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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-50642
 Memory Pharmaceuticals Corp.
  Delaware
    
    04-3363475(State or Other Jurisdiction of Incorporation or
    
    (I.R.S. Employer Identification No.)Organization)100 Philips Parkway, Montvale, New Jersey
    
    07645(Address of Principal Executive Offices)
    
    (Zip Code)
 
  
   þ o
  o o þ
  o þ




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MEMORY PHARMACEUTICALS CORP.
 Table of Contents
 Part I. Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3BALANCE SHEETS
    
    
    3STATEMENTS OF OPERATIONS
    
    
    4STATEMENTS OF CASH FLOWS
    
    
    5NOTES TO FINANCIAL STATEMENTS
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4T. Controls and Procedures
    
    
    25Part II. Other Information.
    
    
    26Item 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    26SIGNATURES
    
    
    28EX-3.1: SECOND AMENDED AND RESTATED BYLAWSEX-10.1: AMENDED AND RESTATED LICENSE AGREEMENTEX-31.1: CERTIFICATIONEX-32.1: CERTIFICATION
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MEMORY PHARMACEUTICALS CORP.
 
 BALANCE SHEETS
 (unaudited)
 (in thousands, except for share and per share amounts)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    43,187
    
    
    $
    50,849Marketable securities
    
    
    38
    
    
    
    474Receivables
    
    
    20
    
    
    
    Prepaid and other current assets
    
    
    1,739
    
    
    
    1,397Total current assets
    
    
    44,984
    
    
    
    52,720Deferred financing costs, net
    
    
    483
    
    
    
    Property and equipment, net
    
    
    6,312
    
    
    
    7,413Restricted cash
    
    
    505
    
    
    
    509Total assets
    
    $
    52,284
    
    
    $
    60,642LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,614
    
    
    $
    741Accrued expenses
    
    
    4,057
    
    
    
    6,179Current portion of loan payable
    
    
    1,215
    
    
    
    Current portion of equipment notes payable
    
    
    371
    
    
    
    744Deferred revenue  current
    
    
    3,188
    
    
    
    6,801Total current liabilities
    
    
    11,445
    
    
    
    14,465Warrant liability
    
    
    
    
    
    
    8,724Loan payable, less current portion
    
    
    8,491
    
    
    
    Equipment notes payable, less current portion
    
    
    129
    
    
    
    345Deferred revenue  long-term
    
    
    14,921
    
    
    
    13,906Total liabilities
    
    
    34,986
    
    
    
    37,440Stockholders equity:Common stock, $0.001 par value per share; 175,000,000 shares authorized; and 72,602,381
and 67,655,132 issued and outstanding at September 30, 2007, and December 31, 2006
respectively.
    
    
    72
    
    
    
    68Additional paid-in capital
    
    
    224,294
    
    
    
    206,372Accumulated deficit
    
    
    (207,068
    )
    
    
    (183,227
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (11
    )Total stockholders equity
    
    
    17,298
    
    
    
    23,202Total liabilities and stockholders equity
    
    $
    52,284
    
    
    $
    60,642
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MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except for share and per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    5,026
    
    
    $
    1,958
    
    
    $
    10,444
    
    
    $
    6,682Operating expenses:Research and development
    
    
    8,988
    
    
    
    10,044
    
    
    
    30,096
    
    
    
    23,266General and administrative
    
    
    2,259
    
    
    
    2,376
    
    
    
    7,104
    
    
    
    6,677Total operating expenses
    
    
    11,247
    
    
    
    12,420
    
    
    
    37,200
    
    
    
    29,943Loss from operations
    
    
    (6,221
    )
    
    
    (10,462
    )
    
    
    (26,756
    )
    
    
    (23,261
    )Change in fair value of warrants (Note 7)
    
    
    
    
    
    
    308
    
    
    
    
    
    
    
    5,801Interest:Income
    
    
    598
    
    
    
    382
    
    
    
    1,877
    
    
    
    1,238Expense
    
    
    (559
    )
    
    
    (42
    )
    
    
    (847
    )
    
    
    (150
    )Interest income, net
    
    
    39
    
    
    
    340
    
    
    
    1,030
    
    
    
    1,088Loss before income taxes
    
    
    (6,182
    )
    
    
    (9,814
    )
    
    
    (25,726
    )
    
    
    (16,372
    )Income taxes
    
    
    (3
    )
    
    
    9
    
    
    
    3
    
    
    
