare company will have to defend a false claim action, pay fines or restitution, or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as a result of an investigation arising out of such action. It is possible that we could become subject to such litigation and, if we are not successful in defending against it, such litigation would have a material adverse effect on our business, financial condition and results of operations. In addition, the cost of defending claims or allegations under the False Claims Act, even if successful, would also have a material adverse effect on our business, financial condition and results of operations.

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

The pharmaceutical industry is highly competitive and characterized by rapid and significant technological change. Our principal competitors in the markets we have targeted, including cardiovascular disease, are large, multinational pharmaceutical companies that have substantially greater financial and other resources than we do and are conducting extensive research and development activities on technologies and product candidates similar to or competitive with ours. Many of our competitors are more experienced than we are in pharmaceutical development and commercialization, obtaining regulatory approvals and product marketing and manufacturing. As a result, they may:

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

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

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

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

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

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

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

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

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

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

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

Risks Relating to our Common Stock

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

The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In particular, the market price of our common stock, like that of the securities of other biopharmaceutical companies, has been and may continue to be highly volatile. During the period from January 1, 2005 to December 31, 2006, our stock price has ranged from a low of $2.04 per share (on October 13, 2006) to a high of $27.99 per share (on February 2, 2005). The following factors, among others, may affect the price of our common stock:

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

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

·general market conditions;

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

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

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·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 March 1, 2007, our directors, executive officers and principal stockholders, together with their affiliates, owned, in the aggregate, approximately 41% of our outstanding common stock. As a result, these stockholders, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, if acting together, will have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership may harm the market price of our common stock by:

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

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

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

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

Provisions of our restated certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may prevent or frustrate attempts by stockholders to replace or remove our current management. These provisions include:

·a prohibition on stockholder action through written consent;

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

·advance notice requirements for stockholder proposals and nominations;

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

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·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 March 1, 2007, there were 37,259,870 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. The exercise of these options and the subsequent sale of the underlying common stock could cause a further decline in our stock price. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

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 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

On February 23, 2007, we entered into a lease for 19,815 square feet of office space at a facility located at 45-55 Hayden Avenue in Lexington, Massachusetts. The initial term of the lease is for sixty-six months. We are in the process of negotiating an assignment of our lease related to approximately 52,000 square feet of laboratory and office space in our current location in Lexington, Massachusetts. We believe that our new facility is adequate for our needs for the foreseeable future, and that, should it be needed, suitable additional space will be available to accommodate expansion of our operations on commercially reasonable terms.

ITEM 3.LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of security holders of our company, through solicitations of proxies or otherwise, during the quarter ended December 31, 2006.

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PART II

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

Market Price of and Dividends on NitroMed’s Common Stock and Related Stockholder Matters; Recent Sales of Unregistered Securities.

Market Price and Dividends

Our common stock is traded on the NASDAQ National Market under the symbol “NTMD”. The following table sets forth the high and low sale prices per share of our common stock as reported on the NASDAQ Global Market for the periods indicated.

	Common stock price
	High		Low
Fiscal year ended December 31, 2006
First quarter	$	14.90	$	7.51
Second quarter	$	8.86	$	3.59
Third quarter	$	4.90	$	2.38
Fourth quarter	$	3.20	$	2.04
Fiscal year ended December 31, 2005
First quarter	$	27.99	$	16.54
Second quarter	$	21.09	$	13.80
Third quarter	$	24.45	$	17.10
Fourth quarter	$	22.61	$	13.24

On March 1, 2007, the reported last sale price of our common stock on the NASDAQ Global Market was $3.59 per share, and we had approximately 60 holders of record of our common stock. This number does not include shareholders for whom shares are held in a “nominee” or “street” name.

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

Information regarding our equity compensation plans and the securities authorized for issuance thereunder is set forth in Item 12 below.

Recent Sales of Unregistered Securities

None.

Use of Proceeds from Registered Securities

On January 30, 2006, we completed a direct offering of shares of our common stock previously registered under our effective shelf registration statement, which was filed with the Securities and Exchange Commission, or SEC, in August 2005. Pursuant to this offering, we sold approximately 6.1 million shares of our common stock to selected institutional investors at a price of $10.25 per share. Proceeds to us from this registered direct offering, net of offering expenses and placement agency fees, totaled $58.5 million.

On December 20, 2004, we completed a follow-on public offering of our common stock at a price to the public of $24.46 per share. We sold an aggregate of 3,579,476 shares of our common stock resulting in

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gross proceeds of $87.6 million. The offer and sale of all the shares in the follow-on public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-120280), which was declared effective by the SEC on December 7, 2004. Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Pacific Growth Equities and Bear, Sterns & Co. Inc. were the managing underwriters of the follow-on public offering. In connection with the offering we paid $5.3 million in underwriting discounts and commissions and incurred $0.5 million in other offering expenses. As part of the initial public offering, we granted these underwriters an over-allotment option to purchase up to an additional 431,581 shares of our common stock from us. The underwriters exercised a portion of the over-allotment option. There were no selling stockholders in the offering. None of the underwriting discounts and commissions or offering expenses were incurred or paid to directors or officers of ours or their associates or to persons owning 10 percent or more of our common stock or to any affiliates of ours. After deducting the underwriting discounts and commissions and offering expenses, we received net proceeds from the offering of $81.8 million.

On November 10, 2003, we completed an initial public offering of 6,000,000 shares of our common stock at a price to the public of $11.00 per share. The offer and sale of all of the shares in the initial public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-108104), which was declared effective by the SEC on November 5, 2003. Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and Pacific Growth Equities were the managing underwriters of the initial public offering. The offering commenced on November 5, 2003 and did not terminate until after the sale of all of the securities registered in the Registration Statement. As part of the initial public offering, we granted these underwriters an over-allotment option to purchase up to an additional 900,000 shares of our common stock from us. The underwriters did not exercise the over-allotment option. There were no selling stockholders in the offering. The gross proceeds of the initial public offering amount registered on our behalf was $66.0 million. In connection with the offering, we paid  $4.6 million in underwriting discounts and commissions to the underwriters and incurred an estimated $1.3 million in other offering expenses. None of the underwriting discounts and commissions or offering expenses were incurred or paid to directors or officers of ours or their associates or to persons owning 10 percent or more of our common stock or to any affiliates of ours. After deducting the underwriting discounts and commissions and offering expenses, we received net proceeds from the offering of $60.1 million.

Comparative Stock Performance Graph

The comparative stock performance graph below compares the cumulative total stockholder return (assuming reinvestment of dividends, if any) from investing $100 on November 6, 2003, the date on which our common stock was first publicly traded, and plotted at the close of the last trading day of the fiscal years ended December 31, 2003, 2004, 2005 and 2006, in each of (i) our common stock, (ii) the Nasdaq Global Stock Market Index of U.S. Companies, which we refer to as the Nasdaq Composite Index, and (iii) the Nasdaq Global Stock Market Pharmaceutical Index, which we refer to as the Nasdaq Pharmaceutical Index; except that, in the case of the Nasdaq Composite Index and the Nasdaq Pharmaceutical Index, the stock performance graph below reflects an investment date of October 31, 2003.

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COMPARISON OF CUMULATIVE TOTAL RETURN*

Among NitroMed Inc., The NASDAQ Composite Index
And The NASDAQ Pharmaceutical Index

Measurement Period (Fiscal Year Covered)	NitroMed, Inc.			NASDAQ Composite Index			NASDAQ Pharmaceutical Index
11/6/2003		$	100.00		$	100.00		$	100.00
12/31/2003		$	77.34		$	104.45		$	102.32
12/31/2004		$	286.87		$	114.09		$	111.71
12/31/2005		$	150.16		$	117.43		$	125.65
12/31/2006		$	26.37		$	133.53		$	128.40

*$100 invested on November 6, 2003 in our common stock and October 31, 2003 in either the NASDAQ Composite Index or the NASDAQ Pharmaceutical Index, including reinvestment of dividends.

The information included under the heading “Comparative Stock Performance Graph” in this Item 5 of our annual report on Form 10-K shall not be deemed to be “soliciting material” or subject to Regulation 14A or 14C, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.

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ITEM 6.SELECTED FINANCIAL DATA

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

We derived the statement of operations data for the years ended December 31, 2006, 2005 and 2004 and the balance sheet data as of December 31, 2006 and 2005 from our audited financial statements, which are included elsewhere in this report. We derived the statement of operations data for the years ended December 31, 2003 and 2002 and the balance sheet data as of December 31, 2004, 2003 and 2002 from our audited financial statements which are not included herein. Historical results are not necessarily indicative of future results. See the notes to the financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net loss per common share.

	Year Ended December 31,
	2006(1)			2005			2004			2003			2002
	(in thousands, except per share data)
Statement of Operations Data:
Revenue	$	12,086		$	6,047		$	16,458		$	12,775		$	750
Cost and operating expenses:
Cost of product sales	3,560			8,009			—			—			—
Research and development	17,029			31,340			27,401			18,447			15,670
Sales, general and administrative	59,403			74,596			20,185			3,574			2,994
Restructuring charges	5,283			—			—			—			—
Total costs and operating expenses	85,275			113,945			47,586			22,021			18,664
Loss from operations	(73,189		)	(107,898		)	(31,128		)	(9,246		)	(17,914		)
Other income, net	1,852			2,046			1,355			477			572
Net loss	(71,337		)	(105,852		)	(29,773		)	(8,769		)	(17,342		)
Deemed dividends related to beneficial conversion features of redeemable convertible preferred stock	—			—			—			(19,357		)	—
Accretion of dividends and redemption value	—			—			—			(2,794		)	(2,697		)
Net loss attributable to common stockholders	$	(71,337	)	$	(105,852	)	$	(29,773	)	$	(30,920	)	$	(20,039	)
Net loss per common share:
Basic and diluted	$	(1.96	)	$	(3.49	)	$	(1.14	)	$	(6.95	)	$	(20.66	)
Weighted average basic and diluted common shares outstanding	36,399			30,355			26,152			4,447			970

(1)The Company includes the expense associated with employee stock options in the Statement of Operations effective in 2006 upon the adoption of SFAS 123R, which resulted in an aggregate of $8 million recorded in the line items of research and development and sales, general and administrative expenses.

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	As of December 31,
	2006			2005			2004			2003			2002
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	42,153		$	61,541		$	142,367		$	97,088		$	11,843
Working capital	31,041			39,924			133,238			87,938			15,838
Total assets	48,705			76,521			149,357			99,170			22,492
Long-term debt	3,728			10,653			—			—			22
Redeemable convertible preferred stock	—			—			—			—			82,884
Accumulated deficit	(313,808		)	(242,471		)	(136,619		)	(106,846		)	(75,926		)
Total stockholders’ equity (deficit)	$	29,079		$	33,066		$	137,012		$	81,799		$	(73,353	)

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

Overview

We are an emerging pharmaceutical company with substantial expertise and intellectual property in nitric oxide-based drug development. We have devoted substantially all of our efforts towards the research and development of our product candidates and the commercialization of our currently marketed product, BiDil. Since our inception, we have mainly funded our operations through the sale of equity securities, debt financings, license fees, research and development funding, milestone payments from our collaborative partners, and more recently, sales of BiDil. We have never been profitable and have incurred an accumulated deficit of $313.8 million as of December 31, 2006.

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

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

In October 2006, we implemented a revised strategy and business model in order to focus our resources on the development of BiDil XR as expeditiously as possible. As part of this strategic shift, we eliminated our current sales force and replaced it with a small team of highly experienced senior cardiovascular specialists, resulting in a net reduction of approximately 120 in sales force headcount. In addition, we also eliminated approximately 20% of our general and administrative personnel in connection with this restructuring program. Our restructured sales force will be comprised of a director of managed markets, six national account directors, two area business directors and twenty-one cardiovascular business managers. Our sales and marketing organization will continue to be managed by our senior vice president of commercial operations. This highly specialized team is currently being assembled and will focus on regional and national thought-leader physicians, current BiDil prescribers, as well as key institutions in major metropolitan centers that treat, and influence the treatment of, large numbers of African-Americans diagnosed with heart failure. Additional marketing methods will be utilized to reach the broader number of existing and potential BiDil prescribers. We expect that this alternative strategy will employ a less costly

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approach to marketing the current immediate release formulation of BiDil during BiDil XR’s planned development. We believe this revised strategy will allow us to conserve the cash required to accelerate development efforts with respect to BiDil XR while refocusing the market presence of the current BiDil formulation. Preclinical studies with BiDil XR have been positive, and we commenced early-stage clinical development of BiDil XR in October 2006. Our current plan for seeking regulatory approval for BiDil XR, that will include conducting of bioequivalence studies, if successful and accepted as part of the basis for approval, is expected to enable us to achieve an accelerated development timeline. We expect to provide further updates on the clinical timeline and regulatory pathway for BiDil XR after preliminary clinical data have been assessed.

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

In the near-term, a key driver of our success will be our ability to successfully commercialize and sustain market penetration of BiDil with our restructured and smaller specialty sales force and to accelerate the development of, and obtain regulatory approval for, the commercial sale of BiDil XR. Since we commercially launched BiDil in July 2005, we have generated approximately $16.5 million in product sales, including product sales of $12.1 million in 2006. We will need to generate significant revenues from sales of BiDil and, if approved, BiDil XR, to achieve profitability. At the present time, we are unable to estimate the level of revenues that we will realize from the sales of BiDil or, if approved, BiDil XR. We are therefore unable to estimate when we will achieve profitability, if at all. We have also applied our nitric oxide technology to develop novel pharmaceuticals, as well as safer and more effective versions of existing drugs, and to target significant diseases that are characterized by a deficiency in nitric oxide.

As a result of our restructurings in March and October 2006, we expect that research, development and commercialization expenses will decline in 2007, due primarily to a decrease in headcount and research and commercialization activities, partially offset by an increase in ongoing development expenses for BiDil XR. We estimate that our operating expenses related to research and development and sales, general and administrative functions for the year ended December 31, 2007 will be approximately $55 million, excluding cost of product sales and including stock-based compensation related to Statement of Financial Accounting Standards No. 123(R). We estimate that our operating expenses will be reduced on an annualized basis by approximately $30 million as a result of our March 2006 and October 2006 restructurings. At December 31, 2006, our principal source of liquidity was $42.2 million of cash and cash equivalents and marketable securities. We believe that our existing sources of liquidity and cash expected to be generated from future operations will be sufficient to fund our current business plan for at least the next twelve months.

Financial Operations Overview

Revenue.   Our first commercial product, BiDil, was launched in July 2005, and generated product sales of  $12.1 million for the year ended December 31, 2006. Prior to the launch of BiDil, all of our revenue had been derived from license fees, research and development payments and milestone payments that we received from our corporate collaborators. In future years, we will seek to generate revenue from a

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combination of product sales, license fees, and milestone and royalty payments in connection with collaborative or strategic relationships, as well as royalties resulting from the license of our intellectual property. We expect that any collaborative revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of research and development, milestone and other payments received under our collaborative or strategic relationships and related continuing obligations, as well as the timing and amount of revenue we recognize for the sale of our products, to the extent any are successfully commercialized.

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

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

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

·BiDil XR.The current formulation of BiDil is an immediate-release tablet that must be taken three times daily. We are currently pursuing the development of BiDil XR, an extended release formulation of BiDil, that could be taken once a day. To date, we have incurred approximately $2.8 million in connection with the development of BiDil XR. Preclinical studies with BiDil XR have been positive, and we have commenced clinical development of BiDil XR. Because of its stage of development, and the uncertainties inherent in pharmaceutical development generally, we may not be able to successfully develop and commercialize BiDil XR. Moreover, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to complete the development of, or the period in which material cash inflows are expected to commence, if at all, for BiDil XR.

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

·Other Discovery Research.We have used our know-how and expertise in nitric oxide to develop drug candidates that are nitric oxide-enhancing versions of existing medicines in the areas of cardiovascular, gastrointestinal/anti-inflammatory and pulmonary medicine. These studies have not progressed beyond 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 are currently seeking out-licensing and collaboration opportunities for these product candidates, and are not presently engaging in any internal research and development activities with respect to

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these drugs. We cannot be certain if we will be able to secure out-licensing or collaboration partners for these product candidates on favorable terms, if at all. As such, we are not able to estimate when material cash inflows from product sales, milestones and royalties could commence, if ever.

·Nitric Oxide Stents.We formerly had a research program with Boston Scientific Corporation, or Boston Scientific, to develop cardiovascular stents enhanced with a bio-compatible polymer that is capable of releasing nitric oxide. In accordance with the terms of our agreement with Boston Scientific, the research term expired in December 2005. The research program under this agreement focused on pre-clinical development. We intend to seek out-licensing and collaboration opportunities for these product candidates, subject to the terms of our agreement with Boston Scientific and pending resolution of the ongoing rights of the parties with respect to this technology. We cannot be certain if we will be able to secure out-licensing or collaboration partners for these product candidates on favorable terms, if at all. Significant additional expenditures will be required to conduct pre-clinical testing and to apply for, and conduct, clinical trials. We are not presently engaging in any internal research and development activities with respect to cardiovascular stents. Because this program has not progressed beyond a pre-clinical stage of development, the successful development of products based upon this program is highly uncertain. As such, we are unable to estimate when material cash inflows from milestones and royalties could commence, if at all.

Sales, General and Administrative.   Sales, general and adminstrative expense consists 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 contract sales agreement with Publicis Selling Solutions, Inc., or Publicis.

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

Results of Operations

Years Ended December 31, 2006, 2005 and 2004

Revenue.   Total revenue for the year ended December 31, 2006 was $12.1 million, compared to $6.0 million in 2005 and $16.5 million in 2004.

Product sales for the year ended December 31, 2006 were $12.1 million, compared to $4.5 million in 2005. We commercially launched BiDil in July 2005. There were no product sales for the year ended December 31, 2004.

Research and development revenues were $-0- for the year ended December 31, 2006, compared to $1.6 million for 2005 and $16.5 million for 2004. The $1.6 million, or 100% decrease in research and development revenues in 2006 compared to 2005 was due to the termination of the research term under our collaboration agreement with Boston Scientific in December 2005. For the year ended December 31, 2005, research and development revenues totaled $1.6 million, a 90% or $14.9 million decrease in revenue compared to 2004. The decrease in research revenue in 2005 was due to the termination of an agreement with Merck in November 2004. In 2004 we recognized $14.9 million in revenue under this agreement, which included all amounts previously deferred. Due to the termination of this collaboration agreement, we no longer have any future performance obligations, and accordingly, we recognized previously deferred license revenue of $5.3 million. In addition, we recognized $1.8 million that was originally scheduled to be

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paid to us during 2005 for research and development funding, but was instead paid to us in 2004 when the agreement was terminated.

Cost of Product Sales.   Cost of product sales decreased to $3.6 million in 2006 from $8.0 million in 2005. The $4.4 million, or 56% decrease in cost of product sales in 2006 compared to 2005 is primarily due to a $4.5 million decrease in inventory impairment charges from $5.6 million in 2005 to $1.1 million in 2006. Included in cost of product sales are charges for contractual purchase commitments in the amounts of $0.4 million in 2006 and $1.5 million in 2005. The charges were due to our current estimate of inventory requirements based on our sales forecast. Offsetting the decrease in inventory impairment charges were higher product costs and higher royalty costs due to increased sales.

Research and Development.   Research and development expense for the year ended December 31, 2006 was $17.0 million, compared to $31.3 million in 2005 and $27.4 million in 2004. The $14.3 million, or 46% decrease in research and development expenses in 2006 compared with 2005 was primarily the result of decreased clinical and medical expenses needed to support the commercial launch of BiDil, a decrease in payroll and benefits due to our restructuring in March 2006, and decreases in the areas of continuing medical education, clinical advisory boards, medical services fees, publications and other various contracted services totaling $16.6 million. These decreases were offset by increases in the amount of $2.9 million for stock-based compensation expense related to the adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS 123R, in January 2006. The $3.9 million, or 14% increase in research and development expenses in 2005 compared with 2004 was primarily the result of increased clinical and medical expenses to support the commercial launch of BiDil in the areas of continuing medical education, clinical advisory boards, medical services fees, publications and other various contracted services totaling $13.2 million. We also incurred increased research and development expenses in 2005 of $2.6 million related to product development projects. Offsetting the increased medical support and research expenses in 2005 was a decrease of $10.2 million in clinical trial expenses as a result of the completion of the A-HeFT trial in 2004, a decrease in drug manufacturing expense of $1.1 million and a decrease in compensation expense of $0.6 million.

The following table summarizes the primary components of our research and development expense for our principal research and development programs for the fiscal years ended December 31, 2006, 2005 and 2004.

	December 31,
Research and Development Program	2006		2005		2004
BiDil	$	9,603,000	$	19,052,000	$	20,000,000
BiDil XR	2,774,000		—		—
Nitric oxide-enhancing cardiovascular compounds	2,568,000		6,073,000		500,000
Nitric oxide-enhancing COX-2 inhibitors	—		—		2,500,000
Nitric oxide stents	206,000		2,279,000		2,500,000
Other	1,878,000		3,936,000		1,901,000
Total research and development expense	$	17,029,000	$	31,340,000	$	27,401,000

Sales, General and Administrative.   Sales, general and administrative expense for the year ended December 31, 2006 was $59.4 million, compared to $74.6 million in 2005 and $20.2 million in 2004. The $15.2 million, or 20% decrease in sales, general and administrative expenses in 2006 compared to 2005 was primarily due to a decrease of $11.4 million related to the termination our sales force and $7.4 million for advertising and promotional services and public relations. These decreases are offset by increases in the amount of $5.1 million for stock-based compensation expense related to the adoption of SFAS 123R in January 2006. Sales, general and administrative expense for the year ended December 31, 2005 was $74.6 million, compared to $20.2 million in 2004. The $54.4 million, or 270% increase in sales, general and administrative expenses in 2005 compared to 2004 was primarily due to an increase of $25.6 million for the

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implementation of our contract sales force under our agreement with Publicis, $4.0 million for the hiring of sales and marketing management personnel, and $20.9 million for advertising and promotional services and public relations. We also incurred higher general and administrative expense in 2005 due to increased costs of $1.1 million associated with the accrual of business development expenses pertaining to the approval process for BiDil, $1.8 million pertaining to additional legal and consulting expenses and $0.4 million related to the hiring of executive management and additional administrative personnel.

Restructurings.   In the first quarter of 2006, we recorded a restructuring charge of $2.0 million related to a restructuring of our discovery research operations that was intended to better align costs with revenue and operating expectations. The restructuring charges pertained to employee severance and impairment of assets and were recorded in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or SFAS 146, and Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144.

In connection with the restructuring plan, we terminated 30 employees in our discovery research group, or approximately 30% of our workforce, resulting in a charge of $1.4 million. None of these employees remained employed as of March 31, 2006. As a result of terminating these employees, we recorded an impairment charge for certain research laboratory equipment, computer equipment, and furniture and fixtures aggregating $597,000, for which the future use was uncertain. These assets were written down to their fair value utilizing a third party appraiser to estimate the fair value of the assets based on current market quotes and the current condition of the equipment, furniture and fixtures.

In the fourth quarter of 2006, we recorded a restructuring charge of $3.2 million comprised of severance benefits of $2.5 million and impairment charges of $0.7 million for certain research and development equipment, leasehold improvements, furniture and fixtures, and computers. The restructuring charges were recorded in accordance with SFAS 146 and SFAS 144. This restructuring program included the elimination of 120 sales personnel and 8 general and administrative and research and development personnel. These employees were terminated in October 2006, and no employee remained employed at December 31, 2006. Due to these actions, certain research and development equipment, leasehold improvements, furniture and fixtures and computers became impaired. These assets were written down to the fair value based on either a third-party quote, or the estimated discounted cash flows they will generate over the remaining economic life.

Stock-based Compensation Expense.   On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS 123R, using the modified prospective application method. Compensation cost is calculated on the date of grant using the fair value of the options as calculated by the Black-Scholes valuation model and is recognized ratably over the employee’s service period.

Prior to the adoption of SFAS 123R, we accounted for share-based payments to employees using the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25. Under APB 25, we generally recognized no compensation cost for employee stock options. The adoption of SFAS 123R under the modified prospective application method allowed us to recognize compensation cost beginning with the effective date of January 1, 2006 based on (a) the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) the requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, or SFAS 123, for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. Under the modified prospective application method, prior periods are not restated for the effect of SFAS 123R.

As a result of adopting SFAS 123R on January 1, 2006, our net loss and net loss per share were $8.0 million and $0.22, respectively, higher than if we had continued to account for share-based

49

compensation under APB 25. As of December 31, 2006, the total compensation cost related to unvested awards to employees not yet recognized in the statement of operations was approximately $10.9 million, which will be recognized over a weighted average period of 1.4 years.

Non-Operating Income.   Non-operating income decreased to $1.9 million in 2006 compared to $2.0 million in 2005 and $1.4 million in 2004. The $0.1 million, or 9% decrease in non-operating income in 2006 compared to 2005 was primarily related to $0.4 million in higher interest expense associated with our debt, which was outstanding all of 2006 compared to six months in 2005, offset by $0.2 million in higher interest income. The $0.6 million, or 51% increase in non-operating income in 2005 compared to 2004 was primarily related to higher interest income due to higher average investment balances and higher interest rates in 2005, offset by interest expense related to long-term debt.

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 December 31, 2006, we have received net proceeds of $322.5 million from the issuance of equity securities, primarily as the result of the sale of $99.1 million of our redeemable convertible preferred stock, net proceeds of $60.1 million from our initial public offering in November 2003, net proceeds of $81.8 million from our follow-on public offering in December 2004, and net proceeds of $58.5 million from our registered direct offering in January 2006. At December 31, 2006, we had $42.2 million in cash, cash equivalents and marketable securities.

On June 28, 2005, we borrowed (i) $10.0 million from Oxford Finance Corporation, or Oxford, and (ii) $10.0 million from General Electric Capital Corporation, or GECC, pursuant to the terms of promissory notes made by us with both Oxford and GECC, respectively. The notes bear interest at a fixed rate of 9.95% per annum and are payable in 36 consecutive monthly installments of principal and accrued interest, beginning July 1, 2005. The notes are secured by a security interest in all our personal property and fixtures with the exception of any intellectual property or products acquired, whether by purchase, license or otherwise, on or after the execution of the notes. The agreements that we entered into with each of Oxford and GECC in connection with the notes also contain a material adverse change clause with both Oxford and GECC. Under this clause, if Oxford or GECC reasonably determine that our ability to repay the notes has been materially impaired, we would be considered in default. As of December 31, 2006, we were in compliance with this clause. As of December 31, 2006, we had paid aggregate principal in the amount of $9.3 million.

During the year ended December 31, 2006, operating activities used cash of $72.4 million primarily due to a net loss of $71.3 million, the use of $9.9 million in cash for accounts payable, and $4.6 million for accrued expenses, offset by decreases in accounts receivable of $1.2 million, and prepaid expenses and other current assets of $3.3 million. These cash flow decreases are offset by adjustments for non-cash impairment charges for restructuring of $1.3 million,  stock-based compensation expense of $7.9 million and depreciation and amortization of $0.8 million.

During the year ended December 31, 2006, investing activities provided cash of $29.3 million primarily due to the net sales of marketable securities of $29.4 million, offset by $0.1 million in fixed asset purchases. We expect to invest $250,000 to $750,000 for capital expenditures in 2007, principally related to the leasehold improvements, and computer equipment to support the current headcount.

During the year ended December 31, 2006, financing activities provided cash of $53.0 million due to proceeds of $58.5 million from our registered direct offering, and $0.8 million from the issuance of common stock under our employee stock plans, offset by $6.3 million in principal payments on long-term debt.

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The following table summarizes our contractual obligations at December 31, 2006 and the effects such obligations are expected to have on our liquidity and cash flows in future periods.

Payments Due by Period

Contractual Obligations	Total		Less than one year		1-3 years		3-5 years		More than five years
Operating lease obligation(1)	$	15,585,000	$	1,906,000	$	4,173,000	$	4,548,000	$4,958,000
Long-term debt	11,512,000		7,675,000		3,837,000		—		—
Purchase obligations(2)	1,080,000		1,080,000		—		—		—
License milestones(3)	250,000		250,000		—		—		—
Total contractual cash obligations	$	28,427,000	$	10,911,000	$	8,010,000	$	4,548,000	$4,958,000

(1)The amounts reflect obligations related to (i) our lease for 52,000 square feet of laboratory and office space at 125 Spring Street in Lexington, Massachusetts and (ii) our lease for 19,815 square feet at 45-55 Hayden Avenue in Lexington, Massachusetts. We entered into the lease for the Spring Street premises on January 30, 2004, and the lease is for a term of ten years with options that permit renewals for additional five-year periods. The expected minimum rental commitments under the Spring Street lease are $1,505,000, $1,505,000, $1,566,000 $1,688,000, and $1,688,000 for each year in the five calendar year period ending December 31, 2011, respectively, and $4.5 million in total for the remainder of the lease term. We are in the process of negotiating the assignment of this lease. We entered into the lease for the Hayden Avenue premises on February 23, 2007. The term of the Hayden Avenue lease is for sixty-six months beginning on the commencement date, which is defined in the lease as the earlier of (a) the day immediately following the substantial completion of certain improvements to the premises as set forth in the lease or (b) the first day on which we occupy all or any portion of the premises for the conduct of our business. The expected minimum rental commitments under the Hayden Avenue lease are $401,000, $542,000, $560,000, $580,000 and $592,000 for each year in the five calendar year period ending December 31, 2011, respectively, and $456,000 in total for the remainder of the lease term.

(2)Other purchase obligations are $1.1 million in purchase commitments to Schwarz Pharma for manufacture of finished goods in the first quarter of 2007.

(3)On February 9, 2007, NitroMed entered into a License Agreement with Elan, pursuant to which NitroMed may be obligated to pay certain milestone payments in the aggregate amount of $2,500,000 of which $250,000 was paid in the first quarter of 2007.

We believe that our existing sources of liquidity and cash expected to be generated from future operations will be sufficient to fund our current business plan for at least the next 12 months. We will require additional funding in the future and may seek to do so through collaborative co-promotion arrangements and/or public or private financings. However, additional funding may not be available to us on acceptable terms, if at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or convertible debt securities, further dilution to our existing stockholders may result.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail certain of our sales and marketing efforts, and our development efforts with respect to BiDil XR, and we may be required to limit, scale back or cease our operations. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products.

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

·the magnitude of product sales of BiDil;

·the successful commercialization of BiDil;

·the cost of manufacturing, marketing and selling BiDil;

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

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

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

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

·the effect of competing technological and market developments;

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

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

Application of Critical Accounting Policies and Estimates

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

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

Revenue.   Our principal source of revenue is the sale of BiDil, which began shipping in July of 2005. Other sources of revenue to date include license fees, research and development payments and milestone payments that we have received from our corporate collaborators.

Product Sales/Deferred Revenue.   We follow the provisions of Staff Accounting Bulletin No. 104, Revenue Recognition, and recognize 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 wholesaler and collectibility of the related receivable is reasonably assured. All revenues from product sales are recorded net of applicable allowances for sales returns, wholesaler allowances, rebates, and discounts. For arrangements where the risk of loss has not passed to wholesalers or pharmacies, we defer the recognition of revenue by recording deferred revenue until such time that risk of loss has passed. In addition, we evaluate our level of shipments to wholesalers and pharmacies on a quarterly basis compared to the estimated level of inventory in the channel,

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remaining shelf-life of the product shipped and quarterly forecasted sales. As a result of this evaluation, we deferred $2.1 million of revenue from the December 2005 shipments and recorded this amount in deferred revenue as of December 31, 2005. During 2006, we reversed $1.8 million of this deferred revenue and recognized the remainder as revenue.

Sales Returns, Allowances, Rebates and Discounts.   Our 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 our 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 discounts. We determine our provisions for sales returns, allowances, rebates and discounts based primarily on estimates and contractual terms. In developing a reasonable estimate for the reserve for product returns, we considered the factors in paragraph 8 of SFAS 48, Revenue Recognition When a Right of Return Exists. Although we have not yet developed a significant history of product returns because of the recent launch of BiDil, we believe we have developed a reasonable estimate of returns based on actual returns data compared to product shipped. We will continue to monitor actual returns as we gain more sales experience with BiDil.

Product Returns.   Consistent with industry practice, we offer contractual return rights that allow customers to return product only during the period that is six months prior to, and twelve months after product expiration. Commercial product shipped during 2005 had a shelf-life of twelve months from date of manufacture with expiration dates ranging from April 2006 to November 2006. During the third quarter of 2006, we began shipping commercial product with an expiration date of 18 months. Factors that are considered in our 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 as reported by Source Projected Launchtrac provided by Wolters Kluwer Health, and, the remaining time to expiration of our product. As a result of this ongoing evaluation, our product return reserve was $1.3 million at December 31, 2006 and $0.1 million at December 31, 2005. This reserve is evaluated on a quarterly basis, assessing each of the factors described above, and adjusted accordingly. Based on the factors noted above, we believe our estimate of product returns is reasonable, and changes, if any, from this estimate would not have a material impact to our financial statements.

Initial Trade Shipments Incentive.   During July of 2005, we offered certain product stocking incentives to a number of wholesalers and pharmacy customers. These incentives included units with guaranteed sales provisions and extended payment terms. As a result of these provisions, we concluded that these sales were essentially consignment sales as the risk of loss of these units had not passed to the customer. Accordingly, we have deferred all revenue related to these units until such time as the unit is provided to a patient with a prescription. At December 31, 2005, the remaining balance of deferred revenue related to these units was $1.2 million. Through December 31, 2006, we had either recognized the revenue related to these units, or the product had been returned or estimated to be returned.

Cash Incentives.   During the third quarter of 2005, we offered certain additional incentives to a number of pharmacy customers. These cash incentives included placement and advertising assistance in the amount of $328,000. We recorded this amount as a reduction to revenue during the year ended December 31, 2005. No cash incentives were offered during the twelve month period ended December 31, 2006.

Sample Voucher and Co-Pay Card Program.   Beginning in the third quarter of 2005, we initiated a sample voucher program whereby we offered an incentive to patients in the form of a free 30-day trial or approximately 100 tablets, of BiDil. We have accounted for this program in accordance with Emerging Issues Task Force Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer, or EITF

53

No. 01-09. These sample programs have historically had quarterly expiration dates such that each sample voucher program is only active for one quarter at a time. As a result, at the end of each quarter we can determine the actual amount of reimbursement claims received for the vouchers distributed during the quarter. The amount of reimbursement is recorded as a reduction to revenue. During the third quarter 2006, we initiated a six month co-pay program. As a result of these programs, we recorded a reduction to revenue of $0.5 million, and $0.8 million for the years ended December 31, 2006, and 2005, respectively. We expect to continue to offer co-pay incentives in future periods.

Sales Discounts, Rebates and Allowances.   Sales discounts, rebates and allowances result primarily from sales under contract with healthcare providers, wholesalers, Medicare and Medicaid programs and other governmental agencies. We estimate rebates and contractual allowances, cash and contract discounts and other rebates by considering the following factors: current contract prices and terms, sales volume, estimated customer and wholesaler inventory levels and current average rebate rates. For the years ended December 31, 2006, and 2005, we recorded cash discounts, rebates and other allowances of $1.5 million and $0.5 million, respectively.

Collaboration Revenue.   We record collaboration revenue on an accrual basis as it is earned and when amounts are considered collectible. Revenues received in advance of performance obligations or in cases where we have a continuing obligation to perform services, are deferred and recognized over the contractual or estimated performance period. Revenues from milestone payments that represent the culmination of a separate earnings process are recorded when the milestone is achieved. Contract revenues are recorded as the services are performed. When we are required to defer revenue, the period over which such revenue should be recognized is subject to estimates by management and may change over the course of the collaborative agreement. We had no collaboration revenue during the year ended December 31, 2006.

Accounts Receivable.   Accounts receivable consists of amounts due from wholesalers and pharmacies for the purchase of BiDil. Ongoing evaluations of customers’ credit worthiness are performed and collateral is generally not required. As of December 31, 2006, we have not reserved any amount for bad debts related to the sale of BiDil. We continuously review all customer accounts to determine if an allowance for uncollectible accounts is necessary. We currently provide substantially all of our customers with payment terms of net 30 days. Amounts past due from customers are determined based on contractual payment terms. Through December 31, 2006, payments have generally been made in a timely manner.

Inventories.   We review our estimates of the net realizable value of our inventories at each reporting period. Our estimate of the net realizable value of our inventories is subject to judgment and estimation. The actual net realizable value of our inventories could vary significantly from our estimates and could have a material effect on our financial condition and results of operations in any reporting period. On a quarterly basis, we analyze our current inventory levels and future irrevocable inventory purchase commitments and write down inventory that has become un-saleable, inventory that has a cost basis in excess of its expected net realizable value and irrevocable inventory purchase commitments that are in excess of expected future inventory requirements based on our sales forecasts. For the year ended December 31, 2006, we recorded an inventory impairment charge of $1.1 million to cost of sales related to commercial trade and patient sample inventory, and a $0.4 million charge to cost of sales for contractual purchase commitments. For the year ended December 31, 2005, we recorded an inventory impairment charge of $5.6 million to cost of sales related to commercial trade and patient sample inventory, and a $1.5 million charge to cost of sales for contractual purchase commitments. During the first quarter of 2007, BiDil’s shelf life for newly produced finished goods was extended to 24 months.

Accrued Expenses.   As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services which have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for such service as of

54

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

Stock-Based Compensation.   Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R to recognize compensation cost associated with stock option issued to employees. Determining the amount of stock-based compensation expense to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of a stock option. The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires us to make estimates for volatility, risk-free interest rate, expected term, and expected dividend yield. Volatility is determined exclusively using historical volatility data of our common stock based on the period of time since our 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 we do not expect substantially different exercise or post-vesting termination behavior amongst its employee population.

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

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

55

to common stockholders from anticipated future financings and a general assessment of future business risks.

Inflation

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

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board, or FASB, issued FIN 48, Accounting for Uncertainty in Income Taxes, or FIN 48. This interpretation requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 (beginning with our 2007 fiscal year), with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We do not believe the adoption of FIN 48 will have a material impact on our financial position or results of operations.

In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, or SAB 108. SAB 108 provides interpretive guidance on the SEC’s views regarding the process of quantifying materiality of financial statement misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006 (beginning with our 2006 fiscal year). The adoption of SAB 108 did not have any impact on our results of operations or financial position.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS No. 157. SFAS No. 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 No. 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 No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those years. We do not currently believe that adoption will have a material impact on our results of operations, financial position or cash flows.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates. Our current investment policy is to maintain an investment portfolio consisting mainly of U.S. money market and high-grade corporate and U.S. government-related securities, directly or through managed funds, with maturities of two years or less. In addition, we hold auction rate securities that reset monthly, however the maturities of securities at December 31, 2006 range from 2007 to 2045. Our cash is deposited in and invested through highly rated financial institutions in North America. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at December 31, 2006 or December 31, 2005, 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.

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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		58
Financial Statements:
Balance Sheets as of December 31, 2006 and 2005		59
Statements of Operations for the Years Ended December 31, 2006, 2005, and 2004		60
Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005, and 2004		61
Statements of Cash Flows for the Years Ended December 31, 2006, 2005, and 2004		64
Notes to Financial Statements		65

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
NitroMed, Inc.

We have audited the accompanying balance sheets of NitroMed, Inc. as of December 31, 2006 and 2005, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NitroMed, Inc. at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of NitroMed, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2007, expressed an unqualified opinion thereon.

As discussed in Note 2 and Note 8 of the financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment, using the modified-prospective transition method.

/s/ Ernst & Young LLP

Boston, Massachusetts
March 6, 2007

58

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

	December 31,
	2006			2005
ASSETS
Current Assets:
Cash and cash equivalents	$	21,074		$	11,091
Marketable securities	21,079			50,450
Accounts receivable	1,370			4,078
Inventories	2,846			3,247
Prepaid expenses and other current assets	570			3,860
Total current assets	46,939			72,726
Property and equipment, net	963			2,992
Restricted cash	803			803
Total assets	$	48,705		$	76,521
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,923		$	11,810
Accrued expenses	6,545			11,269
Accrued restructuring	299			—
Deferred revenue	206			3,451
Current portion of long-term debt	6,925			6,272
Total current liabilities	15,898			32,802
Long-term debt	3,728			10,653
Commitments and contingencies (Note 12)
Stockholders’ Equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $.01 par value; 65,000 shares authorized; 37,181 shares and 30,512 shares issued and outstanding as of December 31, 2006 and 2005, respectively	372			305
Additional paid-in capital	342,528			276,510
Deferred stock compensation	—			(1,208		)
Accumulated deficit	(313,808		)	(242,471		)
Accumulated other comprehensive loss	(13		)	(70		)
Total stockholders’ equity	29,079			33,066
Total liabilities and stockholders’ equity	$	48,705		$	76,521

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

59

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

	Year Ended December 31,
	2006			2005			2004
Revenues:
Product sales	$	12,086		$	4,455		$	—
Research and development	—			1,592			16,458
Total revenues	12,086			6,047			16,458
Cost and operating expenses:
Cost of product sales	3,560			8,009			—
Research and development(1)	17,029			31,340			27,401
Sales, general and administrative(1)	59,403			74,596			20,185
Restructuring charges	5,283			—			—
Total cost and operating expenses	85,275			113,945			47,586
Loss from operations	(73,189		)	(107,898		)	(31,128		)
Non-operating income:
Interest expense	(1,352		)	(930		)	(1		)
Interest income	3,204			2,976			1,336
Rental and other income	—			—			20
	1,852			2,046			1,355
Net loss	(71,337		)	(105,852		)	(29,773		)
Basic and diluted net loss per share	$	(1.96	)	$	(3.49	)	$	(1.14	)
Shares used in computing basic and diluted net loss per share	36,399			30,355			26,152

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

Research and development	$	2,795	$	298	$	2,065
Sales, general and administrative	$	5,119	$	195	$	457

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

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NITROMED, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

																	Accumulated
	Common Stock				Additional				Deferred								Other				Total
		Par			Paid-in				Stock				Accumulated				Comprehensive				Stockholders’
	Shares	Value			Capital				Compensation				Deficit				Income (Loss)				Equity
Balance at December 31, 2003	25,601		$	256		$	191,604			$	(3,240	)		$	(106,846	)		$	25			$	81,799
Exercise of stock options	676		7			871																878
Exercise of warrants	237		2			(2		)														—
Amortization of deferred stock compensation										982												982
Compensation expense associated with options issued to non-employees and performance options issued to employees						1,540																1,540
Issuance of stock under employee stock purchase plan	30		—			155																155
Issuance of common stock from public offering (net of issuance costs of $5,796)	3,580		36			81,722																81,758
Cancellation of compensatory stock options						(163		)		163												—
Unrealized losses on marketable securities																		(327		)		(327		)
Net loss														(29,773		)						(29,773		)
Comprehensive loss.																						(30,100		)
Balance at December 31, 2004	30,124		$	301		$	275,727			$	(2,095	)		$	(136,619	)		$	(302	)		$	137,012

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

61

NITROMED, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

																		Accumulated
																		Other
	Common Stock					Additional				Deferred								Comprehensive				Total
			Par			Paid-in				Stock				Accumulated				Income				Stockholders’
	Shares		Value			Capital				Compensation				Deficit				(Loss)				Equity
Balance at December 31, 2004		30,124		$	301		$	275,727			$	(2,095	)		$	(136,619	)		$	(302	)		$	137,012
Exercise of stock options		339		3			653																656
Exercise of warrants		12		—			1																1
Amortization of deferred stock compensation											887												887
Reversal of compensation expense associated with options issued to non-employees and performance options issued to employees							(394		)														(394		)
Issuance of stock under employee stock purchase plan		37		1			523																524
Unrealized gains on marketable securities																			232				232
Net loss															(105,852		)						(105,852		)
Comprehensive loss.																							(105,620		)
Balance at December 31, 2005		30,512		$	305		$	276,510			$	(1,208	)		$	(242,471	)		$	(70	)		$	33,066

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

62

NITROMED, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

																		Accumulated
																		Other
	Common Stock					Additional				Deferred								Comprehensive				Total
			Par			Paid-in				Stock				Accumulated				Income				Stockholders’
	Shares		Value			Capital				Compensation				Deficit				(Loss)				Equity
Balance at December 31, 2005		30,512		$	305		$	276,510			$	(1,208	)		$	(242,471	)		$	(70	)		$	33,066
Elimination of deferred stock compensation in accordance with the adoption of SFAS 123R							(1,208		)		1,208												—
Exercise of stock options		461		5			688																693
Compensation expense associated with options issued to employees							8,042																8,042
Reversal of compensation expense associated with options issued to non-employees							(239		)														(239		)
Issuance of stock under employee stock purchase plan		32		—			93																93
Issuance of stock in connection with employee benefit plan		78		1			198																199
Issuance of common stock from public offering (net of issuance costs of $4,056)		6,098		61			58,444																58,505
Unrealized gains on marketable securities																			57				57
Net loss															(71,337		)						(71,337		)
Comprehensive loss.																							(71,280		)
Balance at December 31, 2006		37,181		$	372		$	342,528			$	—			$	(313,808	)		$	(13	)		$	29,079

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

63

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

	Year Ended December 31,
	2006			2005			2004
Cash flows from operating activities:
Net loss	$	(71,337	)	$	(105,852	)	$	(29,773	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	798			896			421
Stock-based compensation expense	7,914			493			2,522
Non-cash restructuring charges.	1,342			—			—
Changes in operating assets and liabilities:
Accounts receivable	1,236			(4,078		)	—
Inventories	401			(3,247		)	—
Prepaid expenses and other current assets	3,290			(644		)	(1,920		)
Deferred revenue	(1,773		)	1,859			(12,858		)
Accounts payable	(9,887		)	9,148			1,830
Accrued expenses	(4,636		)	3,178			6,024
Accrued restructuring charge	299			—			—
Net cash used in operating activities	(72,353		)	(98,247		)	(33,754		)
Cash flows from investing activities:
Purchases of property and equipment	(111		)	(925		)	(2,698		)
Purchases of marketable securities	(150,092		)	(126,159		)	(131,410		)
Sales of marketable securities	179,520			182,426			54,072
Restricted cash	—			8			(711		)
Net cash provided by (used in) investing activities	29,317			55,350			(80,747		)
Cash flows from financing activities:
Proceeds from sale of common stock	58,505			—			81,758
Proceeds from long-term debt	—			20,000			—
Principal payments on long-term debt	(6,272		)	(3,075		)	—
Proceeds from employee stock plans	786			1,181			1,033
Principal payments on notes payable	—			—			(22		)
Net cash provided by financing activities	53,019			18,106			82,769
Net increase (decrease) in cash and cash equivalents	9,983			(24,791		)	(31,732		)
Cash and cash equivalents, beginning balance	11,091			35,882			67,614
Cash and cash equivalents, ending balance	$	21,074		$	11,091		$	35,882
Supplemental disclosure:
Cash paid during the year for interest	$	1,403		$	790		$	1

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

64

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

1. The Company

NitroMed, Inc. (the “Company”) is an emerging pharmaceutical company with substantial expertise and intellectual property in nitric oxide-based drug development. The Company has devoted substantially all of its efforts towards the research and development of its product candidates and the commercialization of its currently marketed product, 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 the Company’s product, BiDil, for the treatment of heart failure in self-identified black patients as an adjunct to current standard therapies. BiDil is an orally administered fixed-dose combination of isosorbide dinitrate and hydralazine hydrochloride. The Company commercially launched BiDil in July 2005, and has since generated approximately $16.5 million in product sales, including product sales of $3.5 million during the fourth quarter of 2006, and total product sales of $12.1 million during the year ended December 31, 2006.

The Company has used and will continue to require substantial funds to manufacture, market and sell BiDil during 2007 and beyond. The Company also expects to incur additional expenses related to the ongoing development of an extended release formulation of BiDil, called BiDil XR™, for which the Company has recently commenced clinical development. The Company believes that its existing sources of liquidity and cash expected to be generated from future operations will be sufficient to fund the current business plan for at least the next twelve months.

The Company will require additional funding in the future and may seek to do so through collaborative co-promotion arrangements and/or public or private financings. If the Company is unable to obtain funding on a timely basis, the Company may be required to significantly curtail certain of its sales and marketing efforts, and its development efforts with respect to BiDil XR, and the Company may be required to limit, scale back or cease its operations. The Company could be required to seek funds through arrangements with collaborators or others that may require the Company to relinquish rights to some of its technologies, product candidates or products.

2. Summary of Significant Accounting Policies

Cash Equivalents and Marketable Securities

Cash equivalents are short-term, highly liquid investments with maturities of three months or less at the time of acquisition. Investments with maturities in excess of three months at the time of acquisition are classified as marketable securities and designated as available-for-sale. Cash equivalents consist of institutional money market funds. Available-for-sale securities are carried at fair market value, as reported by the custodian, and unrealized gains and losses are reported as a separate component of accumulated other comprehensive loss within stockholders’ equity. Realized gains and losses were not material for the years ended December 31, 2006, 2005 and 2004.

Fair Value of Financial Instruments

Financial instruments mainly consist of cash and cash equivalents, marketable securities and long-term debt. The carrying amounts of these cash and cash equivalents, and marketable securities approximate their fair values. The fair value of long-term debt is $9.3 million.

65

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

2. Summary of Significant Accounting Policies (Continued)

Research and Development Expenses

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

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

Revenue Recognition

The Company’s principal source of revenue is the sale of BiDil, which began shipping in July of 2005. Other sources of revenue to date include license fees, research and development payments and milestone payments that the Company has received from our corporate collaborators.

Product Sales/Deferred Revenue.   The Company follows the provisions of 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 wholesaler and collectibility of the related receivable is reasonably assured. All revenues from product sales are recorded net of applicable allowances for sales returns, wholesaler allowances, rebates, and discounts. For arrangements where the risk of loss has not passed to wholesalers or pharmacies, the Company defers the recognition of revenue by recording deferred revenue until such time that risk of loss has passed. In addition, the Company evaluates its level of shipments to wholesalers and pharmacies on a quarterly basis compared to the estimated level of inventory in the channel, remaining shelf-life of the product shipped and quarterly forecasted sales. As a result of this evaluation, the Company deferred $2.1 million of revenue from the December 2005 shipments and recorded this amount in deferred revenue as of December 31, 2005. During 2006, the Company reversed $1.8 million of this deferred revenue and recognized the remainder as revenue.

66

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

2. Summary of Significant Accounting Policies (Continued)

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 discounts. The Company determines its provisions for sales returns, allowances, rebates and discounts based primarily on estimates and contractual terms. In developing a reasonable estimate for the reserve for product returns, the Company considers the factors in paragraph 8 of SFAS 48, Revenue Recognition When a Right of Return Exists. Although the Company has not yet developed a significant history of product returns because of the recent launch of BiDil, the Company believes it has developed a reasonable estimate of returns based on actual return data compared to product shipped. The Company will continue to monitor actual returns as it gains more sales experience with BiDil.

Product Returns.   Consistent with industry practice, the Company offers contractual return rights that allow customers to return product only during the period that is six months prior to, and twelve months after product expiration. Commercial product shipped during 2005 had a shelf-life of twelve months from date of manufacture with expiration dates ranging from April 2006 to November 2006. During the third quarter of 2006, the Company began shipping commercial product with an expiration date of 18 months. 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 as reported by Source Projected Launchtrac provided by Wolters Kluwer Health, and the remaining time to expiration of the Company’s product. As a result of this ongoing evaluation, the Company’s product return reserve was $1.3 million at December 31, 2006 and $0.1 million at December 31, 2005. This reserve is evaluated on a quarterly basis, assessing each of the factors described above, and adjusted accordingly. 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. During the first quarter of 2007 BiDil’s shelf life was increased to 24 months.

Initial Trade Shipments Incentive.   During July of 2005, the Company offered certain product stocking incentives to a number of wholesalers and pharmacy customers. These incentives included units with guaranteed sales provisions and extended payment terms. As a result of these provisions, the Company concluded that these sales were essentially consignment sales as the risk of loss of this product had not passed to the customer. Accordingly, the Company deferred all revenue related to this product until such time as the product is provided to a patient with a prescription. As of December 31, 2005, the remaining balance of deferred revenue related to this product was $1.2 million. Through December 31, 2006, the Company had either recognized the revenue related to these units, or the product had been returned or estimated to be returned.

Cash Incentives.   During the third quarter of 2005, the Company offered certain additional incentives to a number of pharmacy customers. These cash incentives included placement and advertising assistance

67

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

2. Summary of Significant Accounting Policies (Continued)

in the amount of $328,000. The Company recorded this amount as a reduction to revenue during the year ended December 31, 2005. The Company did not offer cash incentives during the twelve month period ended December 31, 2006.

Sample Voucher and Co-Pay Card Program.   Beginning in the third quarter of 2005, the Company initiated a sample voucher program whereby the Company offered an incentive to patients in the form of a free 30-day trial, or approximately 100 tablets, of BiDil. The Company accounted for this program in accordance with Emerging Issues Task Force Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (“EITF No. 01-09”). These sample programs have historically had quarterly expiration dates such that each sample voucher program is only active for one quarter at a time. As a result, at the end of each quarter the Company can determine the actual amount of reimbursement claims received for the vouchers distributed during the quarter. The amount of reimbursement is recorded as a reduction to revenue. During the third quarter 2006, the Company initiated a six month co-pay program. As a result of these programs, the Company recorded a reduction to revenue of $0.5 million and $0.8 million for the years ended December 31, 2006 and 2005, respectively. The Company expects to continue to offer co-pay incentives in future periods.

Sales Discounts, Rebates and Allowances.   Sales discounts, rebates and allowances result primarily from sales under contract with healthcare providers, wholesalers, Medicare and Medicaid programs and other governmental agencies. The Company estimates rebates and contractual allowances, cash and contract discounts and other rebates by considering the following factors: current contract prices and terms, sales volume, and current actual average rebate rates. For the years ended December 31, 2006 and December 31, 2005, the Company recorded cash discounts, rebates and other allowances of $1.5 million and $0.5 million, respectively.

Collaboration Revenue.   The Company records collaboration revenue on an accrual basis as it is earned and when amounts are considered collectible. Revenues received in advance of performance obligations or in cases where the Company has a continuing obligation to perform services, are deferred and recognized over the contractual or estimated performance period. Revenues from milestone payments that represent the culmination of a separate earnings process are recorded when the milestone is achieved. Contract revenues are recorded as the services are performed. When the Company is required to defer revenue, the period over which such revenue should be recognized is subject to estimates by management and may change over the course of the collaborative agreement. The Company had no collaboration revenue during the year ended December 31, 2006.

Accounts Receivable

Accounts receivable consists of amounts due from wholesalers and pharmacies for the purchase of BiDil. Ongoing evaluations of customers payment histories are performed and collateral is generally not required. As of December 31, 2006 and 2005, the Company has not reserved any amount for bad debts related to the sale of BiDil. The Company continuously reviews all customer accounts to determine if an allowance for uncollectible accounts is necessary. The Company currently provides substantially all of its customers with payment terms of net 30 days. Amounts past due from customers are determined based on contractual payment terms. Through December 31, 2006, payments have generally been made in a timely manner.

68

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

2. Summary of Significant Accounting Policies (Continued)

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which range between three to five years. Leasehold improvements are amortized based upon the lesser of the term of the lease or the useful life of the asset. The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable and recognizes an impairment loss when the estimated undiscounted cash flows are less than the carrying value of the asset. The asset is written down to its fair value, determined by either a quoted market price or by a discounted cash flow technique, whichever is more appropriate under the circumstances. During 2006, the Company recorded impairment charges of $1.3 million (See Note 7).

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:

	December 31,
	2006		2005
	(in thousands)
Raw materials	$	2,123	$	2,599
Finished goods	723		481
Consigned inventory	—		167
Total	$	2,846	$	3,247

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 year ended December 31, 2006, the Company recorded inventory impairment charges of $1.1 million to cost of sales related to commercial trade and patient sample inventory product, and a $0.4 million charge to cost of sales for contractual purchase commitments in excess of expected future inventory requirements based on the Company’s sales forecast. For the year ended December 31, 2005, the Company recorded an inventory impairment charge of $5.6 million to cost of sales related to commercial trade and patient sample inventory product, and a $1.5 million charge to cost of sales for contractual purchase commitments in excess of expected future inventory requirements based on the Company’s sales forecast. At December 31, 2006, BiDil had an eighteen month shelf life. During the first quarter of 2007, BiDil’s shelf life for newly produced finished goods was increased to 24 months.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss  by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock and the dilutive potential common stock equivalents then outstanding. Potential common stock equivalents consist of stock options and warrants.

69

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

2. Summary of Significant Accounting Policies (Continued)

Since the Company has a net loss for all periods presented, the effect of all potentially dilutive securities is antidilutive. Accordingly, basic and diluted net loss per share is the same.

Options to purchase 4,935,930, 3,819,676 and 3,246,631 shares of common stock for the years ended December 31, 2006, 2005 and 2004, respectively, and warrants to purchase -0-, 1,319 and 13,861 shares of common stock for the years ended December 31, 2006, 2005 and 2004, respectively, have been excluded from the computation of net loss per share as their effects would have been antidilutive.

Concentration of Credit Risk

SFAS 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. Financial instruments that potentially subject the Company to concentration of credit risk consists principally of marketable securities and trade accounts receivable. The Company has no off-balance-sheet or concentrations of credit risk such as foreign exchange contracts, options contracts or other  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 product revenues. This table excludes revenues from collaboration agreements. The Company recognized revenue in 2005 and 2004 from two collaborative partners:

	Number of Significant Customers		Percentage of Total Product Revenues by Customer
Year ended:			A		B		C
December 31, 2006		3	34	%	36	%	18	%
December 31, 2005		3	44	%	21	%	14	%

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 Customers		Percentage of Total Accounts Receivables by Customer
As of:			A		B		C
December 31, 2006		3	37	%	30	%	16	%
December 31, 2005		2	21	%	59	%	—	%

Concentration of Other Risks

The Company currently obtains one of the key active pharmaceutical ingredients for its commercial requirements for BiDil from a single source. The Company also utilizes one manufacturer to produce BiDil. The disruption or termination of the contract with the manufacturer of BiDil or of the supply of the commercial requirement for BiDil or a significant increase in the cost of the key active pharmaceutical

70

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

2. Summary of Significant Accounting Policies (Continued)

ingredient from this single source could have a material adverse effect on the Company’s business, financial position and results of operations.

Advertising Costs

All advertising costs are expensed as incurred. Advertising expenses were $12.8 million, $20.1 million and $2.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates relate to allowances for accounts receivable, product returns rates, contract rebates, the net realizable value of inventory, useful lives of fixed assets, accrued liabilities, and stock-based compensation. Actual results could differ from those estimates, and such differences may be material to the financial statements.

Accumulated Other Comprehensive Income (Loss)

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

Income Taxes

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

Segment Information

During the three years ended December 31, 2006, 2005 and 2004, the Company operated in one reportable business segment, developing nitric oxide enhancing medicines, under the management approach of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

Stock-Based Compensation

On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004) (“SFAS 123R”), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R supersedes APB 25 and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative.

71

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

2. Summary of Significant Accounting Policies (Continued)

On January 1, 2006, the Company adopted SFAS 123R using the modified prospective method as permitted under SFAS 123R. Under this transition method, compensation cost recognized for the year ending December 31, 2006 includes:  (a) compensation cost for all share-based payments granted prior to but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified prospective method of adoption, the Company’s results of operations and financial position for prior periods has not been restated.

See Note 8 for additional information relating to stock-based compensation.

New Accounting Standards

In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 (beginning with the Company’s 2007 fiscal year), with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company does not believe the adoption of this standard will have a material impact on its financial position or results of operations.

In September 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s views regarding the process of quantifying materiality of financial statement misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006 (beginning with the Company’s 2006 fiscal year). The adoption of SAB 108 did not have any impact on the Company’s results of operations or financial position.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS No. 157. SFAS No. 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 No. 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 No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company does not currently believe that adoption will have a material impact on its results of operations, financial position or cash flows.

72

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

3. Cash Equivalents and Marketable Securities

The following is a summary of the fair market value of available-for-sale money market funds and marketable securities the Company held at December 31, 2006 and 2005:

December 31, 2006	Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Estimated Fair Value
Cash and money market funds		$	21,074		$	—		$	—			$	21,074
U.S. Government agencies
Due in one year or less		$	—		$	—		$	—			$	—
Due in one to three years		1,000			—			(13		)		987
Taxable auction securities		18,400			—			—				18,400
Corporate securities
Due in one to three years		1,692			—			—				1,692
Total marketable securities		$	21,092		$	—		$	(13	)		$	21,079

December 31, 2005	Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Estimated Fair Value
Cash and money market funds		$	11,091		$	—		$	—			$	11,091
U.S. Government agencies
Due in one year or less		$	7,750		$	—		$	(20	)		$	7,730
Due in one to three years		1,000			—			(17		)		983
Taxable auction securities		32,725			—			—				32,725
Corporate securities
Due in one year or less		9,045			—			(33		)		9,012
Total marketable securities		$	50,520		$	—		$	(70	)		$	50,450

As of December 31, 2006, taxable auction securities have maturity dates that range from 2007 to 2045. Marketable securities with maturity dates in excess of one year are classified as short term because they are available-for-sale securities and are available to be used in current operations.

4. Property and Equipment

Property and equipment consist of the following:

	December 31,
	2006			2005
Laboratory furniture, fixtures and equipment	$	2,343		$	3,033
Office furniture, fixtures and equipment	903			1,514
Leasehold improvements	221			422
	3,467			4,969
Less accumulated depreciation and amortization	(2,504		)	(1,977		)
Total	$	963		$	2,992

73

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

4. Property and Equipment (Continued)

On February 22, 2007, the Company sold certain equipment previously used in research and development activities and received proceeds in the amount of $528,000, which approximates the equipment’s net book value.

5. Accrued Expenses

Accrued expenses consist of the following:

	December 31,
	2006		2005
Clinical trial and related costs	$	362	$	1,250
Sales and marketing	817		3,596
Compensation, and related benefits	1,425		1,446
Contracted purchase commitments	386		1,468
Returns reserves	1,339		99
Other	2,216		3,410
Total	$	6,545	$	11,269

6. Long-Term Debt

On June 28, 2005, the Company borrowed (i) $10.0 million from Oxford Finance Corporation (“Oxford”), and (ii) $10.0 million from General Electric Capital Corporation (“GECC”) pursuant to the terms of Promissory Notes (“the Notes”). The Notes bear interest at a fixed rate of 9.95% per annum and are payable in 36 consecutive monthly installments of principal and accrued interest, beginning on July 1, 2005. Also on June 28, 2005, the Company entered into Master Security Agreements with both Oxford and GECC (“the Agreements”). Under the terms of these Agreements, the Company granted to both Oxford and GECC a security interest in and against all of the property of the Company and in and against all additions, attachments, accessories and accessions to such property, all substitutions, replacements or exchanges, and all insurance and/or other proceeds (“the Collateral”). The Collateral comprises all of the Company’s personal property and fixtures including, but not limited to, all inventory, equipment, fixtures, accounts, deposit accounts, documents, investment property, instruments, general intangibles, chattel paper and any and all proceeds (but excluding intellectual property). The Collateral does not include any intellectual property or products (or interests in any intellectual property or products (including any royalties)) acquired, whether by purchase, license or otherwise, on or after the execution of the Agreements (collectively, “New Property”), nor do the Agreements limit any indebtedness secured by any New Property provided that debt or non-cash equity (e.g., stock) is used to acquire New Property. In the event that the Company uses cash to purchase New Property, Oxford’s and GECC’s existing liens will extend to such New Property. The Agreements also contain a Material Adverse Change clause with both Oxford and GECC. Under this clause, if Oxford or GECC reasonably determine that the Company’s ability to repay the Notes has been materially impaired, the Company would be considered in default. As of December 31, 2006, the Company was in compliance with this clause.

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

6. Long-Term Debt (Continued)

The following schedule sets forth the principal payments due as of December 31, 2006:

2007	$	6,925
2008	3,728
Total	$	10,653

7. Restructuring

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

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

As a result of terminating these employees, the Company recorded an impairment charge for certain research laboratory equipment, computer equipment, and furniture and fixtures aggregating $597,000, for which the future use was uncertain. These assets were written down to their fair value utilizing a third party appraiser to estimate the fair value of the assets based on current market quotes and the current condition of the equipment, furniture and fixtures.

The following table summarizes the restructuring activity as of December 31, 2006 as part of the March 31, 2006 restructuring plan:

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

In the fourth quarter of 2006, the Company recorded a restructuring charge of $3.2 million comprised of severance benefits of $2.5 million and impairment charges of $0.7 million for certain research and development equipment, leasehold improvements, furniture and fixtures, and computers. The restructuring charges were recorded in accordance with SFAS 146 and SFAS 144. The October 2006 restructuring program included the elimination of 120 sales personnel and 8 general and administrative and research and development personnel. None of these employees remained employed as of December 31, 2006. As a result of these terminations, the Company’s decision to no longer pursue research and development internally, and the Company’s decision to move to a smaller facility, certain

75

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

7. Restructuring (Continued)

research and development equipment, leasehold improvements, furniture and fixtures, and computers became impaired. These assets were written down to the fair value based on either a third-party quote, or the estimated discounted cash flows they will generate over the estimated remaining economic life to the Company.

The following table summarizes the restructuring activity as of December 31, 2006 as part of the October 2006 restructuring plan:

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

8. Stockholders’ Equity

Stockholders’ Equity

Public Offering

On January 2006, the Company completed a direct offering of shares of its common stock previously registered under its effective shelf registration statement, which was filed with the Securities and Exchange Commission, or the SEC, in August 2005. Pursuant to this offering, the Company sold approximately 6.1 million shares of its common stock to selected institutional investors at a price of $10.25 per share. Proceeds to the Company from this offering, net of offering expenses and placement agency fees, totaled approximately $58.5 million.

Stock Purchase Warrants

At December 31, 2005 and 2004, there were stock purchase warrants outstanding to purchase 1,319 and 13,861 shares of common stock, respectively, at exercise prices between $.01 and $.08 per share, which expire through 2007. During 2006 the remaining stock purchase warrants were exercised, and as a result there were no outstanding stock purchase warrants at December 31, 2006.

Stock Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123R”), using the modified-prospective-transition method. Under this transition method, compensation cost recognized in 2006 includes (a) compensation cost for all stock-based payments granted, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (“SFAS 123”), and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. 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,

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

8. Stockholders’ Equity (Continued)

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.

Stock Option Plans.   The Company’s Restated 1993 Equity Incentive Plan (the “1993 Plan”), which expired in accordance with its terms in 2003, provided for the grant of incentive stock options, nonstatutory stock options and restricted stock awards to purchase up to 2,288,200 shares of the Company’s common stock. Officers, employees, directors, consultants and advisors of the Company were eligible to receive grants of options under the 1993 Plan at a price not less than 100% (or 110% in the case of incentive stock options granted to 10% or greater stockholders) of the fair market value of the Company’s common stock, as determined by the Company’s Board of Directors, at the time the option was granted. In May 2003, the Company’s stockholders approved the 2003 Stock Incentive Plan (the “2003 Plan”), under which 800,000 shares of common stock were authorized for issuance. In October 2003, the stockholders of the Company approved an amended and restated 2003 Plan which provided, among other things, for an increase of shares authorized for issuance under the 2003 Plan to 2,500,000. In May 2005, the stockholders of the Company approved an amendment to the 2003 Plan which provided for an increase of shares authorized for issuance under the 2003 Plan to 3,600,000, and the adoption of an “evergreen” provision that allows for an annual increase in the number of shares of the Company’s common stock available for issuance under the 2003 Plan. The evergreen provision provides for an annual increase to be added on the first day of each fiscal year of the Company during the period beginning in fiscal year 2006 and ending on the second day of fiscal year 2013. The increase provided by the evergreen provision is equal to the lesser of (i) 1,400,000 shares of the Company’s common stock, (ii) 4% of the outstanding shares on that date or (iii) an amount determined by the Company’s Board of Directors. In January 2006, an additional 1,219,679 shares of common stock were reserved for issuance under the 2003 Plan. Pursuant to the evergreen provision, in January 2007 an additional 1,400,000 shares of common stock were reserved for issuance under the 2003 Plan.

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

Employee Stock Purchase Plan.   On August 18, 2003, the Board of Directors adopted the 2003 Employee Stock Purchase Plan (the “ESPP”), which allows eligible employees to purchase common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six month period during the term of the ESPP. The first offering period began on January 1, 2004. During the years ended December 31, 2006, 2005, and 2004, the Company issued and sold 32,398, 37,358 and 30,342 shares of common stock, respectively, under the ESPP. In May 2006, the stockholders of the Company approved an amendment to the ESPP, which provided for an increase of shares available for issuance under the ESPP to 150,000, and the adoption of an “evergreen” provision that allows for an annual increase in the number of shares of the Company’s common stock available for issuance under the ESPP. The evergreen provision provides for an annual increase to be added on the first day of each fiscal year of the Company during the period beginning in fiscal year 2007 and ending on the

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

8. Stockholders’ Equity (Continued)

last day of fiscal year 2010, such increase to be equal to the lesser of (i) 150,000 shares of the Company’s common stock or (ii) a lesser amount determined by the Company’s Board of Directors. Under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), which the Company applied to awards under the ESPP prior to January 1, 2006, the Company was not required to recognize stock-based compensation expense for the stock options or shares issued under the ESPP. Upon adoption of SFAS 123R, the Company began recording stock-based compensation expense related to the ESPP. Pursuant to the evergreen provision, in January 2007 an additional 150,000 shares of common stock were reserved for issuance and sale under the ESPP.

Grant-date Fair Value.   The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model based on the assumptions noted in the following table:

	December 31,
	2006		2005		2004
Expected volatility	74	%	73	%	94	%
Risk-free interest rate	4.7	%	4.0	%	3.6	%
Expected lives	5.4 years		6.0 years		4.0 years
Expected dividend	—		—		—

Using the Black-Scholes option-pricing model, the weighted average grant date fair values of options granted during the years ended December 31, 2006, 2005 and 2004 were  $4.14, $11.51 and $9.66, respectively.

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

Stock-Based Compensation Expense.   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 6.4% to all unvested options as of December 31, 2006. 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.

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

8. Stockholders’ Equity (Continued)

The adoption of SFAS 123R on January 1, 2006 had the following impact on fiscal 2006 results: net loss was higher by $8.0 million, and diluted loss per share was higher by $0.22, than if the Company had continued to account for stock-based compensation under APB 25.

The following table illustrates the effect on net loss and net loss per share had the Company applied the fair value recognition provisions of SFAS 123 for the years ended 2005 and 2004. For purposes of this pro-forma disclosure, the value of the options is estimated using the Black-Scholes option-pricing model and amortized to expense over the options’ vesting periods.

	Years Ended December 31,
	2005			2004
Net loss as reported	$	(105,852	)	$	(29,773	)
Add: Stock-based employee compensation expense included in reported net loss	626			1,512
Deduct: Stock-based employee compensation expense determined under fair value based method	(5,961		)	(2,645		)
Pro forma net loss	$	(111,187	)	$	(30,906	)
Basic and diluted net loss per share
As reported	$	(3.49	)	$	(1.14	)
Pro forma	$	(3.66	)	$	(1.18	)

Stock-Based Compensation Activity

A summary of the activity under the Company’s stock options plans as of December 31, 2006 and changes during the year then ended is presented below:

	Number of Options			Weighted- Average Exercise Price Per Share			Weighted- Average remaining Contractual Term in Years		Aggregate Intrinsic Value
Options outstanding at December 31, 2005		3,820			$	9.39
Options granted		3,833			$	6.65
Options exercised		(461	)		$	1.50
Options canceled		(2,256	)		$	11.80
Options outstanding at December 31, 2006		4,936			$	6.90		7.9		$	34,050
Options exercisable at December 31, 2006		2,050			$	6.58		6.2		$	13,486
Options expected to vest at December 31, 2006(1)		2,406			$	7.13		9.1		$	17,149

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

During the year ended December 31, 2006, the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $1,887,000, and the total amount of cash received from exercise of these options was $693,000. The

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

8. Stockholders’ Equity (Continued)

total grant-date fair value of stock options that vested during the year ended December 31, 2006 was approximately $3.7 million.

As of December 31, 2006, there was $10.9 million of total unrecognized compensation cost related to unvested share based awards. This cost is expected to be recognized over a weighted average period of 1.4 years.

During 1999 and 2000, the Company granted performance-based options to purchase 75,100 and 100,000 shares of common stock, respectively, with an exercise price of $1.30, to certain employees, which allow for acceleration of the vesting period upon the occurrence of certain defined events. Of the 100,000 options granted in 2002, 5,000 options were forfeited in 2002. Based on the terms of the arrangements, the awards were required to be accounted for as variable, and compensation expense was measured as the difference between the fair market value of the Company’s common stock at the reporting period date and the exercise price of the award. Compensation expense is recognized over the vesting period. The Company recognized a reversal of stock based compensation expense of ($261,000) for the year ended December 31, 2005, and an expense of $529,000 for the year ended December 31, 2004. In connection with the adoption of SFAS123R, these awards became fixed and their associated expense is included in stock-based compensation expense for the year ended December 31, 2006.

During 2003 and 2002, the Company granted options to purchase 413,250 and 241,000 shares of common stock, respectively, to employees at exercise prices below the deemed fair value for accounting purposes of the Company’s common stock. The weighted average exercise price of these options is $2.00 per share. The Company recorded deferred stock compensation expense related to these grants of $3,317,000 and $566,000 for the years ended December 31, 2003 and 2002, respectively. These amounts were being recognized as stock-based compensation expense ratably over the vesting period of four years. Included in the results of operations for the years ended December 31, 2005 and 2004 is stock based compensation expense of $887,000 and $982,000, respectively. In connection with the adoption of SFAS 123R in January 2006, the Company reversed the remaining deferred stock compensation balance of $1,208,000. The fair value of these awards is accounted for in accordance with SFAS 123R, and related stock compensation expense is included in the statement of operations for the year ended December 31, 2006.

Since 1999, the Company has granted options to purchase a total of 201,000 shares of common stock to nonemployees at a weighted-average exercise price of $3.50 per share, of which 125,000 remained outstanding at December 31, 2006. The Company has applied the recognition provisions of EITF 96-18 related to these stock options and utilized the Black-Scholes option pricing model to determine the fair value of these stock options at each reporting date. In connection with these awards, the Company recognized a reversal of stock based compensation expense of ($239,000), and ($133,000) for the years ended December 31, 2006, and 2005, respectively, and an expense of $1,011,000 for the year ended December 31, 2004.

9. Operating Lease

On January 30, 2004, the Company executed a lease for 52,000 square feet of laboratory and office space in Lexington, Massachusetts. The rent obligation for the building commenced on August 7, 2004,

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

9. Operating Lease (Continued)

which was 30 days after the date the Company commenced occupancy of the building. The lease is for a term of ten years with options that permit renewals for additional five-year periods. The Company has the option to terminate the lease at the end of the fifth year for a fee of $4.2 million. The expected minimum rental commitments under the lease agreement are $1,505,000, $1,505,000, $1,566,000, $1,688,000 and $1,688,000 for each year in the five calendar year period ending December 31, 2011, respectively, and $4.5 million in total for the remainder of the lease term. In addition to the minimum lease commitment, the lease agreement requires the Company to pay its pro rata share of property taxes and building operating expenses. Rent expense was $1.7 million, $1.7 million and $0.6 million for the years ended 2006, 2005 and 2004, respectively. Under the lease, a security deposit of $800,000 is required to be held in escrow for the life of the lease. This amount has been recorded as restricted cash. The Company is in the process of negotiating the assignment of this lease.

On February 23, 2007, the Company entered into a lease pursuant to which the Company agreed to lease 19,815 square feet at another facility located in Lexington, Massachusetts to accommodate its smaller workforce. The term of this lease is for sixty-six months beginning on the commencement date, which is defined in the lease as the earlier of (i) the day immediately following the substantial completion of certain improvements to the premises as set forth in the lease or (ii) the first day on which the Company occupies all or any portion of the premises for the conduct of its business. The expected minimum rental commitments under the lease agreement are $401,000, $542,000, $560,000, $580,000 and $592,000 for each year in the five calendar year period ending December 31, 2011, respectively, and $456,000 in total for the remainder of the lease term. In addition, the Company is obligated to pay a certain portion of the operating expenses and the real property taxes associated with the premises, as calculated pursuant to the terms of the lease. Under the lease, a security deposit in the amount of $190,000 is required to be held in escrow for the term of the lease.

10. License, Manufacturing and Commercialization Agreements

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

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

The term of the agreement runs in the United States from the effective date of the agreement until the later of (a) the 20th anniversary of the date of the first sale of the product by us or a permitted

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

10. License, Manufacturing and Commercialization Agreements (Continued)

sublicensee to an unaffiliated third party, which is referred to in the agreement as the first in market sale, or (b) the expiration of the last-to-expire patent for the product listed in the FDA’s “Orange Book.”  Elsewhere in the world, the term will run on a country by country basis from the effective date of the agreement until the later of (a) the 20th anniversary of the date of the first in market sale of the product in the country concerned or (b) the expiration of the life of the last to expire patent included in the Elan intellectual property in that country.  Following the expiration of the initial term, the agreement shall continue automatically for rolling 3 year periods thereafter, unless the agreement has been terminated by either of the parties by serving 1 year’s written notice on the other party immediately prior to the end of the initial term or any such additional 3 year period.  Either Elan or the Company may terminate the agreement in the event of a material, uncured breach by the other party, or if the other party goes into liquidation or becomes bankrupt or insolvent.  In addition, the Company may terminate the agreement in the event of a technical failure, which is defined as the inability to achieve a pharmacokinetic profile for the product consistent with that of BiDil administered three times daily (at 6 hour intervals).  Elan may terminate the agreement with respect to a particular country in the territory in the event that the Company does not meet certain obligations set forth in the agreement with respect to such country, provided that Elan must first consult with us and, if applicable, provide us with an opportunity to meet such obligations prior to exercising Elan’s termination rights.

Boston Scientific Collaboration.   In November 2001, the Company entered into a research, development and license agreement with Boston Scientific in the field of restenosis. The Company granted Boston Scientific an exclusive worldwide license to develop and commercialize nitric oxide-enhancing cardiovascular stents. The Company also granted to Boston Scientific a right of first refusal to obtain an exclusive license under the Company’s nitric oxide technologies to commercialize products for restenosis, which right of first refusal is for a period of three years after the end of the research term. In December 2003, the Company agreed to extend the agreement to continue the research and development collaboration through December 2005. The research term of the Boston Scientific agreement expired on December 31, 2005, although certain rights extend beyond this term. Boston Scientific made an up-front license payment of $1.5 million to the Company in 2001, and made an additional payment of $3.0 million in December 2003 in connection with the extension of the research and development collaboration. The Company recognized the up-front license payments ratably over the term of the contractual performance obligation. For the years ended December 31, 2005, and 2004, the Company recognized revenue of $1.6 million, respectively. In the event that specified research, development and commercialization milestones were achieved, Boston Scientific would have been obligated to make milestone payments to the Company. In addition, Boston Scientific also would have been obligated to pay royalties to the Company on the sale of any products resulting from the collaboration. Boston Scientific made a $3.5 million equity investment in the Company’s stock in 2001. In August 2003, in connection with a private placement, Boston Scientific made an additional $500,000 equity investment the Company’s stock.

Merck Collaboration.   From December 2002 until November 2004, the Company was party to an exclusive, worldwide research, collaboration and licensing agreement that granted Merck a license to certain existing nitric oxide-enhancing COX-2 technology and any technology pertaining to the license technology developed by the Company under this agreement. The research portion of the agreement was for three years, and the Company was obligated to perform certain research and development activities in consideration of quarterly fees totaling $7.2 million. In consideration of this license in 2003, the Company

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

10. License, Manufacturing and Commercialization Agreements (Continued)

received an upfront non-refundable license payment of $10.0 million, and two payments, each of $5.0 million, for achieving the first two milestones. The license fee revenue and the revenue from the first $5.0 million milestone payment were recognized ratably over the contractual term of the research and development program, which was expected to end on December 31, 2005. The revenue from the second $5.0 million payment was recognized in the fourth quarter of 2003, the period in which Merck achieved the milestone. On September 30, 2004, Merck halted the phase II trial of the Company’s lead candidate in nitric oxide-enhancing COX-2 inhibitors. This lead nitric oxide candidate is composed of a derivative of rofecoxib. Rofecoxib is the active ingredient in Vioxx, a COX-2 inhibitor which Merck voluntarily withdrew from worldwide markets on September 30, 2004. In November 2004, the Company agreed with Merck to terminate the collaboration agreement. Merck paid the Company a lump sum of $1.8 million, representing the full amount of the research funding owed to the Company for 2005, however, the Company will not receive any commercialization milestones or royalty payments from Merck. As a result of the termination of this agreement, the Company accelerated the recognition of deferred license revenue of $5.3 million in the fourth quarter of 2004, and the Company recognized the lump sum payment of $1.8 million as revenue in the fourth quarter of 2004. Under this agreement the Company recognized revenue of $14.9 million for the year ended December 31, 2004.

Dr. Jay N. Cohn.   In January 1999, as amended in January 2001 and March 2002, the Company entered into a collaboration and license agreement with Dr. Jay N. Cohn. Under the agreement, Dr. Cohn licensed to the Company an exclusive worldwide royalty-bearing license to technology and inventions owned or controlled by Dr. Cohn and that relate to BiDil for the treatment of cardiovascular disease. Upon achieving certain developmental events, the Company was required to make milestone payments totaling $1.0 million, which were recorded as a charge to research and development expenses in 2004. Upon commercial sale of BiDil, the Company is required to make royalty payments based on net sales at varying rates depending on sales volume. The royalty terms expires upon the later of the expiration of the patent rights or ten years from the first commercial sale. During the years ended December 31, 2006 and 2005, the Company incurred royalty expenses of $364,000 and $134,000, respectively. The agreement imposes upon the Company an obligation to use reasonable best efforts to develop and, upon receipt of regulatory approval, manufacture, market and commercialize products based upon the licensed rights. If the Company fails to meet this obligation, Dr. Cohn has the right to terminate the agreement and the license granted to the Company under the agreement. Dr. Cohn also has the right to terminate the agreement if the Company materially breaches the agreement and fails to remedy the breach within 30 days. The Company has the right to terminate the agreement at any time upon 30 days’ prior written notice. Unless earlier terminated, the agreement continues in perpetuity. Pursuant to the agreement, Dr. Cohn was appointed to the Company’s then-current scientific advisory board, entered into a consulting agreement with the Company and was granted an option to purchase 10,000 shares of the Company’s common stock.

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

11. Income Taxes

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

	Year Ended December 31,
	2006			2005			2004
Benefit at federal statutory tax rate	$	(24,255	)	$	(35,990	)	$	(10,123	)
State taxes, net of federal benefit	(4,473		)	(6,637		)	(1,867		)
Non-deductible expenses	910			254			157
Unbenefited operating losses	27,818			42,373			11,833
Income tax provision	$	—		$	—		$	—

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

	December 31,
	2006			2005
Deferred tax assets:
Net operating loss carryforwards	$	81,642		$	59,805
Capitalized research costs, net of amortization	27,386			24,991
Tax credit carryforwards	6,663			6,245
Deferred revenue	83			1
Depreciation	422			(29		)
Accrued expenses	218			991
Other	3,979			146
	120,393			92,150
Valuation allowance	(120,393		)	(92,150		)
Net deferred tax assets	$	—		$	—

The Company has increased its valuation allowance by $28,243,000 in 2006 to provide a full valuation allowance for deferred tax assets since the realization of these benefits is not considered more likely than not. At December 31, 2006, the Company had unused net operating loss carryforwards of $206,896,000 available to reduce federal taxable income expiring in 2010 through 2025 and $190,072,000 available to reduce state taxable income expiring in 2006 through 2010. The Company also has federal and state research tax credits of  $7,755,000 available to offset federal and state income taxes, both of which expire beginning in 2010. The net operating losses and tax credit carryforwards may be subject to the annual limitation provisions of Internal Revenue Code Sections 382 and 383. No income tax payments were made in 2006, 2005 or 2004.

12. Commitments and Contingencies

In connection with the Company’s efforts to obtain the approval of BiDil from the FDA, the Company contracted with the law firm of FoxKiser LLC (“FoxKiser”) for services related to the regulatory approval process for BiDil. The agreement provided for payment of legal consulting fees upon receipt of written FDA approval of BiDil. In addition, the agreement requires the Company to pay royalties to FoxKiser on commercial sales of BiDil. The royalty term ends six months after the date of market introduction of an

84

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

12. Commitments and Contingencies (Continued)

FDA-approved generic version of BiDil. During the third quarter of 2005, the Company entered into a separate consulting agreement with FoxKiser following the approval by the FDA of BiDil. During the years ended December 31, 2006, 2005 and 2004, the Company recorded charges of $0.9 million, $1.6 million and $1.9 million, respectively, pertaining to the legal consulting fees, and $364,000, $134,000 and $-0-, respectively, pertaining to royalty expenses related to these agreements.

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

In November 2004, as amended in May 2005, the Company executed an agreement with Publicis Selling Solutions, Inc. (“Publicis”), a contract sales organization, pursuant to which, on the Company’s behalf, Publicis employed and trained a specialty sales force consisting of approximately 142 sales representatives to sell BiDil to the Company’s target prescriber markets. The Company recorded costs in 2006 and 2005 of $10.8 million and $29.8 million, respectively, excluding one-time start-up costs and project costs. The Company transitioned the Publicis sales force internally to NitroMed in May 2006 and paid a liquidated damages fee of $500,000 and a sales force transition fee of $348,000 in the second quarter of 2006. As a result of the sales force transition, the Company no longer has a significant contractual commitment with Publicis.

On February 16, 2005, the Company engaged Schwarz Pharma Manufacturing, Inc. (“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, the Company has the right to engage a backup manufacturer. At December 31, 2006, the Company has outstanding binding purchase orders of $1.1 million for production of BiDil finished goods.

13. Retirement Plan

The Company sponsors a 401(k) plan covering substantially all employees. The plan provides for salary deferral contributions by participants of up to 75% of eligible wages not to exceed Federal requirements. Those employees over 50 years old are permitted to contribute an additional amount per Federal limits ($4,000 per year for 2005). In October 2005, the Board of Directors approved an employee match in the form of shares of the Company’s common stock equal to 50% of employee contributions, limited to the first 6% of salary contributed to the 401(k) plan. For the years ended December 31, 2006, and 2005, the Company recorded expenses of $411,000 and $88,000, respectively, related to the plan.

14. Related Party Transactions—Boston University

Dr. Joseph Loscalzo, a member of the Company’s board of directors, is the Physician-in-Chief and Chair of the Department of Medicine at Brigham and Women’s Hospital in Boston, Massachusetts. Dr. Loscalzo has served as a consultant to the Company since 1992, as the chair of the Company’s scientific advisory board since 1999 and currently as the chair of the Company’s technical review committee, which replaced the Company’s scientific review board at the beginning of fiscal year 2006. In October 2003, the

85

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

14. Related Party Transactions—Boston University (Continued)

Company entered into a consulting agreement with Dr. Loscalzo, as amended in April 2004, pursuant to which the Company agreed to pay Dr. Loscalzo an annual retainer of $55,000 for his services. The agreement is for a period of ten years, subject to the Company’s right to terminate the agreement at any time on 30 days’ notice. In 2006, 2005 and 2004, the Company paid Dr. Loscalzo an aggregate of $58,000, $68,000 and $75,000, respectively.

In June 1993, as amended in July 1997, January 1999 and December 2002, the Company entered into a research and license agreement with the Trustees of Boston University (“BU”). Under the agreement, the Company agreed to fund a multi-year research program under Dr. Loscalzo’s direction at BU in the area of nitric oxide-enhancing medicines. The Company’s funding is principally for laboratory equipment and supplies as well as a portion of the salary of Martin Feelish, Ph.D., a professor of medicine at BU and a member of the Company’s scientific advisory board (which was replaced at the beginning of 2006 by the technical review committee of which Dr. Feelish is not a member). The Company has also agreed to provide Dr. Feelish with access to the Company’s research facilities at the BU School of Medicine. Under the agreement, in exchange for the Company’s sponsored research funding, BU has granted the Company exclusive worldwide royalty-bearing rights to technology and inventions owned by BU at the effective time of, or developed in the course of, the sponsored research program. The Company has agreed to pay royalties to BU on all products sold or distributed by the Company or its affiliates that incorporate or utilize inventions, material or information specified in the agreement. In 2006, 2005 and 2004, the Company made payments to BU of $36,000, $120,000 and $221,000, respectively, pursuant to this agreement, excluding the lease payments described below.

In May 2003, the Company entered into an oral agreement with BU pursuant to which the Company leases approximately 1,500 square feet of laboratory space from BU at its Evans Biomedical Research Center in Boston, Massachusetts. The lease had a term of three years, and the Company makes annual rental payments of $60,000 pursuant to the lease. As provided above, the Company has agreed to make this space available to Dr. Feelish of BU. In each of 2006, 2005 and 2004, the Company made payments to BU under this agreement of $30,000, $60,000, and $60,000, respectively.

15. Quarterly Results of Operations (Unaudited)

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

	Year Ended December 31, 2006
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net revenues	$	2,316		$	2,855		$	3,427		$	3,488
Net loss	(25,924		)	(18,280		)	(16,520		)	(10,613		)
Basic and diluted net loss per share	$	(0.75	)	$	(0.50	)	$	(0.45	)	$	(0.29	)
Weighted average common shares used to compute net loss per share	34,597			36,724			37,090			37,147

86

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

15. Quarterly Results of Operations (Unaudited) (Continued)

	Year Ended December 31, 2005
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net revenues	$	398		$	398		$	1,515		$	3,736
Net loss	(19,589		)	(22,624		)	(32,072		)	(31,567		)
Basic and diluted net loss per share	$	(0.65	)	$	(0.75	)	$	(1.05	)	$	(1.04	)
Weighted average common shares used to compute net loss per share	30,234			30,275			30,421			30,486

87

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

None.

ITEM 9A.CONTROLS AND PROCEDURES

(a)   Evaluation of Disclosure Controls and Procedures.   Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2006. 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 December 31, 2006, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

(b)   Management’s Report on Internal Control Over Financial Reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

88

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, the company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on this assessment, our management concluded that, as of December 31, 2006, our internal control over financial reporting is effective based on those criteria.

Our independent registered public accounting firm has issued an audit report on our assessment of our internal control over financial reporting. This report appears below.

89

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
NitroMed, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that NitroMed, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). NitroMed, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that NitroMed, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, NitroMed, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of NitroMed, Inc. as of December 31, 2006 and 2005, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 of NitroMed, Inc. and our report dated March 6, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts
March 6, 2007

90

(c)Changes in Internal Controls.

No change in our internal control over financial reporting occurred during the fiscal year ending December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.OTHER INFORMATION

None.

PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

Information regarding our directors and executive officers may be found under the captions “Election of Directors,” “Executive Officers” and “Corporate Governance” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Audit Committee

We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Additional information regarding the Audit Committee may be found under the captions “Board of Directors Meetings and Committee Meetings” and “Report of the Audit Committee” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Audit Committee Financial Expert

The Board of Directors has determined that it has at least one “Audit Committee Financial Expert” (as defined by Item 401(h)(2) of Regulation S-K of the Exchange Act) on the Audit Committee of the Board of Directors, Davey S. Scoon. The Board of Directors has further determined that Mr. Scoon is “independent” from management within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

Section 16(a) Beneficial Ownership Reporting Compliance

Information regarding Section 16(a) Beneficial Ownership Reporting Compliance may be found under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics, which applies to all of our officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our code of business conduct and ethics was filed with the SEC as an exhibit to our annual report on Form 10-K for the fiscal year ended December 31, 2003. In addition, we intend to post on our website, which is located at www.nitromed.com, all disclosures that are required by law or NASDAQ Stock Market listing standards concerning any amendments to, or waivers from, any provision of our code of business conduct and ethics.

91

ITEM 11.EXECUTIVE COMPENSATION

Information with respect to this item may be found under the captions “Compensation Discussion and Analysis,” “Directors’ Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Executive Compensation,” and “Employment Agreements,” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

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

Information with respect to this item may be found under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information with respect to this item may be found under the caption “Certain Relationships and Related Transactions” and “Director Independence” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

Information with respect to this item may be found under the caption “Audit Fees” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1)Financial Statements.

For a list of the financial information included herein, see “Index to Financial Statements” on page 57.

(a)(2)Financial Statement Schedules.

All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or Notes thereto.

(a)(3)Exhibits. The list of Exhibits filed as a part of this Annual Report on Form 10-K are set forth on the Exhibit Index immediately preceding such Exhibits, and is incorporated herein by this reference.

92

SIGNATURES

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

	NITROMED, INC.
Date: March 8, 2007	By:	/s/ KENNETH M. BATE
		Kenneth M. Bate
		President and Chief Executive Officer

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

	Signature		Title		Date
/s/ KENNETH M. BATE		President and Chief Executive Officer		March 8, 2007
Kenneth M. Bate		and Director (Principal Executive Officer)
/s/ JAMES G. HAM, III		Vice President, Chief Financial Officer,		March 8, 2007
James G. Ham, III		Treasurer and Secretary
		(Principal Financial Officer and Principal Accounting Officer)
/s/ ROBERT S. COHEN		Director		March 8, 2007
Robert S. Cohen
/s/ FRANK L. DOUGLAS, M.D., PH.D.		Director		March 8, 2007
Frank L. Douglas, M.D., Ph.D.
/s/ ZOLA HOROVITZ, PH.D.		Director		March 8, 2007
Zola Horovitz, Ph.D.
/s/ ARGERIS KARABELAS, PH.D.		Director		March 8, 2007
Argeris Karabelas, Ph.D.
/s/ MARK LESCHLY		Director		March 8, 2007
Mark Leschly
/s/ JOHN W. LITTLECHILD		Director		March 8, 2007
John W. Littlechild
/s/ JOSEPH LOSCALZO, M.D., PH.D.		Director		March 8, 2007
Joseph Loscalzo, M.D., Ph.D.
/s/ DAVEY S. SCOON		Director		March 8, 2007
Davey S. Scoon
/s/ CHRISTOPHER J. SOBECKI		Director		March 8, 2007
Christoper J. Sobecki

93

EXHIBIT INDEX

Exhibit No.	Description
3.1	Restated Certificate of Incorporation of the Company (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
3.2	Amended and Restated Bylaws of the Company (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
*10.1	Restated 1993 Equity Incentive Plan (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
*10.2	Amended and Restated 2003 Stock Incentive Plan, as amended
*10.3	Form of Incentive Stock Option Agreement Granted Under Amended and Restated 2003 Stock Incentive Plan (Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-50439))
*10.4	Form of Nonstatutory Stock Option Agreement Granted Under Amended and Restated 2003 Stock Incentive Plan (Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-50439))
*10.5	2003 Employee Stock Purchase Plan, as amended
10.6†	Development and License Agreement between the Company and Boston Scientific Corporation dated November 20, 2001 (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
10.7†	Research and License Agreement between the Company and Brigham and Women’s Hospital, Inc. dated August 1, 1992, as amended November 22, 1996 (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
10.8†	Collaboration and License Agreement between the Company and Professor Jay N. Cohn dated January 22, 1999, as amended January 29, 2001 and March 15, 2002 (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
10.9	Amendment No. 1 to Collaboration and License Agreement between the Company and Professor Jay N. Cohn dated August 10, 2000 2004 (Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-50439))
10.10†	Research and License Agreement between the Company and Trustees of Boston University dated June 1, 1993, as amended January 1, 1999 (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
10.11†	Agreement between the Company and FoxKiser dated April 26, 2001 (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
10.12†	Agreement between the Company and John D. Folts dated March 13, 1995, as amended, November 22, 1996 and December 2, 1998 (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
*10.13	Letter Agreement between the Company and L. Gordon Letts dated November 4, 1993 (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))

94

10.14	Fourth Amended and Restated Stockholders’ Agreement among the Company and the stockholders named therein dated May 22, 2001, as amended November 20, 2001, May 12, 2003 and July 31, 2003 (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
10.15	Form of Warrant to purchase shares of the Company’s Common Stock, together with a schedule of warrant holders (Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-108104))
10.16	Letter Agreement between the Company, Boston University School of Medicine and Martin Feelisch, Ph.D. dated May 5, 2003 (Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-50439))
10.17	Consulting Agreement between the Company and Joseph Loscalzo, M.D., Ph.D. dated October 27, 2003, as amended on April 1, 2004 (Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-50439))
10.18	Letter Agreement between the Company and Merck Frosst Canada & Co. dated November 8, 2004 (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed on November 8, 2004 (File No. 000-50439))
*10.19	Letter Agreement between the Company and James G. Ham, III dated September 3, 2004 (Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-50439))
10.20†	Supply Agreement between the Company and Schwarz Pharma Manufacturing, Inc. dated as of February 16, 2005 (Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-50439))
*10.21	Letter Agreement between the Company and Michael D. Loberg, Ph.D., dated as of June 16, 2006 (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed on June 22, 2006 (File No. 000-50439))
*10.22	Executive Severance Benefit Plan (Incorporated by reference to the exhibits to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File No. 000-50439))
*10.23	Amendment No. 1 to Executive Severance Benefit Plan (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed on August 22, 2006 (File No. 000-50439))
*10.24	Form of Agreement entered into by and between the Company and certain of its executive officers, together with a schedule of such officers (Incorporated by reference to the exhibits to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File No. 000-50439))
*10.25	Form of Amendment No. 1 to Agreement entered into by and between the Company and certain of its executive officers, together with a schedule of such officers (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed on August 22, 2006 (File No. 000-50439))
*10.26	Employment Offer Letter between the Company and Kenneth M. Bate, dated as of January 19, 2007 (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed on January 25, 2007 (File No. 000-50439))

95

*10.27	Retention Agreement between the Company and Kenneth M. Bate, dated as of January 23, 2007 (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed on January 25, 2007 (File No. 000-50439))
*10.28	Severance Agreement between the Company and Kenneth M. Bate, dated as of January 23, 2007 (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed on January 25, 2007 (File No. 000-50439))
*10.29	Employment Offer Letter between the Company and Gerald Bruce, dated as of January 10, 2006, as amended on April 24, 2006
10.30†	License Agreement between the Company and Elan Pharma International Limited, dated as of February 9, 2007
10.31	Lease between the Company and The Realty Associates Fund VI, L.P., dated as of February 23, 2007
10.32	Lease between the Company and PM Atlantic Lexington, LLC dated January 30, 2004 (Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-50439))
14.1	Code of Business Conduct and Ethics (Incorporated by reference to the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-50439))
21.1	Subsidiaries of the Company
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K

†Confidential treatment requested as to certain portions, which portions have been filed separately with the Securities and Exchange Commission

96

EX-10.2

Exhibit 10.2

NITROMED, INC.

AMENDED AND RESTATED
2003 STOCK INCENTIVE PLAN

1.Purpose

The purpose of this Amended and Restated 2003 Stock Incentive Plan (the “Plan”) of NitroMed, Inc., a Delaware corporation (the “Company”), is to advance the interests of the Company’s stockholders by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company’s stockholders.  Except where the context otherwise requires, the term “Company” shall include any of the Company’s present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”) and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a controlling interest, as determined by the Board of Directors of the Company (the “Board”).

2.Eligibility

All of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock-based awards (each, an “Award”) under the Plan.  Each person who has been granted an Award under the Plan shall be deemed a “Participant”.

3.Administration and Delegation

(a)Administration by Board of Directors.  The Plan will be administered by the Board.  The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable.  The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency.  All decisions by the Board shall be made in the Board’s sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award.  No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith.

(b)Appointment of Committees.  To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a “Committee”).  All references in the Plan to the “Board” shall mean the Board or a Committee of the Board or the executive officers referred to in Section 3(c) to the extent that the Board’s powers or authority under the Plan have been delegated to such Committee or executive officers.

(c)Delegation to Executive Officers.  To the extent permitted by applicable law, the Board may delegate to one or more executive officers of the Company the power to grant Awards to employees

or officers of the Company or any of its present or future subsidiary corporations and to exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the terms of the Awards to be granted by such executive officers (including the exercise price of such Awards, which may include a formula by which the exercise price will be determined) and the maximum number of shares subject to Awards that the executive officers may grant; provided further, however, that no executive officer shall be authorized to grant Awards to any “executive officer” of the Company (as defined by Rule 3b-7 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) or to any "officer" of the Company (as defined by Rule 16a-1 under the Exchange Act).

4.Stock Available for Awards. 

(a)Number of Shares.  Subject to adjustment under Section 8, Awards may be made under the Plan for up to 2,500,000 shares of common stock, $0.01 par value per share, of the Company (the “Common Stock”). If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part (including as the result of shares of Common Stock subject to such Award being repurchased by the Company at the original issuance price pursuant to a contractual repurchase right) or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options, to any limitations under the Code.  Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares.

(b)Per Participant Limit.  Subject to adjustment under Section 8, for Awards granted after the Common Stock is registered under the Securities Exchange Act of 1934 (the “Exchange Act”), the maximum number of shares of Common Stock with respect to which Awards may be granted to any Participant under the Plan shall be 500,000 per calendar year.  The per Participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code (“Section 162(m)”). 

5.Stock Options

(a)General.  The Board may grant options to purchase Common Stock (each, an “Option”) and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable.  An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a “Nonstatutory Stock Option”.

(b)Incentive Stock Options.  An Option that the Board intends to be an “incentive stock option” as defined in Section 422 of the Code (an “Incentive Stock Option”) shall only be granted to employees of the Company, and any of the Company’s present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Code, and any other entities the employees of which are eligible to receive Incentive Stock Options under the Code, and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code.  The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) that is intended to be an Incentive Stock Option is not an Incentive Stock Option.

(c)Exercise Price.  The Board shall establish the exercise price at the time each Option is granted and specify it in the applicable option agreement. 

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(d)Duration of Options.  Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement.

(e)Exercise of Option.  Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised.

(f)Payment Upon Exercise.  Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows:

(1)in cash or by check, payable to the order of the Company;

(2)except as the Board may, in its sole discretion, otherwise provide in an option agreement, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price and any required tax withholding or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price and any required tax withholding;

(3)when the Common Stock is registered under the Exchange Act, by delivery of shares of Common Stock owned by the Participant valued at their fair market value as determined by (or in a manner approved by) the Board in good faith (“Fair Market Value”), provided (i) such method of payment is then permitted under applicable law and (ii) such Common Stock, if acquired directly from the Company, was owned by the Participant at least six months prior to such delivery;

(4)to the extent permitted by the Board, in its sole discretion by (i) delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) payment of such other lawful consideration as the Board may determine; or

(5)by any combination of the above permitted forms of payment.

(g)Substitute Options.  In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Board may grant Options in substitution for any options or other stock or stock-based awards granted by such entity or an affiliate thereof.  Substitute Options may be granted on such terms as the Board deems appropriate in the circumstances, notwithstanding any limitations on Options contained in the other sections of this Section 5 or in Section 2.

6.Restricted Stock

(a)Grants.  The Board may grant Awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, a “Restricted Stock Award”).

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(b)Terms and Conditions.  The Board shall determine the terms and conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any.

(c)Stock Certificates.  Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee).  At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant’s death (the “Designated Beneficiary”).  In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant’s estate.

7.Other Stock-Based Awards

The Board shall have the right to grant other Awards based upon the Common Stock having such terms and conditions as the Board may determine, including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights.

8.Adjustments for Changes in Common Stock and Certain Other Events

(a)Changes in Capitalization.  In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the per Participant limit set forth in Section 4(b), (iii) the number and class of securities and exercise price per share subject to each outstanding Option, (iv) the repurchase price per share subject to each outstanding Restricted Stock Award, and (v) the terms of each other outstanding Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate.  If this Section 8(a) applies and Section 8(b) also applies to any event, Section 8(b) shall be applicable to such event, and this Section 8(a) shall not be applicable.

(b)Reorganization Events

(1)Definition.  A “Reorganization Event” shall mean:  (a) any merger or consolidation of the Company with or into another entity as a result of which all of the Common Stock of the Company is converted into or exchanged for the right to receive cash, securities or other property, (b) any exchange of all of the Common Stock of the Company for cash, securities or other property pursuant to a share exchange transaction, or (c) a liquidation or dissolution of the Company.

(2)Consequences of a Reorganization Event on Options.  Upon the occurrence of a Reorganization Event, or the execution by the Company of any agreement with respect to a Reorganization Event, except to the extent specifically provided for in any agreement evidencing an Option hereunder, the Board shall in its discretion, take any one or more of the following actions with respect to outstanding Options:

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(a)provide that all outstanding Options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof).  For purposes hereof, an Option shall be considered to be assumed if, following consummation of the Reorganization Event, the Option confers the right to purchase, for each share of Common Stock subject to the Option immediately prior to the consummation of the Reorganization Event, the consideration (whether cash, securities or other property) received as a result of the Reorganization Event by holders of Common Stock for each share of Common Stock held immediately prior to the consummation of the Reorganization Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if the consideration received as a result of the Reorganization Event is not solely common stock of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise of Options to consist solely of common stock of the acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair market value to the per share consideration received by holders of outstanding shares of Common Stock as a result of the Reorganization Event;

(b)upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time prior to the Reorganization Event and will terminate immediately prior to the consummation of such Reorganization Event, except to the extent exercised by the Participants before the consummation of such Reorganization Event; or

(c)in the event of a Reorganization Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Reorganization Event (the “Acquisition Price”), then the Board may provide that all outstanding Options shall terminate upon consummation of such Reorganization Event and that each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (to the extent then exercisable), exceeds (B) the aggregate exercise price of such Options.

(3)Consequences of a Reorganization Event on Restricted Stock Awards.  Upon the occurrence of a Reorganization Event, except to the extent specifically provided for in any agreement evidencing a Restricted Stock Award hereunder, the repurchase and other rights of the Company under each outstanding Restricted Stock Award shall inure to the benefit of the Company’s successor and shall apply to the cash, securities or other property which the Common Stock was converted into or exchanged

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for pursuant to such Reorganization Event in the same manner and to the same extent as they applied to the Common Stock subject to such Restricted Stock Award.

(4)Consequences of a Reorganization Event on Other Awards.  The Board shall specify the effect of a Reorganization Event on any other Award granted under the Plan at the time of the grant of such Award.

9.Repricing of Options.  The Board shall have the authority, at any time and from time to time, with the consent of the affected option holders, to amend any or all outstanding options granted under the Plan to provide an option exercise price per share which may be lower or higher than the original option exercise price, and/or cancel any such options and grant in substitution therefor new options covering the same or different numbers of shares of Common Stock having an option exercise price per share which may be lower or higher than the exercise price of the canceled options.

10.General Provisions Applicable to Awards

(a)Transferability of Awards.  Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant.  References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. 

(b)Documentation.  Each Award shall be evidenced in such form (written, electronic or otherwise) as the Board shall determine.  Each Award may contain terms and conditions in addition to those set forth in the Plan.

(c)Board Discretion.  Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award.  The terms of each Award need not be identical, and the Board need not treat Participants uniformly.

(d)Termination of Status.  The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other  change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant’s legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award.

(e)Withholding.  Each Participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability.  Except as the Board may otherwise provide in an Award, when the Common Stock is registered under the Exchange Act, Participants may satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value; provided, however, that the total tax withholding where stock is being used to satisfy such tax obligations cannot exceed the Company’s minimum statutory withholding obligations (based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).  The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant.

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(f)Amendment of Award.  The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant’s consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant.

(g)Conditions on Delivery of Stock.  The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company’s counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations.

(h)Acceleration.  The Board may at any time provide that any Award shall become immediately exercisable in full or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.

(i)Deferred Delivery of Shares Issuable Pursuant to an Award.  The Board may, at the time any Award is granted, provide that, at the time Common Stock would otherwise be delivered pursuant to the Award, the Participant shall instead receive an instrument evidencing the right to future delivery of Common Stock at such time or times, and on such conditions, as the Board shall specify.  The Board may at any time accelerate the time at which delivery of all or any part of the Common Stock shall take place.

11.Miscellaneous

(a)No Right To Employment or Other Status.  No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company.  The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award.

(b)No Rights As Stockholder.  Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares.  Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to such Option are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend.

(c)Effective Date and Term of Plan.  The Plan shall become effective on the date on which it is adopted by the Board.  No Awards shall be granted under the Plan after the completion of ten years

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from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company’s stockholders, but Awards previously granted may extend beyond that date.

(d)Amendment of Plan.  The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that to the extent required by Section 162(m), no Award granted to a Participant that is intended to comply with Section 162(m) after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award, unless and until such amendment shall have been approved by the Company’s stockholders as required by Section 162(m) (including the vote required under Section 162(m)). 

(e)Authorization of Sub-Plans.  The Board may from time to time establish one or more sub-plans under the Plan for purposes of satisfying applicable blue sky, securities or tax laws of various jurisdictions.  The Board shall establish such sub-plans by adopting supplements to this Plan containing (i) such limitations on the Board’s discretion under the Plan as the Board deems necessary or desirable or (ii) such additional terms and conditions not otherwise inconsistent with the Plan as the Board shall deem necessary or desirable.  All supplements adopted by the Board shall be deemed to be part of the Plan, but each supplement shall apply only to Participants within the affected jurisdiction and the Company shall not be required to provide copies of any supplement to Participants in any jurisdiction which is not the subject of such supplement.

(f)Governing Law.  The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law.

*     *     *

Approved by the Board of Directors

     August 18, 2003

Approved by the Stockholders on

     October 6, 2003

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NITROMED, INC.

AMENDMENT NO. 1 TO

AMENDED AND RESTATED 2003 STOCK INCENTIVE PLAN

            Pursuant to Section 11(d) of the Amended and Restated 2003 Stock Incentive Plan (the “Plan”) of NitroMed, Inc., a Delaware corporation (the “Company”), the Plan be, and hereby is, amended as set forth below.  Capitalized terms used and not defined herein shall have the meanings ascribed to them in the Plan.

            1.         Section 4 of the Plan is hereby deleted in its entirety and the following is substituted in its place:

“4.        Stock Available for Awards. 

(a)        Number of Shares.  Subject to adjustment under Section 8, Awards may be made under the Plan for up to the number of shares of common stock, $0.01 par value per share, of the Company (the “Common Stock”) that is equal to the sum of:

(1)        3,600,000 shares of Common Stock; plus

(2)        an annual increase to be added on the first day of each of the Company’s fiscal years during the period beginning in fiscal year 2006 and ending on the second day of fiscal year 2013 equal to the lesser of (i) 1,400,000 shares of Common Stock, (ii) 4% of the outstanding shares on such date or (iii) an amount determined by the Board.

If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part (including as the result of shares of Common Stock subject to such Award being repurchased by the Company at the original issuance price pursuant to a contractual repurchase right) or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options, to any limitations under the Code.  Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares.

(b)        Per Participant Limit.  Subject to adjustment under Section 8, for Awards granted after the Common Stock is registered under the Securities Exchange Act of 1934 (the “Exchange Act”), the maximum number of shares of Common Stock with respect to which Awards may be granted to any Participant under the Plan shall be 500,000 per calendar year.  The per Participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code (“Section 162(m)”).”

            2.         This amendment shall be effective as of the date approved by the stockholders of the Company.

Adopted by the Board of Directors on March 9, 2005

Approved by Stockholders on May 16, 2005

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EX-10.5

Exhibit 10.5

NITROMED, INC.

2003 EMPLOYEE STOCK PURCHASE PLAN

The purpose of this Plan is to provide eligible employees of NitroMed, Inc. (the “Company”) and certain of its subsidiaries with opportunities to purchase shares of the Company’s common stock, $0.01 par value (the “Common Stock”), commencing on January 1, 2004.  Seventy Five Thousand (75,000) shares of Common Stock in the aggregate have been approved for this purpose.  This Plan is intended to qualify as an “employee stock purchase plan” as defined in Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder, and shall be interpreted consistent therewith.

1.Administration.  The Plan will be administered by the Company’s Board of Directors (the “Board”) or by a Committee appointed by the Board (the “Committee”).  The Board or the Committee has authority to make rules and regulations for the administration of the Plan and its interpretation and decisions with regard thereto shall be final and conclusive.

2.Eligibility.  All employees of the Company, including Directors who are employees, and all employees of any subsidiary of the Company (as defined in Section 424(f) of the Code) designated by the Board or the Committee from time to time (a “Designated Subsidiary”), are eligible to participate in any one or more of the offerings of Options (as defined in Section 9) to purchase Common Stock under the Plan provided that:

(a)they are customarily employed by the Company or a Designated Subsidiary for more than 20 hours a week and for more than five months in a calendar year; and

(b)they have been employed by the Company or a Designated Subsidiary for at least six months prior to enrolling in the Plan; and

(c)they are employees of the Company or a Designated Subsidiary on the first day of the applicable Plan Period (as defined below).

No employee may be granted an option hereunder if such employee, immediately after the option is granted, owns 5% or more of the total combined voting power or value of the stock of the Company or any subsidiary.  For purposes of the preceding sentence, the attribution rules of Section 424(d) of the Code shall apply in determining the stock ownership of an employee, and all stock which the employee has a contractual right to purchase shall be treated as stock owned by the employee.

3.Offerings.  The Company will make one or more offerings (“Offerings”) to employees to purchase stock under this Plan.  Offerings will begin each January 1 and July 1, or the first business day thereafter (the “Offering Commencement Dates”).  Each Offering Commencement Date will begin a six month period (a “Plan Period”) during which payroll deductions will be made and held for the purchase of Common Stock at the end of the Plan Period.  The Board or the Committee may, at its discretion, choose a different Plan Period of twelve (12) months or less for subsequent Offerings.

4.Participation.  An employee eligible on the Offering Commencement Date of any Offering may participate in such Offering by completing and forwarding a payroll deduction authorization form to the employee’s appropriate payroll office at least ten days prior to the applicable Offering Commencement Date.  The form will authorize a regular payroll deduction from the

Compensation received by the employee during the Plan Period.  Unless an employee files a new form or withdraws from the Plan, his deductions and purchases will continue at the same rate for future Offerings under the Plan as long as the Plan remains in effect.  The term “Compensation” means the amount of money reportable on the employee’s Federal Income Tax Withholding Statement, excluding overtime, shift premium, incentive or bonus awards, allowances and reimbursements for expenses such as relocation allowances for travel expenses, income or gains on the exercise of Company stock options or stock appreciation rights, and similar items, whether or not shown on the employee’s Federal Income Tax Withholding Statement, but including, in the case of salespersons, sales commissions to the extent determined by the Board or the Committee.

5.             Deductions.  The Company will maintain payroll deduction accounts for all participating employees.  With respect to any Offering made under this Plan, an employee may authorize a payroll deduction in any dollar amount up to a maximum of 10% of the Compensation he or she receives during the Plan Period or such shorter period during which deductions from payroll are made.  Payroll deductions may be at the rate of 2%, 4%, 6%, 8% or 10% of Compensation with any change in compensation during the Plan Period to result in an automatic corresponding change in the dollar amount withheld.

6.             Deduction Changes.  An employee may decrease or discontinue his payroll deduction once during any Plan Period, by filing a new payroll deduction authorization form.  However, an employee may not increase his payroll deduction during a Plan Period.  If an employee elects to discontinue his payroll deductions during a Plan Period, but does not elect to withdraw his funds pursuant to Section 8 hereof, funds deducted prior to his election to discontinue will be applied to the purchase of Common Stock on the Exercise Date (as defined below).

7.             Interest.  Interest will not be paid on any employee accounts, except to the extent that the Board or the Committee, in its sole discretion, elects to credit employee accounts with interest at such per annum rate as it may from time to time determine.

8.             Withdrawal of Funds.  An employee may at any time prior to the close of business on the last business day in a Plan Period and for any reason permanently draw out the balance accumulated in the employee’s account and thereby withdraw from participation in an Offering.  Partial withdrawals are not permitted.  The employee may not begin participation again during the remainder of the Plan Period.  The employee may participate in any subsequent Offering in accordance with terms and conditions established by the Board or the Committee.

9.             Purchase of Shares.  On the Offering Commencement Date of each Plan Period, the Company will grant to each eligible employee who is then a participant in the Plan an option (“Option”) to purchase on the last business day of such Plan Period (the “Exercise Date”), at the Option Price hereinafter provided for, the largest number of whole shares of Common Stock of the Company as does not exceed the number of shares determined by multiplying $2,083 by the number of full months in the Offering Period and dividing the result by the closing price (as defined below) on the Offering Commencement Date of such Plan Period.

Notwithstanding the above, no employee may be granted an Option (as defined in Section 9) which permits his rights to purchase Common Stock under this Plan and any other employee stock purchase plan (as defined in Section 423(b) of the Code) of the Company and its subsidiaries, to accrue at a rate which exceeds $25,000 of the fair market value of such Common Stock (determined at the Offering Commencement Date of the Plan Period) for each calendar year in which the Option is outstanding at any time.

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The purchase price for each share purchased will be 85% of the closing price of the Common Stock on (i) the first business day of such Plan Period or (ii) the Exercise Date, whichever closing price shall be less.  Such closing price shall be (a) the closing price on any national securities exchange on which the Common Stock is listed, (b) the closing price of the Common Stock on the Nasdaq National Market or (c) the average of the closing bid and asked prices in the over-the-counter-market, whichever is applicable, as published in The Wall Street Journal.  If no sales of Common Stock were made on such a day, the price of the Common Stock for purposes of clauses (a) and (b) above shall be the reported price for the next preceding day on which sales were made.

Each employee who continues to be a participant in the Plan on the Exercise Date shall be deemed to have exercised his Option at the Option Price on such date and shall be deemed to have purchased from the Company the number of full shares of Common Stock reserved for the purpose of the Plan that his accumulated payroll deductions on such date will pay for, but not in excess of the maximum number determined in the manner set forth above.

Any balance remaining in an employee’s payroll deduction account at the end of a Plan Period will be automatically refunded to the employee, except that any balance which is less than the purchase price of one share of Common Stock will be carried forward into the employee’s payroll deduction account for the following Offering, unless the employee elects not to participate in the following Offering under the Plan, in which case the balance in the employee’s account shall be refunded.

10.           Issuance of Certificates.  Certificates representing shares of Common Stock purchased under the Plan may be issued only in the name of the employee, in the name of the employee and another person of legal age as joint tenants with rights of survivorship, or (in the Company’s sole discretion) in the name of a brokerage firm, bank or other nominee holder designated by the employee.  The Company may, in its sole discretion and in compliance with applicable laws, authorize the use of book entry registration of shares in lieu of issuing stock certificates.

11.           Rights on Retirement, Death or Termination of Employment.  In the event of a participating employee’s termination of employment prior to the last business day of a Plan Period, no payroll deduction shall be taken from any pay due and owing to an employee and the balance in the employee’s account shall be paid to the employee or, in the event of the employee’s death, (a) to a beneficiary previously designated in a revocable notice signed by the employee (with any spousal consent required under state law) or (b) in the absence of such a designated beneficiary, to the executor or administrator of the employee’s estate or (c) if no such executor or administrator has been appointed to the knowledge of the Company, to such other person(s) as the Company may, in its discretion, designate.  If, prior to the last business day of the Plan Period, the Designated Subsidiary by which an employee is employed shall cease to be a subsidiary of the Company, or if the employee is transferred to a subsidiary of the Company that is not a Designated Subsidiary, the employee shall be deemed to have terminated employment for the purposes of this Plan.

12.           Optionees Not Stockholders.  Neither the granting of an Option to an employee nor the deductions from his pay shall constitute such employee a stockholder of the shares of Common Stock covered by an Option under this Plan until such shares have been purchased by and issued to him.

13.           Rights Not Transferable.  Rights under this Plan are not transferable by a participating employee other than by will or the laws of descent and distribution, and are exercisable during the employee’s lifetime only by the employee.

14.           Application of Funds.  All funds received or held by the Company under this Plan may be combined with other corporate funds and may be used for any corporate purpose.

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15.           Adjustment in Case of Changes Affecting Common Stock.  In the event of a subdivision of outstanding shares of Common Stock, or the payment of a dividend in Common Stock, the number of shares approved for this Plan, and the share limitation set forth in Section 9, shall be increased proportionately, and such other adjustment shall be made as may be deemed equitable by the Board or the Committee.  In the event of any other change affecting the Common Stock, such adjustment shall be made as may be deemed equitable by the Board or the Committee to give proper effect to such event.

16.           Merger.  If the Company shall at any time merge or consolidate with another corporation and the holders of the capital stock of the Company immediately prior to such merger or consolidation continue to hold at least 80% by voting power of the capital stock of the surviving corporation (“Continuity of Control”), the holder of each Option then outstanding will thereafter be entitled to receive at the next Exercise Date upon the exercise of such Option for each share as to which such Option shall be exercised the securities or property which a holder of one share of the Common Stock was entitled to upon and at the time of such merger or consolidation, and the Board or the Committee shall take such steps in connection with such merger or consolidation as the Board or the Committee shall deem necessary to assure that the provisions of Section 15 shall thereafter be applicable, as nearly as reasonably may be, in relation to the said securities or property as to which such holder of such Option might thereafter be entitled to receive thereunder.

In the event of a merger or consolidation of the Company with or into another corporation which does not involve Continuity of Control, or of a sale of all or substantially all of the assets of the Company while unexercised Options remain outstanding under the Plan, (a) subject to the provisions of clauses (b) and (c), after the effective date of such transaction, each holder of an outstanding Option shall be entitled, upon exercise of such Option, to receive in lieu of shares of Common Stock, shares of such stock or other securities as the holders of shares of Common Stock received pursuant to the terms of such transaction; or (b) all outstanding Options may be cancelled by the Board or the Committee as of a date prior to the effective date of any such transaction and all payroll deductions shall be paid out to the participating employees; or (c) all outstanding Options may be cancelled by the Board or the Committee as of the effective date of any such transaction, provided that notice of such cancellation shall be given to each holder of an Option, and each holder of an Option shall have the right to exercise such Option in full based on payroll deductions then credited to his account as of a date determined by the Board or the Committee, which date shall not be less than ten (10) days preceding the effective date of such transaction.

17.           Amendment of the Plan.  The Board may at any time, and from time to time, amend this Plan in any respect, except that (a) if the approval of any such amendment by the shareholders of the Company is required by Section 423 of the Code, such amendment shall not be effected without such approval, and (b) in no event may any amendment be made which would cause the Plan to fail to comply with Section 423 of the Code.

18.           Insufficient Shares.  In the event that the total number of shares of Common Stock specified in elections to be purchased under any Offering plus the number of shares purchased under previous Offerings under this Plan exceeds the maximum number of shares issuable under this Plan, the Board or the Committee will allot the shares then available on a pro rata basis.

19.           Termination of the Plan.  This Plan may be terminated at any time by the Board.  Upon termination of this Plan all amounts in the accounts of participating employees shall be promptly refunded.

20.           Governmental Regulations.  The Company’s obligation to sell and deliver Common Stock under this Plan is subject to listing on a national stock exchange or quotation on the Nasdaq

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National Market (to the extent the Common Stock is then so listed or quoted) and the approval of all governmental authorities required in connection with the authorization, issuance or sale of such stock.

21.           Governing Law.  The Plan shall be governed by Delaware law except to the extent that such law is preempted by federal law.

22.           Issuance of Shares.  Shares may be issued upon exercise of an Option from authorized but unissued Common Stock, from shares held in the treasury of the Company, or from any other proper source.

23.           Notification upon Sale of Shares.  Each employee agrees, by entering the Plan, to promptly give the Company notice of any disposition of shares purchased under the Plan where such disposition occurs within two years after the date of grant of the Option pursuant to which such shares were purchased.

24.           Withholding. Each employee shall, no later than the date of the event creating the tax liability, make provision satisfactory to the Board for payment of any taxes required by law to be withheld in connection with any transaction related to Options granted to or shares acquired by such employee pursuant to the Plan.  The Company may, to the extent permitted by law, deduct any such taxes from any payment of any kind otherwise due to an employee.

25.           Effective Date and Approval of Shareholders.  The Plan shall take effect on the closing of the Company’s initial public offering subject to approval by the shareholders of the Company as required by Section 423 of the Code, which approval must occur within twelve months of the adoption of the Plan by the Board.

*        *        *

Adopted by the Board of Directors

on August 18, 2003

Approved by the stockholders

on October 6, 2003

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AMENDMENT NO. 1 TO
NITROMED, INC.
2003 EMPLOYEE STOCK PURCHASE PLAN

This Amendment No. 1 (the “Amendment”) is made to the 2003 Employee Stock Purchase Plan (the “ESPP”) of NitroMed, Inc. (the “Company”), which was adopted by the Board of Directors of the Company on August 18, 2003 and approved by its stockholders in October 2003.

The introductory paragraph of the ESPP be and hereby is amended such that the second sentence of such paragraph: “Seventy Five Thousand (75,000) shares of Common Stock in the aggregate have been approved for this purpose” is hereby deleted.

The ESPP be and hereby is further amended to add a new section 26 which shall read:

“26. Shares Authorized for Issuance.    One Hundred Fifty Thousand (150,000) shares of Common Stock in the aggregate have been approved for issuance under the ESPP. In addition, beginning on January 1, 2007 (the “Evergreen Commencement Date”) and ending on December 31, 2010 (the “Evergreen Termination Date”) the number of shares of Common Stock authorized for issuance under the ESPP shall automatically increase on the Evergreen Commencement Date and on each anniversary of the Evergreen Commencement Date by the lesser of:

a)  150,000 shares; or

b)  a lesser amount as may be determined by the Board of Directors.”

Except as herein provided, all other terms and conditions of the ESPP remain unchanged and in full force and effect. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to them in the ESPP.

This Amendment was adopted by the Board of Directors of the Company on March 7, 2006.

This Amendment was adopted by the Stockholders of the Company on May 17, 2006.

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EX-10.29

Exhibit 10.29

[NitroMed Letterhead]

January 10, 2006

Mr. Gerald Bruce
3465 Byron Drive
Doylestown, PA  18901

Dear Gerald:

I am very pleased to formally offer you the position of Vice President of Sales for NitroMed Inc. reporting to Mark Pavao, Vice President of Sales and Marketing for NitroMed Inc.  In this position you will be responsible broadly for developing and driving sales strategy and results through leadership of a world class sales team.  You will also be a responsible for providing positive and influential leadership and counsel internally as part of the NitroMed Inc. senior management team as well as externally with key stakeholders as appropriate.

The terms of this offer are as follows:

Annual Base Salary

$220,000 per year paid in 24 equal payments to be reviewed annually.

Annual Performance Bonus

You will be entitled to a bonus target of 50% of your annual salary in accordance with achievement of goals and objectives.  The size of the bonus program will be based on the overall NitroMed performance against its major objectives.  Individual awards will be granted from this bonus pool dependent on individual achievement.  You will be guaranteed a minimum of a $90,000 annual bonus for the performance years 2006, 2007 and 2008 to be paid out respectively in 2007, 2008 and 2009.

Annual Performance Stock Options

You will be eligible to receive an annual stock option grant.  The amount of options available will be determined by the Board of Directors based on overall company performance.  Individual awards will be granted from this option pool dependent on individual achievement.

Cost of Living Adjustment

You will receive a monthly payment of $2,500 for 36 months beginning with your first month of employment.  These payments are designed to help with your cost of living transition in conjunction with your move to the Boston area.

Sign On Cash

You will receive a one time payment of $45,000 as a sign on bonus to be paid within your first 30 days of employment with NitroMed Inc.

Sign On Stock Options

You will be offered an option to purchase 40,000 shares of common stock in the Company.  The price at which the stock closes on your start date will be the exercise price of these options.  These

options will vest over four years in equal installments as long as you remain in the employ of the Company.

Group Benefits:

You will receive comprehensive group health, long term disability, accident and life insurance benefits and eligibility to participate in NitroMed’s 401K plan.

Leave:

You will be entitled to illness and vacation days consistent with the Company’s standard policy.  This policy will provide you with four weeks of vacation per calendar year.

Relocation

Subject to your continued employment, the Company will reimburse you up to a sum not to exceed $75,000 for relocation related expenses including such things as moving household contents, buying and selling commissions and temporary housing.  Pursuant to your conversation with Michael Loberg, CEO, in the event there is a reasonable situation in which additional funds are needed for a specific aspect of relocation, the request should be made in writing and will be reviewed and subject to his approval.

Change of Control

A separate change of control agreement will be provided to you that includes details relative to key definitions, terms and benefits which will include the following benefit:  you will be entitled to 2.0 times your salary if the Company or the employee (you) terminates employment within 12 months of a change of control event.  The Company is in process of finalizing and establishing these agreements with the entire NitroMed management team as this offer is being executed and as such will provide it to you shortly.

Agreements:

As a condition of employment, you will be required to sign the Company’s Invention and Non-disclosure Agreement and Code of Business Conduct and Ethics.

The commencement date for this position is February 6, 2006.  Please sign a copy of this letter and return it as acceptance of this offer by January 16, 2006.

Gerald, we look forward to working with you at NitroMed.  It is my wish that this position allows you to participate in the success of NitroMed and will both enrich and enhance your career experience.

Sincerely,

/s/ Mark Pavao

Mark Pavao

Vice President, Marketing and Sales

April 24, 2006

Mr. Gerald Bruce
3465 Byron Drive
Doylestown, PA  18901

Re: Offer Letter Addendum

Dear Gerald:

In addition to the previously executed offer letter, you will be a participant in the NitroMed Inc. Executive Severance Benefit Pan and Summary Plan Description.  All terms and conditions apply.

This addendum constitutes an exception for you to Schedule A of the above referenced plan in that you will be entitled to salary continuation for a period of twelve (12) months in addition to the following: one times (1X) the average of your last 2 annual bonus amounts or 1X your existing bonus target or 1X your existing bonus guarantee whichever of the 3 is higher.  You will also be entitled to 1X any cost of living payments existing at the time of Severance.

Sincerely,

/s/ Argeris Karabelas

Argeris Karabelas

Acting Chief Executive Officer and Chairman

EX-10.30

Confidential Materials omitted and provided separately with the	Exhibit 10.30
Securities and Exchange Commission. Asterisks denote omissions.

EXECUTION COPY

ELAN PHARMA INTERNATIONAL

LIMITED

AND

NITROMED, INC.

LICENSE AGREEMENT

INDEX

1.	Definitions and Interpretation
2.	The License
3.	Intellectual Property
4.	Non-Competition
5.	Registration, Marketing and the Promotion of the Product
6.	Production License
7.	Financial Provisions
8.	Payments, Reports and Audits
9.	Duration and Termination
10.	Consequences of Termination
11.	Warranties, Indemnification and Liability
12.	Confidentiality
13.	Miscellaneous Provisions
Schedule 1	Technological Competitors of Elan
Schedule 2	Key Terms for Supply Agreement
Schedule 3	Product Manufacturing Costs

THIS AGREEMENT is dated 9 February, 2007.

PARTIES:

(1)ELAN PHARMA INTERNATIONAL LIMITED, a public limited company incorporated under the laws of Ireland, having its registered office at Monksland Industrial Estate, Athlone, County Westmeath Ireland (“Elan”); and

(2)NITROMED, INC., a Delaware corporation, having its principal place of business at 125 Spring Street, Lexington MA 02421-7801 (“NitroMed”).

BACKGROUND:

(A)Elan possesses certain proprietary technology and confidential information used or useful in the manufacture and use of pharmaceutical products displaying a sustained or modified release profile, as described more fully below.

(B)NitroMed is developing pharmaceutical formulations containing the Compound, as defined below.

(C)NitroMed wishes to enter into this Agreement to obtain the right to utilize the Elan Intellectual Property (as defined below) to import, use, offer for sale and sell the Product in the Field in the Territory, on the terms and conditions set out below.

(D)Simultaneously with this Agreement, Elan’s Affiliate EDDI (as defined below) and NitroMed have entered into a Development Agreement whereby EDDI is to develop the Product (the “Development Agreement”).

TERMS:

The parties agree as follows:

1.DEFINITIONS AND INTERPRETATION

1.1.Definitions.  In this Agreement:

“Affiliate” means any corporation or entity controlling, controlled or under common control with Elan or NitroMed, as the case may be.  For the purposes of this Agreement, “control” means the direct or indirect ownership of more than 50% of the issued voting shares or other voting rights of the subject entity to elect directors, or if not meeting the preceding criteria, any entity owned or controlled by or owning or controlling at the maximum control or ownership right permitted in the country where such entity exists.

“Agreement” means this license agreement (which expression shall be deemed to include its Recitals and Schedules).

“BiDil” means the existing immediate release product containing the Compound that is currently marketed in the United States by NitroMed.

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“Business Days” means Monday to Friday inclusive, excluding any days on which the clearing banks are generally closed in Dublin and/or New York.

“Claims” means all and any claims (whether successful or otherwise), loss, liability, damages and expenses, including reasonable attorneys’ fees and expenses and legal costs.

“CMC Section” means the chemistry, manufacturing, and controls section of the Regulatory Application in the USA as defined in 21 C.F.R. Section 314.50 (1) relating to the Product, as may be amended from time to time, and/or its equivalent in other Regulatory Applications.

“Competitive Product” means any pharmaceutical product (other than the Product itself) that has received final regulatory approval (including marketing, pricing, reimbursement and any other applicable approval) from the applicable Governmental Authority in a country in the Territory for use solely for the treatment of heart failure as an adjunct to current standard therapy in self-identified black patients to improve survival.

“Compound” means the combination of the active drug substances isosorbide dinitrate and hydralazine HCl and/or other salts, bases and isomeric forms of each.

“Compound Data” means data relating to the Compound generated by NitroMed or EDDI pursuant to the R&D Program.

“DMF” means the Drug Master File, as defined in the 21 C.F.R., Section 314.420 and/or its equivalent in the other countries of the Territory, which Elan (or an Affiliate) may file in respect of the Elan Technology and the application of the Elan Technology as regards the Product.

“EDDI” means Elan Drug Delivery  Inc., a Delaware corporation, having its principal place of business at 3000 Horizon Drive, King of Prussia, PA 19406

“EEA” means the Member States of the European Economic Area, as same may change from time to time in terms of Member States.

“EHI” means Elan Holdings, Inc a Delaware corporation having its principal place of business at 1300 Gould Drive, Gainesville, GA 30504, USA.

“Effective Date” means the date of this Agreement as first set forth above.

“Elan Improvements” means any and all improvements to the Elan Patents, the Elan Know-How, the Elan Technology and/or the Product Patents that have been conceived, created, developed and/or otherwise invented by Elan and/or NitroMed under the R&D Program, or otherwise pursuant to this Agreement.

“Elan Intellectual Property” means the Elan Know-How, the Elan Patents, the Elan Improvements and the Product Patents.

“Elan Know-How” means any and all rights owned, licensed or controlled by Elan as of the Effective Date to any scientific, pharmaceutical or technical information, data, discovery, invention (whether patentable or not), know-how, substances, techniques, processes, systems, formulations, designs and expertise relating to the Elan Technology which is not generally known to the public.

3

“Elan Patents” means any and all Patent Rights now existing, currently pending or hereafter filed by Elan relating to the Elan Technology.

“Elan Technology” means the SODASâ oral controlled release formulation technology that comprises the formation of 0.5-5mm beads containing an active agent and excipients which can be coated with a product-specific modified release polymer and then formulated into a final formulation such as a sprinkle, a tablet or a capsule, as applied in the Elan Know-How.

“Elan Trademark” means SODAS® or such other trade marks as Elan may from time to time reasonably specify.

“EXW” (ex works) has the same meaning as in the ICC Incoterms 2000, International Rules for the Interpretation of Trade Terms, ICC Publication No. 560.

“FDA” means the United States Food and Drug Administration or any other successor agency whose approval is necessary to market the Product in the United States of America.

“Field” means the use as a prescription or over-the-counter pharmaceutical product in humans.

“Force Majeure” means any cause or condition beyond the reasonable control of the party obliged to perform, including acts of God, acts of government (in particular with respect to the refusal to issue necessary import or export licenses), fire, flood, earthquake, war, acts of terrorism, riots or embargoes, strikes or other labour difficulties affecting a party.

“Governmental Authority” means all governmental and regulatory bodies, agencies, departments or entities, whether or not located in the Territory, which regulate, direct or control commercial and other related activities in or with the Territory.

“In Market” means the sale of the Product in the Territory by NitroMed, or where applicable, by a permitted sub-licensee, to an unaffiliated third party, such as a wholesaler, distributor, managed care organisation, hospital or pharmacy, and shall exclude the transfer pricing of the Product by one NitroMed Affiliate to another NitroMed Affiliate or a permitted sub-licensee.

“Major Market(s)” means the United States, the United Kingdom, France, Germany, Spain and Italy and such additional countries as may be agreed by the parties from time to time.

“Major Territories” means the United States, the United Kingdom, France, Germany, Spain, Italy, Canada, Australia, New Zealand, Japan, South Korea and Brazil.

“Net Sales” shall, subject to the provisions of Clause 7.4, mean in the case of Product sold by NitroMed, or by a permitted sub-licensee, the aggregate gross In Market sales proceeds billed for the Product by NitroMed, or by a permitted sub-licensee, as the case may be, in accordance with generally accepted accounting principles, less the following:

(i)trade, cash or quantity discounts, allowances, adjustments and rejections;

(ii)rebates, recalls (other than where the Product is replaced without charge) and returns;

(iii)price reductions or rebates imposed by Governmental Authorities;

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(iv)debts arising from failure to collect on customer accounts (such debts not to exceed 1% of gross In Market sales);

(v)sales, excise, turnover, inventory, value-added and similar taxes assessed on the royalty-bearing sale of such Product, but not including any taxes on income paid by or assessed against NitroMed or a permitted sub-licensee;

(vi)transportation, importation, shipping, insurance and other handling expenses directly chargeable to the royalty-bearing sale of the Product, but only to the extent that such expenses are separately delineated in the applicable invoices; and

(vii)chargebacks granted to drug wholesalers or their customers in cases where there are not direct shipments to such customers by NitroMed or its permitted sublicense.

Any discretionary rebates, discounts or adjustments shall be commercially reasonable and consistent with standard industry practices.

“NitroMed Improvements” means any and all improvements to the NitroMed Patents, the NitroMed Know-How and/or the Compound that have been conceived, created, developed and/or otherwise invented by NitroMed and/or Elan under the R&D Program, or otherwise pursuant to this Agreement.

“NitroMed Intellectual Property” means the NitroMed Know-How, the NitroMed Patents and the NitroMed Improvements.

“NitroMed Know-How” means any and all rights owned, licensed or controlled by NitroMed (otherwise than pursuant to the Elan License) to any scientific, pharmaceutical or technical information, data, discovery, invention (whether patentable or not), know-how, substances, techniques, processes, systems, formulations and designs and expertise relating to the Compound which is not generally known to the public.

“NitroMed Patents” means any and all Patent Rights now existing, currently pending or hereafter filed, or acquired or licensed by NitroMed relating to the Compound.

“NitroMed Trademark” means NitroMed’s rights to use the trademark(s) NitroMed®,BiDil®, NitRx®, the NitroMed “N” logo and such other trademarks as NitroMed may from time to time reasonably specify.

“Patent Rights” means any and all rights under any and all patent applications and/or issued or granted patents, now existing, currently pending or hereafter filed, including, but not limited to, provisional applications, substitutions, divisionals, continuations, continuations-in-part, renewals and any foreign counterparts thereof or equivalents thereto, including the right to claim priority from any of the foregoing under the Paris Convention, and all patents issuing or granted on any of the foregoing, and any foreign counterparts thereof, together with all registrations, reissues, re-examinations, supplemental protection certificates, or extensions thereof, and any foreign counterparts thereof, or any other government-issued rights substantially equivalent to the foregoing.

“Product” means the once or twice-daily oral tablet or oral capsule formulation(s) incorporating the Elan Technology and containing the Compound as its sole active combination of ingredients, being developed pursuant to the R&D Program.

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“Product Patents” means Patent Rights specifically exemplifying or claiming the Product.  For the avoidance of doubt, Product Patents do not include the NitroMed Patents or the Elan Patents.

“Prosecute” means in relation to a class of intellectual property:

(a)to secure the grant of any patent application within such class;

(b)to file and prosecute patent applications on patentable inventions and discoveries relating to that class;

(c)to defend all such applications against third party oppositions; and

(d)to maintain in force any issued letters patent relating to the same

and “Prosecution” has a corresponding meaning.

“R&D Program” means the research and development program set forth in the Development Agreement.

“Regulatory Application” means any regulatory application or any other application for marketing approval for the Product, which NitroMed may file in the Territory, including any supplements or amendments thereto which NitroMed may file.

“Regulatory Approval” means the final approval to market the Product in any country of the Territory, including all approvals which are required to launch the Product in the normal course of business.

“Supply Agreement” means the manufacturing and supply agreement to be negotiated in good faith between Elan and NitroMed whereby Elan will supply substantially all of NitroMed’s commercial requirements of the Product, subject to the terms herein and therein, and which shall incorporate the key terms set out in Schedule 2.

“Technical Failure” means the inability to achieve a pharmacokinetic profile for Product (assessing Cmax (maximum concentration) and AUC (area under the curve) criteria within 80-125% of mean data) consistent with that of BiDil administered three times daily (at 6 hour intervals).

“Technological Competitor” means a person or entity listed in Schedule 1, and divisions, subsidiaries and successors thereof, and such other corporate entities that, other than as a de minimis activity, develop oral drug delivery technology displaying a sustained release or modified release profile and/or manufacture products displaying a sustained or modified release profile that Elan may request to add to Schedule 1 from time to time, subject to the consent of NitroMed, which consent may not be unreasonably withheld or delayed.

“Term” means the term of this Agreement, as set out in Clause 9.

“Territory” means all of the countries of the world.

“$” and “US$” mean United States Dollars.

1.2.Further Definitions.  In addition, the following definitions have the meanings in the Clauses corresponding thereto, as set forth below:

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Definition	Clause
“Alternate Source”	6.1
“Bankruptcy Code”	2.3
“Confidential Information”	12.1
“Development Agreement”	Recital (D)
“Disclosing Party”	12.12
“Due Date”	8.8
“Elan License”	2.1
“Estimated Statement”	8.1
“Final Statement”	8.1
“Firm”	3.5.5
“Infringement Claim”	3.4.1
“Initial Term”	9.1
“License Milestone Payments”	7.1
“Manufacturer”	6.1.2
“Second Source”	6.1
“Tech Transfer Program”	6.2
“Notice”	13.11.1
“Notified Party”	3.5.1
“Notifying Party”	3.5.1

1.3.Interpretation.  In this Agreement:

1.3.1the singular includes the plural and vice versa, and unless the context or subject otherwise requires, references to words in one gender include references to the other genders;

1.3.2references to persons include all natural or legal persons including unincorporated associations;

1.3.3unless the context otherwise requires, reference to a recital, article, paragraph, provision, clause or schedule is to a recital, article, paragraph, provision, clause or schedule of or to this Agreement;

1.3.4the headings in this Agreement are inserted for convenience only and do not affect its construction; and

1.3.5the expressions “include”, “includes”, “including”, “in particular” and similar expressions shall be construed without limitation.

2.THE LICENSE

2.1.Elan License to NitroMed.  Subject to the terms of this Agreement, Elan hereby grants to NitroMed for the Term an exclusive license (the “Elan License”) to the Elan Intellectual Property to import, use, offer for sale and sell the Product in the Field in the Territory. For the avoidance of doubt, the Elan License does not include the right to perform any formulation and/or process development activities for the Product.

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2.2.Sub-licensing.  NitroMed shall be entitled to grant sub-licenses in respect of the Elan Intellectual Property in one or more countries of the Territory, subject to the following conditions:

2.2.1NitroMed shall have the right to grant a sub-license to a Technological Competitor solely for the purposes of co-promotion, distribution and/or marketing in countries where a DMF or equivalent procedure exists such that Elan will not be required to disclose to the sub-licensee or publicly Elan’s Confidential Information; outside of these countries NitroMed shall have the right to grant a sub-license to a Technological Competitor for the purposes aforementioned provided all of the following conditions are met (and in the case of a Technological Competitor acquiring control of NitroMed pursuant to Clause 13.2.4, or the assignment of this Agreement to a Technological Competitor pursuant to Clause 13.2.2, the requirements of this Clause 2.2.1 shall apply):

(a) the potential sub-licensee does not generate a majority of its revenues in connection with activities in relation to oral controlled release technologies;

(b) the commercialisation activities in relation to the Product will be carried out by a separate division that is  not  involved in any activities related to sub-licensee’s oral controlled release technology;

(c) NitroMed has used its reasonable best efforts to ensure that the potential sub-licensee does not gain access to Elan’s confidential information in relation to the chemistry, manufacturing and control processes for the Product and to this end the parties agree to negotiate in good faith an appropriate three-way confidentiality agreement between NitroMed, Elan and the potential sub-licensee; and

(d) if such access to information cannot be avoided then Elan and NitroMed shall discuss in good faith the establishment of mechanisms to allow for the maximum reasonable protection of Elan’s confidential information whilst permitting the commercialisation of the Product in such countries, which will ensure that the potential sub-licensee provides, directly to Elan, appropriate undertakings, with appropriate rights of enforcement of those undertakings.

2.2.2NitroMed shall not grant a sub-license to a person selling Competitive Products, and any sub-license shall automatically terminate upon the sub-licensee selling Competitive Products;

2.2.3Any sub-license granted shall be in the same terms as the terms of this Agreement insofar as they are applicable, mutatis mutandis, but excluding the right to grant a sub-license or a production license;

2.2.4For the avoidance of doubt, NitroMed shall ensure that Elan shall have the same rights of audit and inspection vis-à-vis a sub-licensee as Elan has vis-à-vis NitroMed pursuant to this Agreement;

2.2.5NitroMed shall be liable to Elan for all acts and omissions of any sub-licensee as though such acts and omissions were by NitroMed; and

2.2.6NitroMed shall undertake to protect the confidentiality of Elan’s chemistry, manufacturing and control processes for the Product in its dealings with permitted sub-

8

licensees and shall not disclose any information from the CMC Section to a any third party, including a permitted sub-licensee, without the prior written consent of Elan, which consent shall not be unreasonably withheld or delayed, other than as contemplated pursuant to the terms of Clause 2.2.1.

2.3.Section 365(n) of the Bankruptcy Code.  The licenses granted under this Agreement shall be treated as licenses of rights to “intellectual property” (as defined in Section 101(56) of Title 11 of the United States Code, as amended (the “Bankruptcy Code”)) for purposes of Section 365(n) of the Bankruptcy Code.  The parties agree that each party may elect to retain and may fully exercise all of its rights and elections under the Bankruptcy Code; provided that the electing party complies with the terms of this Agreement.

3.INTELLECTUAL PROPERTY

3.1.Ownership of Intellectual Property.

3.1.1Elan shall be and remain the owner of the Elan Intellectual Property.

3.1.2NitroMed shall be and remain the owner of the NitroMed Intellectual Property.

3.2.Patent Prosecution and Maintenance.

3.2.1Elan, at its sole discretion and expense, may Prosecute the Elan Intellectual Property in the Territory.

3.2.2NitroMed, at its sole discretion and expense, may Prosecute the NitroMed Intellectual Property in the Territory.

3.2.3Elan shall promptly notify NitroMed of any developments that fall within the NitroMed Intellectual Property.  NitroMed shall promptly notify Elan of any developments that fall within the Elan Intellectual Property.

3.2.4Each party shall provide the other with reasonable support in the Prosecution of the Elan Intellectual Property and the NitroMed Intellectual Property in respect of any inventions that were developed under this Agreement and shall provide all information and/or data in its possession that is necessary to support any relevant patent application in the Territory.

3.2.5NitroMed and Elan shall discuss the filing strategy for any proposed patent application(s) in the Territory and shall co-ordinate the filing of such patent application(s) between the two parties in order to protect the intellectual property rights of both parties in the Territory.

3.2.6In the event that Elan does not wish to Prosecute the Elan Intellectual Property, or some part thereof, in a particular country, Elan shall notify NitroMed prior to ceasing Prosecution, and NitroMed shall then have the right to assume such further action at its own expense.

3.3.Enforcement.

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With respect to infringement of the Elan Intellectual Property or the NitroMed Intellectual Property as it relates to the Product or a Competitive Product the parties agree as follows:

3.3.1Elan and NitroMed shall promptly inform each other in writing of any actual or alleged unauthorized use of the Elan Intellectual Property or the NitroMed Intellectual Property by a third party of which it becomes aware and provide the other party with any available evidence of such unauthorized use.

3.3.2Subject to Clause 3.3.5, Elan shall have the right to enforce for Elan’s own benefit (including by agreement or by litigation) Elan’s intellectual property rights at its own instigation.  To the extent such rights relate to Elan Improvements and/or Product Patents, NitroMed shall reasonably cooperate with Elan to enforce such rights, provided that NitroMed is indemnified for any out-of-pocket expenses incurred in providing such cooperation.  NitroMed shall be kept advised at all times of all such suits or proceedings under this Clause 3.3.2 brought by Elan. Any recovery, lump-sum settlement, royalty payment or other consideration received by Elan for past infringement or misappropriation as a result of litigation related to the Elan Improvements and/or Product Patents shall be disbursed as follows:

3.3.2.1first, Elan and NitroMed shall be reimbursed pro rata for the expenses of the suit actually incurred by them in connection with the alleged infringement or misappropriation including, without limitation, attorney’s fees and court costs;

3.3.2.2second, any amount awarded in relation to actual damage (calculated on the basis of lost sales, reasonable royalty, account of profits or otherwise) shall be paid [**]% to Elan and [**]% to NitroMed; and

3.3.2.3third, all other amounts shall be paid [**]% to Elan and [**]% to NitroMed.

3.3.3In the event Elan elects not to enforce the Elan Improvements and/or Product Patents pursuant to Clause 3.3.2 as a result of an actual unauthorised use of such Elan intellectual property by a third party and NitroMed has actual money damages from such unauthorised use, NitroMed may institute such infringement suit at its own expense. Elan shall reasonably cooperate with NitroMed to enforce such rights, provided that Elan is indemnified for any out-of-pocket expenses incurred in providing such cooperation. Elan shall be kept advised at all times of all such suits or proceedings under this Clause 3.3.3 brought by NitroMed. NitroMed shall not settle or compromise any such infringement suit without the prior written consent of Elan which shall not be unreasonably withheld. Any recovery, lump sum settlement, royalty payment or other consideration received by NitroMed for past infringement or misappropriation as a result of litigation related to the Elan Improvements and/or Product Patents shall be disbursed in the same manner as laid down in Clause 3.3.2.

3.3.4Subject to Clause 3.3.5, NitroMed shall have the right to enforce for NitroMed’s own benefit (including by agreement or through litigation) NitroMed’s intellectual property rights at its own instigation.  To the extent such rights relate to NitroMed Improvements, Elan shall fully cooperate with NitroMed to enforce such rights, provided that Elan is indemnified for out-of-pocket expenses incurred in providing such

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cooperation.  Elan shall be kept advised at all times of all such suits or proceedings under this Clause 3.3.4 brought by NitroMed.

3.3.5In the event that Elan and NitroMed Orange Book listed patents are collectively challenged, the Parties shall have joint enforcement rights. In particular under the foregoing circumstances where a “Paragraph IV Certification” (as defined in CFR Title 21) is filed by a third party against Product in the United States, the parties shall consult as to the commercial reasonableness of suing such third party for patent infringement within 15 days of receipt of such notice.  Following such discussion, the parties shall be entitled jointly to commence such action within 45 days of the date of such notice, except that no action shall be taken in relation to a party’s patent where that same party’s litigation counsel believes such claim to be baseless (even considering the doctrine of equivalents).

3.4.Defense of and Liability for Infringement Claims.

3.4.1Each of the parties shall promptly notify the other party in writing of any Claim made or brought against either of them alleging infringement or other unauthorised use of the proprietary rights of a third party arising from the development, manufacture, importation, use, offer for sale, sale or other commercialization of the Product in the Territory (“Infringement Claim”).

3.4.2NitroMed shall indemnify and hold harmless Elan against all Infringement Claims resulting from:

3.4.2.1a breach by NitroMed of its representations and warranties set forth in Clauses 11.2.3 or 11.2.4; or

3.4.2.2intellectual property which is owned by, licensed to or controlled by NitroMed, any Affiliate of NitroMed or a permitted sub-licensee in the country in question, or which is/was generated pursuant to some agreement between NitroMed (or an Affiliate or permitted sub-licensee) on the one hand and a third party on the other.

3.4.3Subject to Clauses 3.4.4, 3.4.5 and 3.4.6 Elan shall indemnify and hold harmless NitroMed against all Infringement Claims resulting from a breach by Elan of its representations and warranties set forth in Clauses 11.1.3 and 11.1.4. For the avoidance of doubt, the parties agree that NitroMed shall indemnify and hold harmless Elan against all claims (whether successful or otherwise), damages, losses, liabilities and expenses (including reasonable attorney’s fees) which may arise in connection with any Infringement Claim where such Infringement Claim does not result from a breach by Elan of any of its representations or warranties set forth in Clauses 11.1.3 and 11.1.4 or by NitroMed of its representations and warranties set forth in Clauses 11.2.3 and 11.2.4.

3.4.4Subject to Clauses 3.4.5 and 3.4.6, Elan’s aggregate cumulative liability pursuant to Clause 3.4.3 (and/or under any other provision of this Agreement) in respect of those Infringement Claims for which Elan is liable under Clause 3.4.3 (“Infringement Claim Fees”) shall not exceed certain limitations as follows:

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3.4.4.1[**]% of any lump sum payment due to a third party as a result of a court order or settlement in respect of the Infringement Claim (including a claim for damages); and

3.4.4.2[**]% of any license fees due to a third party under any license entered into hereunder in order to develop, manufacture, sell or otherwise commercialize the Product in the Territory under this Agreement.

3.4.5NitroMed will be entitled to recover amounts due by Elan to NitroMed under Clause 3.4.4 solely as a credit against the royalties payable by NitroMed to Elan under the provisions of Clause 7.3, provided, however, that the maximum credit which may be claimed by NitroMed in any one such year will be [**]% of the royalty otherwise payable to Elan until such time as the aggregate amount of the credit due by Elan to NitroMed pursuant to this clause exceeds the amount that represents all royalties that have previously been paid by NitroMed to Elan under the provisions of Clause 7.3, after which such time the maximum credit shall be reduced to [**]% of the royalty otherwise payable to Elan.

3.4.5.1Any deficit remaining in NitroMed’s recovery of amounts due by Elan to NitroMed under Clauses 3.4.3 and 3.4.4 following recovery by NitroMed within the limitations set forth in this Clause 3.4.5 shall be borne by NitroMed and Elan shall have no liability to NitroMed in relation thereto.

3.4.5.2For the avoidance of doubt, NitroMed shall indemnify and hold harmless Elan against all Infringement Claims to the extent they are in excess of the limits set forth in Clause 3.4.4 and this Clause 3.4.5.

3.4.6 Save as specifically provided otherwise in this Clause 3.4, the provisions of Clause 11.7 shall apply as regards the conduct of any Infringement Claim.

3.4.6.1With reference to the provisions of Clause 11.7.4, Elan and NitroMed shall consult as regards any actions Elan or NitroMed proposes to take in order to mitigate any loss or liability in respect of any Infringement Claim, such as NitroMed ceasing to sell the Product, the parties agreeing to modify the Product, or either or both of the parties entering into a licensing or settlement negotiation with the third party.

3.4.6.2In the event that NitroMed and Elan fail to reach agreement on the course of such actions, the party directing such actions shall indemnify and hold the other party harmless against all Infringement Claims to the extent that such Infringement Claims (i) relate to the period after the date that  the parties were unable to reach final agreement on such action and (ii) arose as a direct result of the failure of NitroMed and Elan to reach final agreement on such action.  For the avoidance of doubt, the Elan’s aggregate cumulative liability pursuant to Clause 3.4.4 and the NitroMed recovery mechanism pursuant to Clause 3.4.5 shall apply to this Clause 3.4.6.

3.5.Third Party Licenses

3.5.1Notice.  If during the Term either party reasonably believes that the importation, use, offer for sale or sale of the Product in the Field in the Territory would infringe the

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intellectual property rights of a third party and that such infringement arises from or relates to use of the Elan Technology in the Product, that party (the “Notifying Party”) shall so inform the other party (the “Notified Party”) by written notice, which shall include documents supporting the Notifying Party’s position.  If the Notifying Party believes a license from such third party is necessary or advisable to exercise its rights and obligations under this Agreement, including without limitation to sell the Product and/or mitigate any potential liability arising therefrom (a “Third Party License”), the notice shall include reference to such Third Party License.

3.5.2Counter-Notice.  The Notified Party shall have fifteen (15) working days to review the notice issued pursuant to Clause 3.5.1 from the Notifying Party and to agree or disagree with the Notifying Party’s belief by written counter-notice.  If the Notified Party disagrees with the Notifying Party’s belief, then the Notified Party shall provide the Notifying Party with documents supporting the Notified Party’s position.  The Notifying Party shall have fifteen (15) working days from the date of receipt to review the documents from the Notified Party.  Failure to respond to the other party’s notice shall be taken for the purposes of the decision as to whether to obtain a license under this Clause 3.5.2 (but for the avoidance of doubt, not for any other purpose whatsoever) as accession to the position of the other party.  The parties agree that the time periods as set forth in this Clause 3.5.2 may be reasonably extended by the mutual written agreement of the parties.

3.5.3Use of Documents.  All documents exchanged by the parties shall be maintained in confidence and shall not be used for any other purpose than the resolution of the scope of a third party’s intellectual property rights as it pertains to the importation, use, offer for sale or sale of the Product as set forth in this Agreement.

3.5.4Resolution.  If the Notified Party disagrees with the Notifying Party’s position pursuant to the terms as set forth in Clause 3.5.2 herein and if the Notifying Party maintains its original position after such review period, then the matter shall be referred first to the officers of Elan and NitroMed having responsibility for the subject matter of the dispute, or their designees.  Such officers, or their designees, as the case may be, shall negotiate in good faith to resolve such dispute in a mutually satisfactory manner.  If such efforts do not result in a mutually satisfactory resolution of the dispute within fifteen (15) working days of such referral, the matter shall be referred to the chief executive officer of each party, or their respective designees.

3.5.5Final Resolution.  If the parties’ chief executive officers or their designees do not resolve the dispute within fifteen (15) working days of the matter being referred to them (or such longer time periods as may be mutually agreed in writing by the parties), an independent mutually acceptable Third Party law firm with suitable expertise in the field of intellectual property in pharmaceuticals (the “Firm”) shall be appointed to determine whether, in its opinion, the sale of the Product would infringe such third party intellectual property. The Firm’s opinion shall be binding on both parties.  An appropriate community of interest agreement shall be entered into so that the benefit of the Firm’s opinion shall inure to both parties.  Once appointed, the Firm shall not be used by either party for matters pertaining to the Elan Intellectual Property or the NitroMed Intellectual Property, other than subsequent disputes under this Clause 3.5.  The costs of the Firm shall be borne by the party with whom the Firm disagrees.

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3.5.6Disputes Not To Be Reopened.  The procedure in Clauses 3.5.1 to 3.5.5 shall not be used more than once in relation to any particular third party intellectual property allegedly infringed, absent new and relevant facts.

3.5.7Negotiation.  If the parties or the Firm determine that a license should be obtained, Elan shall have the initial right to negotiate such license.  Elan shall not agree to or settle any license negotiations for an amount that exceeds its obligation to pay pursuant to Section 3.4 without NitroMed’s prior written approval.  To the extent Elan violates the foregoing, Elan shall be fully liable for the monetary obligation arising from the agreement and/or settlement as a result thereof.  In the event that Elan is unsuccessful in obtaining such a license within [**] days of the determination to seek a license from such third party, then NitroMed shall have the right to negotiate such license.  In the event that NitroMed obtains the right to negotiate a third party license pursuant to this Clause 3.5.7, and chooses to exercise such right, NitroMed shall not, without Elan’s prior written approval, propose nor agree to the grant of any right whatsoever under the Elan Intellectual Property as a part of those negotiations or as a part of any settlement arising from such negotiations.

3.5.8Terms.  The party attempting to negotiate the license shall:

3.5.8.1use all commercially reasonable efforts to achieve commercially reasonable terms;

3.5.8.2keep the other party reasonably informed of such negotiations;

3.5.8.3submit to the other party any draft terms for approval;

3.5.8.4reasonably take into account any comments the other party may have; and

3.5.8.5without prejudice to the generality of the foregoing, use all commercially reasonable efforts to ensure that the license is sub-licensable to NitroMed (in the case of Elan) or sub-licensable and freely transferable to Elan (in the case of NitroMed).

3.5.9Third Party Royalties. Regardless as to whether Elan or NitroMed is responsible for negotiating any Third Party License pursuant to this Clause 3.5 the costs of obtaining such Third Party License shall be apportioned as follows:

3.5.9.1Elan shall be responsible for [**] of all such costs, including license fees, milestone payments and royalties up to a maximum aggregate responsibility under all Third Party Licenses (“Third Party Royalties”) in any given calendar quarter up to [**] of the royalties otherwise payable to Elan under this Agreement in that quarter, subject to the provisions of Clause 3.4;

3.5.9.2NitroMed shall be responsible for any Third Party Royalties in any calendar quarter of the Term in excess in excess of the limits set forth in Clause 3.5.9.1; and

3.5.9.3Notwithstanding the foregoing, any amounts payable by NitroMed under Clause 3.5.9.2 may be carried forward to subsequent calendar quarters of

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the Term until exhausted. Such carry forward shall remain subject to the limit of [**] of the royalties otherwise payable to Elan under this Agreement in such calendar quarter, except as otherwise provided herein.

3.5.10Unrelated Licenses.  Nothing in this Clause 3.5 shall be construed as affecting NitroMed’s rights to obtain licenses wholly unrelated to the incorporation of the Elan Technology in the Product, at its own expense.

3.6.Notwithstanding any provision to the contrary in this Agreement and for clarity, Elan’s maximum aggregate liability for Third Party Royalties and Infringement Claim Fees shall be limited to a maximum of [**] of the royalties otherwise payable to Elan under this Agreement, except as otherwise provided in Clause 3.4, but NitroMed shall be entitled to recover any Third Party Royalties or Infringement Claim Fees for which (in each case) Elan is responsible in excess of such quarterly limit as a credit against any royalties due to  Elan in subsequent quarters of the Term up to [**] of the royalties otherwise payable to Elan under this Agreement in such quarter, except as otherwise provided in Clause 3.4.

3.7.Trademarks.

3.7.1NitroMed Trademark.

3.7.1.1NitroMed shall market the Product in the Territory under the NitroMed Trademark.

3.7.1.2NitroMed grants to Elan and its Affiliates for the Term a royalty free, worldwide, non-exclusive license to the NitroMed Trademark and, if different, trademarks showing NitroMed’s corporate logo, for the purpose of Elan’s promotion of its activities and of the Elan Technology.

3.7.1.3Elan shall ensure that each reference to and use of the NitroMed Trademark by Elan is in a manner from time to time approved by NitroMed and accompanied by an acknowledgement, in a form approved by NitroMed, that the same is a trademark (or registered trademark) of NitroMed.

3.7.1.4Elan shall not use the NitroMed Trademark in any way which might materially prejudice its distinctiveness or validity or the goodwill of NitroMed therein.

3.7.1.5Elan shall not use in the Territory any trademarks or trade names so resembling the NitroMed Trademark as to be likely to cause confusion or deception.

3.7.1.6NitroMed shall, at its sole discretion and expense, file and prosecute applications to register and maintain registrations of the NitroMed Trademark in the Territory.

3.7.1.7NitroMed will be entitled to conduct all enforcement proceedings relating to the NitroMed Trademark and shall at its sole discretion decide what action, if any, to take in respect of any infringement or alleged infringement of the NitroMed Trademark or passing-off or any other claim

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or counter-claim brought or threatened in respect of the use or registration of the NitroMed Trademark.  Any such proceedings shall be conducted at NitroMed’s expense and for its own benefit.

3.7.2Elan Trademark.

3.7.2.1To the extent permitted under applicable law, NitroMed shall prominently display the Elan Trademark on the packaging of the Product and on all promotional materials in relation to the Product to acknowledge that the Elan Technology has been applied in developing and manufacturing the Product.

3.7.2.2Elan grants to NitroMed for the Term a paid-up, worldwide, non-exclusive license to the Elan Trademark, solely for the purpose of fulfilling NitroMed’s obligations under this Clause 3.7.2.

3.7.2.3NitroMed shall ensure that each reference to and use of the Elan Trademark by NitroMed is in a manner from time to time approved by Elan and accompanied by an acknowledgement, in a form approved by Elan, that the same is a trademark (or registered trademark) of Elan.

3.7.2.4NitroMed shall not use the Elan Trademark in any way which might materially prejudice its distinctiveness or validity or the goodwill of Elan therein.

3.7.2.5NitroMed shall not use in the Territory any trademarks or trade names so resembling the Elan Trademark as to be likely to cause confusion or deception.

3.7.2.6Elan shall, at its sole discretion and expense, file and prosecute applications to register and maintain registrations of the Elan Trademark in the Territory.

3.7.2.7Elan will be entitled to conduct all enforcement proceedings relating to the Elan Trademark and shall at its sole discretion decide what action, if any, to take in respect of any infringement or alleged infringement of the Elan Trademark or passing-off or any other claim or counter-claim brought or threatened in respect of the use or registration of the Elan Trademark.  Any such proceedings shall be conducted at Elan’s expense and for its own benefit.

4.NON-COMPETITION

4.1.NitroMed.  Following the earlier of (i) achievement of a pharmacokinetic profile for Product (assessing Cmax (maximum concentration) and AUC (area under the curve) criteria within 80-125% of mean data) consistent with that of BiDil administered three times daily (at 6 hour intervals) or (ii) achievement of such other pharmacokinetic profile for the Product as may be defined by the FDA, NitroMed shall not, and shall procure that its Affiliates do not develop, market or sell any oral dosage formulation containing the Compound other than (a) the Product, (b) BiDil in its current formulation or any other immediate release formulation, (c) the current formulation of BiDil or any other immediate

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release formulation of BiDil in combination with any other compound in the Territory and (d) any such formulation containing hydralazine as its sole active ingredient,  during the Term; (provided, however, that to the extent EEA laws and regulations specifically so require, this restriction shall apply in the EEA for a period of five years beginning on the date of First Commercial Sale of the Product in the EEA, or such other maximum time period as EEA laws and regulations shall specifically so require).

4.2.Elan.  Elan shall not license, develop, manufacture or sell any oral dosage formulation (i) applying the Elan Intellectual Property to the Compound, (ii) applying the Elan Improvements to either constituent ingredient of the Compound as the sole active ingredient or (iii) applying the Elan Intellectual Property to hydralazine as the sole active ingredient: in the Territory during the Term;(provided, however, that to the extent EEA laws and regulations specifically so require, this restriction shall apply in the EEA for a period of five years beginning on the date of First Commercial Sale of the Product in the EEA, or such other maximum time period as EEA laws and regulations shall specifically so require).

5.REGISTRATION, MARKETING AND THE PROMOTION OF THE PRODUCT

5.1.Regulatory Matters.  Except as specified otherwise in this Agreement or in the Development Agreement and/or Supply Agreement, NitroMed shall own and shall be responsible for filing for and maintaining all necessary Regulatory Approvals and any necessary export or import licenses in relation to the Compound and/or the Product.

5.2.Diligent Efforts.  NitroMed shall use commercially reasonable efforts, and at least the same level of effort as used by it with other similar products of similar sales potential:

5.2.1to obtain Regulatory Approvals for the Product; and

5.2.2to market and promote the Product with a view to achieving maximum market impact and concentration throughout the Territory.

5.3.Reporting: NitroMed shall promptly notify Elan in writing of (i) the submission date of all Regulatory Applications; (ii) the date that such submissions are accepted for filing by the relevant regulatory authority and (iii) the date of all Regulatory Approvals.

5.4.Promotional Campaigns  NitroMed shall:

5.4.1control and be responsible for the content and format of each promotional campaign to be submitted to the relevant Governmental Authority but shall inform Elan thereof in a reasonably detailed manner;

5.4.2within a reasonable period of time after the filing of the first Regulatory Application in the Territory, NitroMed will outline to Elan the structure of the promotional activities to be carried out by NitroMed for the period up to the first launch of the Product and for a period of one year thereafter;

5.4.3prior to the launch of the Product, communicate with Elan regarding its objectives for  the Product in the Territory.

5.5.Meetings. Following the first Regulatory Approval of the Product, the parties shall meet as often as reasonably requested by the other (not more than once per calendar quarter). At

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such meetings NitroMed shall report on the ongoing sales performance of the Product in each country of the Territory, including overviews of marketing, promotional and educational campaigns, information on performance of the Product in the market and plans for the next quarterly period. Such meetings may be held by telephone. If held in person, each party shall be responsible for its own costs in respect of travel and accommodation expenses in attending such meetings.

5.6.Required Markings.  All trade packaging and marketing materials shall:

5.6.1to the extent permitted by law, include due acknowledgement that the Product is manufactured by an Affiliate of Elan; and

5.6.2have marked representative patent number(s) including that of the formulation patent in respect of the Elan Patents on all Product, or otherwise reasonably communicate to the trade the existence of any Elan Patents for the countries within the Territory in such a manner as to ensure compliance with, and enforceability under, applicable laws.

5.7.Launch.  NitroMed shall effect the first full scale national commercial launch of the Product:

5.7.1in each Major Market, within [**] days after the Regulatory Approval in that Major Market is obtained, subject to the timely receipt of launch stocks; and

5.7.2in each of the other countries of the Territory, within [**] days after the relevant Regulatory Approval in that country is obtained, subject to the timely receipt of launch stocks.

6.PRODUCTION LICENSE

6.1.Qualification.  NitroMed shall be entitled at its own expense to qualify another facility as an alternate to supply of the Product by Elan or its affiliates  (“Alternate Source”), subject to the following provisions if the operator of NitroMed’ desired facility is not NitroMed or an Affiliate of NitroMed:

6.1.1The facility shall be subject to the written approval of Elan, which shall not be unreasonably withheld.

6.1.2The operator of the facility (the “Manufacturer”) shall have undertaken to Elan, in terms reasonably satisfactory to Elan, to protect the confidentiality of Elan’s manufacturing processes related to Product and not use them for any other purpose.

6.2.Technology Transfer Program.  In the event that NitroMed wishes to qualify an Alternate Source, it shall so notify Elan in writing.  Thereafter, the parties shall negotiate in good faith a technology transfer program (“Tech Transfer Program”) consistent with this Agreement.  Elan may specify that its activities shall be carried out by Elan or another Affiliate.  Such Tech Transfer Program shall have due regard to the commercial interests of Elan in relation to the manufacture of the Product and other products, and shall be such that the Program will be completed with due dispatch but without undue disruption to Elan’s   other commercial activities.

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6.3.Assistance.  At NitroMed’s request, it shall be part of the Tech Transfer Program that Elan shall use commercially reasonable efforts to assist in qualifying the Alternate Source as an alternative site of manufacture of the Product.  Pursuant to this obligation, Elan shall:

6.3.1provide NitroMed or the Manufacturer (at NitroMed’s request) with any information necessary to manufacture the Product;

6.3.2provide to NitroMed or the Manufacturer (at NitroMed’s request) the documentation constituting the required material support, more particularly practical performance advice, shop practice, specifications as to materials to be used and control methods;

6.3.3assist NitroMed and/or the Manufacturer (at NitroMed’s request) with the working up and use of the technology and with the training of Manufacturer’s personnel to the extent which may reasonably be necessary in relation to the manufacture of the Product by the Manufacturer.  In this regard, Elan will receive the NitroMed’s and/or Manufacturer’s scientific staff, as applicable, in its premises for certain periods, the term of which will be agreed by the parties; and

6.3.4comply with the other obligations and responsibilities of Elan relating to technology transfer to the Alternate Source, as set forth in the Tech Transfer Program.

6.4.NitroMed Obligations.  NitroMed shall comply with its obligations and responsibilities set forth in the Tech Transfer Program.

6.5.Technological Competitors.  Under no circumstances may the Manufacturer be a Technological Competitor.  In the event of a Manufacturer becoming a Technological Competitor or an Affiliate of a Technological Competitor, all manufacturing rights of the Manufacturer shall cease.  In such event, Elan shall on request negotiate in good faith terms for qualifying and using a different Alternate Source.

6.6.Supply of Product from Alternate Source.  NitroMed may acquire from the Alternate Source only such quantities of Product as are permitted to be so sourced under the terms of the Supply Agreement, as amended from time to time.

7.FINANCIAL PROVISIONS

7.1.License Milestone Payments.  In consideration of the grant of the Elan License, NitroMed shall pay to Elan the following non-refundable amounts:

7.1.1a milestone payment of US$[**] dollars) upon the execution of this Agreement by both NitroMed and Elan;

7.1.2a milestone payment of US$[**] dollars) upon the delivery by EDDI of clinical supplies of the Product for the first pivotal study of the Product (Phase II or Phase III) or, if earlier, upon the License Milestone Payment referred to in Clause 7.1.3 becoming payable (in addition to such payment);

7.1.3a milestone payment of US$[**] dollars) upon the first filing of a DMF supportive of a Regulatory Application, provided that Elan is not notified by the FDA or its equivalent in another country within thirty (30) days of filing of the rejection thereof, in which

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case such milestone payment shall be payable upon notice of acceptance of such DMF filing, or if earlier, Regulatory Approval of the Product in that country;

7.1.4a milestone payment of US$[**] dollars) upon the first Regulatory Approval of the Product.

(the payments described in Clauses 7.1.1 to 7.1.4 being “License Milestone Payments”).

The License Milestone Payments shall be payable in respect of each of the once-daily and twice —daily formulations of the Product, as and when applicable, but in no circumstances will such License Milestone Payments be payable more than twice each.

7.2.Not Subject to Future Performance Obligations.  The License Fee and the License Milestone Payments shall not be subject to future performance obligations of Elan to NitroMed and shall not be applicable against future services provided by Elan to NitroMed.

The terms of Clause 7.1 relating to the License Fee and License Milestone Payments are independent and distinct from the other terms of this Agreement.

7.3.Royalty on Sales.  In further consideration of the grant of the Elan License, NitroMed shall pay to Elan a non-refundable royalty calculated by reference to the table set out below, being the royalties within the bands of aggregate Net Sales below for the applicable formulation as from the date of its first commercial sale at the corresponding royalty percentage below:

Formulation	Annual Net Sales Bands	Applicable Royalty Rate
Once-daily	First US$[**]	[**]% of Net Sales
	Next US$[**]	[**]% of Net Sales
	Increments above US$[**]	[**]% of Net Sales
Twice-daily	First US$[**]	[**]% of Net Sales
	Next US$[**]	[**]% of Net Sales
	Increments above US$[**]	[**]% of Net Sales

By way of example for the purposes of clarifying the intention of the parties, if: (a) prior to commencement of a given calendar quarter, aggregate Net Sales to date are $[**] for the once daily formulation and $[**] for the twice daily formulation; and (b) Net Sales in the calendar quarter are $[**] for each formulation, the royalty payable shall be:

Once-daily —first band:  ($[**] - $[**]) x [**]%

PLUS

Once-daily —second band:  ($[**] - ($[**] - $[**]) x [**]%

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PLUS

Twice-daily — first band:  $[**] x [**]%

= $[**] + $[**] + $[**] = $[**]

7.4.Bundling.  In the event that NitroMed or a permitted sub-licensee shall sell the Product together with other products to third parties (by the method commonly known in the pharmaceutical industry as “bundling”), the price attributable to the Product shall be discounted by reference to the average price of “arms length” sales by no more than the discount applied to any other product with which it is bundled.

7.5.Method of calculation of fees.  The parties acknowledge and agree that the methods for calculating the royalties and fees under this Agreement are for the purposes of the convenience of the parties, are freely chosen and not coerced.

8.PAYMENTS, REPORTS AND AUDITS

8.1.Records.  NitroMed shall keep true and accurate records of gross sales of the Product, the items deducted from the gross amount in calculating the Net Sales, the Net Sales and the royalties payable to Elan under Clause 7.3.  NitroMed shall deliver to Elan a written estimated statement (the “Estimated Statement”) thereof within 45 days following the end of each calendar quarter, (or any part thereof in the first or last calendar quarter of this Agreement) for such calendar quarter, with a written final statement (the “Final Statement”) to be delivered by NitroMed to Elan no later than 75 days following the end of each calendar quarter.  The Estimated Statement shall outline on a country-by-country basis, the calculation of the Net Sales from gross revenues during that calendar quarter, the aggregate Net Sales of each formulation from its first commercial sale to the end of that calendar quarter, the applicable percentage rate, and a computation of the sums due to Elan.  Following the delivery of the Final Statement for each calendar quarter, the parties shall reconcile the Estimated Statement and the Final Statement.  If the Final Statement reports a greater amount of royalties due than were initially reported in the Estimated Statement, NitroMed shall pay the difference to Elan.  If the Final Statement reports a lesser amount of royalties due that was initially reported in the Estimated Statement, Elan shall refund the difference to NitroMed.  In either case, the additional amount due to Elan or the refund due to NitroMed shall be paid by the other party, as the case may be, within 30 days of delivery of the Final Statement.  The parties’ financial officers shall agree upon the precise format of the Estimated Statement and the Final Statement.

8.2.Foreign Currency.  Net Sales of the Product based on sales amounts in a currency other than US$ shall be converted to US$ on the basis of the median exchange rate in effect for the purchase of US$ with such foreign currency quoted in the Wall Street Journal (or comparable publication if not quoted in the Wall Street Journal) at the closing of the Business Days during the calendar quarter in question, prior to being included in the Estimated Statement or the Final Statement.

8.3.VAT.  All payments to Elan are exclusive of any applicable value added or any other sales tax for which NitroMed will be additionally liable if applicable.

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8.4.Taxes.  If NitroMed is required by law to pay or withhold any income or other taxes on behalf of Elan with respect to any monies payable to Elan under this Agreement:

8.4.1NitroMed shall deduct them from the amount of such monies due;

8.4.2any such tax required to be paid or withheld shall be an expense of and borne solely by Elan;

8.4.3NitroMed shall promptly provide Elan with a certificate or other documentary evidence to enable Elan to support a claim for a refund or a foreign tax credit.

8.5.Double Tax Co-operation.  Elan and NitroMed agree to co-operate in all respects necessary to take advantage of any double taxation agreements or similar agreements as may, from time to time, be available in order to enable NitroMed to make such payments to Elan without any deduction or withholding.

8.6.Timing.  Payments to Elan shall be made as follows:

8.6.1each of the License Milestone Payments shall be paid within 45 days of the achievement of the relevant event to which they relate; and

8.6.2payment of royalties shall be made upon provision of the Estimated Statement (subject to applicable further payment or refund in the event the Final Statement reports a greater or lesser amount of royalties due, as the case may be).

8.7.Manner of Payment.  All payments due hereunder shall be made in US$ to the designated bank account of Elan in accordance with such timely written instructions as Elan shall from time to time provide.

8.8.Interest.  Without prejudice to Elan’s other remedies hereunder, NitroMed shall pay interest to Elan on sums not paid to Elan on the date on which payment should have been made pursuant to the applicable provisions of this Agreement (“Due Date”) over the period from the Due Date until the date of actual payment (both before and after judgement) at the Prime Rate publicly announced by Morgan Guaranty Trust Company of New York at its principal office on the Due Date (or next to occur Business Day, if such date is not a Business Day) plus 5%, such interest to payable on demand from time to time and compounded monthly.  Interest shall be payable both before and after judgment.

8.9.Audit.  For the 180 day period following the close of each calendar year of the Agreement, NitroMed will, in the event that Elan reasonably requests such access, provide Elan’s independent certified accountants (reasonably acceptable to the other party) with access, during regular business hours and subject to the confidentiality provisions as contained in this Agreement, to NitroMed’s books and records relating to the Product, solely for the purpose of verifying the accuracy and reasonable composition of the calculations under this Agreement for the calendar year then ended.

8.10.Correction of Discrepancies.  In the event of a discovery of a discrepancy, a correcting payment shall be made forthwith by NitroMed to Elan or Elan to NitroMed, as the case may be, together with interest at the rate specified in Clause 8.8.  If the discrepancy exceeds 5% of the amount due or charged by a party for any period and provided that the amount of the

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discrepancy exceeds US$25,000, then additionally the cost of such accountants shall be borne by the audited party.

9.              DURATION AND TERMINATION

9.1.Initial Term.  This Agreement shall be deemed to have come into force on the Effective Date and, subject to the rights of termination outlined in this Clause 9 and the provisions of applicable laws, will expire:

9.1.1In the US:  on (a) the 20th anniversary of the date of the first In Market sale of the Product; or (b) the expiration of the last-to-expire patent for the Product listed in the Food and Drug Administration’s “Orange Book”; and

9.1.2Elsewhere in the Territory, on a country by country basis: on (a) the 20th anniversary of the date of the first In Market sale of the Product in the country concerned; or (b)  the expiration of the life of the last to expire patent included in the Elan Intellectual Property in that country;

in each case whichever date is later to occur (the “Initial Term”).

9.2.Continuation.  At the end of the Initial Term, the Agreement shall continue automatically for rolling 3 year periods thereafter, unless the Agreement has been terminated by either of the parties by serving 1 year’s written notice on the other party immediately prior to the end of the Initial Term or any such additional 3 year period.

9.3.Breach / Insolvency.  In addition to the rights of termination provided for elsewhere in this Agreement, either party will be entitled forthwith to terminate this Agreement by written notice to the other party if:

9.3.1that other party commits a material breach of any of the provisions of this Agreement, and fails to cure the same within [**] days after receipt of a written notice from another party hereto giving full particulars of the breach and requiring it to be remedied; provided, that if the breaching party has proposed a course of action to cure the breach and is acting in good faith to cure same but has not cured the breach by the [**] day, such period shall be extended by such period as is reasonably necessary to permit the breach to be cured, provided that such period shall not be extended by more than 90 days, unless otherwise agreed in writing by the parties;

9.3.2that other party goes into liquidation under the laws of any applicable jurisdiction (except for the purposes of amalgamation or reconstruction and in such manner that the company resulting therefrom effectively agrees to be bound by or assume the obligations imposed on that other party under this Agreement);

9.3.3a receiver, administrator, examiner, trustee or similar officer is appointed over all or substantially all of assets of that other party under the laws of any applicable jurisdiction; or

9.3.4any proceedings are filed or commenced by that other party under bankruptcy, insolvency or debtor relief laws, or anything analogous to any of the foregoing under the laws of any applicable jurisdiction occurs in relation to that other party.

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9.4.Additional Elan Rights.  In further addition to the rights and termination provided for elsewhere in this Agreement, Elan shall be entitled to terminate this Agreement with respect to any particular country in the Territory in the event that NitroMed, in such particular country:

9.4.1fails to use commercially reasonable efforts to develop and promote the Product in any Major Territory;

9.4.2notifies Elan that it does not wish to commercialise the Product in a Major Market or does not notify Elan within [**] months of the later of the completion of the R&D Program or the conclusion of the Phase III clinical trial program as regards a Major Market that it wishes to advance to commercialisation of the Product; or

9.4.3fails to obtain Regulatory Approval in a Major Market in Europe within [**] months of receiving marketing authorisation in that country, or under the mutual recognition procedure, as the case may be, unless such failure is due to circumstances beyond NitroMed’s control (including governmental action, inaction and / or delay).

Elan agrees that, prior to exercising its termination rights under this Clause 9.4, it shall (i) consult with NitroMed, and (ii) grant extensions to the above timelines (the duration of which shall be at Elan’s sole discretion), provided Elan has been in receipt of information from NitroMed that has demonstrated (either pursuant to the meetings referred to in Clause 5.5 or otherwise) that such extensions are reasonably required.

9.5.Cross-Termination.  This Agreement shall automatically terminate upon the termination of the Development Agreement or the termination of the Supply Agreement.  For the purposes of Clause 10, such a termination of this Agreement shall be treated:

9.5.1if termination of the Development Agreement or Supply Agreement is on the ground of a material breach by NitroMed or EDDI / EHI (as the case may be), as if this Agreement were terminated on the ground of a material breach by NitroMed or Elan, as the case may be; and

9.5.2if termination of the Development Agreement or the Supply Agreement is on the ground of the insolvency of NitroMed or EDDI / EHI (as the case may be), as if this Agreement were terminated on the ground of the insolvency of NitroMed or Elan, as the case may be.

9.6.Additional NitroMed Termination Rights.  In further addition to the rights and termination provided for elsewhere in this Agreement, NitroMed shall be entitled to terminate this Agreement in the event of a Technical Failure.

10.            CONSEQUENCES OF TERMINATION

10.1.General Consequence.  Upon exercise of those rights of termination specified in Clause 9 or elsewhere in this Agreement, this Agreement shall, subject to Clause 10.2, automatically terminate forthwith and be of no further legal force or effect.

10.2.Specific Consequences.  Upon termination of the Agreement by either party, or upon termination by Elan of a license for a particular country under Clause 9.4, the following shall be the consequences relating to the Territory or the particular country, as applicable:

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10.2.1any sums that were due from NitroMed to Elan under the provisions of this Agreement prior to its termination or expiry shall be paid in full within 14 days of termination of this Agreement and Elan shall not be liable to repay to NitroMed any amount of money paid or payable by NitroMed to Elan up to the date of the termination of this Agreement;

10.2.2all representations and warranties shall insofar as are appropriate remain in full force and effect;

10.2.3the provisions of this Agreement regarding with respect to confidentiality and non-use of materials or confidential information shall remain in effect for a further period of 7 (seven) years.

10.2.4the rights of inspection and audit shall continue in force for the period referred to in the relevant provisions of this Agreement;

10.2.5the license granted by Elan to NitroMed of the Elan Trademark under Clause 3.7.2.2 shall automatically terminate; provided, however, that NitroMed may utilize such license for a period not exceeding six (6) months after termination in connection with the sale of any inventory existing at the time of termination subject to the provisions of this Agreement regarding royalties in respect thereof;

10.2.6any other provision of this Agreement which, by its nature, is intended to continue after termination, shall survive termination; and

10.2.7any sub-license granted under Clause 2.2 shall automatically terminate.

11.            WARRANTIES, INDEMNIFICATION AND LIABILITY

11.1.Elan Warranties.  Elan represents and warrants to NitroMed as of the Effective Date, as follows:

11.1.1Elan has the right to enter into this Agreement and grant the Elan License.

11.1.2There are no agreements between Elan and any third party that conflict with the Elan License.

11.1.3Elan has not been notified of, nor to the best of its knowledge with no special search are there any, infringement proceedings, actions, suits or complaints pending against nor any outstanding injunctions, judgments, orders, decrees, rulings or other charges against, Elan or any Affiliate of Elan in connection with the Elan Patents, the Elan Technology or the Elan Know How in the Territory that may affect the making, using, or selling of the Product.

11.1.4Elan has not been notified of any allegation by a third party that the application of the Elan Patents, the Elan Technology or the Elan Know-How in the Territory as it may concern the making, using, or selling of the Product infringes the intellectual property rights of a third party, nor to the best of its knowledge with no special search has any such allegation been made.

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11.2.NitroMed Warranties.  NitroMed represents and warrants to Elan as of the Effective Date, as follows:

11.2.1NitroMed has the right to enter into this Agreement.

11.2.2There are no agreements between NitroMed and any third party that conflict with this Agreement.

11.2.3NitroMed has not been notified of, nor to the best of its knowledge with no special search are there any, infringement proceedings, actions, suits or complaints pending against nor any outstanding injunctions, judgments, orders, decrees, rulings or other charges against, NitroMed or any Affiliate of NitroMed in connection with the NitroMed Patents or the NitroMed Know How in the Territory that may affect the making, using, or selling of the Product.

11.2.4NitroMed has not been notified of any allegation by a third party that the application of the NitroMed Patents or the NitroMed Know-How in the Territory as it may concern the making, using, or selling of the Product infringes the intellectual property rights of a third party, nor to the best of its knowledge with no special search has any such allegation been made.

11.3.Mutual Indemnification.  Each of the parties shall indemnify and hold harmless the other party against all Claims insofar as they arise out of any breach by the first party of any of its obligations or warranties under this Agreement or from the first party’s fraud or wilful misconduct.

11.4.Infringement Claims.  The parties acknowledge that Clause 3.4 contains the parties’ full agreement as regards liability for Infringement Claims, save to the extent that Clause 3.4 incorporates other provisions of this Agreement by specific cross-reference.

11.5.Indemnification (Medical Claims). NitroMed shall indemnify Elan against all Claims made or brought against Elan seeking damages for personal injury (including death) and/or for the cost of medical treatment, caused by or attributed to the Product, but without prejudice to any right of indemnification NitroMed may have against EDDI or EHI under the Development Agreement or the Supply Agreement respectively.

11.6.Sub-licensees.  With reference to Clause 2.2.5, NitroMed shall indemnify and hold harmless Elan to the extent that any Claims arise out of any such acts or omissions of any sub-licensee.

11.7.Conduct of Claims.  Subject to Clause 11.8, the party seeking an indemnity shall:

11.7.1fully and promptly notify the other party of any claim or proceedings, or threatened claim or proceedings;

11.7.2permit the indemnifying party to take full control of such claim or proceedings, with counsel of the indemnifying party’s choice, provided that the indemnifying party shall reasonably and regularly consult with the indemnified party in relation to the progress and status of such claim or proceedings;

11.7.3co-operate in the investigation and defense of such claim or proceedings; and

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11.7.4take all reasonable steps to mitigate any loss or liability in respect of any such claim or proceedings.

The indemnifying party may settle a Claim on terms which provide only for monetary relief and do not include any admission of liability.  Save as aforesaid, neither the indemnifying party nor the party to be indemnified shall acknowledge the validity of, compromise or otherwise settle any Claim without the prior written consent of the other, which shall not be unreasonably withheld.

11.8.Pursuant to the procedure set out in Clause 3.5 and the monetary limits set out therein, NitroMed may settle an Infringement Claim of the type referred to therein on terms which provide only for monetary relief and/or the grant by the plaintiff in such Infringement Claim of a license solely relating to the Product and not to any other product and do not include any admission of liability, infringement, or invalidity or unenforceability of any of the Elan Intellectual Property.  Save as aforesaid, neither Elan nor NitroMed shall acknowledge the validity of, compromise or otherwise settle any such Infringement Claim without the prior written consent of the other, which shall not be unreasonably withheld.

11.9.Exclusion of Implied Warranties.  EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NITROMED ACKNOWLEDGES THAT THE ELAN LICENSE IS GRANTED ON AN “AS IS” BASIS, WITHOUT REPRESENTATION OR WARRANTY WHETHER EXPRESS OR IMPLIED INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR INFRINGEMENT OF THIRD PARTY RIGHTS, AND ALL SUCH WARRANTIES ARE EXPRESSLY DISCLAIMED TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAWS.

11.10.Exclusion of Consequential Loss.  WITHOUT PREJUDICE TO THE OBLIGATION OF EITHER PARTY TO INDEMNIFY THE OTHER IN RESPECT OF CLAIMS BY A THIRD PARTY, NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, ELAN AND NITROMED SHALL NOT BE LIABLE TO THE OTHER BY REASON OF ANY REPRESENTATION OR WARRANTY, CONDITION OR OTHER TERM OR ANY DUTY OF COMMON LAW, OR UNDER THE EXPRESS TERMS OF THIS AGREEMENT, FOR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL OR PUNITIVE LOSS OR DAMAGE (WHETHER FOR LOSS OF CURRENT OR FUTURE PROFITS, LOSS OF ENTERPRISE VALUE OR OTHERWISE) AND WHETHER OCCASIONED BY THE NEGLIGENCE OF THE RESPECTIVE PARTIES, THEIR EMPLOYEES OR AGENTS OR OTHERWISE.

11.11.Extension of Indemnification.  Where this Agreement provides for the indemnification of a party to this Agreement or for the limitation of a party’s liability, such indemnification and/or limitation (as the case may be) shall also apply for the benefit of such party’s Affiliates and the employees, officers, directors and agents of any of them, acting in such capacity.

11.12.Inherent Risk.  It is hereby acknowledged that there are inherent uncertainties involved in the development and registration of pharmaceutical products and such uncertainties form part of the business risk involved in undertaking the form of commercial collaboration outlined in this Agreement.  Accordingly, Elan and NitroMed shall have no liability to each other as a result of the failure of the Product to obtain Regulatory Approval, and Elan will

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have no liability to NitroMed as a result of any failure or delay of the Product to achieve the Product Specifications (as defined in the Development Agreement) or one or more of the milestones set out in the R&D Program and/or to obtain Regulatory Approval in one or more countries of the Territory.  The foregoing shall not derogate from the responsibilities and obligations of each of Elan and NitroMed pursuant to the terms of this Agreement.

11.13.Insurance.  Throughout the Term, and for a period of five (5) years thereafter, each party shall maintain comprehensive general business liability insurance coverage, with minimum limits of $10,000,000 per occurrence and $10,000,000 annual aggregate of all claims.  In addition, from and after the later of NitroMed’s commercial launch of the Product, during the Term, and for a period of one (1) year thereafter, each party shall maintain product liability insurance coverage, with minimum limits of $10,000,000 per occurrence and $10,000,000 annual aggregate of all claims.

Each party shall provide the other party with a certificate from the insurance company verifying the above and shall notify the other party in writing at least 30 days prior to the expiration or termination of such coverage.

12.            CONFIDENTIALITY

12.1.Confidential Information:  The parties agree that it will be necessary, from time to time, to disclose to each other confidential and proprietary information, including without limitation, inventions, trade secrets, specifications, designs, data, know-how and other proprietary information relating to the Product and the processes, services and business of the disclosing party.

The foregoing shall be referred to collectively as “Confidential Information”.

12.2.Exclusion.  Confidential Information shall be deemed not to include:

12.2.1information which is in the public domain prior to disclosure;

12.2.2information which is made public through no breach of this Agreement;

12.2.3information which is independently developed by a party without reference to the other party’s Confidential Information, as evidenced by such party’s written records; or

12.2.4information that becomes available to a receiving party on a non-confidential basis, whether directly or indirectly, from a source other than the other party hereto, which source did not acquire this information on a confidential basis.

12.3.Use of Confidential Information.  Any Confidential Information disclosed by the disclosing party shall be used by the receiving party exclusively for the purposes of fulfilling the receiving party’s obligations, or exercising the receiving party’s rights, under this Agreement and for no other purpose.

12.4.Non-Disclosure.  Except as otherwise specifically provided in this Agreement, each party shall disclose Confidential Information of the other party only to those employees, representatives and agents requiring knowledge thereof in connection with fulfilling the party’s obligations under this Agreement, and not to any other third party.

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12.5.Obligation to Inform.  Each party further agrees to inform all such employees, representatives and agents of the terms and provisions of this Agreement relating to Confidential Information and to obtain their agreement to confidentiality obligations no less onerous in any respect than those set forth herein as a condition of receiving Confidential Information.

12.6.Care.  Each party shall exercise the same standard of care as it would itself exercise in relation to its own confidential information (but in no event less than a reasonable standard of care) to protect and preserve the proprietary and confidential nature of the Confidential Information disclosed to it by the other party.

12.7.Return of Information.  Upon termination or expiration of this Agreement, each party shall promptly, upon request of the other party, return all documents and any copies thereof containing Confidential Information belonging to, or disclosed by, such other party, save that it may retain one copy of the same solely for the purposes of ensuring compliance with this Clause 12.

12.8.Attribution.  Any breach of this Clause 12 by any person informed by one of the parties is considered a breach by the party itself.

12.9.Acknowledgment.  The parties agree that the obligations of this Clause 12 are necessary and reasonable in order to protect the parties’ respective businesses.  The parties further agree that monetary damages may be inadequate to compensate a party for any breach by the other party of its covenants and agreements with respect to confidentiality, and that each party shall be entitled to seek injunctive or other equitable relief against the threatened or continued breach of those provisions, in addition to with any other remedy which may be available.

12.10.Compound Data.  For the purpose of demonstrating to third parties the benefits of the Elan Technology, Elan shall be entitled, subject to the prior written consent of NitroMed, to disclose to third parties the Compound Data provided that Elan does not disclose NitroMed’s name or the name of the Compound. Prior to any such disclosure, Elan and NitroMed shall agree on a mutually acceptable scope of disclosure for the Compound Data. For the avoidance of doubt, Elan shall be entitled, without the consent of NitroMed, to disclose any portion of the Compound Data already in the public domain.

12.11.Announcements.  No announcement or public statement concerning the existence, subject matter or any term of this Agreement, or its performance, shall be made by or on behalf of any party without the prior written approval of the other, such approval not to be unreasonably withheld or delayed.  Notwithstanding any provision in this Agreement to the contrary, following the initial disclosure relating to the terms of this Agreement on a Form 8-K and an application for confidential treatment filed with the U.S. Securities and Exchange Commission (on both of which the parties shall collaborate), the parties may make such announcements or public statements concerning the existence, subject matter or any term of this Agreement to the extent required by applicable law or regulation (including, without limitation, any requirements of any stock exchange, Nasdaq or the U.S. Securities and Exchange Commission); provided, however, that neither party shall, without the consent of the other party, disclose any term which remains confidential pursuant to the confidential treatment application filed with the U.S. Securities and Exchange Commission.

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12.12.Required Disclosures.  A party (the “Disclosing Party”) will be entitled to make an announcement or public statement concerning the existence, subject matter or any term of this Agreement, or to disclose Confidential Information that the Disclosing Party is required to make or disclose pursuant to:

12.12.1a valid order of a court or Governmental Authority; or

12.12.2any other requirement of law or any securities or stock exchange;

provided that if the Disclosing Party becomes legally required to make such announcement, public statement or disclosure hereunder, the Disclosing Party shall give the other party prompt notice of such fact to enable the other party to seek a protective order or other appropriate remedy concerning any such announcement, public statement or disclosure, including confidential treatment and/or appropriate redactions.

The Disclosing Party shall fully co-operate with the other party in connection with that other party’s efforts to obtain any such order or other remedy.  If any such order or other remedy does not fully preclude announcement, public statement or disclosure, the Disclosing Party shall make such announcement, public statement or disclosure only to the extent that the same is legally required.

13.            MISCELLANEOUS PROVISIONS

13.1.Force Majeure.  Neither party shall be liable for failure or delay in the performance of any of its obligations under this Agreement if such failure or delay results from Force Majeure, but any such failure or delay shall be remedied by such party as soon as practicable.

13.2.Assignment and Change of Control.

13.2.1Elan shall be entitled, without prior consent, to assign or subcontract, in whole or in part, its rights and obligations under this Agreement to an Affiliate or in connection with the sale or transfer of all or substantially all of the Elan Intellectual Property provided that Elan fully compensates NitroMed for any adverse tax consequence that may arise from the assignment.

13.2.2NitroMed shall be entitled, without prior consent, to assign or subcontract, in whole or in part, its rights and obligations under this Agreement to an Affiliate or to a third party in connection with the sale and transfer of all NitroMed’s business assets relating to this Agreement provided that:

(i)the assignment does not grant manufacturing rights to a Technological Competitor;

(ii)NitroMed fully compensates Elan for any adverse tax consequences that may arise from the assignment; and

(iii)where the assignee is a Technological Competitor, Elan shall have the right to refuse to grant its consent to the assignment unless the conditions of Clause 2.2.1 (a) to (d), as applied to assignment to a Technological Competitor, have been satisfied.

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13.2.3Except as provided for in Clauses 13.2.1 and 13.2.2, this Agreement may not be assigned by a party without the prior written consent of the other, which shall not be unreasonably withheld or delayed.

13.2.4Elan shall be entitled to terminate this Agreement by notice in writing to NitroMed in the event a Technological Competitor obtains Control of NitroMed during the Term of this Agreement unless the conditions set out in Clause 2.2.1(a) to (d), as applied to a Technological Competitor acquiring Control, have been satisfied. For the purposes of this Clause 13.2.4 “Control” will have been obtained where a person or persons acting in concert acquire the direct or indirect ownership of more than 50% of the issued  voting shares or 50% of the other voting rights, if applicable, to elect directors.

13.3.Parties Bound.  This Agreement shall be binding upon and run for the benefit of the parties, their successors and permitted assigns.

13.4.Relationship of the Parties.  In this Agreement, nothing shall be deemed to constitute a partnership between the parties or make either party an agent for the other, for any purpose whatsoever.

13.5.Entire Agreement.  This Agreement constitutes the entire agreement and understanding between the parties with respect to its subject matter, and except as otherwise expressly provided, supersedes all prior representations, writings, negotiations or understandings with respect to that subject matter.

Nothing in this Clause 13.5 shall exclude any liability which any party would otherwise have to the other party or any right which either of them may have to rescind this Agreement in respect of any statements made fraudulently by the other prior to the execution of this Agreement or any rights which either of them may have in respect of fraudulent concealment by the other.

13.6.Severability.  If any provision in this Agreement is deemed to be, or becomes invalid, illegal, void or unenforceable under applicable laws, such provision will be deemed amended to conform to applicable laws so as to be valid and enforceable, or if it cannot be so amended without materially altering the intention of the parties, it will be deleted, but the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired or affected in any way.

13.7.Further Assurance.  Each party shall do and execute, or arrange for the doing and executing of, each necessary act, document and thing reasonably within its power to implement this Agreement.

13.8.Counterparts.  This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement.

13.9.Waivers.  A failure to exercise or delay in exercising a right or remedy provided by this Agreement or by law does not constitute a waiver of the right or remedy or a waiver of other rights or remedies.  No single or partial exercise of a right or remedy provided by this Agreement or by law prevents further exercise of the right or remedy or the exercise of another right or remedy.

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13.10.Variations.  No variation of this Agreement shall be effective unless it is made in writing and signed by each of the parties.

13.11.Notices.

13.11.1A notice under or in connection with this Agreement (a “Notice”)

(a) shall be in writing; and

(b) may be delivered personally or sent by first class post (and air mail if overseas) by any internationally recognized overnight courier or by fax to the party due to receive the Notice at its address set out below.

13.11.2The address referred to in Clause 13.12.1 is:

(a)           in the case of Elan:

Address:	Elan Pharma International Limited
	Monksland Industrial Estate
	Athlone
	Co. Westmeath
	Ireland
Fax:	+353 9064 95402

Marked for the attention of:  Vice President & Legal Counsel

(b)           in the case of NitroMed:

Address:	125 Spring Street
	Lexington
	MA 02421-7801
	United States of America
Fax:	+1 781-274 8080

Marked for the attention of:  Vice President Finance

13.12.Set-off.  Each of the parties will be entitled but not obliged to set-off against any amount of money payable to it by the other party under this Agreement, any amount of money payable by it to the other party under this Agreement.

13.13.Governing Law and Jurisdiction:  This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflict of laws rules, and shall be subject to the exclusive jurisdiction of the State and Federal Courts located in New York, New York.

***

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SCHEDULE 1 TECHNOLOGICAL COMPETITORS OF ELAN

[**]

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SCHEDULE 2

KEY TERMS FOR SUPPLY AGREEMENT

Capitalized terms used and not otherwise defined in this Schedule shall have the meaning ascribed to such term in the License Agreement.

1.EHI shall supply Product to NitroMed in the Territory for commercial supplies, subject to Clause 8 below.  EHI to use commercially reasonable efforts to meet NitroMed supply requirements.

2.EHI to own and be responsible for (i) filing regulatory approvals in regard to Elan Technology, (ii) DMFs that EHI or its Affiliates may file in respect of Elan Technology and the application of Elan Technology as regards the Product and/or the manufacture of Product, and (iii) all necessary manufacturing approvals for the commercial manufacture of the Product.  NitroMed to be responsible for filing for and maintaining all other necessary Regulatory Approvals.

3.EHI to supply Product that conforms to agreed specifications and to all applicable laws and regulations for supply and manufacturing, including cGMP, within the Territory.  Product to be provided EXW in defined packaging configuration (bulk or finished).  Product packaging to conform to specifications agreed with and  approved by the FDA or other relevant regulatory body in the Territory.

4.Detailed forecasting, ordering and delivery provisions to be negotiated in good faith between the parties and to be fully set out in the Supply Agreement, the foregoing to include (i) a provision that delivery periods for binding purchase orders of Product shall be commensurate with the Product manufacturing lead time and (ii) NitroMed shall be entitled to cancel any Purchase Order for Product provided Elan is compensated by NitroMed for the non-recoverable cost incurred in manufacturing the Product up to the date of notification of any such cancellation plus the full margin that would otherwise have been earned by Elan if the Product Purchase Order had not been cancelled. The parties agree that during the agreed “launch period” the forecasting and ordering provisions may differ to reflect the respective challenges for both parties during this period.

5.NitroMed shall in a timely fashion review and approve proposed changes in advance of their implementation specific to the Product manufacturing, testing, or controls documentation which require prior Regulatory Authority approval.

6.NitroMed to have right to audit EHI and subcontractors relevant to the Product manufacturing and testing in conformance with cGMPs no more than once per calendar year, or for just cause provided in each case that reasonable advance notice is provided to EHI.

7.NitroMed to order safety stock through agreed order and forecast procedures.  EHI shall not hold safety stock.

8.NitroMed shall have a Manufacturing License and the right to obtain Product from the Alternate Source in the event of an EHI “serious failure to supply”, the meaning of such term to be negotiated in good faith and defined in the Supply Agreement.  The cost of such technology transfer shall be borne by NitroMed.   Otherwise NitroMed may only source such quantities of Product from the Alternate Source as are necessary to maintain its qualification.

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9.Release and rejection provisions reasonably acceptable to the parties, with EHI to have a specified time to rectify the issue. NitroMed to be refunded where problem cannot be rectified within specified time save where it is established that the non-conformity is due to the negligent acts or omissions of NitroMed.

10.NitroMed to be responsible for coordinating any Product recall and ensuring that recalls are conducted in a commercially reasonable manner.  Costs of recall shall be borne by NitroMed unless the recall arises from EHI’s failure to supply Product in accordance with agreed specifications or cGMP or from the negligent acts or omissions of EHI in manufacturing the Product.

11.EHI responsible for compliance to cGMP, applicable laws for supply and manufacture, and adherence to specifications. NitroMed responsible for marketing and promotion and for recalls and indemnification arising otherwise. Indemnification provisions will correspond to such responsibilities.

12. NitroMed shall pay to EHI a fixed sum per dosage unit for the Product, which such sum will be specified in the Supply Agreement and shall be [**]%.  For purposes of this calculation, the cost of manufacturing shall be as described in Schedule 3 and in accordance with US GAAP. For the avoidance of doubt, EHI shall not include costs associated with [**]. On the second anniversary of the first Product launch date (or such other date as may be agreed between the parties) the parties shall enter into good faith negotiations to settle [**] for commercial supplies of Product. From the time the price for commercial supplies is agreed as aforesaid, thereafter the price for such commercial supplies of Product shall be as EHI notifies to NitroMed from time to time provided that during the term of the Supply Agreement price increases for commercial supplies of Product shall be limited to the [**], as compared to the most recent price adjustment for Product.  In addition, if (i) the price EHI must pay for the active ingredients (or other raw materials) used to manufacture the Product increases by a percentage in excess of [**], (ii) additional regulatory obligations are imposed on EHI by law or a Governmental Authority; or (iii) any other price increase is required or agreed resulting from changes to Product specifications, EHI may increase the price of the Product by [**].  The parties agree that NitroMed will be [**] on the date of the License Agreement.  For the avoidance of doubt, NitroMed [**] with the manufacture of the Product.

13.  NitroMed shall have audit rights in order to verify EHI manufacturing costs, such audit to occur (i) in the first two years, no more than twice per annum; and (ii) thereafter, no more than once per annum, and upon reasonable advance notice to EHI.

14. The parties shall agree minimum volumes of product to be ordered by NitroMed under the Supply Agreement, such minimum volumes to take effect [**] months after the first launch of the Product. EHI shall ensure that sufficient capacity is available during the term of the Supply Agreement to manufacture such minimum volumes.  In the event that the actual quantities of Product ordered by NitroMed fall below such minimum volumes, NitroMed shall pay to EHI an annual capacity fee equal to [**]% of the applicable price of shortfall of Product ordered for delivery in that year.   Shortfall shall mean the amount, if any, by

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which in the calendar year in question the quantities of Product properly ordered is less than the minimum volumes.   The parties further agree that the Supply Agreement shall include a mechanism whereby EHI shall be entitled to terminate the Supply Agreement  where there is a failure to meet minimum volume requirements and subject to conditions (to include tech transfer to a third party).  The parties further agree that as part of the negotiations of the Supply Agreement there will be good faith discussions on additional EHI termination rights in circumstances other than failure to meet minimum volume requirements.

15.  Term of the Supply Agreement will be the term of the License Agreement.

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SCHEDULE 3

Product Manufacturing Costs

The following costs are Product Manufacturing Costs which are prepared by EHI.

1.Direct Materials

Materials used in the manufacturing process that are traced directly to the completed product and include:

-Inert raw materials or excipients.

-Active substances/ingredients.

-Packaging components such as bottles, caps, labels, etc.

2.Direct Labor

The cost of employees engaged in production activities which are directly identifiable with product costs.  Excludes supervision, which is included in indirect labor, and production support activities such as inspection, plant and equipment maintenance labor, and material handling personnel.  Direct Labor cost includes:

-Base pay, overtime, vacation and holidays, illness, personal with pay and shift differential.

- Cost of employee fringe benefits such as health and life insurance, payroll taxes, welfare, pension and profit sharing.

3.Indirect Manufacturing Costs

Costs which are ultimately allocated to product based on standard labor hours of the operating departments.  These costs include:

-Indirect Production Labor: Salaries of employees engaged in production labor which are not classified as direct labor, including supervision, clerical, etc.

-Costs of Direct Labor:  Employees not utilized for the manufacturing of product such as training, downtime and general duties.

-Indirect Materials:  Supplies and chemicals which are used in the manufacturing process and are not assigned to specific products but are included in manufacturing overhead costs.  Includes supplies which are either common to several products or for which direct assignment to products is not practical.

-Utilities:  Expenses incurred for fuel, electricity and water in providing power for production and other plant equipment.

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-Maintenance and Repairs:  Amount of expense incurred in-house or purchased to provide services for plant maintenance and repairs of facilities and equipment.

-Other Services:  Purchased outside services and rentals such as the cost of security, ground maintenance, etc.

-Depreciation: Of plant (being manufacturing and laboratory premises and buildings and the service, maintenance and renovation thereof) on the basis of a 40 year life and equipment (being handling, storage, manufacturing, processing and testing machinery and equipment) on the basis of a 10 year life utilizing the straight-line method of calculation.

-Insurance:  Cost of comprehensive and other insurance necessary for the safeguard of manufacturing plant and equipment, and business interruption.

-Taxes:  Expense incurred for taxes on real and personal property (manufacturing site, buildings, and the fixed assets of equipment, furniture and fixtures, etc.).  If manufacturing site includes other operations (marketing, research, etc.), taxes are allocated on the basis of total real and personal property.

-Cost of Manufacturing Service Department such as:

•      Packaging Engineering.

•      Manufacturing Maintenance.

•      Industrial Engineering.

•      Receiving and Warehousing.

•      Purchasing and Accounting.

•      Inventory Management.

•      Plant Materials Management.

•      Central Weigh.

•      Manufacturing Administration.

-Allocation Costs of Services Provided to Manufacturing including (where applicable):

•      Cafeteria

•      Personal Operations

•      Health and Safety Services

•      Division Engineering and Operations Services

•      Plant Services (housekeeping)

•      Manufacturing Information Systems

•      Plant Power

•      Office of VP Manufacturing

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Various bases are used for allocating these costs to manufacturing operating departments including headcount, square feet, metered utilities use, estimated services rendered, EDP computer hours etc.

4.Quality Assurance Costs

Direct labor and indirect costs for Quality Assurance departments testing and approving materials used in manufacturing and completed manufacturing batches and finished products.  This includes all manufacturing in-process testing and testing of finished materials.  Excluded from product costs are QA costs related to research and development testing and testing which is allocated back to appropriate manufacturing sites.

5.Inventory Carrying Costs

Inventory carrying costs which relate to personnel and warehousing, but excluding any application of interest costs suffered as a result of carrying inventory.

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SIGNED

/s/ Paul Breen

Duly authorised for and on behalf of:

ELAN PHARMA INTERNATIONAL LIMITED

SIGNED

/s/ Kenneth M. Bate

Duly authorised for and on behalf of:

NITROMED, INC.

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EX-10.31

Exhibit 10.31

LEASE BY AND BETWEEN

THE REALTY ASSOCIATES FUND VI, L.P.

AND

NITROMED, INC.

at

45-55 Hayden Avenue

Lexington, Massachusetts

Dated

February 23, 2007

The mailing, delivery or negotiation of this Lease shall not be deemed an offer to enter into any transaction or to enter into any relationship, whether on the terms contained herein or on any other terms.  This Lease shall not be binding upon Landlord or Tenant, nor shall Landlord or Tenant have any obligations or liabilities with respect thereto, or with respect to the premises, unless and until Landlord and Tenant have signed counterparts and executed and delivered such counterparts of this Lease to the other party.  Until such execution and delivery of this Lease by Landlord and Tenant, Landlord or Tenant may terminate all negotiation and discussion of the subject matter hereof, without causes and for any reason, without recourse or liability.

TABLE OF CONTENTS

1.	Basic Lease Provisions.
2.	Premises
3.	Term
4.	Rent.
5.	Security Deposit
6.	Permitted Use.
7.	Maintenance, Repairs and Alterations.
8.	Insurance.
9.	Damage or Destruction.
10.	Real and Personal Property Taxes.
11.	Utilities.
12.	Assignment and Subletting.
13.	Default; Remedies.
14.	Landlord’s Right to Cure Default; Payments by Tenant
15.	Condemnation
16.	Vehicle Parking.
17.	Broker’s Fee
18.	Estoppel Certificate.
19.	Financial Information
20.	Landlord’s Liability
21.	Indemnity
22.	Exemption of Landlord from Liability
23.	Hazardous Substances.

i

24.	Intentionally Omitted.
25.	Tenant Improvements
26.	Subordination and Rights of Mortgagees.
27.	Option to Extend
28.	Landlord Reservations
29.	Changes to Property
30.	Intentionally Omitted
31.	Holding Over
32.	Landlord’s Access
33.	Security Measures
34.	Easements
35.	Transportation Management
36.	Severability
37.	Time of Essence
38.	Definition of Additional Rent
39.	Incorporation of Prior Agreements
40.	Amendments
41.	Notices
42.	Waivers
43.	Covenants
44.	Binding Effect; Choice of Law
45.	Attorneys’ Fees
46.	Auctions
47.	Signs
48.	Merger

ii

49.	Quiet Possession
50.	Authority
51.	Conflict
52.	Multiple Parties
53.	Interpretation
54.	Prohibition Against Recording
55.	Relationship of Parties
56.	Rules and Regulations
57.	Right to Lease
58.	Intentionally Omitted
59.	Intentionally Omitted
60.	Attachments
61.	Costs Related to Tenant Requests
62.	Confidentiality
63.	Waiver Of Jury Trial
64.	Access To Premises

iii

INDEX TO DEFINED TERMS

Term	Section
Alterations	7.3(a)
Bankruptcy Code	13.1(e)
Base Rent	1.14
Building	1.3
Changes	29
Comparison Year	4.2(b)
Commencement Date	1.11
Common Areas	2.2
Condemnation	15
Damages	21
Expiration Date	1.13
Extended Term	27
Force Majeure	13.3
Grossed Up Operating Expenses	4.2
HVAC	4.2(c)
Hazardous Substance	23.1
Holder	26.1
Indemnified Matter	21
Indemnified Parties	21
Land	1.4
Landlord	1.1
Mortgage	26.1
Net Worth	12.2
Number of Tenant Parking Spaces	1.19
Operating Expense Base Year	1.18
Operating Expenses	4.2(c)
Option	27
Permitted Use	1.9
Premises	1.2
Property	1.5
Real Estate Broker	1.20
Real Property Taxes	10.2
Rent Commencement Date	1.12
Rentable Area of Building	1.8
Rentable Area of Premises	1.7
Requisition	3.1(c)(2)
Rules	16.1
SNDA	26.2
Security Deposit	1.16
Supplemental Systems	11.5
Tax Base Year	1.18
Tenant	1.1

iv

Tenant Parties	21
Tenant’s Property	9.5
Tenant’s Share	1.17
Term	1.10
Transfer	12.1
Transfer Premium	12.6
Work Letter	3.2

v

LEASE

1.             Basic Lease Provisions.

1.1          Parties:  This Lease, dated as of February     , 2007, made by and between The Realty Associates Fund VI, L.P., a Delaware limited partnership (“Landlord”) and NitroMed, Inc., a Delaware corporation (“Tenant”).

1.2          Premises:  A portion of the third (3rd) floor of the Building, consisting of 19,815 rentable square feet, as shown on Exhibit A attached hereto.

1.3          Building:  Together, the two connected buildings known as and numbered 45-55 Hayden Avenue, Lexington, Massachusetts.

1.4          Land:  The Land upon which the Building is located as it may be enlarged or reduced from time to time.

1.5          Property:  The Land and the Building.

1.6          Intentionally Omitted.

1.7          Rentable Area of Premises: Agreed to be 19,815 square feet.

1.8          Rentable Area of Building: Agreed to be 190,079 square feet.

1.9          Permitted Use:  General office use, subject to the requirements and limitations contained in Section 6.

1.10        Term: The period commencing on the Commencement Date and ending on the Expiration Date.

1.11        Commencement Date: The Commencement Date shall be the earlier of (i) the day immediately following the Substantial Completion Date, or (ii) the first day on which Tenant occupies all or any portion of the Premises for the conduct of Tenant’s business.

1.12        Rent Commencement Date: The Commencement Date.

1.13        Expiration Date: 11:59 p.m., local time, on the day immediately preceding the sixty-sixth (66th) monthly anniversary of the Commencement Date or, if the Commencement Date is not the first day of a calendar month, then the last day of the sixty-sixth (66th) full calendar month following the calendar month in which the Commencement Date occurs.

1.14        Base Rent:  Subject to Section 4.1, the Base Rent is as follows:

RENTAL PERIOD (Months)	ANNUAL BASE RENT		MONTHLY PAYMENT		BASE RENT PER SQUARE FOOT
Lease Months 1-12	$	535,005.00	$	44,583.75	$	27.00
Lease Months 13-24	$	544,912.50	$	45,409.38	$	27.50
Lease Months 25-36	$	564,727.50	$	47,060.63	$	28.50
Lease Months 37-48	$	584,542.50	$	48,711.88	$	29.50
Lease Months 49-60	$	594,450.00	$	49,537.50	$	30.00
Lease Months 61-66	$	614,265.00	$	51,188.75	$	31.00

1.15        Intentionally Omitted

1.16        Security Deposit:  $189,761.65.

1.17        Tenant’s Share: 10.42%

1.18        Tax Base Year:  Fiscal Year 2008.

Operating Expense Base Year:  Calendar Year 2007.

1.19        Number of Tenant Parking Spaces:  Fifty-nine (59) spaces (3 per 1,000 square feet of rentable area), to be used in common and on an unassigned basis.

1.20        Real Estate Broker: Richards Barry Joyce & Partners, LLC

1.21        Attachments to Lease:

Exhibit A — Layout Plan

Exhibit A-1 — Work Letter

Exhibit A-2 — Temporary Premises

Exhibit B — Verification Letter

Exhibit C — Rules and Regulations

Exhibit D — Cleaning Specifications

1.22        Address for Notices:

Landlord:	The Realty Associates Fund VI, L.P.
	c/o Jones Lang LaSalle Americas, Inc
	55 Hayden Avenue
	Lexington, Massachusetts 02421
	Telephone No. (781) 778-2563
	Fax No. (781) 676-7719
	Attention: Property Manager

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With a copy to:	TA Associates Realty
	28 State Street, 10th Floor
	Boston, Massachusetts 02109
	Telephone No. (617) 476-2700
	Fax No. (617) 476-2799
	Attention: Hayden Asset Manager
and:	Stephen T. Langer, Esq.
	Langer & McLaughlin, LLP
	137 Newbury Street
	Boston, MA 02116
	Telephone No. (617) 536-9050
	Fax No. (617) 536-9040
Tenant:
	NitroMed, Inc.
	125 Spring Street
	Lexington, MA
	Attn: James G. Ham, III, Vice President/
		Chief Financial Officer
	Telephone No. (781) 266-4129
	Fax No. (781) 274-8080
With a copy to:	Cynthia B. Keliher, Esq.
	McCarter & English, LLP
	225 Franklin Street
	Boston, Massachusetts 02110
	Telephone No. (617) 345-7000
	Fax No. (617) 345-7050

2.             Premises

2.1          Lease of Premises.  Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, upon all of the conditions set forth herein, the Premises, together with certain rights to the Common Areas as hereinafter specified.

2.2          Common Areas-Defined. The term “Common Areas” is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Property that are designated by Landlord from time to time for the general non-exclusive use of Landlord, Tenant and the other tenants of the Property and their respective employees, suppliers, customers and invitees, including, but not limited to, common entrances, lobbies, corridors, stairwells, public restrooms, elevators, parking areas, loading and unloading areas, roadways and sidewalks.  Landlord may also designate other land and improvements outside the boundaries of the Property in which Landlord has rights to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Property.

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3.             Term.

3.1          (a) Term, Commencement Date, Rent Commencement Date and Expiration Date.  The Term, Commencement Date, Rent Commencement Date and Expiration Date of this Lease are as specified in Sections 1.10, 1.11, 1.12 and 1.13, respectively. As used in this Lease, “Lease Year” shall mean each period of one year during the Term commencing on the Commencement Date or on any anniversary thereof, provided that the first Lease Year shall consist of the period between the Commencement Date and the last day of the calendar month in which the Commencement Date occurs and the succeeding twelve full calendar months, and each succeeding Lease Year shall consist of a one-year period (or part thereof with respect to the last Lease Year) commencing on the first day of the calendar month following the calendar month in which the Commencement Date fell.

Tenant shall, within fifteen (15) days after Landlord’s written request, complete and execute the Verification Letter attached hereto as Exhibit B, or propose appropriate modification to accurately reflect the factual state of affairs, and deliver it to Landlord.  Tenant’s failure to execute the Verification Letter or propose such modifications within said fifteen (15) day period shall constitute Tenant’s acknowledgment of the truth of the facts contained in the letter delivered by Landlord to Tenant. However, Landlord’s failure to prepare or deliver a Verification Letter shall have no effect on the Term, Commencement Date, Rent Commencement Date or Expiration Date.

3.2          Preparation of the Premises.

(a)           Attached to this Lease as Exhibit A is a “Layout Plan,” dated December 21, 2006, showing generally the improvements to be made by Landlord to prepare the Premises for Tenant’s occupancy. The Layout Plan attached as Exhibit A has been approved by Tenant.  Landlord will have further plans (the “Plans”) prepared consistent with the Layout Plan, and in accordance with Building standards and otherwise with information provided to Landlord by Tenant. The Plans shall be submitted to Tenant for its approval, which shall not be unreasonably withheld or delayed. Failure by Tenant to disapprove any submission or resubmission of the Plans within five (5) business days after submission or any resubmission shall constitute approval thereof. Any disapproval shall be accompanied by a specific statement of the reasons therefor.

(b)           A work letter (the “Work Letter”) describing the work to be performed by Landlord pursuant to the Plans (“Landlord’s Work”) is attached hereto as Exhibit A-1. Landlord shall undertake Landlord’s Work at Landlord’s sole cost and expense and in accordance with the Work Letter and applicable laws, codes and regulations. Except as specifically set forth in the Work Letter, Landlord’s Work shall not include any furniture, fixtures or equipment for Tenant’s business or any wiring for Tenant’s equipment. Subject to the provisions of Section 3.3(b) below, Landlord shall use commercially reasonable efforts to achieve Substantial Completion on or before the sixtieth (60th) day following the date hereof, but Landlord shall have no liability for failure to do so, and Tenant shall have no claim against Landlord, except for the right to terminate this Lease as provided in Section 3.3(c) below.  The Landlord’s Work shall be deemed Substantially Complete on the first day as of which (i) Landlord’s Work has been completed, including, to the extent applicable, the Substantial Completion Punch List (as hereinafter defined) (as certified in writing by Landlord’s Architect),

4

except for items of work (and, if applicable, adjustment of equipment and fixtures) which can be completed after occupancy has been taken without unreasonable interference with Tenant’s use of the Premises (the “Final Punch List”), and (ii) a certificate of occupancy has been issued by the Town of Lexington for the Premises (or Landlord has obtained other written confirmation from a responsible official of the Town of Lexington that the requirements for such a certificate have been satisfied and that a certificate will issue in the ordinary course), and (iii) the utilities serving the Premises are operational, and (iv) Tenant has been given written notice of the occurrence of the matters described in the foregoing clauses (i), (ii) and (iii). Such date is hereinafter called the “Substantial Completion Date.”  Upon receipt of such notice, Tenant shall be entitled to inspect the Premises with a representative of Landlord or Landlord’s contractor for the purpose of preparing the Final Punch List. Landlord shall complete as soon as conditions permit all Final Punch List items, and Tenant shall afford Landlord access to the Premises for such purposes. Landlord shall use commercially reasonable efforts to complete all Final Punch List items within 45 days after the Substantial Completion Date. In the course of completing either the Substantial Completion Punch List or the Final Punch List in accordance with this Article 3, Landlord shall use commercially reasonable efforts to avoid unreasonable interference with Tenant’s operations in the Premises.

3.3          Condition; Landlord’s Performance                (a) Tenant shall give Landlord written notice, not later than forty-five (45) days after the Substantial Completion Date, of any respects in which Landlord has not performed Landlord’s Work fully, properly and in accordance with the terms of this Lease (except for latent defects and matters that could not be discovered by normal use or a reasonably careful visual inspection). Except as identified in any such notice from Tenant to Landlord, Tenant shall have no right to make any claim that Landlord has failed to perform any of Landlord’s Work fully, properly and in accordance with the terms of this Lease, or to require Landlord to perform any further Landlord’s Work.  Except for Landlord’s Work, the Premises are being leased in their present condition, AS IS, WITHOUT REPRESENTATION OR WARRANTY by Landlord. Tenant acknowledges that it has inspected the Premises and Common Areas and, subject to completion of Landlord’s Work, has found the same satisfactory.

(b) Landlord acknowledges that Tenant has advised Landlord that, due to its existing tenancy conditions, Tenant must vacate its current leased premises on or before March 31, 2007. Notwithstanding anything to the contrary in Section 3.2(b), Landlord will use commercially reasonable efforts (excluding overtime labor or other premium services) to Substantially Complete Landlord’s Work and make the Premises ready for occupancy on or before March 31, 2007, but Landlord makes no commitment that it will be able to do so, and Landlord will have no liability or penalty (except for any delay in the Commencement Date or any offset to a Tenant Delay that may apply in accordance with Section 3.4) if Landlord’s Work is not Substantially Complete and the Premises are not ready for Occupancy by March 31, 2007.  No later than March 9, 2007, authorized representatives from Landlord and Tenant will meet at Landlord’s office in Boston (or at another mutually agreeable location) to review the then status of the Landlord’s Work (the “Status Meeting”), at which time Landlord will identify in writing those items of Landlord’s Work which, despite the use of commercially reasonable efforts, will not be Substantially Complete by March 31, 2007 (collectively, the “Substantial Completion Punch

5

List”).  Based on the Substantial Completion Punch List, Tenant, no later than March 15, 2007, will identify, in writing, (i) those items (the “Priority Items”) of Landlord’s Work which Tenant requests be completed by March 31, 2007 and (ii) those items of Landlord’s Work which Tenant requests be completed by the Substantial Completion Date. Tenant acknowledges that, due to subcontractor availability, materials availability or other matters beyond the reasonable control of Landlord or its contractor, it is possible that not every Priority Item requested by Tenant can be accommodated. Landlord will review Tenant’s request described in clause (i) and advise Tenant within three (3) business days of (A) the then estimated costs associated with completing such Priority Items by March 31, 2007 (including without limitation the estimated costs of material fabrication or delivery, or the re-sequencing or reallocation of work and/or labor priorities), and (B) if applicable, any Priority Item(s) that Landlord and its contractor do not believe can be accommodated by March 31, 2007. With respect to those Priority Items that can be accommodated, Landlord will (subject to Tenant’s approval of the estimated costs of the Priority Items as set forth above, within two (2) business days after receipt of the notice from Landlord described in the immediately preceding sentence) use overtime labor or use such other premium services as may be appropriate to Substantially Complete such Priority Items  by March 31, 2007, provided that Tenant shall be solely responsible for any and all costs associated therewith.  With respect to those items of Landlord’s Work referred to in the foregoing clause (ii), Landlord shall use commercially reasonable efforts to complete such work by the Substantial Completion Date.  Any overtime labor or premium services costs (including without limitation the cost of expedited material fabrication or delivery, and any costs or delays incurred as a result of re-sequencing work or reallocation of labor priorities) due in accordance with Section 3.3(b)(i) shall be paid by Tenant as additional rent within thirty (30) days after Tenant’s receipt of an itemized bill from Landlord. Tenant acknowledges that requesting that the Landlord’s contractor change priorities to meet the Substantial Completion Punchlist may result in other portions of Landlord’s Work (that would otherwise have been completed) being delayed. Notwithstanding the foregoing, if, for any reason other than a Tenant’s Delay, the Priority Items have not been Substantially Completed by March 31, 2007, then Landlord will provide for Tenant’s temporary use space in the Building (the “Temporary Premises”) from April 1, 2007 until such time as Landlord’s Work is Substantially Complete and the Premises are ready for occupancy. The Temporary Premises will contain approximately 5,690 rentable square feet of space (as shown on Exhibit A-2), and be delivered in their “As Is” condition. Tenant will be responsible for the cost of relocating Tenant’s property, furnishings and equipment from the Temporary Premises to the Premises following the Substantial Completion Date. During such time as Tenant occupies the Temporary Premises, the Temporary Premises shall be deemed to be the Premises for all purposes of this Lease (including without limitation all indemnification and insurance requirements), except that (i) Tenant shall not be required to pay Base Rent for the Temporary Premises, (ii) Tenant’s Share of Operating Expenses and Real Property Taxes shall be based on the square footage of the Temporary Premises during such period and (iii) the Commencement Date shall not be deemed to have occurred solely by virtue of such occupancy.

(c)           Notwithstanding anything to the contrary in this Lease, if the Substantial Completion Date has not occurred by the ninetieth (90th) day after the date hereof (the “Construction Deadline,” which shall be extended for the period of any Tenant’s Delays or Force Majeure), then Tenant shall have the option, as its sole and exclusive remedy at law or in equity, upon notice to Landlord given within ten (10) days after the Construction Deadline (as so

6

extended), to terminate this Lease.  In the event of such termination, this Lease shall be without further force or effect upon the thirtieth (30th) day after the Landlord receives such notice, unless the Substantial Completion Date occurs prior to such thirtieth (30th) day. In the event of such termination, Landlord shall return to Tenant any security deposit or Base Rent that Tenant may have paid to Landlord hereunder, and Landlord shall have no further obligation or liability to Tenant in connection with this Lease or the Premises.

3.4          Tenant’s Delays.

(a)           If a delay shall occur in the Substantial Completion Date, and such delay would not have occurred but for the occurrence of any of the following:

(i)any request by Tenant that Landlord delay the commencement or completion of Landlord’s Work for any reason;

(ii)any change by Tenant in the Layout Plan, or in any other Plans or specifications, after initial approval thereof by Tenant, or any request by Tenant for work that is inconsistent with the Layout Plan as approved, or any request for items or materials not specifically reflected on materials submitted by Tenant to Landlord and agreed to by Landlord prior to the date hereof (including the request by Tenant for so-called “long lead-time” items);

(iii)any other act or omission of Tenant or its officers, agents, employees or contractors;

(iv)any re-sequencing or any change in labor or materials priorities as a result of a request by Tenant described in Section 3.3(b); or

(v)any reasonably necessary displacement of any of Landlord’s Work from its place in Landlord’s construction schedule resulting from any of the causes for delay referred to in this paragraph (a) and the fitting of such Landlord’s Work back into such schedule;

then Tenant shall, from time to time and within thirty (30) days after demand therefor, pay to Landlord for each day of such delay the amount of Base Rent, Additional Rent and other charges that would have been payable hereunder had the Rent Commencement Date occurred immediately prior to such delay. If any of the circumstances described in clauses (i) through (v) above occur, and Landlord is aware that such occurrence is reasonably likely to result in a delay in the Substantial Completion Date, then Landlord shall so advise Tenant, and shall give Tenant the Landlord’s then good faith estimate of the likely duration of such delay. Such estimate will not be binding on Landlord and shall not limit any subsequent claim of a Tenant’s Delay. Landlord will use reasonable efforts to advise Tenant periodically if circumstances change or if Landlord becomes aware of any change in the estimated duration of any delay described herein. The period of any Tenant’s Delay shall not include any delay attributable solely to the negligent or willful and wrongful act or omission of Landlord, including without limitation Landlord’s disregard of any deadlines set forth in this Lease or any work letter. In the event of any dispute regarding the duration of any Tenant’s Delay, the parties agree that such dispute shall be resolved through arbitration, with a single arbitrator (with opportunity for review, as set forth in such procedures), in accordance with the procedures established by the Real Estate Bar Association for Massachusetts (REBA Dispute Resolution, Inc.).

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(b)           If a delay in the Substantial Completion Date, or if any substantial portion of such delay, is the result of Force Majeure, and such Force Majeure delay would not have occurred but for a delay described in paragraph (a), such Force Majeure delay shall be added to the delay described in paragraph (a).

(c)           The delays referred to in paragraphs (a) and (b) are herein referred to collectively and individually as “Tenant’s Delay” or “Tenant Delay.” The Construction Deadline shall be extended one day for each day of Tenant’s Delays.

3.5          Early Access.  At such time as Landlord’s contractor reasonably determines that such access will not interfere with the timely and efficient completion of Landlord’s Work, Tenant shall have access to the Premises (and, if applicable, the Temporary Premises) prior to the Commencement Date solely for the purpose of installation of furniture, equipment, and telephone/data wiring, provided that such access shall be subject to all of the terms and conditions of this Lease, other than the payment of Base Rent or any additional rent or electrical charges. Landlord will in any event afford Tenant’s information systems consultants access to the Premises at least seven (7) days prior to the earlier of (i) March 31, 2007 or (ii) the then-estimated Substantial Completion Date. Subject to the preceding sentence, Tenant’s access shall be subject to reasonable scheduling, and shall in any event be subject to other requirements of Landlord and Landlord’s contractor, and Tenant shall deliver to Landlord certificates of liability, casualty and workmen’s compensation insurance prior to having any such access. Any interference with Landlord’s Work as a result of Tenant’s early access shall constitute a Tenant Delay. Both Landlord’s and Tenants contractors shall use commercially reasonable efforts to accommodate one another’s requirements to complete work in a timely and professional manner.

4.             Rent.

4.1          Base Rent.  Tenant shall pay to Landlord the Base Rent set forth in Section 1.14, without offset or deduction commencing on the Rent Commencement Date and thereafter on the first day of each calendar month. So long as (i) this Lease shall be in full force and effect and (ii) there shall exist no Event of Default on the part of Tenant (nor any event or circumstance which, with the passage of time or the giving of notice, or both, would constitute an Event of Default), Landlord will waive payment of Base Rent (but not Additional Rent, utility charges or any other amounts due or payable hereunder) on 4,815 rentable square feet of Premises Area for the period commencing on the Commencement Date and expiring on the 365th day following the Commencement Date (e.g. Tenant shall only be responsible during such period for Base Rent on 15,000 rentable square feet of Premises Area (19,815 r.s.f. - 4,815 r.s.f. = 15,000 r.s.f. x $27.00/r.s.f./annum = $405,000/year or $33,750/month)). If the Commencement Date is not the first day of a calendar month, the partial month will be added to the first full twelve months of the Term, and Base Rent shall commence on the Commencement Date and shall be payable for the remainder of the partial month at the rate set forth in Section 1.14 for such period.  Base Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved.  Base Rent and all other amounts payable to Landlord hereunder shall be payable to Landlord in lawful money of the United States, and Tenant shall be responsible for delivering said amounts to Landlord at the

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address stated herein or to such other person or to such other place in the continental United States as Landlord may designate in writing. Landlord and Tenant agree that all amounts due from Tenant under or in respect of this Lease, whether labeled Base Rent, additional rent, additional charges or otherwise, shall be considered as rental reserved under this Lease for all purposes, including without limitation regulations promulgated pursuant to the Bankruptcy Code, and including further without limitation Section 502(b) thereof.

4.2          Operating Expense Increases.  Tenant shall pay to Landlord during the term hereof, in addition to the Base Rent, Tenant’s Share of the amount by which all Operating Expenses for each Comparison Year exceed the amount of all Operating Expenses for the Operating Expense Base Year.  If less than 95% of the rentable square feet in the Building is occupied by tenants or Landlord is not supplying services to tenants occupying 95% of the rentable square feet of the Building at any time during any calendar year (including the Operating Expense Base Year), Operating Expenses for such calendar year shall be reasonably extrapolated by Landlord to the amount of Operating Expenses that would normally be expected to be incurred had 95% of the Building’s rentable square feet been occupied and had Landlord been supplying services to tenants occupying 95% of the Building’s rentable square feet throughout such calendar year (hereinafter the “Grossed Up Operating Expenses”), and such amount shall be the Operating Expenses for such calendar year. Landlord’s good faith estimate of Grossed Up Operating Expenses shall not be subject to challenge or recalculation by Tenant, except as otherwise set forth in Section 4.2(h).  Tenant’s Share of Operating Expense increases shall be determined in accordance with the following provisions:

(a)           “Tenant’s Share” is defined as the percentage set forth in Section 1.17, which percentage has been determined by dividing the Rentable Area of Premises by the Rentable Area of Building, and multiplying the resulting quotient by one hundred (100). In the event that the Rentable Area of Premises or the Rentable Area of Building changes, Tenant’s Share shall be adjusted in the year the change occurs, and Tenant’s Share for such year shall be determined on the basis of the days during such year that each Tenant’s Share was in effect.

(b)           For purposes of determining Tenant’s Share of Operating Expense increases, “Comparison Year” is defined as each calendar year during the term of this Lease after the Operating Expense Base Year. In the event of any partial Comparison Years during the Term, Tenant’s Share of the Operating Expense increases therefor shall be prorated according to that portion of such Comparison Year as to which Tenant is responsible for a share of such increase.  For purposes of determining Tenant’s Share of Real Property Tax increases, “Comparison Year” is defined as each tax fiscal year during the term of this Lease after the Tax Base Year. Tenant’s Share of Real Property Tax increases for any partial Comparison Years during the Term shall be prorated according to that portion of such Comparison Year as to which Tenant is responsible for a share of such increase.

(c)           “Operating Expenses” shall mean, except as expressly provided herein, all costs, expenses and fees incurred by Landlord in connection with or attributable to the Property, including but not limited to, the following items: (i) all costs, expenses and fees associated with or attributable to the ownership, management, operation, repair, maintenance, improvement, alteration and replacement of the Property, or any part thereof, including but not limited to, the following: (A) all surfaces, coverings, decorative items, carpets, drapes, window

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coverings, parking areas, loading and unloading areas, trash areas, roadways, sidewalks, stairways, landscaped areas, striping, bumpers, irrigation systems, lighting facilities, building exteriors and roofs, fences and gates; (B) all heating, ventilating and air conditioning equipment (“HVAC”), plumbing, mechanical, electrical systems, life safety systems and equipment, telecommunication equipment, elevators, escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair; (ii) the cost of trash disposal, janitorial services and security services and systems; (iii) the cost of all insurance purchased by Landlord pursuant to Section 8 of this Lease, including any deductibles; (iv) the cost of water, sewer, gas, electricity, and other utilities available at the Property and paid by Landlord; (v) the cost of labor, salaries and applicable fringe benefits incurred by Landlord with respect to the Property; (vi) the cost (purchase or rental) of materials, supplies and tools used in operating, managing, maintaining, repairing and/or cleaning the Property; (vii) the cost of reasonable accounting fees, management fees, legal fees and consulting fees attributable to the ownership, operation, management, maintenance and repair of the Property plus the cost of any space at the Property occupied by the property manager, provided that if the Property is managed by Landlord or an affiliate of Landlord, the management fee so included in Operating Expenses shall not exceed an amount equal to four percent (4%) of the gross rental receipts of the Property (excluding for this purpose capital expenses, Landlord’s markups and amounts separately reimbursed by tenants); (viii) the cost of replacing, modifying and/or adding improvements or equipment mandated by any law, statute, regulation or directive of any governmental agency and any repairs, disposals or removals necessitated thereby (including, but not limited to, the cost of complying with the Americans With Disabilities Act), so long as the cost is not incurred to cure a violation of such requirement that existed on the date of this Lease; (ix) payments made by Landlord under any easement, license, operating agreement, declaration, restrictive covenant, or instrument pertaining to the payment or sharing of costs among property owners; (x) any business property taxes or personal property taxes imposed upon the fixtures, machinery, equipment, furniture and personal property used in connection with the operation of the Property; (xi) the cost of all business licenses, any gross receipt taxes based on rental income or other payments received by Landlord, commercial rental taxes or any similar taxes or fees; (xii) all costs and expenses associated with or related to the implementation or support by Landlord of any vanpool or other traffic management or transportation demand management or similar program, such as but not limited to the 128 Business Council or LEXPRESS, if and to the extent required by any governmental agency or board, or if Landlord is subsidizing such cost for tenants of the Property; (xiii) fees assessed by any air quality management district or other governmental or quasi-governmental entity regulating pollution; and (xiv) the cost of any other service provided by Landlord to all tenants of the Building or any cost that is elsewhere stated in this Lease to be an Operating Expense. With respect to the foregoing subparagraphs (i) - (xiv), if any such costs associated therewith relate to other properties of Landlord, such costs shall be allocated by Landlord among the Property and such other properties.

(d)           Operating Expenses shall not include any expenses paid by any tenant directly to third parties, or as to which Landlord is otherwise reimbursed by any third party or by insurance proceeds.  The following costs and expenses shall also be excluded from the definition of “Operation Expenses” for purposes of this Lease:

(i)            Repairs or other work occasioned by fire, windstorm or other casualty to the extent that Landlord is reimbursed by insurance or would have been

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reimbursed if Landlord had carried insurance specifically required of landlord under Section 8 below (but the amount of any deductible paid shall be included),

(ii)           Leasing commissions, attorneys’ fees, accountant’s fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants, or associated with the enforcement of any leases;

(iii)          Costs (including permit, license and inspection fees) incurred in renovating or otherwise improving or decorating, painting, or redecorating space for new tenants or existing tenants in connection with extensions of the terms of their respective tenancies;

(iv)          Depreciation and amortization on the Building (except that the foregoing shall not limit Landlord’s rights to amortize certain capital expenses as provided in Subsection 4.2(e) below);

(v)           expenses for the repair, maintenance or operation of any parking garage (including without limitation salaries and benefits of attendants, and the cost utilities) to the extent that Landlord receives separately stated income from such parking garage;

(v)           Costs (including the amortization thereof) of any repairs, improvements, alterations, or equipment that would be properly classified as a capital expenditure according to generally accepted accounting principles, except as otherwise expressly included in the definition of “Operating Expenses” under Subsection 4.2(e) below;

(vii)         Costs of services provided free of direct charge to other tenants but not offered free of direct charge to Tenant;

(viii)        Costs incurred to remedy any violation of the terms and conditions of any lease or any governmental law or regulation, which violation existed on the date of this Lease, as determined by written admission, stipulation, final judgment, or arbitration award, except to the extent that such costs reflect costs that would have been incurred by Landlord absent such violation;

(ix)           Overhead and profit increment paid to Landlord or its subsidiaries or affiliates for management or other services on or to the Property or for supplies or other materials, to the extent that the costs of such materials, services, or supplies exceed the costs normally payable for like services, supplies or materials provided by unaffiliated parties on a competitive basis (taking into account the market factors in effect on the date any relevant contracts were negotiated) in comparable office buildings in the greater Route 128/Route 2 office market;

(x)            Principal, interest or other financing charges (including points and fees) on debt secured by any mortgages or deeds of trust;

(xi)           Landlord’s general corporate overhead and general administrative expenses unrelated to the Property;

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(xii)          The cost of any work required in order to rectify design and/or construction defects and bring the Building into compliance with building and safety code requirements applicable to the Building at the time of its construction;

(xiii)         Advertising and promotional expenditures for leasing space at the Property;

(xiv)        Costs for purchasing paintings, sculpture, and other objects of “fine art” that would be considered unusually or unreasonably expensive in comparison with that found in other first-class suburban office parks and buildings in the Route 2/Route 128 office market (provided, however, that the cost of customary and reasonable artwork, wall hangings and decorations, and the reasonable costs of installing, protecting, and maintaining any such items of artwork, may be included in “Operating Expenses”);

(xv)         The costs and expenses incurred by Landlord in operating any retail stores, hotels or similar amenities in the Building;

(xvi)        Any compensation paid to clerks, attendants, or to other persons in commercial concessions operated by Landlord;

(xvii)       Rental under any ground lease or underlying lease;

(xviii)      The cost of abating, removing, remediating, or cleaning up any unlawful levels of asbestos or other Hazardous Materials, except that Operating Expenses may include the costs attributable to those actions taken by Landlord to comply with any environmental requirements in connection with the ordinary operation and maintenance of the Property; and

(xix)         Reserves.

(e)           If the cost incurred in making a capital improvement or replacing (as opposed to repairing) any capital equipment is either (i) required to meet the requirements of any applicable laws, codes, ordinances or regulations, or (ii) reasonably deemed by Landlord to be likely to reduce Operating Expenses or to increase the operating efficiency of the Building, consistent with sound property management practices and procedures and, in either case such cost is not fully deductible as an expense in the year incurred in accordance with generally accepted accounting principles, the cost shall be amortized in accordance with generally accepted accounting principles over the useful life of the capital improvement or equipment, as reasonably determined by Landlord, together with a reasonable interest factor on the unamortized cost of such item. In no event shall the expiration or earlier termination of the Term of this Lease shorten the useful life of any such improvement or replacement. Any costs described in clause (i) above shall not include any cost necessary to cure a violation of such laws, codes, ordinances or regulations that existed on the date hereof. The cost of any capital repairs shall also be amortized according to the foregoing provisions.

(f)            Real Property Taxes shall be paid in accordance with Section 10 below and shall not be included in Operating Expenses.

(g)           Tenant’s Share of Operating Expense increases shall be payable by Tenant within twenty (20) days after a reasonably detailed statement of actual expenses is presented to

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Tenant by Landlord.  At Landlord’s option, however, Landlord may, from time to time, estimate what Tenant’s Share of Operating Expense increases will, and the same shall be payable by Tenant in monthly installments during each Comparison Year of the Lease Term, on the same day as the Base Rent is due hereunder.  In the event that Tenant pays Landlord’s estimate of Tenant’s Share of Operating Expense increases, Landlord shall use its best efforts to deliver to Tenant within one hundred eighty (180) days after the expiration of each Comparison Year a reasonably detailed statement showing Tenant’s Share of the actual Operating Expense increases incurred during such year.  Landlord’s failure to deliver the statement to Tenant within said period shall not constitute Landlord’s waiver of its right to collect said amounts or otherwise prejudice Landlord’s rights hereunder.  If Tenant’s payments under this Section 4.2(f) during said Comparison Year exceed Tenant’s Share as indicated on said statement, Tenant shall be entitled to credit the amount of such overpayment against Tenant’s Share of Operating Expense increases next falling due (or refund within thirty (30) days the amount of such overpayment if the Term of this Lease has ended and Tenant has no further obligation to Landlord).  If Tenant’s payments under this Section 4.2(f) during said Comparison Year were less than Tenant’s Share as indicated on said statement, Tenant shall pay to Landlord the amount of the deficiency within thirty (30) days after delivery by Landlord to Tenant of said statement. Landlord agrees that Tenant shall not be responsible to pay any amounts due on account of Operating Expenses that are not billed by Landlord to Tenant within two (2) years after the last day of the Comparison Year in which such Expenses were incurred, or if later, within two (2) years after the date on which any third-party costs are billed to Landlord (including corrections or revisions to billings previously sent to Landlord). Landlord and Tenant shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Tenant is responsible for Operating Expense increases, notwithstanding that the Lease term may have terminated before the end of such Comparison Year; and this provision shall survive the expiration or earlier termination of the Lease.

                                (h)           Provided there then exists no Event of Default on the part of Tenant hereunder, if Tenant shall so request within sixty (60) days after receipt of any statement presented by Landlord hereunder, and upon reasonable advance written notice from Tenant, Landlord shall permit Tenant, at Tenant’s expense and during normal business hours, to review Landlord’s ledger and supporting records relating to Operating Expenses for the Comparison Year in respect of which such statement was prepared for the purpose of verifying any accounting that Landlord is required to give hereunder. Any third party agent retained by Tenant to perform such a review shall have expertise in and familiarity with general industry practice with respect to the operation of and accounting for a first class office building and such agent’s compensation shall in no way be contingent upon or correspond to the financial impact on Tenant resulting from the review. In making any such examination, Tenant agrees, and shall cause its auditors, accountants and any other employees, agents or contractors having access to such information to agree, to keep strictly confidential (i) any and all information contained in such records, and (ii) the circumstances and details pertaining to such examination, including without limitation the nature of any dispute in respect of Operating Expenses and the nature or details of any settlement thereof; and Tenant will confirm and cause its auditors, accountants, employees, agents and contractors to confirm such agreement in writing, if so requested by Landlord, prior to such examination. Landlord’s accounting shall be binding and conclusive upon Tenant unless, (i) Tenant has within such 60-day period, advised Landlord of Tenant’s desire to review Landlord’s records, and (ii) within thirty (30) days after completion of such

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review, Tenant shall notify Landlord in writing that Tenant disputes the correctness of such accounting, specifying the particular respects in which the accounting is claimed to be incorrect. If such dispute has not been resolved by agreement within thirty (30) days after Tenant’s notice of such dispute, then Tenant may, within ten (10) days after the expiration of such 30-day period, submit the matter to arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, except that there shall be only one arbitrator, who shall have had at least ten (10) years’ experience as a certified property manager in buildings similar to the Building and in the same general location and market, and who has not at any time been employed by either party hereto or any affiliate of either party. Such arbitrator shall be reasonably agreed upon by Landlord and Tenant, in good faith, upon receipt of Tenant’s submission, and the fees of such arbitrator shall be paid by Tenant (subject to reimbursement as provided below). If the parties are unable within ten (10) business days to agree on an acceptable arbitrator, either party may request that the then president of the Real Estate Finance Association of the Greater Boston Real Estate Board designate an arbitrator meeting the qualifications herein. If Tenant shall fail to submit the matter to arbitration within such 10-day period, then the accounting shall be conclusively deemed to be correct. Pending resolution by agreement or arbitration, and as a condition to Tenant’s rights hereunder, Tenant shall continue to make any payments claimed by Landlord to be due on account of Operating Expenses, such payment to be without prejudice to Tenant’s position. Any decision by an arbitrator shall be final and binding on the parties. If the dispute shall be resolved in Tenant’s favor, Landlord shall forthwith credit the amount overpaid by Tenant against amounts subsequently coming due on account of Operating Expenses (or refund within thirty (30) days the amount of such overpayment if the Term of this Lease has ended and Tenant has no further obligation to Landlord), and Landlord shall reimburse Tenant for the actual out-of-pocket third party costs incurred by Tenant in connection with such arbitrator. If the arbitrator shall determine that Tenant was overcharged Operating Expenses by more than five percent (5%), Landlord shall reimburse Tenant for the actual out-of-pocket third party costs reasonably paid by Tenant in connection with such review.

(i)            The computation of Tenant’s Share of Operating Expense increases is intended to provide a formula for the sharing of costs by Landlord and Tenant and will not necessarily result in the reimbursement to Landlord of the exact costs it has incurred.

5.             Security Deposit.  (a)  Tenant shall deliver to Landlord at the time of execution of this Lease by Tenant the security deposit set forth in Section 1.16 as security for Tenant’s faithful performance of Tenant’s obligations hereunder. If Tenant fails to pay Base Rent or other charges due hereunder, and such failure continues beyond the expiration of applicable notice and grace periods, or otherwise defaults with respect to any provision of this Lease, which default continues beyond the expiration of applicable notice and grace periods, Landlord may (but shall have no obligation to) use all or any portion of said deposit for the payment of any Base Rent or other charge due hereunder, to pay any other sum to which Landlord may become obligated by reason of Tenant’s default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby.  Provided that (i) Tenant has properly elected to exercise its option to extend the Term of this Lease for the Extended Term as provided in Section 27, and as of the first day of the Extended there exists no Event of Default on the part of Tenant under this Lease (nor any event or circumstance which, with the giving of notice or the passage of time, would constitute an Event of Default) and this Lease is then in full force and effect, then Tenant shall be entitled to reduce the face amount of the security deposit (or the letter of credit referred to below) as of

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the first day of the Extended Term to an amount equal to two (2) months’ Base Rent (at the rate in effect for the first year of the Extended Term), and (unless the Landlord has then elected to keep the security deposit in the form of cash) Landlord shall accept a substitute letter of credit for such reduced amounts or an endorsement to the then existing letter of credit. If Landlord so uses or applies all or any portion of the security deposit hereunder, Tenant shall within twenty (20) days after written demand therefor deposit cash with Landlord in an amount sufficient to restore said deposit to its full amount. Landlord shall not be required to keep said security deposit separate from its general accounts. If Tenant performs all of Tenant’s obligations hereunder, said deposit, or so much thereof as shall not then have been applied by Landlord, shall be returned, without payment of interest or other amount for its use, to Tenant (or, at Landlord’s option, to the last assignee, if any, of Tenant’s interest hereunder) within a reasonable time after the expiration of the Term hereof, and after Tenant has vacated and delivered the Premises as required hereunder. Landlord may retain an amount reasonably calculated to be sufficient to pay any final amount of Taxes or Operating Expenses for the Comparison Year in which the Term ends, provided that the amount so retained shall not exceed 107% of the Tenant’s actual share of Taxes and Operating Expenses for the immediately prior Comparison Year. No trust relationship is created herein between Landlord and Tenant with respect to said security deposit. Tenant acknowledges that the security deposit is not an advance payment of any kind or a measure of or limit on Landlord’s damages in the event of Tenant’s default. Any application of the security deposit by Landlord shall be without prejudice to any other right or remedy. If Landlord conveys Landlord’s interest under this Lease, the security deposit, or any part thereof not previously applied, may be turned over by Landlord to Landlord’s grantee, and, if so turned over, Tenant agrees to look solely to such grantee for proper application of the security deposit in accordance with the terms of this Section 5, and the return thereof in accordance herewith. The holder of a mortgage shall not be responsible to Tenant for the return or application of any such deposit, whether or not it succeeds to the position of Landlord hereunder, unless such deposit shall have been received in hand by such holder. Tenant hereby waives the provisions of any law which is inconsistent with this Section 5.

(b)           Landlord and Tenant agree that, instead of a cash security deposit, Tenant will satisfy the security deposit requirement under this Lease by delivering to Landlord, upon execution of this Lease by Tenant, a clean irrevocable standby letter of credit in favor of Landlord in the amount of the security deposit referred to in Section 1.16.  Any such letter of credit shall be drawn on a Massachusetts or New York bank having offices in Boston, Massachusetts reasonably approved by Landlord from time to time, and shall be in form and substance reasonably acceptable to Landlord.  In the event of a material adverse change in the financial position of any bank which has issued a letter of credit hereunder, Landlord reserves the right, on any scheduled expiration or renewal date of any such letter (or immediately, in the event that Landlord reasonably determines that the condition of the issuing bank is in imminent danger of insolvency), to request that Tenant change the issuing bank to another bank reasonably approved by Landlord. Regardless of whether Landlord shall have previously requested that Tenant change issuing banks, if the bank on which the original letter of credit or any replacement letter is drawn is declared insolvent or placed into conservatorship or receivership, Tenant shall, within 20 days thereafter, replace the then-outstanding letter of credit with a like letter of credit from another bank acceptable to Landlord. In the event of a reduction in the required amount of the security deposit pursuant to paragraph (a) hereof, Tenant shall obtain and deliver to Landlord (at Tenant’s expense) an endorsement to the then-existing letter of credit reflecting such

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reduction in amount or a substitution thereof. The letter of credit shall in all events be assignable by Landlord to any successor without cost or charge to Landlord.

(c)           The letter of credit shall contain a so-called “Evergreen” clause, whereby the issuing bank agrees to automatically extend the term of the letter of credit from year to year throughout the Initial Term and any Extended Term, with a final expiry date no sooner than thirty (30) days beyond the Initial Term (or any Extended Term, as the case may be) unless, not less than sixty (60) days prior to the date on which the letter would expire absent such extension, the issuing bank gives written notice to Landlord, by commercial overnight delivery or by certified or registered mail, of non-extension.  In the event of notice from the issuing bank of non-extension, Tenant shall, not later than twenty (20) business days prior to the date on which the outstanding letter shall expire without extension, obtain a replacement letter of credit from a Massachusetts or New York bank reasonably acceptable to Landlord, under all of the terms and conditions set forth above.  Upon the occurrence of any failure or default on the part of Tenant hereunder, Landlord may at its election draw all or a portion of the letter of credit, and within twenty (20) days Tenant shall cause the issuing bank to replenish the letter of credit to the original full amount.  Upon the failure of Tenant to replace any such letter at least twenty (20) days prior to its expiration or to replenish any funds as herein required, and upon written certification thereof by Landlord to the issuing bank, Landlord may at its election draw the full amount or any part thereof, and either (x) hold, use and apply the proceeds thereof as if such proceeds were originally deposited with Landlord in cash under this Section, or (y) use such proceeds (or any excess proceeds after application) to obtain from another bank a replacement letter of credit, and the cost of such replacement shall be deducted from the available balance and reimbursed by Tenant. Tenant hereby agrees, if so requested by Landlord, to enter into a letter of credit agreement with the bank so designated by Landlord, failing which Landlord may do so in Tenant’s name and behalf.  The order in which Landlord applies the proceeds of the cash security deposit and the proceeds of the letter of credit shall be determined by Landlord from time to time in its sole discretion.

(d)           From and after the time at which Landlord shall have drawn all or any portion of the proceeds of such a letter of credit, Landlord shall have the right from time to time without prejudice to any other remedy Landlord may have on account thereof, to apply such proceeds, or any part thereof, to Landlord’s damages arising from any then existing or subsequently occurring default by Tenant hereunder.  While Landlord holds any unapplied proceeds, Landlord may commingle the same as hereinabove provided, and shall not be required to pay interest thereon.  There then existing no Event of Default by Tenant hereunder (nor any event or circumstance which, with the giving of notice or the passage of time, or both, would constitute an Event of Default), at the expiration of the Term of this Lease and delivery of the Premises to Landlord in accordance herewith and payment of all amounts then due and coming due, Landlord shall return to Tenant the proceeds thereof (or, if not drawn upon, any letter of credit), or so much thereof as shall not have theretofore been applied or returned in accordance with the terms of this Section, within a reasonable time after the expiration of the Term hereof, and after Tenant has vacated and delivered the Premises as required hereunder. Landlord may retain an amount (to be in the form of a letter of credit or cash, at Tenant’s election) reasonably calculated by Landlord (taking into account information then available for prior years) to be sufficient to pay any final amount of Taxes or Operating Expenses for the Comparison Year in

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which the Term ends, provided that the amount so retained shall not exceed 107% of the Tenant’s actual share of Taxes and Operating Expenses for the immediately prior Comparison Year.  If Landlord conveys Landlord’s interest under this Lease, the proceeds (or, if not drawn upon, any letter of credit), or any part thereof not previously applied, may be turned over or endorsed by Landlord to Landlord’s grantee, and, if actually turned over, Tenant agrees to look solely to such grantee for proper application of the proceeds in accordance with the terms of this Section, and the return thereof in accordance herewith.  The holder of a mortgage shall not be responsible to Tenant for the return of any letter of credit or application of any such proceeds, whether or not it succeeds to the position of Landlord hereunder, unless such proceeds or letter of credit shall have actually been received by such holder.

6.             Permitted Use.

                6.1          Permitted Use.  The Premises shall be used and occupied only for the Permitted Use set forth in Section 1.9 and for no other purpose.  If Section 1.9 gives Tenant the right to use the Premises for general office use, by way of example and not limitation, general office use shall not include medical or dental office use or any similar use, offices of a governmental agency or authority, clinic or laboratory use, classroom use, or any other use not characterized by applicable zoning and land use restrictions as general office use, or any use which would require Landlord or Tenant to obtain a conditional use permit, special permit or variance from any federal, state or local authority. Notwithstanding any Permitted Use set forth in Section 1.9, Tenant shall not use the Premises for any purpose that would violate the Building’s certificate of occupancy, any conditional use permit, special permit or variance applicable to the Property or violate any covenants, conditions or other restrictions applicable to the Building or the Property.  No exclusive use has been granted to Tenant hereunder.

                6.2          Compliance with Law.  Except as otherwise set forth below, Tenant shall, at Tenant’s sole expense, promptly comply with all applicable laws and ordinances, governmental rules, regulations, and orders, certificates of occupancy, conditional use or other permits, variances, covenants and restrictions of record, the reasonable recommendations of Landlord’s engineers or other consultants, and all requirements of any fire insurance underwriters, rating bureaus or government agencies, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the Term or any part of the Term hereof, relating in any manner to the Premises and the occupation and use by Tenant of the Premises (i.e., a use giving rise to legal or other requirements other than those applicable to commercial business offices generally).  Except as otherwise set forth below, Tenant shall, at Tenant’s sole expense, comply with those requirements of the Americans With Disabilities Act that relate to the Premises or to Tenant’s specific use of the Premises (or that apply by reason of any work performed in the Premises by Tenant or the special needs of any employee, agent, contractor or invitee of Tenant), and with all federal, state and local laws and regulations governing occupational safety and health.  Tenant shall conduct its business and use the Premises in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Building.  Tenant shall obtain, at its sole expense, any permit or other governmental authorization required to operate its business from the Premises. Landlord shall not be liable for the failure of any other tenant or person to abide by the requirements of this Section 6 or to otherwise comply with applicable laws and regulations and, to the extent permitted by law,

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Tenant shall not be excused from the performance of its obligations under this Lease due to such a failure. Notwithstanding any of the foregoing to the contrary, Tenant shall not be required to make any alterations, modifications, renovations, additions or improvements to the Premises that are mandated by such laws, regulations or insurance requirements for all buildings of the nature of the Building generally, except to the extent that such requirements would not have been applicable (or that such work would not have been required) but for any act, omission of, or special requirements of, Tenant or its agents, employees, contractors or invitees as aforesaid. Such alterations, modifications, renovations, additions or improvements shall be Landlord’s responsibility at Landlord’s cost and expense (provided that the same may be included in Operating Expenses). Furthermore, Landlord shall be responsible for the cost of correcting or changing any system or structural element of the Property, including the Premises, the need for which arises solely from a violation of any governmental law or regulation, if such violation existed on the date of this Lease, as determined by written admission, stipulation, final judgment, or arbitration award.

                6.3          Condition of Premises. Tenant hereby accepts the Premises and the Building in their condition existing as of the date this Lease is executed by Landlord and Tenant, subject to all applicable federal, state and local laws, ordinances, regulations and permits governing the use of the Premises, the Building’s certificate of occupancy, any applicable permits, approvals or variances, and any easements, covenants or restrictions affecting the use of the Premises or the Property.  Tenant acknowledges that it has satisfied itself by its own independent investigation that the Premises and the Property are suitable for its intended use, and that neither Landlord nor Landlord’s agents has made any representation or warranty as to the present or future suitability of the Premises, or the Building or the Property for the conduct of Tenant’s business.

7.             Maintenance, Repairs and Alterations.

                7.1          Landlord’s Obligations.  (a)  Landlord shall keep the Building and Common Areas (including the parking areas, walkways, driveways, landscaping and exterior lighting, structures, floors, subfloors, slabs, glass, ceilings, common or party walls, as well as the roof and exterior of the Building, and the plumbing, heating, lighting and other building standard electrical equipment, ventilating equipment, air conditioning equipment, and the elevators or escalators and life safety systems, but excluding the interior of the Premises and space leased to other occupants of the Building) in good condition and repair.  If Tenant becomes aware that plumbing, pipes, electrical wiring, or HVAC ducts or vents within the Premises (that are not part of any separate system or equipment installed by or for Tenant) are in need of repair, Tenant shall notify Landlord promptly upon becoming aware of the same, and Landlord shall cause the repairs to be completed within a reasonable time and the cost thereof shall be included in Operating Expenses.  Except as provided in Section 9.3, there shall be no abatement of rent or liability to Tenant on account of any injury or interference with Tenant’s business with respect to any improvements, alterations or repairs made by Landlord to the Property or any part thereof. To the extent permitted by law, and except as expressly provided in paragraph (b) below, Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord’s expense or to terminate this Lease because of Landlord’s failure to keep the Property in good order, condition and repair.  Landlord shall never be liable for any failure to make repairs which Landlord has undertaken to make under the provisions of this Section 7.1 or elsewhere in this Lease, unless Tenant has given notice to

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Landlord of the need to make such repairs, and Landlord has failed to commence to make such repairs within thirty (30) days after receipt of such notice (provided that, in the case of any failure posing an imminent threat to Tenant’s property or to the safety of occupants, Tenant shall so advise Landlord and such 30-day period will be shortened to that which is commercially reasonable under the particular circumstances), or fails thereafter to proceed with reasonable diligence to complete such repairs.

(b)  If (i) Landlord fails to make any repair to the Premises after receipt of notice of the need therefor and within the time period described in paragraph (a) above, and (ii) as a result of such failure there is interference with Tenant’s ability to use the Premises for the reasonable conduct of Tenant’s business, and (iii) such failure to repair involves only an area within the Premises and does not involve the structure of the Building or any of the electrical, mechanical or plumbing systems in the Building that serve areas other than the Premises, then Tenant may give Landlord a second notice of such failure and stating that Tenant intends to cure such failure. A copy of such notice shall be delivered to Landlord’s managing agent (in addition to any other parties required hereunder), and the envelope in which any such notice or copy is delivered shall be marked in prominent lettering “NOTICE OF FAILURE — IMMEDIATE RESPONSE REQUIRED.” If Landlord shall fail to advise Tenant within five (5) additional business days after receipt of such notice that Landlord has commenced to restore such services or utilities, then Tenant may (as its sole remedy) commence and thereafter diligently pursue the same to completion (provided that, in the case of any failure posing an imminent threat to Tenant’s property or to the safety of occupants, Tenant shall so advise Landlord and Tenant shall not be required to wait for such additional 5-day period before commencing repairs). Tenant shall undertake any such work using qualified contractors and suppliers, and in complete accordance with all applicable laws, codes and ordinances. Once Tenant commences such restoration, Tenant shall not discontinue or abandon the same without Landlord’s consent, which shall not be unreasonably withheld. Landlord shall reimburse Tenant for the actual and reasonable out-of-pocket cost to Tenant of completing such restoration, within thirty (30) days after receipt from Tenant of invoices evidencing the same. Tenant shall in no event have the right to deduct or offset any such amounts from payments of rent, additional rent or any other amount payable by Tenant under this Lease.

7.2          Tenant’s Obligations.

(a)           Subject to Landlord’s maintenance and repair obligations set forth in Section 7.1, and to the requirements of Section 7.3, Tenant shall be responsible for keeping the Premises in good condition and repair, at Tenant’s sole expense.  By way of example, and not limitation, Tenant shall be responsible, at Tenant’s sole expense, for repairing and/or replacing carpet, marble, tile or other flooring, paint, wall coverings, corridor and interior doors and door hardware, telephone and computer equipment, interior glass, window treatments, ceiling tiles, shelving, cabinets, millwork and other tenant improvements made by or for Tenant.  In addition, Tenant shall be responsible for the installation, maintenance and repair of all of Tenant’s required telephone, computer, and related cabling from the telephone terminal room on the floor on which the Premises is located to and throughout the Premises, and Tenant shall be responsible for any loss, cost, damage, liability and expense (including without limitation reasonable attorneys’ fees) arising out of or related to the installation, maintenance, repair and replacement of such cabling.  If Tenant fails to keep the Premises in good condition and repair, Landlord may,

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but shall not be obligated to, make any necessary repairs.  If Landlord makes such repairs, Landlord may bill Tenant for the cost of the repairs as additional rent, and said additional rent shall be payable by Tenant within thirty (30) days after receipt of Landlord’s invoice therefor.

(b)           On the last day of the Term hereof, or on any sooner termination, Tenant shall surrender the Premises, together with any Alterations made by Tenant in accordance with this Lease and which Tenant is not obligated to remove pursuant to Section 7.3, to Landlord in the condition in which Tenant is required to keep the Premises pursuant to Section 7.2(a), ordinary wear and tear and damage by fire or other casualty excepted, clean and free of debris and Tenant’s personal property.  Tenant shall repair any damage to the Premises occasioned by the installation or removal of Tenant’s personal property, trade fixtures, furnishings and equipment and any Alterations that Landlord requires Tenant to remove pursuant to Section 7.3.  Unless Landlord otherwise requires pursuant to Section 7.3, Tenant shall leave the electrical distribution systems, plumbing systems, lighting fixtures, HVAC ducts and vents, window treatments, wall coverings, carpets and other floor coverings, doors and door hardware, millwork, ceilings and other tenant improvements at the Premises and in good condition, ordinary wear and tear and damage by casualty excepted. The parties hereby acknowledge and agree that, except with respect to specialty items or features such as extensive glazed partitions, Tenant shall not be obligated to remove any portion of the Landlord’s Work from Premises upon the expiration or earlier termination of the Lease. Notwithstanding the foregoing, Tenant shall not pull or otherwise remove any computer network cabling, telephone cabling or similar items which Tenant has installed in the Premises, without Landlord’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed.  In the event of any such removal, Tenant shall repair any damage to the Premises occasioned thereby.

7.3          Alterations and Additions.

(a)           Except as provided herein, Tenant shall not, without Landlord’s prior written consent, make any alterations, improvements, additions, utility installations or repairs (hereinafter collectively referred to as “Alterations”) in, on or about the Premises or the Property.  Alterations shall include, but shall not be limited to, the installation or alteration of security or fire protection systems, communication systems, millwork, shelving, file retrieval or storage systems, carpeting or other floor covering, window and wall coverings, electrical distribution systems, lighting fixtures, telephone or computer system wiring, HVAC and plumbing. Landlord agrees that its consent shall not be unreasonably withheld, conditioned or delayed as to non-structural Alterations proposed by Tenant that do not affect the electrical, mechanical or plumbing systems of the Building or the Premises. As to Alterations for which Landlord’s consent is given hereunder, if Tenant so requests at the time of its request for consent, Landlord shall, at the time of giving such consent, advise Tenant as to whether Landlord will require the removal of such Alterations and the restoration of the Premises and the Building to their prior condition at the expiration or earlier termination of this Lease, such removal and restoration to be at Tenant’s expense. As to any other Alterations, at the expiration of the Term, Landlord may require the removal of any Alterations installed by Tenant and the restoration of the Premises and the Building to their prior condition, at Tenant’s expense.  If, as a result of any Alteration made by Tenant, Landlord is obligated to comply with the Americans With Disabilities Act or any other law or regulation and such compliance requires Landlord to make any improvement or alteration to any portion of the Building, as a condition to Landlord’s consent, Landlord shall

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have the right to require Tenant to pay to Landlord prior to the construction of any Alteration by Tenant, the entire cost of any improvement or alteration Landlord is obligated to complete by such law or regulation.  With respect to any Alterations for which Landlord’s approval is required, Tenant shall reimburse Landlord for the actual and reasonable overhead and other costs it incurs in reviewing the plans for the Alterations and in monitoring the construction of the Alterations.  Should Landlord permit Tenant to make such Alterations, Tenant shall use only such contractor as has been expressly approved by Landlord, which approval shall not be unreasonably withheld, and with respect to any Alterations (or any group or series of related alterations comprising one project) costing twenty-five thousand dollars ($25,000) or more, Landlord may require Tenant to provide to Landlord, at Tenant’s sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alterations, to insure Landlord against any liability for mechanic’s and materialmen’s liens and to insure completion of the work.  Should Tenant make any Alterations without the prior approval of Landlord, or use a contractor not expressly approved by Landlord, Landlord may, at any time during the term of this Lease, require that Tenant remove all or part of the Alterations and return the Premises to the condition it was in prior to the making of the Alterations.  In the event Tenant makes any Alterations, Tenant agrees to obtain or cause its contractor to obtain, prior to the commencement of any work, “builder’s all risk” insurance in an amount reasonably approved by Landlord and workers compensation insurance.

(b)           Any request for Landlord’s consent to Alterations in or about the Premises that Tenant shall desire to make shall be presented to Landlord in written form, with plans and specifications which are sufficiently detailed to obtain a building permit (if and to the extent necessary in light of the Alterations being proposed).  If Landlord consents to an Alteration, the consent shall be deemed conditioned upon Tenant acquiring a building permit (if necessary) and any other licenses, permits, approvals or authorizations required therefor from the applicable governmental agencies, furnishing copies thereof to Landlord prior to the commencement of the work, and compliance by Tenant with all conditions of said permits, licenses, approvals and authorizations in a prompt and expeditious manner. Tenant shall provide Landlord with as-built plans and specifications for any Alterations made to the Premises.

(c)           Tenant shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use in the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Premises or the Building, or any interest therein.  If Tenant shall, in good faith, contest the validity of any such lien, Tenant shall furnish to Landlord a surety bond satisfactory to Landlord in an amount equal to not less than one and one half (1½) times the amount of such contested lien claim indemnifying Landlord against liability arising out of such lien or claim.  Such bond shall be sufficient in form and amount to free the Property from the effect of such lien.  In addition, Landlord may require Tenant to pay Landlord’s reasonable attorneys’ fees and costs in participating in such action.

(d)           Tenant shall give Landlord not less than ten (10) days’ advance written notice prior to the commencement of any work in the Premises by Tenant, and Landlord shall have the right to post notices of non-responsibility in or on the Premises or the Property.

(e)           All Alterations (whether or not such Alterations constitute trade fixtures of Tenant) which may be made to the Premises by Tenant shall be paid for by Tenant, at Tenant’s

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sole expense, and shall be made and done in a good and workmanlike manner and with new materials reasonably satisfactory to Landlord, and such Alterations shall be the property of Landlord and remain upon and be surrendered with the Premises at the expiration of the Lease Term, unless Landlord requires their removal pursuant to Section 7.3(a). Tenant’s personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Property, shall remain the property of Tenant and may be removed by Tenant subject to the provisions of Section 7.2(b).

                7.4          Failure of Tenant to Remove Property.  If this Lease expires or is otherwise terminated, and Tenant fails to remove its property as required by Section 7.2(b), in addition to any other remedies available to Landlord under this Lease, and subject to any other right or remedy Landlord may have under applicable law, Landlord may remove any property of Tenant from the Premises and store the same elsewhere at the expense and risk of Tenant. If such property is not claimed within thirty (30) days, Landlord may at its option dispose of the same in any manner Landlord in its sole discretion deems appropriate. All of Landlord’s costs and expenses of removal and storage (and other amounts owed by Tenant to Landlord) shall be paid by Tenant within thirty (30) days after Tenant’s receipt of an invoice therefor, and any proceeds realized by Landlord may be applied to Landlord’s costs and expenses and other amounts owed by Tenant to Landlord.

8.             Insurance.

8.1          Insurance-Tenant.

(a)           Tenant shall obtain and keep in force during the Term of this Lease a commercial general liability policy of insurance with coverages reasonably acceptable to Landlord, which shall without limitation protect Tenant and Landlord, any lender of Landlord and such other persons as Landlord may reasonably request as additional insureds, against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an “Additional Insured-Managers and Landlords of Premises Endorsement” and contain the “Amendment of the Pollution Exclusion” for damage caused by heat, smoke or fumes from a hostile fire.  The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease (as the same may be amended or modified from time to time) as an “insured contract.”

(b)           Tenant shall obtain and keep in force during the term of this Lease “special form” property insurance with coverages acceptable to Landlord, in Landlord’s sole discretion. Said insurance shall be written on a one hundred percent (100%) replacement cost basis on Tenant’s personal property, all tenant improvements installed at the Premises by Landlord or Tenant, Tenant’s trade fixtures and other property.  Such policies shall provide protection against any peril included within the classification “fire and extended coverage,” or “special form coverage” against vandalism and malicious mischief, theft, sprinkler leakage, earthquake damage and flood damage.  If this Lease is terminated as the result of a casualty in accordance with Section 9, the proceeds of said insurance attributable to the replacement of all tenant improvements at the Premises shall be paid to Landlord.

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(c)           Tenant shall, at all times during the term hereof, maintain in effect workers’ compensation insurance as required by applicable law and business interruption and extra expense insurance satisfactory to Landlord.

(d)           From time to time, upon not less than thirty (30) days prior written notice to Tenant, Landlord may require Tenant to carry such additional insurance or higher coverage amounts as landlords of comparable buildings in the geographical area of the Property are requiring of their tenants.

(e)           Tenant shall have the right to provide its required insurance coverage pursuant to blanket policies obtained by the Tenant.

8.2          Insurance-Landlord.

(c)           Landlord shall obtain and keep in force a policy of general liability insurance providing coverage to Landlord with respect to liability arising out of the ownership, operation and management of the Property.

(d)           Landlord shall also obtain and keep in force during the Term of this Lease a commercially reasonable policy or policies of insurance covering loss or damage to the Property (excluding any alterations or improvements made by Tenant).  The terms and conditions of said policies and the perils and risks covered thereby shall be determined by Landlord, from time to time, in Landlord’s sole discretion.  In addition, at Landlord’s option, Landlord shall obtain and keep in force, during the term of this Lease, a policy of rental interruption insurance, with loss payable to Landlord, which insurance shall, at Landlord’s option, also cover all Operating Expenses.  At Landlord’s option, Landlord may obtain insurance coverages and/or bonds related to the operation of the parking areas. In addition, Landlord shall have the right to obtain such additional insurance as is customarily carried by prudent and sophisticated owners or operators of other comparable office buildings in the geographical area of the Property.  Tenant will not be named as an additional insured in any insurance policies carried by Landlord and shall have no right to any proceeds therefrom.  The policies purchased by Landlord shall contain such deductibles as Landlord may reasonably determine.  In addition to amounts payable by Tenant in accordance with Section 4.2, Tenant shall pay any increase in the property insurance premiums for the Property over what was payable immediately prior to the increase to the extent the increase is specified by Landlord’s insurance carrier as being caused by the nature of Tenant’s occupancy or any act or omission of Tenant.

8.3          Insurance Policies.  Tenant shall deliver to Landlord certificates evidencing the issuance and validity of the insurance policies required under Section 8.1 not later than fifteen (15) days prior to the Commencement Date of this Lease, and Landlord shall have the right, upon request, to receive the actual policies in order to verify that the terms and conditions of said policies conform to the requirements hereof.  Tenant’s insurance policies shall not be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Landlord.  Tenant shall, at least thirty (30) days prior to the expiration of such policies, furnish Landlord with certificates evidencing renewal thereof.  Tenant’s insurance policies shall be issued by insurance companies authorized to do business in the state in which the Property is located, and said companies shall maintain during the policy term a “General Policyholder’s Rating” of at least A-X (or such other rating as may be required by any lender

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having a lien on the Property) as set forth in the most recent edition of “Best Insurance Reports.”  All insurance obtained by Tenant shall be primary to and not contributory with any similar insurance carried by Landlord, whose insurance shall be considered excess insurance only.  Landlord, and at Landlord’s option, the holder of any mortgage or deed of trust encumbering the Building and any person or entity managing the Building on behalf of Landlord, shall be named as an additional insured on all insurance policies Tenant is obligated to obtain by Section 8.1 above.  Tenant’s insurance policies shall not include deductibles in excess of Five Thousand Dollars ($5,000).

8.4          Waiver of Claims and Subrogation.  Landlord waives any and all rights of recovery against Tenant for or arising out of damage to, or destruction of, the Property.  Landlord’s waiver shall not relieve Tenant from liability under Section 21 below except to the extent Landlord’s insurance company actually satisfies Tenant’s obligations under Section 21 in accordance with the requirements of Section 21. Tenant waives any and all rights of recovery against Landlord, Landlord’s employees, agents and contractors for liability or damages if such liability or damage is covered by Tenant’s insurance policies then in force or the insurance policies Tenant is required to obtain by Section 8.1 (whether or not the insurance Tenant is required to obtain by Section 8.1 is then in force and effect), whichever is broader. Tenant’s waiver shall not relieve Landlord from liability under Section 21 below except to the extent Tenant’s insurance company actually pays or reimburses Tenant for Tenant’s loss. Each party shall cause the insurance policies it obtains in accordance with this Section 8 to provide that the insurance company consents to the foregoing waivers by the parties and that it waives all right of recovery by subrogation against the other party in connection with any liability or damage covered by any policy or policies covering the insured party.

8.5          Coverage.  Landlord makes no representation to Tenant that the limits or forms of coverage specified above or approved by Landlord are adequate to insure Tenant’s property or Tenant’s obligations under this Lease, and the limits of any insurance carried by Tenant shall not limit Tenant’s obligations or liability under any indemnity provision included in this Lease or under any other provision of this Lease.

9.             Damage or Destruction.

9.1          Effect of Damage or Destruction.   (a) If all or part of the Building is damaged by fire, earthquake, flood, explosion, the elements, riot, the release or existence of Hazardous Substances (as defined below) or by any other cause whatsoever (hereinafter collectively referred to as “damages”), but the damages are not material (as defined in Section 9.2 below), Landlord shall promptly and diligently pursue appropriate insurance claims and settlements, and following receipt of proceeds from appropriate insurance policies, Landlord shall diligently commence and complete repair of the damage to the Building within a commercially reasonable time, and this Lease shall remain in full force and effect. If all or part of the Building is destroyed or materially damaged (as defined in Section 9.2 below), Landlord shall have the right, in its sole and complete discretion, to repair or to rebuild the Building or to terminate this Lease. Landlord shall within sixty (60) days after the occurrence of such material damage or destruction notify Tenant (a “Landlord Election Notice”) in writing of Landlord’s intention to repair or to rebuild or to

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terminate this Lease.  Except for the rent abatement referred to in Section 7.3, Tenant shall in no event be entitled to compensation or damages on account of annoyance or inconvenience in making any repairs, or on account of construction, or on account of Landlord’s election to terminate this Lease.

(b)           Notwithstanding the foregoing, if the Premises are destroyed or materially damaged as aforesaid and Landlord in good faith determines that the Premises cannot be rebuilt or repaired within two hundred seventy (270) days from the time that repair work would commence, without payment of overtime or other premiums, and such damage will render the entire Premises Untenantable during said two hundred seventy (270) day period, Landlord shall in the Landlord’s Election Notice advise Tenant thereof, and Tenant shall thereafter have a period of fifteen (15) days within which Tenant may elect to terminate this Lease, such termination to be effective upon written notice to Landlord. If Landlord does not give a Landlord’s Election Notice within the 60-day period referred to in paragraph (a) above, then Tenant may give Landlord a notice of such failure, which shall clearly state that failure to give the Landlord’s Election Notice may result in a termination of this Lease.. A copy of such notice from Tenant shall be delivered to Landlord’s managing agent (in addition to any other parties required hereunder), and the envelope in which any such notice or copy is delivered shall be marked in prominent lettering “NOTICE OF FAILURE — IMMEDIATE RESPONSE REQUIRED.” If the Landlord does not give a Landlord’s Election Notice within ten (10) days after the receipt of Tenant’s notice, then Tenant shall thereafter have a period of fifteen (15) days within which Tenant may elect to terminate this Lease, such termination to be effective upon written notice to Landlord.  As used in this Article 9, the term “Premises” shall mean the Premises itself and such portions of the common areas and facilities of the Building as are necessary to provide reasonably safe access to the Premises and to provide those building services, such as parking facilities, utilities, elevator and HVAC service, that Landlord is required to provide hereunder. In addition, if Tenant does not so elect to terminate this Lease within such 15-day period, and if Landlord’s restoration work in the Premises is not substantially completed within two hundred seventy (270) days after the date of the occurrence of the damage or destruction (which 270-day period shall be extended (i) for such time as Landlord is prevented or delayed by acts or omissions of Tenant, or (ii) for such time as Landlord is prevented or delayed by any Force Majeure, then Tenant may again elect to terminate this Lease, any such termination to be effective on the forty-fifth (45th) day after written notice to Landlord of such termination (unless restoration work to the Premises is substantially completed within such 45-day period).

(c)           Subject to Section 9.3 below, if Landlord or Tenant terminates this Lease in accordance with this Section 9.1, Tenant shall continue to pay all Base Rent, Operating Expense increases and other amounts due hereunder which arise prior to the date of termination.

9.2          Definition of Material Damage.  Damage to the Building or the Premises shall be deemed material if, in Landlord’s reasonable judgment, the uninsured cost of repairing the damage will exceed Twenty-Five Thousand Dollars ($25,000).  If insurance proceeds are available to Landlord in an amount which is sufficient to pay the entire cost of repairing all of the damage to the Premises or the Building (subject to any applicable deductible), the damage shall be deemed material if the cost of repairing the damage exceeds One Hundred Thousand Dollars ($100,000).  Damage to the Premises or the Building shall also be deemed material if (a) the

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Premises or the Building, as the case may be, cannot be rebuilt or repaired to substantially the same condition it was in prior to the damage due to laws or regulations in effect at the time the repairs will be made, (b) the holder of any mortgage or deed of trust encumbering the Property requires that insurance proceeds available to repair the damage in excess of Twenty-Five Thousand Dollars ($25,000) be applied to the repayment of the indebtedness secured by the mortgage or the deed of trust, or (c) the damage occurs during the last twelve (12) months of the Lease Term.

9.3          Abatement of Rent.  If Landlord elects to repair damage to the Property and all or part of the Premises will be unusable or inaccessible to Tenant in the ordinary conduct of its business until the damage is repaired, Tenant’s Base Rent and Tenant’s Share of Operating Expense increases and Tenant’s Share of Real Property Taxes shall be abated until the repairs are completed in proportion to the amount of the Premises which is unusable or inaccessible to Tenant in the ordinary conduct of its business.  Notwithstanding the foregoing, there shall be no abatement of Base Rent, Tenant’s Share of Operating Expense increases or Tenant’s Share of Real Property Taxes by reason of any portion of the Premises being unusable or inaccessible for a period equal to three (3) consecutive business days or less.

9.4          Tenant’s Acts.  If such damage or destruction occurs as a result of the negligence or the intentional acts of Tenant or Tenant’s employees, agents, contractors or invitees, and the proceeds of insurance which are actually received by Landlord or its mortgagee (or, if Landlord was not carrying the insurance that Landlord is required to carry under this Lease, then the proceeds that would have been received if Landlord were carrying all such insurance) are not sufficient to pay for the repair of all of the damage, Tenant shall pay, at Tenant’s sole cost and expense, to Landlord within thirty (30) days after written demand, the difference between the cost of repairing the damage and the insurance proceeds received by Landlord.

9.5          Tenant’s Property.  As more fully set forth in Section 22, Landlord shall not be liable to Tenant or its employees, agents, contractors, invitees or customers for loss or damage to merchandise, tenant improvements, fixtures, automobiles, furniture, equipment, computers, files or other property (hereinafter in this Section 9.5 collectively “Tenant’s Property”) located at the Property, unless damaged due to the gross negligence or willful misconduct of Landlord, its employees or agents.  Tenant shall repair or replace all of Tenant’s property at Tenant’s sole cost and expense.  Tenant acknowledges that it is Tenant’s sole responsibility to obtain adequate insurance coverage to compensate Tenant for damage to Tenant’s property.

9.6          Waiver.  Landlord and Tenant hereby waive the provisions of any present or future statutes which relate to the termination of leases when leased property is damaged or destroyed and agree that such event shall be governed by the terms of this Lease.

10.          Real and Personal Property Taxes.

10.1        Payment of Taxes.  Tenant shall pay to Landlord during the Term of this Lease, in addition to Base Rent and Tenant’s Share of Operating Expense increases, Tenant’s Share of the amount by which all “Real Property Taxes” (as defined in Section 10.2 below) for each Comparison Year exceeds the amount of all Real Property Taxes for the Tax Base Year.  Tenant’s Share of Real Property Tax increases shall be payable by Tenant at the same time, in

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the same manner and under the same terms and conditions as Tenant pays Tenant’s Share of Operating Expense increases as provided in Section 4.2(f) of this Lease.  Except as expressly provided in Section 10.4 below, if the Real Property Taxes incurred during any Comparison Year are less than the Real Property Taxes incurred during the Tax Base Year, Tenant shall not be entitled to receive any credit, offset, reduction or benefit as a result of said occurrence.

10.2        Definition of “Real Property Tax”.  As used herein, the term “Real Property Taxes” shall mean (i) all taxes, assessments (special or otherwise), levies, fees and all other government levies, exactions and charges of every kind and nature, general and special, ordinary and extraordinary, foreseen and unforeseen, which are, at any time prior to or during the Term, imposed or levied upon or assessed against the Property or any portion thereof, or against any Base Rent, additional rent or other rent of any kind or nature payable to Landlord by anyone on account of the ownership, leasing or operation of the Property, or which arise on account of or in respect of the ownership, development, leasing, operation or use of the Property or any portion thereof; (ii) all gross receipts taxes or similar taxes imposed or levied upon, assessed against or measured by any Base Rent, additional rent or other rent of any  kind or nature or other sum payable to Landlord by anyone on account of the ownership, development, leasing, operation, or use of the Property or any portion thereof; (iii) all value added, use and similar taxes at any time levied, assessed or payable on account of the ownership, development, leasing, operation, or use of the Property or any portion thereof; and (iv) reasonable expenses of any proceeding for abatement of any of the foregoing items included in Real Property Taxes, provided Landlord prevails in such abatement proceeding; but the amount of special taxes or special assessments included in Real Property Taxes shall be limited to the amount of the installment (plus any interest, other than penalty interest, payable thereon) of such special tax or special assessment required to be paid during the year in respect of which such Real Property Taxes are being determined. There shall be excluded from Real Property Taxes all income, estate, succession, inheritance and transfer taxes of Landlord or any tax defined as an Operating Expense by Section 4.2(c); provided, however, that if at any time during the Term the present system of ad valorem taxation of real property shall be changed so that a capital levy, franchise, income, profits, sales, rental, use and occupancy, or other tax or charge shall in whole or in part be substituted for, or added to, such ad valorem tax and levied against, or be payable by, Landlord with respect to the Property or any portion thereof, such tax or charge shall be included in the term “Real Property Taxes” for the purposes of this Lease.

10.3        Personal Property Taxes.  Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises or related to Tenant’s use of the Premises.  If any of Tenant’s personal property shall be assessed with Landlord’s real or personal property, Tenant shall pay to Landlord the taxes attributable to Tenant within thirty (30) days after receipt of a written statement from Landlord setting forth the taxes applicable to Tenant’s property.

10.4        Reassessments.  From time to time Landlord may challenge the assessed value of the Building and Land as determined by applicable taxing authorities and/or Landlord may attempt to cause the Real Property Taxes to be reduced on other grounds.  If Landlord is successful in causing the Real Property Taxes to be reduced or in obtaining a refund, rebate, credit or similar benefit (hereinafter in this Section 10.4 collectively referred to as a “reduction”), Landlord shall, after deducting the costs reasonably incurred by Landlord in

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causing the reduction to be made, credit the reduction(s) to Real Property Taxes for the calendar year to which a reduction applies and to recalculate the Real Property Taxes owed by Tenant for years after the year in which the reduction applies based on the reduced Real Property Taxes (if a reduction applies to Tenant’s Tax Base Year, the Tax Base Year Real Property Taxes shall be reduced by the amount of the reduction and Tenant’s Share of Real Property Tax increases shall be recalculated for all Comparison Years following the year of the reduction based on the lower Tax Base Year amount).  After deducting Landlord’s reasonably incurred expenses as hereinabove provided, Landlord shall, within thirty (30) days after Landlord actually receives net proceeds thereof, refund to Tenant Tenant’s Share of the reduction of Real Property Taxes (exclusive of interest) for the years to which any reductions apply.

11.          Utilities.

11.1        Services Provided by Landlord.  Subject to all governmental rules, regulations and guidelines applicable thereto, Landlord shall use commercially reasonable efforts to provide:

a.             heating, ventilation and air conditioning to the Common Areas and the Premises during the times described in Section 11.4, and sufficient to maintain reasonably comfortable temperature and conditions;

b.             electricity within the Premises at a level sufficient to reasonably accommodate normal business office uses with the improvements to be made by Landlord as part of Landlord’s Work as reflected on the Plans approved by Landlord, and in the Common Areas, and the replacement of light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures in the Common Areas (Landlord will replace light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures in the Premises at Tenant’s expense);

c.             domestic water supply to the Premises (at the temperature and pressure provided by the applicable utility company), and hot and cold water to the Common Areas for reasonable and normal drinking and lavatory use;

d.             building standard janitorial services (including window cleaning), substantially consistent with the standards set forth in Exhibit A-3;

e.             maintenance of the Common Areas, as described in Section 7.1, including reasonable landscaping and snow and ice removal;

f.              at least one (1) passenger elevator during normal Building hours; and

g.             access to the Premises, including parking areas, twenty-four hours per day, three hundred sixty-five days per year, subject to reasonable security systems and precautions from time to time in effect, and subject always to emergency conditions.

11.2        Intentionally Omitted.

11.3        Services Exclusive to Tenant.  Tenant shall pay directly to the provider thereof, on or before the date when due and in addition to payments of Base Rent and other additional

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rent provided for herein, the costs of all electricity used in the Premises (including, but not limited to, for HVAC), water, gas, heat, heat pump fuel, telephone and any other utilities and services supplied and/or metered exclusively to the Premises or to Tenant, together with any taxes thereon. Tenant acknowledges that, as of the date hereof, electricity provided to the Premises is measured by a submeter, and that natural gas, water and sewer service are all metered to the Building.  If Landlord measures electricity or any other utility usage in the Premises by a submeter, Tenant shall pay the costs as shown on such submeter to Landlord, as additional rent, at Landlord’s actual cost for such services, without mark-up, within thirty (30) days after receipt of an invoice therefor. If any such services are not separately metered or submetered to the Premises, Tenant shall pay Tenant’s Share thereof as an Operating Expense.

11.4        Hours of Service.  Building services described in Section 11.1(a)-(c) and (e)-(f)shall be provided Monday through Friday from 8:00 a.m. to 6:00 p.m. and Saturdays from 9:00 a.m. to 1:00 p.m.  Janitorial services described in Section 11.1(d) shall be provided Monday through Friday.  Other Building services, if any, shall not be provided at other times or on nationally recognized holidays. Nationally recognized holidays are: New Years Day, Martin Luther King Jr. Day, Presidents’ Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (and the following day when any such day occurs on Sunday) and such other days that may hereafter be designated as national holidays.

11.5        Excess Usage by Tenant. Notwithstanding the Permitted Use set forth in Section 1.9, Tenant shall not use Building utilities or services in excess of those used by the average office building tenant using its premises for ordinary office use; provided, however, that the parties hereby acknowledge and agree that Tenant may use the Building utilities or services for the Permitted Use, as contemplated by the Layout Plan attached hereto as Exhibit A, and Landlord agrees that the HVAC capacity of the Building and the Premises upon completion of the Landlord’s Work in accordance with the Plans will be adequate for normal office use in the Premises as reflected on the Plans, given an occupancy not exceeding one person per 125 square feet of usable area in the Premises.  Tenant shall not install at the Premises office machines, lighting fixtures or other equipment which will generate above average heat, noise or vibration at the Premises or which will adversely affect the Building’s HVAC or other systems. If the Premises include or if Tenant hereafter installs any computer, telecommunications or other so-called “special purpose” room or area, other than the “computer room” currently identified on the Layout Plan attached hereto as Exhibit A, Tenant shall at its sole cost and expense, provide such supplemental heating, ventilation and air conditioning equipment and systems (the “Supplemental Systems”) as may be required to keep such room or area at the proper temperature and environmental conditions. All Supplemental Systems shall be subject to Landlord’s prior review and consent and other conditions in Article 7, and if approved, shall be maintained, repaired and replaced as necessary by Tenant, so as not to impose any additional load on the Building systems. Tenant shall pay, as additional rent, the cost of electricity, water and other materials necessary for the proper operation of Supplemental Systems, as well as any costs or expenses incurred by Landlord to provide additional capacity for Building systems to accommodate or provide the same. Without limiting the foregoing, if Tenant does use Building utilities or services in excess of those used by the average office building tenant, Landlord shall have the right (but no obligation), in addition to any other rights or remedies it may have under this Lease, to (a) at Tenant’s expense, install additional equipment and/or separate metering devices at the Premises, and to charge Tenant therefor and for such usage, (b) require Tenant to

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install Supplemental Systems as provided above, (c) require Tenant to pay to Landlord all costs, expenses and damages incurred by Landlord as a result of such usage, and/or (d) require Tenant to stop using excess utilities or services.

11.6        Interruptions. (a)  Except as expressly provided below, Tenant agrees that Landlord shall not be liable to Tenant for its failure to furnish gas, electricity, telephone service, water, HVAC or any other utility services or building services when such failure is occasioned, in whole or in part, by repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, telephone service or other utility at the Building, by any accident, casualty or event arising from any cause whatsoever, including the negligence of Landlord, its employees, agents and contractors, by act, negligence or default of Tenant or any other person or entity, or by any other cause and, to the extent permitted by law, such failures shall never be deemed to constitute an eviction or disturbance of Tenant’s use and possession of the Premises or relieve Tenant from the obligation of paying rent or performing any of its obligations under this Lease.  Furthermore, Landlord shall not be liable under any circumstances for loss of property or for injury to, or interference with, Tenant’s business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any such services or utilities.  Landlord may comply with voluntary controls or guidelines promulgated by any governmental entity relating to the use or conservation of energy, water, gas, light or electricity or the reduction of automobile or other emissions without creating any liability of Landlord to Tenant under this Lease.

(b)           Notwithstanding the foregoing to the contrary, if, due to any act or omission of Landlord or Landlord’s agents or employees, Tenant is prevented from receiving essential services or utilities that Landlord is obligated to perform or deliver under this Lease, and such interruption of essential services or utilities renders all or a material portion of the Premises “Untenantable” (meaning that Tenant is unable to use and occupy the Premises or such portion in a reasonably safe manner for the conduct of Tenant’s business), and if such interruption resulting in Untenantability shall continue for a period of five (5) consecutive business days after notice thereof from Tenant to Landlord that the Premises are Untenantable as a result thereof, then Base Rent and additional rent shall abate commencing on the sixth (6th) business day after such notice (and, if less than all of the Premises rendered Untenantable by such interruption, such abatement shall be pro-rated according to the area rendered Untenantable) until such time as such services or utilities are restored.

(c)           In addition to the foregoing, if, as a result of any act or omission by Landlord as described in paragraph (b) above, the Premises are rendered Untenantable for more than sixty (60) consecutive days after written notice thereof from Tenant to Landlord, and Tenant shall actually have vacated the Premises as a result of such failure, then Tenant shall have the right to terminate this Lease by giving Landlord notice of its desire to do so, whereupon this Lease shall terminate on the fifteenth (15th) day after the giving of such notice with the same force and effect as if such 15th day were the date originally set forth herein as the expiration date hereof, unless within such 15-day period Landlord has made the necessary repairs or taken such action as may be necessary to make the Premises tenantable. The foregoing paragraph (b) and this paragraph (c) shall not apply to any failure to perform services to the extent the same arises from any act or omission of Tenant or its agents, contractors or employees, or from fire or casualty, Force Majeure or taking or condemnation by the power of eminent domain. Tenant’s rights under paragraph (b) and this

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paragraph (c) shall be Tenant’s sole and exclusive remedies for any loss or damage arising from any such Untenantability arising from such an interruption.

12.          Assignment and Subletting.

12.1        Landlord’s Consent Required. (a) Except as otherwise expressly provided herein, Tenant shall not voluntarily or by operation of law assign, pledge, hypothecate, mortgage, sublet, or otherwise transfer or encumber all or any part of Tenant’s interest in this Lease or in the Premises (any of the foregoing hereinafter may be referred to as a “Transfer”), or permit any Transfer to occur, without Landlord’s prior written consent in each case, which shall be given or withheld according to the standards set forth below.  A “Transfer” requiring Landlord’s consent hereunder shall include, without limitation, the use or occupancy of the Premises or any part thereof by any party other than Tenant, and the granting of concessions, licenses and the like with respect to the Premises or any part thereof.  Landlord shall respond to Tenant’s written request for consent hereunder within thirty (30) days after Landlord’s receipt of the written request from Tenant. If Landlord fails to respond (which means failure to approve, disapprove or request additional information consistent with the requirements of this Section 12) to any request for Landlord’s consent hereunder within such 30-day period, Tenant may give Landlord an additional notice of such failure.  A copy of such additional notice shall be delivered to Landlord’s managing agent (in addition to any other parties required hereunder), and the envelope in which any such notice or copy is delivered shall be marked in prominent lettering “NOTICE OF FAILURE — IMMEDIATE RESPONSE REQUIRED.” If Landlord shall fail to respond within five (5) additional business days after receipt of such notice, then Landlord shall be deemed to have approved such request. Any attempted Transfer without such consent shall be void and shall constitute an Event of Default under this Lease.  Tenant’s written request for Landlord’s consent shall include, and Landlord’s thirty (30) day response period referred to above shall not commence, unless and until Landlord has received from Tenant, all of the following information: (a) one or more of (i) financial statements for the proposed assignee or subtenant for the past two (2) years (or, if shorter, from inception of the entity) prepared in accordance with generally accepted accounting principles, or (ii) federal tax returns for the proposed assignee or subtenant for the past two (2) years (or, if shorter, from inception of the entity); (b) a detailed description of the business the assignee or subtenant intends to operate at the Premises; (c) the proposed effective date of the assignment or sublease; (d) a copy of the executed term sheet or letter of intent, setting forth the material terms and conditions of the proposed assignment or sublease; (e) a detailed description of any ownership or commercial relationship between Tenant and the proposed assignee or subtenant; and (f) a description of any Alterations the proposed assignee or subtenant desires to make to the Premises.  If the obligations of the proposed assignee or subtenant will be guaranteed by any person or entity, Tenant’s written request shall not be considered complete until the information described in (a) of the previous sentence has been provided with respect to each proposed guarantor. If Landlord will require, as a condition to its consent hereunder, that any proposed assignee of this Lease provide an acceptable guaranty of the assignee’s obligations hereunder (without in any way diminishing Tenant’s ongoing liability), Landlord shall so advise Tenant at the time of responding to Tenant’s request for Landlord’s consent.

(b)           A “Transfer” shall also include: (i) if Tenant is a corporation, and Tenant’s stock is not publicly traded over a recognized securities exchange, or Tenant is a partnership, limited liability

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company, or other entity, transfer of more than fifty percent (50%) of the voting stock of such corporation or fifty percent (50%) (or in either case, such lower percentage as would effect a change of control) of the voting interests in such partnership, limited liability company or other entity during the Term of this Lease (whether or not in one or more transfers, but excluding bona fide transfers not entered into for the purpose of evading this provision and constituting further equity investment in Tenant or transfers of not more than ten percent (10%) and not resulting in a change of control); and (ii) the dissolution, merger or liquidation of the corporation or other entity, and (iii) the involvement by Tenant or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise) whether or not a formal assignment or hypothecation of this Lease or Tenant’s assets occurs, but only if such transaction results or will result in a reduction of the “Net Worth” of Tenant (as hereinafter defined), by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Tenant as it is represented to Landlord at the time of the execution by Landlord of this Lease

12.2        Business Combinations; Affiliate Transactions. (a) Section 12.1 shall not apply to, and Landlord’s prior consent shall not be required for, any Transfer arising or resulting from the involvement by Tenant or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Tenant’s assets occurs, unless such transaction or series of transactions results or will result in a reduction of the “Net Worth” of Tenant as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Tenant as it is represented to Landlord at the time of the execution by Landlord of this Lease, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Tenant was or is greater. “Net Worth” of Tenant for purposes of this Section 12.2 shall be the net worth of Tenant (excluding any guarantors) established under generally accepted accounting principles consistently applied.

(b)           Section 12.1 shall not apply to, and Landlord’s prior consent shall not be required for, any assignment of this Lease, or a sublease of all or any portion of the Premises, by the Tenant to its wholly owned subsidiary or immediate controlling entity or its Affiliate (as hereinafter defined) (for such period of time as such corporation remains such a subsidiary or such a controlling entity or such an Affiliate, respectively, it being agreed that the subsequent sale or transfer of stock or ownership interest resulting in a change in voting control, or any other transaction(s) having the overall effect that such entity ceases to be such a subsidiary or such a controlling entity or such an Affiliate, respectively, of the Tenant, shall be treated as if such sale or transfer or transaction(s) were, for all purposes, a Transfer governed by the provisions of Section 12.1), provided (and it shall be a condition of the validity of any such assignment) that such Transferee first agree directly with the Landlord to be bound by all of the obligations of the Tenant hereunder, including, without limitation, the obligation to pay the rent and other amounts provided for under this Lease, the covenant to use the Premises only for the purposes specifically permitted under this Lease and the covenant against further assignment, but no such assignment or sublease shall relieve the Tenant herein named of any of its obligations hereunder, and the Tenant shall at the request of Landlord affirm in writing its ongoing primary liability therefor. As used herein, “Affiliate” shall mean any entity that is under common direct or indirect control with Tenant.  “Control” shall mean ownership of fifty-one percent (51%) or more of the voting

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securities, or other ownership interests or rights of the controlled entity (which includes the right to elect the directors of the corporation or the equivalent if such entity is not a corporation)

12.3        Standard For Approval.  Landlord shall not unreasonably withhold, condition or delay its consent to a Transfer, provided that Tenant has complied with each and every requirement, term and condition of this Section 12.  Tenant acknowledges and agrees that each requirement, term and condition in this Section 12 is a reasonable requirement, term or condition, but that the terms and conditions of this Section 12 are not an exclusive statement of the reasonable grounds on which Landlord may withhold its consent to a Transfer.  Without limiting the generality of the foregoing, it shall be deemed reasonable for Landlord to withhold its consent to a Transfer if any requirement, term or condition of this Section 12 is not complied with, or: (a) the Transfer would cause Landlord to be in violation of its obligations under another lease or agreement to which Landlord is a party; (b) a proposed assignee or subtenant has a smaller Net Worth than Tenant had on the date of this Lease, or, in Landlord’s sole but reasonable judgment, is less able financially to pay the rents due under this Lease as and when they are due and payable; (c) a proposed assignee’s or subtenant’s business will impose a burden on the Property’s parking facilities, elevators, Common Areas or utilities that is greater than the burden imposed by Tenant, in Landlord’s reasonable judgment; (d) the terms of a proposed assignment or subletting will allow the proposed assignee (unless the Assignee is an Affiliate of Tenant) to exercise a right of renewal, right of expansion, right of first offer, right of first refusal or similar right held by Tenant; (e) a proposed assignee or subtenant refuses to enter into a written agreement, satisfactory to Landlord in its reasonable discretion, which provides that it will abide by and assume all of the terms and conditions of this Lease for the term of any assignment or sublease and containing such other terms and conditions as Landlord reasonably deems necessary or appropriate; (f) the use of the Premises by the proposed assignee or subtenant will not be consistent with the Permitted Use; (g) any then-existing guarantor of this Lease refuses to consent to the Transfer or to execute a written agreement reaffirming the guaranty; (h) there exists at the time of the request by Tenant an Event of Default on the part of Tenant under this Lease (or a failure by Tenant to make any required payment or perform any obligation, of which failure Tenant has received notice and which, with the passage of time, would constitute an Event of Default), or there shall have existed more than two Events of Default during the Term of this Lease; (i) if requested by Landlord, the assignee or subtenant refuses to sign a non-disturbance and attornment agreement in favor of Landlord’s lender as provided in Section 26 of this Lease; (j) Landlord has sued or been sued by the proposed assignee or subtenant; (k) the proposed assignee or subtenant is involved in a business which in Landlord’s reasonable judgment is not in keeping with the then current standards of the Building; (l) if Landlord or an affiliate of Landlord has space available for lease in the Building and the proposed assignee or subtenant is an existing tenant or subtenant of the Building; or (m) the proposed assignee or subtenant is a person or entity then negotiating with Landlord for the lease of space in the Building (as evidenced by the exchange of one or more written proposals within the three month period preceding Tenant’s request for consent).

12.4        Additional Terms and Conditions.  The following terms and conditions shall be applicable to any Transfer:

(a)           Regardless of Landlord’s consent, no Transfer shall release Tenant from Tenant’s obligations hereunder or alter the primary liability of Tenant to pay the rent and other

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sums due Landlord hereunder and to perform all other obligations to be performed by Tenant hereunder, or release any guarantor from its obligations under its guaranty.

(b)           Landlord may accept rent from any person other than Tenant pending approval or disapproval of an assignment or subletting.

(c)           Neither a delay in the approval or disapproval of a Transfer, nor the acceptance of rent, shall constitute a waiver or estoppel of Landlord’s right to exercise its rights and remedies for the breach of any of the terms or conditions of this Section 12.

(d)           The consent by Landlord to any Transfer shall not constitute a consent to any subsequent Transfer by Tenant or to any subsequent or successive Transfer by an assignee or subtenant. However, Landlord may consent to subsequent Transfers or any amendments or modifications thereto without notifying Tenant or anyone else liable on the Lease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease.

(e)           In the event of any Event of Default under this Lease, Landlord may proceed directly against Tenant, any then-existing guarantors or anyone else responsible for the performance of this Lease, including any subtenant or assignee, without first exhausting Landlord’s remedies against any other person or entity responsible therefor to Landlord, or any security held by Landlord.

(f)            Landlord’s written consent to any Transfer by Tenant shall not constitute an acknowledgment that no default then exists under this Lease nor shall such consent be deemed a waiver of any then existing default.

(g)           The discovery of the fact that any financial statement relied upon by Landlord in giving its consent to an assignment or subletting was materially false shall, at Landlord’s election, render Landlord’s consent null and void.

(h)           Landlord shall not be liable under this Lease or under any sublease to any subtenant.

(i)            No assignment or sublease may be terminated, modified or amended without Landlord’s prior written consent, which shall not be unreasonably withheld, delayed or conditioned.

(j)            Any assignee of, or subtenant under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Landlord, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Tenant during the term of said assignment or sublease, except as Landlord may otherwise specifically agree in writing.

12.5        Additional Terms and Conditions Applicable to Subletting.  The following terms and conditions shall apply to any subletting by Tenant of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

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(a)           Tenant hereby absolutely and unconditionally assigns and transfers to Landlord all of Tenant’s interest in all rentals and income arising from any sublease entered into by Tenant, and Landlord may collect such rent and income and apply same toward Tenant’s obligations under this Lease; provided, however, that until an Event of Default shall occur in the performance of Tenant’s obligations under this Lease, Tenant may receive, collect and enjoy the rents accruing under such sublease.  Landlord shall not, by reason of this or any other assignment of such rents to Landlord nor by reason of the collection of the rents from a subtenant, be deemed to have assumed or recognized any sublease or to be liable to the subtenant for any failure of Tenant to perform and comply with any of Tenant’s obligations to such subtenant under such sublease, including, but not limited to, Tenant’s obligation to return any security deposit.  Tenant hereby irrevocably authorizes and directs any such subtenant, upon receipt of a written notice from Landlord stating that an Event of Default exists in the performance of Tenant’s obligations under this Lease, to pay to Landlord the rents due as they become due under the sublease.  Tenant agrees that such subtenant shall have the right to rely upon any such statement and request from Landlord, and that such subtenant shall pay such rents to Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Tenant to the contrary.

(b)           Each sublease shall provide that if, prior to the termination of any sublease, any event (other than a casualty described in Section 9.1 or condemnation described in Section 15) occurs which, by voluntary or involuntary act or by operation of law, might cause or permit this Lease to be terminated, expire, be canceled, be foreclosed against, or otherwise come to an end, including but not limited to (1) an Event of Default by Tenant under this Lease of any of the terms or provisions hereof, (2) foreclosure proceedings brought by the holder of any mortgage or trust deed to which the Property is subject; or (3) the termination of Tenant’s leasehold estate by dispossession proceeding or otherwise, then, at Landlord’s sole election and option, the subtenant shall attorn to Landlord and recognize Landlord as the subtenant’s landlord under the sublease, upon the terms and conditions and at the rental rate specified in the sublease, and for the then remaining term of the sublease, except that Landlord shall not be bound by any provision of the sublease which in any way increases Landlord’s duties, obligations or liabilities to the subtenant beyond those owed to Tenant under this Lease.  The subtenant shall execute and deliver, at any time and from time to time, upon request of Landlord, any commercially reasonable instruments which may be necessary or appropriate to evidence such attornment.  Landlord shall not (i) be liable to the subtenant for any act, omission or breach of the sublease by Tenant, (ii) be subject to any offsets or defenses which the subtenant might have against Tenant, (iii) be bound by any rent or additional rent which the subtenant might have paid in advance to Tenant, or (iv) be bound to honor any rights of the subtenant in any security deposit made with Tenant except to the extent Tenant has turned over such security deposit to Landlord.  Tenant hereby agrees that upon the occurrence of any event with respect to this Lease described above, Tenant shall immediately pay or transfer to Landlord any security deposit, rent or other sums then held by Tenant.  In the event of any such attornment, Landlord’s liability shall be limited to matters arising during Landlord’s ownership of the Building.  The liability of Landlord to the subtenant for any default by landlord after such attornment, or arising in connection with Landlord’s operation, management, leasing, repair, renovation, alteration, or any other matter relating to the Building or the subleased premises, shall be limited to the interest of the Landlord in the Building (and proceeds thereof).  Landlord shall have the right, in Landlord’s sole discretion, to elect not to have the subtenant attorn to Landlord and, in that event, the sublease

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shall be deemed terminated on the date of the occurrence of the event with respect to this Lease described above, and Landlord shall have no obligation to permit the subtenant to continue to occupy all or any part of the Premises.

12.6        Transfer Premium from Assignment or Subletting.  Landlord shall be entitled to receive from Tenant (as and when received by Tenant) as an item of additional rent fifty percent (50%) of the gross amounts received by Tenant from such assignee or subtenant in excess of the amounts payable by Tenant to Landlord hereunder (the “Transfer Premium”).  The Transfer Premium shall be reduced by (i) the reasonable brokerage commissions and legal fees actually paid by Tenant in order to assign the Lease or to sublet all or a portion of the Premises, as well as (ii) the actual and commercially reasonable out-of-pocket costs paid by Tenant for leasehold improvements or other work performed by Tenant for such subtenant (or allowances paid to the assignee or subtenant for such improvements or work) as an inducement to enter into such assignment or sublease, and (iii) a commercially reasonable and customary (if any) period of “free rent” granted as an inducement to enter into such assignment or sublease. If less than all of the Premises is transferred, the Base Rent and the additional rent shall be determined on a per rentable square foot basis.  “Transfer Premium” shall also include, but not be limited to, key money and bonus money paid by the assignee or subtenant to Tenant in connection with such Transfer, the fair value of any work or services provided by the assignee or subtenant for Tenant, and any payment in excess of fair market value for services rendered by Tenant to the assignee or subtenant or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to the assignee or subtenant in connection with such Transfer.

12.7        Landlord’s Option to Recapture Space.  Notwithstanding anything to the contrary contained in this Section 12, in the case of any proposed assignment of this Lease or any proposed sublease that covers (together with any other sublease(s) then in effect) fifty percent (50%) or more of the Premises, Landlord shall have the option, by giving written notice to Tenant within thirty (30) days after receipt of any request from Tenant for Landlord’s consent to such assignment or sublease, to terminate this Lease as of the date thirty (30) days after Landlord’s election. In addition, and without limiting the foregoing rights, in the event that Tenant shall at any time hereafter lease other space in the Building, and such space is included in the Premises by amendment to this Lease, and if Tenant thereafter desires to (x) enter into any sublease that covers (together with any other sublease(s) then in effect) fifty percent (50%) or more of such additional space, or (y) enter into any sublease of such additional space (or a portion thereof) that has a term equal to all or substantially all of the then-remaining Term of this Lease, Landlord will also have the right to terminate this Lease, provided that such termination right would only be effective with respect to such additional space. In the event of any recapture by Landlord, if this Lease shall be terminated with respect to less than the entire Premises, the Base Rent, Tenant’s Share of Operating Expense and Real Property Tax increases and the number of parking spaces Tenant may use shall be adjusted on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the original Premises, and this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of same.  If Landlord recaptures only a portion of the Premises, it shall construct and erect at its sole cost such partitions as may be required to sever the space to be retained by Tenant from the space recaptured by Landlord.  Landlord may, at its option, lease any recaptured portion of the Premises to the proposed subtenant or assignee or to any other person or entity without liability

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to Tenant.  Tenant shall not be entitled to any portion of the profit, if any, Landlord may realize on account of such termination and reletting.  Tenant acknowledges that the purpose of this Section 12.7 is to enable Landlord to receive profit in the form of higher rent or other consideration to be received from an assignee or subtenant, to give Landlord the ability to meet additional space requirements of other tenants of the Building and to permit Landlord to control the leasing of space in the Building.  Tenant acknowledges and agrees that the requirements of this Section 12.7 are commercially reasonable and are consistent with the intentions of Landlord and Tenant. The provisions of this Section 12.7 shall not be applicable to any Transfer described in Section 12.2.  Notwithstanding anything to the contrary in this Section 12.7, if, within fifteen (15) days after Landlord gives notice of an election to terminate this Lease, Landlord receives from Tenant a written notice withdrawing and canceling its notice regarding such Transfer, then Tenant’s notice of such Transfer and Landlord’s recapture notice shall be deemed null, void and of no further force or effect, and Tenant shall not enter into such Transfer. Tenant shall not have the right to withdraw and cancel any notice of a proposed Transfer more than once in any twelve (12) month period, and in the event that Tenant does withdraw such a notice, Tenant shall reimburse Landlord for all of Landlord’s reasonable costs and expenses incurred in connection therewith, including, but not limited to, attorneys’, architects’, accountants’, engineers’ or other consultants’ fees (and the limitation on such costs in Section 12.8 shall not be applicable).

12.8        Landlord’s Expenses.  In the event Tenant shall assign this Lease or sublet the Premises or request the consent of Landlord to any Transfer, then Tenant shall pay Landlord’s reasonable costs and expenses incurred in connection therewith, including, but not limited to, attorneys’, architects’, accountants’, engineers’ or other consultants’ fees. Landlord agrees that during the first two (2) years of the Term, Tenant shall not be required to reimburse Landlord more than $2,000 (per request) on account of legal fees in connection with any such request for consent.

13.          Default; Remedies.

13.1        Default by Tenant.  Landlord and Tenant hereby agree that the occurrence of any one or more of the following events shall be an “Event of Default” by Tenant under this Lease and that said Event of Default shall give Landlord the rights described in Section 13.2.  Landlord or Landlord’s authorized agent shall have the right to execute and to deliver any notice of default, notice to pay rent or quit or any other notice Landlord gives Tenant.

(a)           Tenant’s failure to make any payment of Base Rent, Tenant’s Share of Operating Expense increases, Tenant’s Share of Real Property Taxes, late charges, or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of five (5) days after written notice thereof from Landlord to Tenant.  In the event that Landlord serves Tenant with a notice to pay rent or quit pursuant to applicable summary process or unlawful detainer statutes, such notice shall also constitute the notice required by this Section 13.1(a), so long as Tenant has the benefit of the grace period described above.

(b)           The abandonment of the Premises by Tenant, in which event Landlord shall not be obligated to give any notice of default to Tenant.

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(c)           The failure of Tenant to (1) comply with any of its obligations under Sections 7.3, 8, 12, 21, 23 or 26 and failure to cure the same within fifteen (15) days following written notice from Landlord to Tenant, or (2) comply with any of its obligations under Section 6.2 and failure to cure the same within such time as may be allowed by the applicable legal or regulatory requirement, so long as (i) Tenant shall diligently and continuously work to effect such cure at the soonest practicable time, and (ii) the time used by Tenant to effect such a cure shall not in any way subject Landlord or the Property to civil or criminal sanction or liability or create a default under Landlord’s mortgage or any other lease or contract to which Landlord is a party or by which Landlord or the Property is bound, and all enforcement proceedings against Landlord or the Property shall be stayed.  In the event Landlord serves Tenant with a notice to quit or any other notice pursuant to applicable summary process or unlawful detainer statutes, said notice shall also constitute the notice required by this Section 13.1(c), so long as Tenant has the benefit of the grace period described above.

(d)           The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant (other than those referenced in Sections 13.1(a), (b) and (c), above), where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant’s non-performance is such that more than thirty (30) days are reasonably required for its cure, then an Event of Default shall not be deemed to exist if Tenant commences such cure within fifteen (15) days after such notice and thereafter diligently pursues such cure to completion.  In the event that Landlord serves Tenant with a notice to quit or any other notice pursuant to applicable summary process or unlawful detainer statutes, said notice shall also constitute the notice required by this Section 13.1(d), so long as Tenant has the benefit of the grace period described above.

(e)           (i) The making by Tenant or any guarantor of Tenant’s obligations hereunder of any general arrangement or general assignment for the benefit of creditors; (ii) Tenant or any guarantor becoming a “debtor” as defined in 11 U.S.C. Section 101 (the “Bankruptcy Code”) or any successor statute thereto (unless, in the case of a petition filed against Tenant or guarantor, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where possession is not restored to Tenant within thirty (30) days; (iv) the attachment, execution or other judicial seizure of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where such seizure is not discharged within thirty (30) days; (v) Tenant shall be adjudicated insolvent, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future Federal, State or other statute, law or regulation for the relief of debtors (other than the Bankruptcy Code), or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of Tenant or of all or any substantial part of its properties, or shall admit in writing its inability to pay its debts generally as they become due; (vi) a petition shall be filed against Tenant under any law other than the Bankruptcy Code seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any present or future Federal, State or other statute, law or regulation and shall remain undismissed or unstayed for an aggregate of sixty (60) days (whether or not consecutive), or if any trustee, conservator, receiver or liquidator of Tenant or of all or any substantial part of its properties shall be appointed without the consent

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or acquiescence of Tenant and such appointment shall remain unvacated or unstayed for an aggregate of sixty (60) days (whether or not consecutive); or (vii) the occurrence of any of the events described in this paragraph (e) with respect to any guarantor of all or any portion of Tenant’s obligations under this Lease.  In the event that any provision of this Section 13.1(e) is unenforceable under applicable law, such provision shall be of no force or effect.

(f)            The discovery by Landlord that any financial statement, representation or warranty given to Landlord by Tenant, or by any guarantor of Tenant’s obligations hereunder, is or was materially false.  Tenant acknowledges that Landlord has entered into this Lease in material reliance on such information.

(g)           If Tenant is a corporation, limited liability company, partnership, or other business entity, the dissolution or liquidation of Tenant.

(h)           If Tenant’s obligations under this Lease are guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor’s becoming insolvent or the subject of a bankruptcy filing, or (iv) a guarantor’s refusal to honor the guaranty.

13.2        Remedies.

(a)           In the event of any default or breach of this Lease by Tenant, continuing after any applicable notice and grace period provided for by Section 13.1, Landlord may, at any time thereafter, with or without notice or demand, and without limiting Landlord in the exercise of any other right or remedy which Landlord may have by reason of such default:

(i)terminate Tenant’s right to possession of the Premises by any lawful means, in which case this Lease and the Term hereof shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord; and Tenant covenants that in case of such termination, Tenant shall pay any amount of Base Rent that was initially waived by Landlord under Section 4.1, and otherwise pay the rent, additional charges and other sums payable hereunder (including, without limitation, Tenant’s share of Operating Expenses increases and Tenant’s Share of Real Property Tax Increases) up to the time of such termination. Thereafter, Tenant shall continue to pay all such amounts until the end of what would have been the Expiration Date in the absence of such termination, which shall be reduced by the net receipts (if any, after deducting all expenses of reletting) actually received by Landlord from any replacement tenant. At any time after such termination, Landlord may elect to recover from Tenant, in lieu of all other rent so payable by Tenant hereunder, a lump sum equal to the then net present value (computed using an interest rate equal to the discount rate of the Federal Reserve Bank of Boston) of the amount by which (x) the unpaid rent and all additional charges that would have been payable hereunder from the date of such election for what would have been the remainder of the Term of this Lease

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(including, without limitation, Tenant’s share of Operating Expenses increases and Tenant’s Share of Real Property Tax Increases) exceeds (y) the fair market rental value of the Premises as of the date of such election. In addition Tenant shall be responsible for and pay on demand any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, the cost of recovering possession of the Premises, expenses of releasing, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, any real estate commissions actually paid by Landlord and the unamortized value of any free rent, reduced rent, tenant improvement allowance or other economic concessions provided by Landlord. For purposes of this Section 13.2(a)(i), “rent” shall be deemed to be all monetary obligations required to be paid by Tenant pursuant to the terms of this Lease.

(ii)collect sublease rents (or appoint a receiver to collect such rent) and otherwise perform Tenant’s obligations at the Premises, it being agreed, however, that the appointment of a receiver for Tenant shall not constitute an election by Landlord to terminate this Lease; and/or

(iii)pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the Commonwealth of Massachusetts.

(b)           No remedy or election hereunder shall be deemed exclusive, but shall, wherever possible, be cumulative with all other remedies at law or in equity.  The expiration or termination of this Lease and/or the termination of Tenant’s right to possession of the Premises shall not relieve Tenant of liability under any indemnity provisions of this Lease as to matters occurring or accruing during the Term of this Lease or by reason of Tenant’s occupancy of the Premises.

(c)           If Tenant abandons the Premises, Landlord may re-enter the Premises and such re-entry shall not be deemed to constitute Landlord’s election to accept a surrender of the Premises or to otherwise relieve Tenant from liability for its breach of this Lease.  No surrender of the Premises shall be effective against Landlord unless Landlord has entered into a written agreement with Tenant in which Landlord expressly agrees to (i) accept a surrender of the Premises and (ii) relieve Tenant of liability under this Lease.  The delivery by Tenant to Landlord of possession of the Premises shall not constitute the termination of this Lease or the surrender of the Premises.

13.3        Default by Landlord.  Landlord shall not be in default under this Lease unless Landlord fails to perform obligations required of Landlord within thirty (30) days after written notice by Tenant to Landlord and to the Holder of any Mortgage encumbering the Property whose name and address shall have theretofore been furnished to Tenant in writing, specifying

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wherein Landlord has failed to perform such obligation; provided, however, that if the nature of Landlord’s obligation is such that more than thirty (30) days are required for its cure, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently pursues the same to completion.

13.4        Late Charges.  Tenant hereby acknowledges that late payment by Tenant to Landlord of Base Rent, Tenant’s Share of Operating Expense increases, Tenant’s Share of Real Property Tax increases or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain.  Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed encumbering the Property. Accordingly, if any installment of Base Rent, Tenant’s Share of Operating Expense increases, Tenant’s Share of Real Property Tax increases or any other sum due from Tenant shall not be received by Landlord when such amount shall be due, then, without any requirement for notice or demand to Tenant, Tenant shall immediately pay to Landlord a late charge equal to three percent (3%) of such overdue amount, provided that Landlord agrees to waive such late charge for the first late payment in any period of twelve consecutive months, so long as the requisite payment is made in full within two (2) business days after notice from Landlord that such payment was not received when due.  The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant’s default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder including the assessment of interest under Section 13.5.

13.5        Interest on Past-due Obligations.  Except as expressly herein provided, any amount due to Landlord that is not paid within five (5) days of the date when due shall bear interest at the lesser of (i) the prime rate from time to time in effect at the Bank of America (at its Boston, Massachusetts offices), plus three percent (3%), or (ii) the maximum rate permitted by applicable law. Payment of such interest shall not excuse or cure any default by Tenant under this Lease.

This Lease and the obligations of Landlord and Tenant hereunder shall not be affected or impaired because such party is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike or other labor problems, acts of God, riot, insurrection, governmental actions or requirements, or any other cause beyond the reasonable control of such party (the foregoing circumstances being individually and collectively referred to as “Force Majeure”), and the time for performance by such party shall be extended for the period of any such delay. Any party so affected by a Force Majeure delay shall promptly notify the other party thereof, and shall use commercially reasonable efforts to minimize the adverse effect of such delay. In no event, however, shall lack or unavailability of adequate funds ever be grounds for a delay or excuse hereunder, and Force Majeure shall not be an excuse for failure to pay rent or additional rent as and when due.

14.          Landlord’s Right to Cure Default; Payments by Tenant.  All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant’s sole cost and expense and without any reduction of rent.  If Tenant shall fail to perform

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any of its obligations under this Lease, within a reasonable time after such performance is required by the terms of this Lease (or immediately, in case of emergency), Landlord may, but shall not be obligated to, after three (3) days prior written notice to Tenant, (but no notice will be required in case of emergency), make any such payment or perform any such act on Tenant’s behalf without waiving its rights based upon any default of Tenant and without releasing Tenant from any obligations hereunder.  Tenant shall pay to Landlord, within thirty (30) days after delivery by Landlord to Tenant of statements therefor, an amount equal to the expenditures reasonably made by Landlord in connection with the remedying by Landlord of Tenant’s defaults pursuant to the provisions of this Section 14.

15.          Condemnation.  If any portion of the Premises is taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called “Condemnation”), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises is taken by Condemnation as would substantially and adversely affect the operation and profitability of Tenant’s business conducted from the Premises, and said taking lasts for ninety (90) days or more, Tenant shall have the option, to be exercised only in writing within thirty (30) days after Landlord shall have given Tenant written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession.  If a taking lasts for less than ninety (90) days and limits Tenant’s use of the Premises for the Permitted Use, Tenant’s rent shall be abated in proportion to such limitation during said period but Tenant shall not have the right to terminate this Lease.  If Tenant does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent and Tenant’s Share of Operating Expenses shall be reduced in the proportion that the usable floor area of the Premises taken bears to the total usable floor area of the Premises.  Common Areas taken shall be excluded from the Common Areas usable by Tenant and no reduction of rent shall occur with respect thereto or by reason thereof.  Landlord shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Tenant of such election within thirty (30) days after receipt of notice of a Condemnation of any part of the Premises or the Property.  Any award for the taking of all or any part of the Premises or the Property under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord, whether such award shall be made as compensation for diminution in value of the leasehold, for good will, for the taking of the fee, as severance damages, or as damages for tenant improvements; provided, however, that Tenant shall be entitled to any separate award for loss of or damage to Tenant’s removable personal property.  In the event that this Lease is not terminated by reason of such condemnation, and subject to the requirements of any lender that has made a loan to Landlord encumbering the Property, Landlord shall to the extent of severance damages received by Landlord in connection with such condemnation, repair any damage to the Property caused by such Condemnation except to the extent that Tenant has been reimbursed therefor by the condemning authority.  Tenant shall pay any amount in excess of such severance damages required to complete such repair.  This Section 15 shall govern the rights and obligations of Landlord and Tenant with respect to the condemnation of all or any portion of the Property.

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16.          Vehicle Parking.

16.1        Use of Parking Facilities.  During the Term and subject to the rules and regulations attached hereto as Exhibit “C,” as modified by Landlord from time to time (the “Rules”), Tenant shall be entitled to use the number of parking spaces set forth in Section 1.19. Landlord may, in its sole discretion designate the location of any reserved parking spaces.  For purposes of this Lease, a “parking space” refers to the space in which one (1) motor vehicle is intended to park.  If Tenant commits or allows in the parking facility any of the activities prohibited by the Lease or the Rules, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Tenant, which cost shall be payable by Tenant within thirty (30) days following demand by Landlord.  Tenant’s parking rights are the personal rights of Tenant and Tenant shall not transfer, assign, or otherwise convey its parking rights separate and apart from this Lease, except to a permitted assignee or sublessee hereunder, and then only in connection with and subject to such sublease or assignment. All spaces, whether covered or uncovered, are currently available on a first-come, first-served basis.

16.2        Parking Charges.  INTENTIONALLY OMITTED.

17.          Broker’s Fee.  Tenant and Landlord each represent and warrant to the other that neither has had any dealings or entered into any agreements with any person, entity, broker or finder other than the persons, if any, listed in Section 1.20, in connection with the negotiation of this Lease, and no other broker, person, or entity is entitled to any commission or finder’s fee in connection with the negotiation of this Lease, and Tenant and Landlord each agree to indemnify, defend and hold the other harmless from and against any claims, damages, costs, expenses, attorneys’ fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings, actions or agreements of the indemnifying party. Landlord shall be solely responsible for any commission or finder’s fee due to the person or entity listed in Section 1.20 pursuant to the terms of a separate written agreement.

18.          Estoppel Certificate.

18.1        Delivery of Certificate.  Tenant shall from time to time, upon not less than twenty (20) days’ prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing certifying such information as Landlord may reasonably request including, but not limited to, the following: (a) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) (b) the date to which the Base Rent and other charges are paid in advance and the amounts so payable, (c) that there are not, to Tenant’s knowledge, any uncured defaults or unfulfilled obligations on the part of Landlord, or specifying such defaults or unfulfilled obligations, if any are claimed, (d) that all tenant improvements to be constructed by Landlord, if any, have been completed in accordance with Landlord’s obligations and (e) that Tenant has taken possession of the Premises.  Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Property.

18.2        Failure to Deliver Certificate.  At Landlord’s option, the failure of Tenant to deliver such statement within such time shall constitute a representation by Tenant that (a) this Lease is in full force and effect, without modification except as may be represented by Landlord,

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(b) there are no uncured defaults in Landlord’s performance, (c) not more than one month’s Base Rent has been paid in advance, (d) all tenant improvements to be constructed by Landlord, if any, have been completed in accordance with Landlord’s obligations and (e) Tenant has taken possession of the Premises.

19.          Financial Information.  From time to time (but not more than once in any twelve-month period, except in connection with a proposed sale or refinancing of the Building), at Landlord’s request, Tenant shall cause the following financial information to be delivered to Landlord, at Tenant’s sole cost and expense, upon not less than twenty (20) days’ advance written notice from Landlord: (a) a current financial statement for Tenant and Tenant’s financial statements for the previous two accounting years, and (b) a current financial statement for any guarantor(s) of this Lease and the guarantor’(s) financial statements for the previous two accounting years.  All financial statements shall be prepared in accordance with generally accepted accounting principles consistently applied and either certified as true, correct and complete by the Tenant’s chief financial officer or, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant.

20.          Landlord’s Liability.  Tenant acknowledges that Landlord shall have the right to transfer all or any portion of its interest in the Property and to assign this Lease to the transferee.  Tenant agrees that in the event of such a transfer, and upon the transferee’s assumption of the same (as evidenced by a written agreement between Landlord and such transferee), Landlord shall automatically be released from all liability under this Lease arising after the date of the transfer; and Tenant hereby agrees to look solely to Landlord’s transferee for the performance of Landlord’s obligations hereunder after the date of the transfer.  Upon such a transfer, Landlord shall, at its option, return Tenant’s security deposit to Tenant or transfer Tenant’s security deposit to Landlord’s transferee and, in either event, Landlord shall have no further liability to Tenant for the return of its security deposit.  Subject to the rights of any lender holding a mortgage or deed of trust encumbering all or part of the Property, Tenant agrees to look solely to Landlord’s equity interest in the Property for the collection of any judgment requiring the payment of money by Landlord arising out of (a) Landlord’s failure to perform its obligations under this Lease or (b) the negligence or willful misconduct of Landlord, its partners, employees and agents.  No other property or assets of Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of any judgment or writ obtained by Tenant against Landlord.  No partner, trustee, beneficiary, officer, director, member, shareholder, employee or agent of Landlord shall be personally liable for the performance of Landlord’s obligations hereunder or be named as a party in any lawsuit arising out of or related to, directly or indirectly, this Lease and the obligations of Landlord hereunder.  The obligations under this Lease do not constitute personal obligations of the individual partners, trustees or shareholders, beneficiaries or members of Landlord, if any, and Tenant shall not seek recourse against any of said persons or their assets. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord’s successors-in-interest, or to take any action not involving the personal liability of Landlord (original or successor) to respond in monetary damages from Landlord’s assets other than Landlord’s interest in the Property

21.          Indemnity.  (a)  Tenant hereby agrees to indemnify, defend and hold harmless Landlord and its employees, officers, directors, trustees, beneficiaries, members, partners, shareholders,

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agents, contractors, lenders and ground lessors (said persons and entities are hereinafter collectively referred to as the “Indemnified Parties”) from and against any and all liability, loss, cost, damage, claims, loss of rents, liens, judgments, penalties, fines, settlement costs, investigation costs, the cost of consultants and experts, attorneys fees, court costs and other legal expenses, the effects of environmental contamination, the cost of environmental testing, the removal, remediation and/or abatement of Hazardous Substances (as said term is defined below), insurance policy deductibles and other expenses (hereinafter collectively referred to as “Damages”) arising out of or related to an “Indemnified Matter” (as defined below).

(b)           For purposes of this Section 21, an “Indemnified Matter” shall mean any matter for which one or more of the Indemnified Parties incurs liability or Damages if the liability or Damages arise out of or involve, directly or indirectly, (i) Tenant’s or its employees’, agents’, contractors’ or invitees’ (all of said persons or entities are hereinafter collectively referred to as “Tenant Parties”) use or occupancy of the Premises or the Property, (ii) any act, omission or neglect of a Tenant Party, (iii) Tenant’s failure to perform any of its obligations under this Lease, (iv) the existence, use or disposal of any Hazardous Substance (as defined in Section 23 below) brought on to the Property by a Tenant Party, or (v) any other matters for which Tenant has expressly agreed to indemnify Landlord pursuant to any other provision of this Lease.  Tenant’s obligations hereunder shall include, but shall not be limited to compensating the Indemnified Parties for Damages arising out of Indemnified Matters within ten (10) days after written demand from an Indemnified Party, and providing a defense, with counsel reasonably satisfactory to the Indemnified Party, at Tenant’s sole expense, within thirty (30) days after written demand from the Indemnified Party, of any claims, action or proceeding arising out of or relating to an Indemnified Matter whether or not litigated or reduced to judgment and whether or not well founded.

(c)           If Tenant is obligated to compensate an Indemnified Party for Damages arising out of an Indemnified Matter, Landlord shall have the immediate and unconditional right, but not the obligation, without notice or demand to Tenant, to pay the damages and Tenant shall, upon thirty (30) days advance written notice from Landlord, reimburse Landlord for the costs incurred by Landlord.  By way of example, and not limitation, Landlord shall have the immediate and unconditional right to cause any damages to the Common Areas, another tenant’s premises or to any other part of the Property to be repaired and to compensate other tenants of the Property or other persons or entities for Damages arising out of an Indemnified Matter.  The Indemnified Parties need not first pay any Damages to be indemnified hereunder.  Tenant’s obligations under this Section 21 shall not be released, reduced or otherwise limited because one or more of the Indemnified Parties are or may be actively or passively negligent with respect to an Indemnified Matter or because an Indemnified Party is or was partially responsible for the Damages incurred.  This indemnity is intended to apply to the fullest extent permitted by applicable law.  Tenant’s obligations under this Section 21 shall survive the expiration or termination of this Lease unless specifically waived in writing by Landlord after said expiration or termination.  In no event shall Tenant be required to indemnify and Indemnified Party to the extent Damages are caused by the gross negligence or willful misconduct of such party.

(d)           Subject to applicable waivers of claims and subrogation set forth in Section 8.4, Landlord agrees to indemnify and save harmless Tenant from and against all claims, loss, cost, damage or expense arising from any accident, bodily or personal injury or damage

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occurring in the common areas on the Property, to the extent that such accident, damage or injury results from a negligent act or omission on the part of Landlord or Landlord’s agents or employees, occurring after the Commencement Date until the end of the Term of this Lease. This indemnity and hold harmless agreement shall include indemnity against all losses, costs, damages, expenses and liabilities incurred during the Term of this Lease in connection with any such claim or proceeding brought thereon, and the defense thereof, including, without limitation, reasonable attorneys’ fees and costs at both the trial and appellate levels.

22.          Exemption of Landlord from Liability.   Tenant hereby agrees that Landlord shall not be liable for injury to Tenant’s business or any loss of income therefrom or, except as may otherwise be expressly provided in this Lease, for loss of or damage to the merchandise, tenant improvements, fixtures, furniture, equipment, computers, files, automobiles, or other property of Tenant, Tenant’s employees, agents, contractors or invitees, or any other person in or about the Property. In addition, Landlord shall notincluding, but not limited to, theft, criminal activity at the Property, bombings or bomb scares, Hazardous Substances (as defined below), fire, steam, electricity, gas, water or rain, flooding, breakage of pipes, sprinklers, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Property, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Property.  Landlord shall not be liable for any damages arising from any act or neglect of any employees, agents, contractors or invitees of any other tenant, occupant or user of the Property, nor from the failure of Landlord to enforce the provisions of the lease of any other tenant of the Property. Except as may otherwise expressly provided in this Lease, Tenant, as a material part of the consideration to Landlord hereunder, hereby assumes all risk of damage to Tenant’s property or business, in, upon or about the Property arising from any cause, except Landlord’s negligence or the negligence of its employees or agents

23.          Hazardous Substances.

23.1        Definition and Consent.  The term “Hazardous Substance” as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or affect, either by itself or in combination with other materials expected to be on the Premises or the Property, is either: (a) potentially injurious to the public health, safety or welfare, the environment or the Premises or the Property, (b) regulated or monitored by any governmental entity, (c) a basis for liability to any governmental entity or third party under any federal, state or local statute or common law theory or (d) defined as a hazardous material or substance by any federal, state or local law or regulation.  Except for small quantities of ordinary office supplies such as copier toner, liquid paper, glue, ink and common household cleaning materials, Tenant shall not cause or permit any Hazardous Substance to be brought, kept, or used in or about the Premises or the Property by Tenant, its agents, employees, contractors or invitees.

23.2        Duty to Inform.  If Tenant or Landlord knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on or under or about the Premises or the Property, Tenant or Landlord, as the

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case may be, shall promptly give written notice of such fact to the other. Tenant shall also immediately give Landlord (upon demand) a copy of any statement, report, notice, registration, application, permit, license, given to or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of or exposure to, any Hazardous Substance or contamination in, on or about the Premises the Property. Landlord agrees that, on the Substantial Completion Date, there will be no unlawful levels of Hazardous Substances in the Premises.

23.3        Inspection; Compliance.  Landlord and Landlord’s employees, agent, contractors and lenders shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times and upon reasonable notice (which need not be in writing, and which need not be given at all in the case of any emergency), for the purpose of inspecting the condition of the Premises and for verifying compliance by Tenant with this Section 23.  Landlord shall have the right to employ experts and/or consultants in connection with its examination of the Premises and with respect to the installation, operation, use, monitoring, remediation, maintenance, or removal of any Hazardous Substance on or from the Premises.  The costs and expenses of any such inspections shall be paid by the party requesting same, unless a release, discharge or contamination, caused or materially contributed to by Tenant, is found to exist or be imminent, or unless the inspection is requested or ordered by governmental authority as the result of any such existing or imminent release, discharge or contamination.  In any such case, Tenant shall upon request reimburse Landlord for the cost and expenses of such inspection.

24.          Intentionally Omitted.

25.          Tenant Improvements.  Except for Landlord’s Work, Tenant specifically agrees that Landlord has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, the Property, or any part thereof, or to provide any allowance for such purposes and that, except for Landlord’s Work, no representations respecting the condition of the Premises, Property or the Building have been made by Landlord to Tenant.

26.          Subordination and Rights of Mortgagees.

26.1        Effect of Subordination.  Landlord represents to Tenant that, as of the date hereof, no mortgage encumbers the Property. This Lease, and any option granted hereby, upon Landlord’s written election, shall be subject and subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security interest (any of the foregoing, a “Mortgage”) hereafter made of or with respect to or placed on all or any part of the Property and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof.  If the mortgagee or holder of any such Mortgage (a “Holder”) shall elect to have this Lease prior to the lien of its Mortgage and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such Mortgage, whether this Lease is dated prior or subsequent to the date of said Mortgage or the date of recording thereof. Upon request by Tenant (and at the sole cost and expense of Tenant), Landlord shall request and use commercially reasonable efforts (which shall not include the obligation to pay any fee or charge or to agree to any less favorable terms or conditions in the secured indebtedness) to obtain an agreement (a “SNDA”) executed by the Holder for the benefit, on the Holder’s standard form

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then in use that, for so long as there exists no default beyond applicable grace periods under this Lease by Tenant, and subject to the Holder’s reasonable and customary exceptions and qualifications, the Holder will not, in foreclosing against or taking possession of the Premises or otherwise exercising its rights under such mortgage, terminate this Lease or disturb Tenant’s possession of the Premises hereunder, or words of similar import. In the event of the foreclosure of a Mortgage, or a deed in lieu of foreclosure of a Mortgage, or exercise of any similar remedy by a Holder, the new owner of the Property as a result of such exercise shall not (a) be liable for any act or omission of any prior landlord or with respect to events occurring prior to its acquisition of title, (b) be liable for the breach of this Lease by any prior landlord, (c) be subject to any offsets or defenses which Tenant may have against the prior landlord, or to any amendments to this Lease prior to such foreclosure, or (d) be liable to Tenant for the return of its security deposit.  At the request of any such new owner, Tenant shall attorn to such new owner.  Tenant will arrange for the recording of the SNDA in the appropriate registry of deeds.

26.2        Execution of Documents.  Tenant agrees to execute and acknowledge any commercially reasonable documents Landlord reasonably requests that Tenant execute to effectuate an attornment, a subordination, or to make this Lease granted herein prior to the lien of any Mortgage, as the case may be. Tenant’s failure to execute such documents or propose reasonable modifications thereto within fifteen (15) days after written demand shall constitute an Event of Default by Tenant hereunder.

26.3        Assignment to Mortgagee.  With reference to any assignment by Landlord of Landlord’s interest in this Lease, or the rents payable hereunder, conditional in nature or otherwise, which assignment is made to the Holder of a Mortgage on property which includes the Premises, Tenant agrees that the execution thereof by Landlord, and the acceptance thereof by the Holder of such Mortgage shall never be treated as an assumption by such Holder of any of the obligations of Landlord hereunder unless such Holder shall, by notice sent to Tenant, specifically otherwise elect and, except as aforesaid, such Holder shall be treated as having assumed Landlord’s obligations hereunder only upon foreclosure of such holder’s Mortgage and the taking of possession of the Premises.

26.4        Sale Leaseback.  In no event shall the acquisition of Landlord’s interest in the Property by a purchaser which, simultaneously therewith, leases Landlord’s entire interest in the Property back to the seller thereof be treated as an assumption, by operation of law or otherwise, of Landlord’s obligations hereunder, but Tenant shall look solely to such seller-lessee, and its successors from time to time in title, for performance of Landlord’s obligations hereunder.   For all purposes, such seller-lessee, and its successors in title, shall be the Landlord hereunder unless and until Landlord’s position shall have been assumed by such purchaser-lessor.

26.5        Cure by Mortgagee.  The curing of any default of Landlord’s under this Lease by any Holder shall be treated as performance by Landlord.

27.          Option to Extend.

27.1        Tenant’s Right.   Provided that, at the time of such exercise, (i) there exists no Event of Default on the part of Tenant under this Lease (nor any failure by Tenant to make any required payment or perform any obligation, of which failure Tenant has received notice and which, with the passage of time, would constitute an Event of Default), and (ii) Tenant then

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actually occupies all of the Premises, and (iii) this Lease is still in full force and effect, Tenant shall have the right to extend the Term of this Lease for one extended term (the “Extended Term”) of five (5) years. The Extended Term shall commence on the day immediately following the last day of the initial Term, and shall end at 11:59 p.m. on that day immediately preceding the fifth anniversary of the first day of the Extended Term. Tenant shall exercise such option to extend by giving written notice to Landlord not later than twelve (12) months prior to the date on which the initial Term ends.  The giving of such notice by Tenant shall automatically and irrevocably extend the Term of this Lease for the Extended Term and no instrument of renewal need be executed.  In the event that Tenant fails to give such notice to Landlord, this Lease shall automatically terminate on the last day of the initial Term, and Tenant shall have no further option to extend the Term of this Lease, it being agreed that time shall be of the essence in the giving of any such notice. The Extended Term shall be on all the terms and conditions of this Lease, except that the Base Rent for the Extended Term shall be determined pursuant to Section 27.2 below.

27.2        Rental Etc.  (a) The annual Base Rent for each year of the Extended Term shall be an amount equal to the Fair Market Rental Value of the Premises (exclusive of the cost of supplying Tenant electricity, if and to the extent the same is paid separately by Tenant), established for each such year as of the commencement of the Extended Term (the “Determination Date”). The term “Fair Market Rental Value” shall mean the annual fixed rent that a willing tenant would pay and a willing landlord would accept, each acting in its own best interest and without duress, in an arms-length lease of the Premises as of the Determination Date, and shall take into account, among other things, the location and condition of the Premises and amenities of which Tenant has the benefit, and any inducements then usual and customary in the leasing market in which the Property is located (such as improvements allowances or so-called “free rent” periods). For purposes of determining the Fair Market Rental Value, the Tax Base Year for the Extended Term shall be the fiscal year ending June 30, 2013 and (iii) the Operating Expense Base Year for the Extended Term shall be calendar year 2012. If Landlord and Tenant shall fail to agree upon the Fair Market Rental Value within six (6) months before the Determination Date, then Landlord and Tenant each shall give notice (the “Determination Notice”) to the other setting forth their respective determinations of the Fair Market Rental Value, and, subject to the provisions of paragraph (b) below, either party may apply to the American Arbitration Association or any successor thereto for the designation of an arbitrator satisfactory to both parties to render a final determination of the Fair Market Rental Value. The fair market rental value shall be determined by arbitration in accordance with the commercial arbitration rules of the American Arbitration Association, except that there shall be only one arbitrator, who shall have had at least ten (10) years’ experience as a real estate broker or appraiser in the greater Route 128/Route 2 area. The arbitrator shall conduct such hearings and investigations as the arbitrator shall deem appropriate and shall, within thirty (30) days after having been appointed, choose one of the determinations set forth in either Landlord’s or Tenant’s Determination Notice, and that choice by the arbitrator shall be binding upon Landlord and Tenant. Each party shall pay its own counsel fees and expenses, if any, in connection with any arbitration under this paragraph (a), and the parties shall share equally all other expenses and fees of any such arbitration. The determination rendered in accordance with the provisions of this paragraph (a) shall be final and binding in fixing the Fair Market Rental Value. The arbitrator shall not have the power to add to, modify, or change any of the provisions of this Lease.

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(b)           In the event that the determination of the Fair Market Rental Value set forth in the Landlord’s and Tenant’s Determination Notices shall differ by less than five percent (5%) per square foot of Premises Rentable Area per annum for each year for which the same is being determined, then the Fair Market Rental Value shall not be determined by arbitration, but shall instead be set by taking the average of the determinations set forth in Landlord’s and Tenant’s Determination Notices. Only if the determinations set forth in Landlord’s and Tenant’s Determination Notices shall differ by more than five percent (5%) per square foot of Premises Rentable area per annum for any year for which the same is being determined shall the actual determination of Fair Market Rental Value be made by an arbitrator as set forth in paragraph (a) above.

(c)           If for any reason the Fair Market Rental Value shall not have been determined prior to the Determination Date, then, until the Fair Market Rental Value and, accordingly, the Base Rent, shall have been finally determined, Tenant shall continue to pay Base Rent at the rate in effect as of the last day of the initial Term. Upon final determination of the Fair Market Rental Value, an appropriate adjustment to the Base Rent theretofore paid by Tenant from and after the Determination Date shall be made reflecting such final determination, and Landlord or Tenant, as the case may be, shall promptly credit or pay, respectively, to the other any overpayment of deficiency, as the case may be, in the payment of Base Rent from the Determination Date to the date of such final determination.

28.          Landlord Reservations.  Landlord shall have the right: (a) to change the name and address of the Property or Building upon not less than ninety (90) days prior written notice; (b) to permit any tenant the exclusive right to conduct any business as long as such exclusive right does not conflict with any rights expressly given herein; and (c) to place signs, notices or displays upon the roof, interior, exterior or Common Areas of the Building or the Property.  Tenant shall not use a representation (photographic or otherwise) of the Building in connection with Tenant’s business or suffer or permit anyone, except in an emergency, to go upon the roof of the Building. Landlord reserves the right to use the exterior walls of the Premises, and the area beneath, adjacent to and above the Premises together with the right to install, use, maintain and replace equipment, machinery, pipes, conduits and wiring through the Premises, which serve other parts of the Property, provided that Landlord’s use does not unreasonably interfere with Tenant’s use of the Premises, including Tenant’s rights with respect to signage under Section 47.

29.          Changes to Property.  Landlord shall have the right, in Landlord’s sole discretion, from time to time, to make changes to the size, shape, location, number and extent of the improvements comprising the Property (hereinafter referred to as “Changes”) including, but not limited to, the Building interior and exterior, the Common Areas, elevators, escalators, restrooms, HVAC, electrical systems, communication systems, fire protection and detection systems, plumbing systems, security systems, parking control systems, driveways, entrances, parking spaces, parking areas and landscaped areas.  In connection with the Changes, Landlord may, among other things, erect scaffolding or other necessary structures at the Building, limit or eliminate access to portions of the Building or Property, including portions of the Common Areas, or perform work in the Building, which work may create noise, dust or leave debris in the Building.  Tenant hereby agrees that such Changes and Landlord’s actions in connection with such Changes shall in no way constitute a constructive eviction of Tenant or entitle Tenant to any abatement of rent.  Landlord shall have no responsibility or for any reason be liable to Tenant for

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any direct or indirect injury to or interference with Tenant’s business arising from the Changes, nor shall Tenant be entitled to any compensation or damages from Landlord for any inconvenience or annoyance occasioned by such Changes or Landlord’s actions in connection with such Changes.  Landlord shall use commercially reasonable efforts to minimize interference with the conduct of Tenant’s business in connection with any of the foregoing.

30.          Intentionally Omitted.

31.          Holding Over.  If Tenant remains in possession of the Premises or any part thereof after the expiration or earlier termination of the Term hereof, such occupancy shall be a tenancy from month to month upon all the terms and conditions of this Lease pertaining to the obligations of Tenant, except that the Base Rent payable with respect to the first thirty (30) days shall be one hundred fifty percent (150%) of the Base Rent payable immediately preceding the Expiration Date of this Lease, and all Options, if any, shall be deemed terminated and be of no further effect.  If Tenant remains in possession of the Premises or any part thereof for more than thirty (30) days after the expiration of the Term hereof, Tenant may, at Landlord’s option, be treated as a tenant at sufferance or a trespasser, and Tenant shall be liable to Landlord for use and occupancy charges equal to the greater of (a) two hundred percent (200%) of the Base Rent payable immediately preceding the Expiration Date of this Lease or (b) the fair market Base Rent for the Premises as of the date Tenant holds over, plus all other amounts otherwise payable by Tenant under this Lease as though it continued in effect.  Nothing contained herein shall be construed to constitute Landlord’s consent to Tenant holding over at the expiration or earlier termination of the Lease term or to give Tenant the right to hold over after the expiration or earlier termination of the Lease Term.  Tenant hereby agrees to indemnify, hold harmless and defend Landlord from any cost, loss, claim or liability (including attorneys’ fees) Landlord may incur as a result of Tenant’s failure to surrender possession of the Premises to Landlord upon the termination of this Lease.

32.          Landlord’s Access.

32.1        Access.  Landlord and Landlord’s agents, contractors and employees shall have the right to enter the Premises at reasonable times and on reasonable advance notice (which need not be in writing, and which need not be given at all in the case of an emergency) for the purpose of inspecting the Premises, performing any services required of Landlord, showing the Premises to prospective purchasers, lenders, or (during the last twelve (12) months of the Term) tenants, or for undertaking safety measures and making alterations, repairs, improvements or additions to the Premises or to the Building.  In the event of an emergency, Landlord may gain access to the Premises by any reasonable means, and Landlord shall not be liable to Tenant for damage to the Premises or to Tenant’s property resulting from such access. Landlord may at any time place on or about the Building for sale or for lease signs and Landlord may at any time during the last ninety (90) days of the term hereof place on or about the Premises for lease signs.  Landlord shall use commercially reasonable efforts to minimize interference with the conduct of Tenant’s business in connection with any of the foregoing.

32.2        Keys.  Landlord shall have the right to retain keys and electric codes or card keys to the locks, card key access systems and other security systems on the entry doors to the Premises and all interior doors at the Premises.  At Landlord’s option, Landlord may require

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Tenant to obtain all keys to door locks at the Premises from Landlord’s engineering staff or Landlord’s locksmith and to only use Landlord’s engineering staff or Landlord’s locksmith to change locks at the Premises.  Tenant shall pay Landlord’s or its locksmith’s standard charge for all keys and other services obtained from Landlord’s engineering staff or locksmith.

33.          Security Measures.  Tenant hereby acknowledges that Landlord shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Property, and Landlord shall have no liability to Tenant due to its failure to provide such services.  Tenant assumes all responsibility for the protection of Tenant, its agents, employees, contractors and invitees and the property of Tenant and of Tenant’s agents, employees, contractors and invitees from acts of third parties.  Nothing herein contained shall prevent Landlord, at Landlord’s sole option, from implementing security measures for the Property or any part thereof, in which event Tenant shall participate in such security measures and the cost thereof shall be included within the definition of Operating Expenses, and Landlord shall have no liability to Tenant or its agents, employees, contractors and invitees arising out of Landlord’s negligent provision of security measures.  Landlord shall have the right, but not the obligation, to require all persons entering or leaving the Property to identify themselves to a security guard and to reasonably establish that such person should be permitted access to the Property.

34.          Easements.  Landlord reserves to itself the right, from time to time, to grant such easements, rights and dedications that Landlord deems necessary or desirable, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Tenant.  Tenant shall sign (or propose reasonable modifications) any of the aforementioned documents within fifteen (15) days after Landlord’s request and Tenant’s failure to do so shall constitute a material default by Tenant.  The obstruction of Tenant’s view, air, or light by any structure erected in the vicinity of the Building, whether by Landlord or third parties, shall in no way affect this Lease or impose any liability upon Landlord.

35.          Transportation Management.  Tenant shall fully comply at its sole expense with all present or future programs implemented or required by any governmental or quasi-governmental entity, such as but not limited to the 128 Business Council or LEXPRESS, to manage parking, transportation, air pollution, or traffic in and around the Property or the metropolitan area in which the Property is located.

36.          Severability.  The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof.

37.          Time of Essence.  Time is of the essence with respect to each of the obligations to be performed by Tenant under this Lease.

38.          Definition of Additional Rent.  All monetary obligations of Tenant to Landlord under the terms of this Lease, including, but not limited to, Base Rent, Tenant’s Share of Operating Expenses and Tenant’s Share of Real Property Tax increases, shall be deemed to be rent.

39.          Incorporation of Prior Agreements.  This Lease and the attachments listed in Section 1.17 contain all agreements of the parties with respect to the lease of the Premises and

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any other matter mentioned herein.  No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. Except as otherwise stated in this Lease, Tenant hereby acknowledges that no real estate broker nor Landlord or any employee or agents of any of said persons has made any oral or written warranties or representations to Tenant concerning the condition or use by Tenant of the Premises or the Property or concerning any other matter addressed by this Lease.

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40.          Amendments.  This Lease may be modified in writing only, signed by the parties in interest at the time of the modification.

41.          Notices.  All notices required or permitted by this Lease shall be in writing and may be delivered (a) in person (by hand, by messenger or by courier service), (b) by U.S. Postal Service certified mail, return receipt requested, or (c) by U.S. Postal Service Express Mail, Federal Express or other nationally recognized overnight courier, and shall be deemed sufficiently given if served in a manner specified in this Section 41.  The addresses set forth in Section 1.22 of this Lease shall be the address of each party for notice purposes, provided that in any case a notice permitted or required hereunder, including without limitation any notice to pay rent or quit or similar notice, shall be deemed personally delivered to Tenant on the date the notice is personally delivered to any employee of Tenant at the Premises. Landlord or Tenant may by written notice to the other specify a different address for notice purposes.  A copy of all notices required or permitted to be given to either party hereunder shall be concurrently transmitted to such party or parties at such addresses as such other party may from time to time hereinafter designate by written notice to the other party.  Any notice sent by certified mail, return receipt requested, shall be deemed given three (3) days after deposited with the U.S. Postal Service.  Notices delivered by U.S. Express Mail, Federal Express or other nationally recognized courier shall be deemed given on the date delivered by the carrier or the date delivery is refused at the appropriate party’s address for notice purposes.  If notice is received on Saturday, Sunday or a legal holiday, it shall be deemed received on the next business day.  Nothing contained herein shall be construed to limit Landlord’s right to serve any notice to pay rent or quit or similar notice by any method permitted by applicable law, and any such notice shall be effective if served in accordance with any method permitted by applicable law whether or not the requirements of this Section 41 have been met.

42.          Waivers.  No waiver by Landlord of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Landlord’s consent to or approval of any subsequent act by Tenant.  The acceptance of rent hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of any provision hereof, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord’s knowledge of such preceding breach at the time of acceptance of such rent.  No acceptance by Landlord of partial payment of any sum due from Tenant shall be deemed a waiver by Landlord of its right to receive the full amount due, nor shall any endorsement or statement on any check or accompanying letter from Tenant be deemed an accord and satisfaction.  Tenant hereby waives for Tenant and all those claiming under Tenant all rights now or hereafter existing to redeem by order or judgment of any court or by legal process or writ, Tenant’s right of occupancy of the Premises after any termination of this Lease or to otherwise obtain relief from the forfeiture or termination of the Lease.

43.          Covenants. This Lease shall be construed as though Landlord’s covenants contained herein are independent and not dependent and, to the extent permitted by applicable law, Tenant hereby waives the benefit of any statute or other law to the contrary. Tenant agrees that Tenant shall not have any right to terminate this Lease on account of any default or breach by Landlord of its obligations hereunder, and that Tenant’s remedies in the case of such a default or breach

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shall be limited to an action against Landlord for damages. All provisions of this Lease to be observed or performed by Tenant are both covenants and conditions.

44.          Binding Effect; Choice of Law

Subject to any provision hereof restricting assignment or subletting by Tenant, this Lease shall bind the parties, their heirs, personal representatives, successors and assigns.  This Lease shall be governed by the laws of the state in which the Property is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Property is located.

45.          Attorneys’ Fees.  If Landlord or Tenant brings an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, or appeal thereon, shall be entitled to its reasonable attorneys’ fees and court costs to be paid by the losing party as fixed by the court in the same or separate suit, and whether or not such action is pursued to decision or judgment.  The attorneys’ fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees and court costs reasonably incurred in good faith.  Landlord shall be entitled to reasonable attorneys’ fees and all other costs and expenses incurred in the preparation and service of notices of default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such default. Landlord and Tenant agree that attorneys’ fees incurred with respect to defaults and bankruptcy are actual pecuniary losses within the meaning of Section 365(b)(1)(B) of the Bankruptcy Code or any successor statute.

46.          Auctions.  Tenant shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas.  The holding of any auction on the Premises or Common Areas in violation of this Section 46 shall constitute a material default hereunder.

47.          Signs.  Tenant shall not place any sign upon the Premises (including on the inside or the outside of the doors or windows of the Premises) or the Building without Landlord’s prior written consent, which may be given or withheld in Landlord’s sole discretion.  Landlord shall have the right to place any sign it deems appropriate on any portion of the Building or the Property except the interior of the Premises.  Any sign Landlord permits Tenant to place upon the Premises shall be maintained by Tenant, at Tenant’s sole expense.  Landlord shall include Tenant’s name in the Building’s directories (main lobby and third floor elevator lobby) at Landlord’s expense, and the cost of any subsequent modifications thereto shall be paid for by .

48.          Merger.  The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, or a termination by Landlord, shall not result in the merger of Landlord’s and Tenant’s estates, and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies.

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49.          Quiet Possession.  Provided there is no Event of Default hereunder, and subject to the rights of any lender (and in that regard subject to Section 26), Tenant shall have quiet possession of the Premises for the entire Term hereof, subject to all of the provisions of this Lease.

50.          Authority.  Each party represents and warrants to the other that the individual executing and delivering this Lease is duly authorized to execute and deliver this Lease on behalf of said party, that said party is duly authorized to enter into this Lease, and that this Lease is enforceable against said party in accordance with its terms.

51.          Conflict.  Except as otherwise provided herein to the contrary, any conflict between the printed provisions, exhibits, addenda or riders of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions.

52.          Multiple Parties.  If more than one person or entity is named as Tenant herein, the obligations of Tenant shall be the joint and several responsibilities of all persons or entities named herein as Tenant.  Service of a notice in accordance with Section 41 on one Tenant shall be deemed service of notice on all Tenants.

53.          Interpretation.  This Lease shall be interpreted as if it was prepared by both parties and ambiguities shall not be resolved in favor of Tenant because all or a portion of this Lease was prepared by Landlord.  The captions contained in this Lease are for convenience only and shall not be deemed to limit or alter the meaning of this Lease.  As used in this Lease the words tenant and landlord include the plural as well as the singular.  Words used in the neuter gender include the masculine and feminine gender.

54.          Prohibition Against Recording.  Neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant.  Either Landlord or Tenant shall have the right to record a notice of this Lease, and the other party shall execute, acknowledge and deliver to the party requesting same for recording any such notice within thirty (30) following request. The form of any such notice shall be reasonably acceptable to counsel for each party.

55.          Relationship of Parties.  Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant.

56.          Rules and Regulations.  Tenant agrees to abide by and conform to the Rules and to cause its employees, suppliers, customers and invitees to so abide and conform.  Landlord shall have the right, from time to time, to modify, amend and enforce the Rules in a non-discriminatory manner. Landlord shall not be responsible to Tenant for the failure of other persons including, but not limited to, other tenants, their agents, employees and invitees to comply with the Rules.

57.          Right to Lease.  Landlord reserves the absolute right to effect such other tenancies in the Building or the Property as Landlord in its sole discretion shall determine, and Tenant is not relying on any representation that any specific tenant or number of tenants will occupy the Building or the Property.

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58.          Intentionally Omitted.

59.          Intentionally Omitted.

60.          Attachments.  The items listed in Section 1.21 are a part of this Lease and are incorporated herein by this reference.

61.          Costs Related to Tenant Requests.  To the extent that the proper evaluation of, and/or response to, any request by Tenant reasonably requires professional advice or input, and if Landlord in fact seeks such professional advice, Tenant shall (except as may otherwise be provided in this Lease) reimburse Landlord promptly upon request for the actual and reasonable out-of-pocket costs and expenses incurred by Landlord as a result of any Tenant request, including, for example, legal fees and expenses incurred to review an assignment or subletting request or architectural and engineering fees incurred to review a proposed alteration by Tenant.

62.          Confidentiality.  Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute propriety information of Landlord.  Disclosure of the terms hereof could adversely affect the ability of Landlord to negotiate other leases with respect to the Building and may impair Landlord’s relationship with other tenants of the Building. Except to the extent required by any applicable statutes, rules, regulations, including, but not limited to, any filings required by the Securities and Exchange Commission, the National Association of Securities Dealers or any regulatory body, or in connection with any legal action or as requested by its auditors, Tenant agrees that it and its partners, officers, directors, employees, brokers, and attorneys, if any, shall not disclose the terms and conditions of this Lease to any other person or entity without the prior written consent of Landlord which may be given or withheld by Landlord, in Landlord’s sole discretion.  It is understood and agreed that damages alone would be an inadequate remedy for the breach of this provision by Tenant, and Landlord shall also have the right to seek specific performance of this provision and to seek injunctive relief to prevent its breach or continued breach.

63.          Waiver Of Jury Trial.  LANDLORD AND TENANT HEREBY WAIVE THEIR RESPECTIVE RIGHT TO TRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM, COUNTERCLAIM OR CROSS-COMPLAINT IN ANY ACTION, PROCEEDING AND/OR HEARING BROUGHT BY EITHER LANDLORD AGAINST TENANT OR TENANT AGAINST LANDLORD ON ANY MATTER WHATSOEVER ARISING OUT OF, OR IN ANY WAY CONNECTED WITH, THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT’S USE OR OCCUPANCY OF THE PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY LAW, STATUTE, OR REGULATION, EMERGENCY OR OTHERWISE, NOW OR HEREAFTER IN EFFECT.  LANDLORD AND TENANT ACKNOWLEDGE THAT THEY HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO.  THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LANDLORD AND TENANT WITH RESPECT TO THE PREMISES.  TENANT ACKNOWLEDGES THAT IT HAS BEEN GIVEN THE OPPORTUNITY TO

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HAVE THIS LEASE REVIEWED BY ITS LEGAL COUNSEL PRIOR TO ITS EXECUTION. PREPARATION OF THIS LEASE BY LANDLORD OR LANDLORD’S AGENT AND SUBMISSION OF SAME TO TENANT SHALL NOT BE DEEMED AN OFFER BY LANDLORD TO LEASE THE PREMISES TO TENANT OR THE GRANT OF AN OPTION TO TENANT TO LEASE THE PREMISES.  THIS LEASE SHALL BECOME BINDING UPON LANDLORD ONLY WHEN FULLY EXECUTED BY BOTH PARTIES AND WHEN LANDLORD HAS DELIVERED A FULLY EXECUTED ORIGINAL OF THIS LEASE TO TENANT.

64.          Access To Premises.  Tenant shall have access to the Premises 24 hours a day, 7 days per week, but such access shall always be subject to reasonable rules and regulations from time to time established for the Building by Landlord (and shall be subject to interruption due to causes beyond Landlord’s reasonable control).

Balance of Page Intentionally Left Blank

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IN WITNESS WHEREOF, the undersigned have hereunto se their hands and seals as of the date first above written.

LANDLORD
The Realty Associates Fund VI, L.P.,
a Delaware limited partnership
By:			Realty Associates Fund VI LLC,
			a Massachusetts limited liability company,
			general partner
	By:		Realty Associates Advisors LLC, a Delaware
			limited liability company, Manager
			By:			Realty Associates Advisors Trust, a
						Massachusetts business trust, sole member
			By:	/s/ James P. Raisides
			Name: James P. Raisides
			Title: Sr. Vice President
By:			Realty Associates Fund VI Texas Corporation,
			a Texas corporation, general partner
			By:		/s/ James P. Raisides
			Name: James P. Raisides
			Title: Sr. Vice President
TENANT:
NITROMED, INC.
By:		/s/ Kenneth M. Bate
Name: Kenneth M. Bate
Title: President and CEO
By:		/s/ James G. Ham, III
Name: James G. Ham, III
Title: Vice President, CFO, Treasurer and Secretary

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IF TENANT IS A CORPORATION, TRUST, LIMITED PARTNERSHIP OR LIMITED LIABILITY COMPANY, A SECRETARY’S, CLERK’S, TRUSTEE’S, GENERAL PARTNER’S OR MANAGING MEMBER’S CERTIFICATE OF THE AUTHORITY AND THE INCUMBENCY OF THE PERSON SIGNING ON BEHALF OF TENANT SHALL BE ATTACHED.

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EXHIBIT A

LAYOUT PLAN

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EXHIBIT A-1

WORK LETTER

45 Hayden Avenue
Lexington MA
 - Nitromed — Work Letter -

February 9, 2007

I. General Requirements
ADA	All architectural and engineering will conform to the requirements of ADAAG. All new construction and renovations shall comply to with the Americans with Disabilities Act.
Building Codes	All new construction and renovations shall be built in full compliance with all city regulation, the city zoning ordinance and state building codes. The contractor shall obtain and pay for all applicable permits including building and occupancy permits.
Substitutions	The information given here is intended to provide minimum quality levels for construction standards. Substitutions will be entertained but must be approved in writing by the owner’s architect and agent
Existing Conditions	Where improvements as planned to modify an existing space, the existing condition shall not fall below the standard described in this document.
Electric Meters	Tenant must connect all power sources to meters supplied by Landlord
II. Doors, Frames & Hardware
Main Tenant
Entrance Doors	Main tenant entrance door shall be 3’-0” wide x 8’-0” high, 1-3/4” thick, rail & stile, natural finished wood door with glass panel and adjacent natural finished wood framed sidelight to match existing. Hardware will include 2 pairs of butt hinges, one lever action lock set, one floor stop & one closer.
Additional Tenant
Entrance Doors	Additional entrance doors will be 3’-0” x 7’-0”, natural finished wood, solid core, 1 3¤4” thick, to match existing conditions and finished with two coats clear polyurethane. Door frames will be natural finish wood to match existing. Hardware will include 2 pairs of butt hinges, one lever action lock set, one floor stop, and one closer. Entrance doors will be provided in sufficient quantity to meet local code requirements.

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Interior Doors	Interior doors will be 3’-0” x 7’-0”, natural finish wood, solid core, 1 3¤4” thick, stained to match existing conditions and finished with two coats of polyurethane. Door frames will be hollow metal (unless otherwise noted) to match existing. Hardware will include 1-1/2 pairs of butt hinges, one lever action passage latch set and one floor stop.
	Door finish to match - HALCON Light Beech - BE10S5
Sidelights	All offices will have sidelights. Sidelights will be 2’-0” x 7’-0” with hollow metal frames painted to match door frames.
Door Hardware	All door hardware shall be US26D brushed chrome finish.
	All pairs and uneven pairs shall receive concealed manual flush bolts at top and bottom of inactive leaf.
	Passage Latch Set:
	“Schlage” Series “D” Athens
	Model: Passage #D10S
	Lock Set:
	“Schlage” Series “D” Athens
	Model: Lock #D73P
	Store Room Lock Set:
	“Schlage” Series “D” Athens
	Model: Lock #D80PD
	Dummy Trim:
	“Schlage” Series “D” Athens
	Model: #D170
	Stops:
	“Ives” #436 Floor Stop
	Hinges:
	“Hagar”
	Number pairs per leaf varies, see door descriptions
Door Closures	All closures shall be US26D brushed chrome finish.
	Tenant wood doors: LCN 4041
III. Partitions
Note: Partition thicknesses vary. Verify in field.

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Typical Partition	Partitions will be 3-5/8” metal studs, 16” o.c. with one layer of 5/8” gypsum board on each side. Partition will extend from floor to 6” above acoustical tile ceiling. (Studs need only extend to 6” above ceiling).
	Partitions will be 2-1/2” metal studs, 16” o.c. with one layer of 5/8” gypsum board on each side. Partition will extend from floor to 6” above acoustical tile ceiling. (Studs need only extend to 6” above ceiling).
Demising Partition	Demising partition will be 3-5/8” metal studs, 16” o.c. with one layer of 5/8” type X gypsum board on each side, sound batt insulation. Wall will extend to deck of floor above.
	Demising partition will be 2-1/2” metal studs, 16” o.c. with one layer of 5/8” type X gypsum board on each side, sound batt insulation. Wall will extend to deck of floor above.
Covebase	All partitions will have a vinyl base, 4” high, color selection to be from building standard. Straight base at carpet, cove base at VCT. Johnsonite 1/8” vinyl base — Color — 44 — Dark Brown
IV. Ceilings
Tenant Area
Tile and Grid	Shall be 24” x 24” lay-in mineral acoustical tile “Armstrong”, Model 2195, white tile, with angled tegular edge, to match existing, on an exposed 15/16” grid “T” white suspension system.
	Ceiling heights will be: 9’-4”
V. Floor
Tenant Area
Carpeting	Tenant will have its choice of “Bigelow” carpeting. All carpet shall be directly glued down and min. 28 oz. (bldg. standard).
	Field Carpet - Bigelow - Grid works W024 - color 3779 Wrought Iron - 32 oz. per sq yd
	Accent Border - Spectrum III 36 BC112 - color 7979 Ebony - 36 oz. per sq yd

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Tile	Shall be 12” x 12”standard vinyl composition to be installed only in kitchen area, mail room and computer server rooms. Tile shall be Armstrong Imperial Texture Standard Excelon — Color —Polar White - 51941 w/ 20% random accent tile Shadow Blue - 51807
VI. Painting and Wallcovering
Painting	All wall surfaces shall receive two coats of “Benjamin Moore” (or equal) pearl finish latex paint. Color selection will be tenant’s discretion with not more than one color per room. All metal door frames shall receive two coats of semi-gloss latex.
VII. Specialties
Window Coverings	Vertical “Laserlite” blinds shall be installed at exterior windows throughout the tenant area. Blinds will be uniform in color throughout the building.
	Track: “Laserlite” V-3000, color: clear anodized aluminum
	Louvers: 3-1/2” wide perforated PVC, color: to match existing
Signage	Company name in white vinyl lettering, reverse cut. No logos are allowed.
Movable Partition	Movable partition of approximately 16’-3” x 9’high to be provided in split conference room. Hufcor or equal.
VIII. Lighting
Tenant Area
Lighting	“Lightolier” #DPA2G18LP332 or equal. Low brightness, 2’x4’, 18- cell, three tube parabolic fixtures.
	“Lightolier” Paralyte #PLA2G9LP3U4OC or equal. Low brightness, 2’x2’, 9- cell, two-tube (“U”) parabolic fixtures.
	“Lightolier” or equal fluorescent downlight fixtures to match existing.
IX. Fire Protection
Sprinklers	A complete fire protection sprinkler system using exposed chrome ring, semi-recessed sprinkler heads, manufactured by Reliable, will be provided to protect normal office use. Additional fire protection for special uses will be provided at tenant’s request. Tenant should advise its architect that sprinkler heads have already been installed. Relocation or additional heads will be at tenant’s expense.

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Fire Extinguishers	“Larsen’s” or equal semi-recessed fire extinguisher white, full glass cabinets to match existing.
Smoke Detectors	Smoke detectors shall be installed to meet all local, state, & federal codes.
Horn Strobes	Horn Strobes shall be installed to meet all local, state, & federal codes.
Exit Signage	“Cooper” Sure-Lites or equal. Exit signage shall be installed to meet all local, state, & federal codes.
X. Electrical Service
Electrical Outlets	One duplex outlet will be provided for each 100 square feet of usable area. Outlets shall be ivory on ivory in all public spaces, and ivory on ivory in all tenant spaces.
XI. HVAC
HVAC System	A zoned variable air volume HVAC system will be provided including distribution duct work, diffusers, return air grilles and thermostatic controls for a normal office layout. The perimeter boxes in the building are also fan powered induction type with heating hot water coils. Relocation of VAV boxes or creation of additional for specialty areas will not be allowed.
	The building is equipped with a “Johnson” pneumatic automatic temperature control system.
	If areas such as computer rooms, copier rooms, telephone/network rooms, or cafeterias require special cooling equipment, stand-alone units will be provided at the tenant’s expense.
Zones	Exterior: 12-15’ x 40-60’ (diffusers every other window and approx. 14 zones per floor) Linear diffusers are standard
Corners:	Separate Zones
Interior:	1500-2000 SF (Approx. 12 zones per floor)
Conference Rooms:	Separate zone recommended
Returns & Diffusers	All HVAC returns & diffusers shall match existing. Returns & diffusers shall be 2’x2’. Provide 4’ linear diffusers at exterior window line.

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EXHIBIT A-2
Temporary Premises

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EXHIBIT B

VERIFICATION LETTER

                      , 200  

[Name of Contact]

[Name of Tenant]

RE:          [Name of Tenant]

[Premises Rentable Area and Floor]

Dear [Name of Contact]:

Reference is made to that certain Lease, dated as of            , 200  , between THE REALTY ASSOCIATES FUND VI, L/P/, as Landlord and NitroMed, Inc. as Tenant, with respect to approximately 19,815 square feet of space on the third floor of 45-55 Hayden Avenue, Lexington, Massachusetts. In accordance with Section 3.1 of the Lease, this is to confirm that the Commencement Date of the Term of such Lease occurred on            , and that the Term of such Lease shall expire on            , 200  , subject to Tenant’s Option to Extend set forth in Section 27 of the Lease. If the foregoing is in accordance with your understanding, would you kindly execute this letter in the space provided below, and return the same to us for execution by Landlord, whereupon it will become a binding agreement between us.

Very truly yours,

		By:
		Name:
		Title:
Accepted and Agreed:
[Name of Tenant]
By:
	Name:
	Title:
	Date:

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EXHIBIT C

RULES AND REGULATIONS

GENERAL RULES

Tenant shall faithfully observe and comply with the following Rules and Regulations. In the event of any irreconcilable conflict between these Rules and Regulations, on the one hand, and the Lease, on the other, the terms and conditions of the Lease shall prevail and control.

1.             Tenant shall not alter any locks or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed.  Tenant shall bear the cost of any lock changes or repairs required by Tenant. Keys required by Tenant must be obtained from Landlord at a reasonable cost to be established by Landlord.

2.             All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the Premises. Tenant shall assume any and all responsibility for protecting the Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed.

3.             Landlord reserves the right to close and keep locked all entrance and exit doors of the Building except during the Building’s normal hours of business as defined in Section 11.4 of the Lease.  Tenant, its employees and agents must be sure that the doors to the Building are securely closed and locked when leaving the Premises if it is after the normal hours of business of the Building.  Tenant, its employees, agents or any other persons entering or leaving the Building at any time when it is so locked, or any time when it is considered to be after normal business hours for the Building, may be required to sign the Building register.  Access to the Building or the Property may be refused unless the person seeking access has proper identification or has a previously received authorization for access to the Building or the Property.  Landlord and its agents shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building or the Property of any person.  In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent or limit access to the Building or the Property during the continuance thereof by any means it deems appropriate for the safety and protection of life and property, subject to the applicable provisions of this Lease.

4.             Landlord reserves the right, in Landlord’s commercially reasonable discretion, to close or limit access to the Building, the Property and/or the Premises, from time to time, due to the failure of utilities, due to damage to the Building, the Property and/or the Premises, to ensure the safety of persons or property or due to government order or directive, and Tenant agrees to comply with any such decision by Landlord.  If Landlord closes or limits access to the Building, the Property and/or the Premises for the reasons described above, Landlord’s actions shall not constitute a breach of the Lease.

5.             No furniture, freight or equipment of any kind shall be brought into the Building without Landlord’s prior authorization, which shall not be unreasonably withheld, delayed or conditioned.  All moving activity into or out of the Building shall be scheduled with Landlord

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and done only at such time and in such manner as Landlord reasonably designates.  Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy property brought into the Building and also the times and manner of moving the same in and out of the Building.  Safes and other heavy objects shall, if considered reasonably necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight, and Tenant shall be solely responsible for the cost of installing all supports.  Except as may be expressly provided in the Lease, (i) Landlord will not be responsible for loss of or damage to any such safe or property in any case, and (ii) any damage to any part of the Building or the Property, its contents, occupants or visitors by moving or maintaining any such safe or other property shall be the sole responsibility and expense of Tenant.

6.             The requirements of Tenant will be attended to only upon application at the management office for the Building or at such office location designated by Landlord.  Tenant shall not ask employees of Landlord to do anything outside their regular duties without special authorization from Landlord.

7.             Tenant shall not disturb, solicit, or canvass any occupant of the Building and shall cooperate with Landlord and its agents to prevent the same.  Tenant, its employees and agents shall not loiter in or on the entrances, corridors, sidewalks, lobbies, halls, stairways, elevators, or any Common Areas for the purpose of smoking tobacco products or for any other purpose, nor in any way obstruct such areas, and shall use them only as a means of ingress and egress for the Premises.  Smoking shall not be permitted in the Common Areas.

8.             The toilet rooms, urinals and wash bowls shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein.  The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or agents, shall have caused it.

9.             Except for vending machines intended for the sole use of Tenant’s employees and invitees, no vending machine or machines other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord, which shall not be unreasonably withheld, conditioned or delayed.  All vendors or other persons visiting the Premises shall be subject to the reasonable control of Landlord.  Tenant shall not permit its vendors or other persons visiting the Premises to solicit other tenants of the Building.

10.           Tenant shall not use or keep in or on the Premises or the Building any kerosene, gasoline or other inflammable or combustible fluid or material.  Tenant shall not bring into or keep within the Premises or the Building any animals, birds, bicycles or other vehicles.

11.           Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in or on the Premises, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, or vibrations, or to otherwise interfere in any way with the use of the Building or the Property by other tenants.

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12.           No cooking shall be done or permitted on the Premises, nor shall the Premises be used for the storage of merchandise, for loading or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Underwriters’ Laboratory approved equipment and microwave ovens may be used in the Premises for heating food and brewing coffee, tea, hot chocolate and similar beverages for employees and visitors of Tenant, provided that such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations; and provided further that such cooking does not result in odors escaping from the Premises.

13.           Landlord shall have the right to reasonably approve where and how telephone wires are to be introduced to the Premises.  No boring or cutting for wires shall be allowed without the consent of Landlord as provided in Section 7.3 of the Lease. The location of telephone call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord.  Tenant shall not mark, drive nails or screws, or drill into the partitions, woodwork or plaster contained in the Premises or in any way deface the Premises or any part thereof without Landlord’s prior written consent.  Tenant shall not install any radio or television antenna, satellite dish, loudspeaker or other device on the roof or exterior walls of the Building.  Tenant shall not interfere with broadcasting or reception from or in the Building or elsewhere.

14.           Landlord reserves the right to exclude or expel from the Property any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations.

15.           Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to ensure the most effective operation of the Building’s heating and air conditioning system, and shall refrain from attempting to adjust any controls.  Tenant shall not without the prior written consent of Landlord use any method of heating or air conditioning other than that supplied by Landlord.  Tenant shall not use electric fans or space heaters in the Premises.

16.           Tenant shall store all its trash and garbage within the interior of the Premises.  No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash from the Building without violation of any law or ordinance governing such disposal.  All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes at such times as Landlord shall designate.

17.           Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.

18.           No awnings or other projection shall be attached to the outside walls or windows of the Building by Tenant.  No curtains, blinds, shades or screens shall be attached to or hung in any window or door of the Premises without the prior written consent of Landlord.  Landlord shall have the right to require Tenant to use Landlord’s standard curtains or window coverings. Tenant shall not place any signs in the windows of the Premises or the Building.  All electrical ceiling fixtures hung in the Premises must be fluorescent and/or of a quality, type, design and bulb color approved by Landlord.  Tenant shall abide by Landlord’s reasonable regulations

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concerning the opening and closing of window coverings which are attached to the windows in the Premises.  The skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the window sills.

19.           Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises unless otherwise agreed to in writing by Landlord.   Landlord shall not be obligated to notify Tenant of the times at which the janitorial staff will enter the Premises, and Tenant hereby authorizes the janitorial staff to enter the Premises at reasonable times, without notice.  Janitor service shall include ordinary dusting and cleaning by the janitor assigned to such work and shall not include cleaning of carpets or rugs, except normal vacuuming, or moving of furniture and other special services. Window cleaning shall be done only by Landlord at reasonable intervals and as Landlord deems necessary.

20.           Tenant acknowledges that the local fire department has previously required Landlord to participate in a fire and emergency preparedness program or may require Landlord and/or Tenant to participate in such a program in the future.  Tenant agrees to take all actions necessary to comply with the requirements of such a program including, but not limited to, designating certain employees as “fire wardens” and requiring them to attend any necessary classes and meetings and to perform any required functions.

PARKING RULES

1.             Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles or minivans.  Tenant and its employees shall park automobiles within the lines of the parking spaces.

2.             Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant’s employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities.  Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking.

3.             Parking stickers, parking cards and other identification devices shall be the property of Landlord and shall be returned to Landlord by the holder thereof upon termination of the holder’s parking privileges.  Landlord may require Tenant and each of its employees to give Landlord a deposit when a parking card or other parking device is issued.  Landlord shall not be obligated to return the deposit unless and until the parking card or other device is returned to Landlord.  Tenant will pay such replacement charges as is reasonably established by Landlord for the loss of such devices.  Loss or theft of parking identification stickers or devices from automobiles must be reported to the parking operator immediately.  Any parking identification stickers or devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution.

4.             Landlord reserves the right to relocate all or a part of parking spaces within the parking area, and to allocate them between compact and standard size and tandem spaces, as long as the same complies with the terms of the Lease and with applicable laws, ordinances and regulations.

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5.             Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle.  Landlord will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area.

6.             Validation of visitor parking, if established, will be permissible only by such method or methods as Landlord may establish at rates determined by Landlord, in Landlord’s sole discretion.  Only persons visiting Tenant at the Premises shall be permitted by Tenant to use the Property’s visitor parking facilities.

7.             The maintenance, washing, waxing or cleaning of vehicles in the parking spaces or Common Areas is prohibited.

8.             Tenant shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements.  Parking area managers or attendants, if any, are not authorized to make or allow any exceptions to these Parking Rules and Regulations.  Landlord reserves the right to terminate parking rights for any person or entity that willfully fails or refuses to comply with these rules and regulations, provided that (except in circumstances where safety of persons or property is reasonably likely to be jeopardized) Landlord shall have given Tenant notice thereof and such failure or refusal is not corrected to the Landlord’s reasonable satisfaction within ten (10) days.

9.             Every driver is required to park his own car. Tenant agrees that all responsibility for damage to cars or the theft of or from cars is assumed by the driver, and further agrees that Tenant will hold Landlord harmless for any such damages or theft.

10.           Any vehicle parked by Tenant, its employees, contractors or visitors in a reserved parking space or in any area of the parking area that is not designated for the parking of such a vehicle may, at Landlord’s option, and without notice or demand, be towed away by any towing company selected by Landlord, and the cost of such towing shall be paid for by Tenant.

11.           At Landlord’s request, Tenant shall provide Landlord with a list which includes the name of each person using the parking facilities based on Tenant’s parking rights under this Lease and the license plate number of the vehicle being used by that person. Tenant shall provide Landlord with an updated list semi-annually or as Landlord may otherwise request.

Landlord reserves the right at any time to change or rescind any one or more of these Rules and Regulations, or to make such other and further reasonable Rules and Regulations as in Landlord’s reasonable judgment may from time to time be necessary for the management, safety, care and cleanliness of the Property, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein.  Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Property.  Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises.

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EXHIBIT D

CLEANING SPECIFICATIONS

Janitorial vendor will perform daily, weekly, and monthly services at 45-55 Hayden Ave. Lexington, MA.  The services are the following:

Cleaning will begin at 6:00pm each evening.  Monday through Friday.  The contractor shall not provide cleaning during holidays unless otherwise requested, if cleaning is requested on a holiday Monday through Friday, cleaning services shall be provided at an additional cost.

Janitorial company to provide all equipment and material necessary to perform all cleaning.

Services will also include one full-time Day Porter.

All cleaners and supervisors shall be provided with proper identification (uniforms and name tags)

Contractor shall have a full time Manager on location nightly, and identified as Manager.

Cleaners shall be restricted to the assigned areas, keep tenant doors locked and familiar with the security systems.

Janitorial Manager quality control audit tour of common area & tenants areas performed once per month during normal business hours.  The inspections of tenant space also allows each tenant the option to discuss deficiencies or concerns.

Lobbies & Common Areas (Nightly):

Daily:

·      Vacuum clean all carpet floor surfaces, including entry mats.  Inspect for stains and remove where possible.

·      thoroughly sweep and damp mop all hard surface floors

·      empty all waste receptacles and replace liners (to be supplied by customer)

·      remove dust from all horizontal surfaces, furniture, window ledges, radiators, coat racks, artificial plants, paintings and other wall decorations using chemically treated cloths

·      completely wipe all furniture

·      spot clean doors and walls, especially around door frames and light switches

·      spot clean all glass

Weekly:

·      spray-buff or hi-speed burnish all hard surface floors

·      completely wash all glass

·      vacuum carpet edges

Monthly:

·      vacuum all upholstered furniture

·      render all dusting of accessible surfaces not reached by daily cleaning

Quarterly:

·      dust all ceiling vents

General Office Areas:

Daily:

·      empty all waste receptacles and replace liners (to be supplied by customer)

·      empty all Hayden Recycles receptacles when 3/4 full to recycle container at loading doc.

·      spot clean all glass doors, partitions and glass walls that may exist

·      spot vacuum all carpeting

·      thoroughly sweep and damp mop all hard surface floors

Weekly:

·      remove dust from all furniture, window ledges, radiators, etc.

·      spot clean doors and walls especially around door frames and light switches

·      completely wash all glass doors, partitions and glass walls that may exist

·      thoroughly vacuum all carpeting

·      spot clean all carpeting

Monthly:

·      render all dusting of accessible surfaces not reached by daily cleaning

·      spray-buff or hi-speed burnish all hard surface floors

Quarterly:

·      dust all ceiling vents

Cafeteria:

Daily:

·      pull all trash and replace liners (to be provided by customer)

·      wipe down all trash containers

·      remove dust from all furniture, window ledges, radiators, coat racks, artificial plants, paintings and other wall decorations

·      clean and polish all tables, chairs and arrange in an orderly fashion

·      spot clean doors and walls especially around and behind trash receptacles

·      thoroughly vacuum and spot clean all carpeting

·      thoroughly dry mop and damp mop all hard surface floors

2

Monthly:

·      spray-buff or hi-speed burnish all hard surface flooring

Quarterly:

·      vacuum all ceiling vents

General Items

1.Any damages internally or externally to the building will be reported to Jones Lang LaSalle (781) 778-2563 (i.e. defective locks, plumbing etc.)

2.All trash will be removed from the building nightly.

3.At the end of each evening, all lights will be extinguished and doors secured.

3

EX-21.1

Exhibit 21.1

NitroMed, Inc.

List of Subsidiaries

NAME OF SUBSIDIARY	JURISDICTION OF INCORPORATION
NitroMed Securities Corp.	Massachusetts

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-111302, 333-128338 and 333-134896 and Form S-3 No. 333-127154) of NitroMed, Inc. and in the related Prospectus of our reports dated March 6, 2007, with respect to the financial statements of NitroMed, Inc., NitroMed, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of NitroMed, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2006.

/s/ Ernst & Young LLP

Boston, Massachusetts
March 6, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Kenneth M. Bate, certify that:

1.I have reviewed this annual report on Form 10-K of NitroMed, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

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.The registrant’s other certifying officer and I are 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:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and 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 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.

Date: March 8, 2007	/s/ Kenneth M. Bate
	Kenneth M. Bate
	Chief Executive Officer and President
	(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, James G. Ham III, certify that:

1.I have reviewed this annual report on Form 10-K of NitroMed, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

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.The registrant’s other certifying officer and I are 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:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and 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.

Date: March 8, 2007	/s/ JAMES G. HAM, III
	James G. Ham, III
	Vice President, Chief Financial Officer, Treasurer and Secretary
	(Principal Financial Officer and Principal Accounting Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of NitroMed, Inc. (the “Company”) for the fiscal year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Kenneth M. Bate, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(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.

Date: March 8, 2007	/s/ Kenneth M. Bate
	Kenneth M. Bate
	Chief Executive Officer and President

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of NitroMed, Inc. (the “Company”) for the fiscal year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, James G. Ham, III, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(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.

Date: March 8, 2007	/s/ JAMES G. HAM, III
	James G. Ham, III
	Vice President, Chief Financial Officer, Treasurer and Secretary