    8Net loss
    
    $
    (6,179
    )
    
    $
    (9,823
    )
    
    $
    (25,729
    )
    
    $
    (16,380
    )Basic and diluted net loss per share of common stock
    
    $
    (0.09
    )
    
    $
    (0.26
    )
    
    $
    (0.36
    )
    
    $
    (0.43
    )Basic and diluted weighted average number of shares of
common stock outstanding
    
    
    72,610,018
    
    
    
    37,923,706
    
    
    
    71,617,983
    
    
    
    37,835,147
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MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows used in operating activities:Net loss
    
    $
    (25,729
    )
    
    $
    (16,380
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,476
    
    
    
    1,566Non-cash stock based compensation
    
    
    2,259
    
    
    
    2,062Unrealized gain on warrants
    
    
    
    
    
    
    (5,801
    )Amortization of deferred financing costs and discount on loans
    
    
    384
    
    
    
    Changes in operating accounts:Receivables
    
    
    (20
    )
    
    
    1,562Prepaid and other current assets
    
    
    (344
    )
    
    
    (285
    )Other assets
    
    
    4
    
    
    
    Accounts payable
    
    
    1,873
    
    
    
    1,484Accrued expenses
    
    
    (2,430
    )
    
    
    66Deferred revenue
    
    
    (2,598
    )
    
    
    (2,457
    )Net cash used in operating activities
    
    
    (25,125
    )
    
    
    (18,183
    )Cash flows provided by investing activities:Purchases of marketable securities
    
    
    
    
    
    
    (986
    )Sales of marketable securities
    
    
    425
    
    
    
    4,997Additions to property and equipment
    
    
    (374
    )
    
    
    (193
    )Net cash provided by investing activities
    
    
    51
    
    
    
    3,818Cash flows provided by financing activities:Proceeds from issuance of common stock
    
    
    7,262
    
    
    
    207Proceeds from issuance of loan payable and warrants
    
    
    11,000
    
    
    
    Deferred financing costs
    
    
    (261
    )
    
    
    Principal repayment of equipment notes payable
    
    
    (589
    )
    
    
    (1,026
    )Net cash provided by / (used in) financing activities
    
    
    17,412
    
    
    
    (819
    )Net decrease in cash and cash equivalents
    
    
    (7,662
    )
    
    
    (15,184
    )Cash and cash equivalents, beginning of period
    
    
    50,849
    
    
    
    39,533Cash and cash equivalents, end of period
    
    $
    43,187
    
    
    $
    24,349Supplemental cash flow information:Cash paid for interest
    
    $
    681
    
    
    $
    150Cash paid for taxes
    
    $
    3
    
    
    $
    8
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MEMORY PHARMACEUTICALS CORP.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 (1)
    
    Basis of PresentationAs used herein, we, us, the Company and similar terms refer to Memory Pharmaceuticals
Corp. We are a biopharmaceutical company focused on the discovery and development of innovative
drug candidates for the treatment of a broad range of central nervous system, or CNS,
conditions, many of which exhibit significant impairment of memory and other cognitive
functions. These conditions include neurological diseases associated with aging, such as
Alzheimers disease, and also include certain psychiatric disorders, such as schizophrenia,
bipolar disorder and depression.The financial statements included herein have been prepared from our books and records pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on
Form 10-Q. The information and note disclosures normally included in complete financial
statements prepared in accordance with generally accepted accounting principles in the United
States of America (US GAAP) have been condensed or omitted pursuant to these rules and
regulations. The interim financial statements should be read in conjunction with the audited
financial statements and notes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2006.We are responsible for the financial statements included in this document. Our interim
financial statements are unaudited. Interim results may not be indicative of the results and
trends that may be expected for the year. However, we believe all adjustments considered
necessary for a fair presentation of these interim statements have been included and are of a
normal and recurring nature.(2)
    
    Stock-Based CompensationAs of September 30, 2007 we had two stock-based compensation plans, our Amended and Restated
2004 Stock Incentive Plan (the 2004 Plan), pursuant to which we currently grant stock
options, and our Amended and Restated 2004 Employee Stock Purchase Plan. In addition, we
granted options pursuant to our 1998 Employee, Director and Consultant Stock Option Plan (the
1998 Plan) until 2004, when our 2004 Plan was adopted. The compensation expense recognized
in the Statements of Operations for the three months ended September 30, 2007 for our
stock-based compensation plans was $0.6 million, of which $0.3 million was a component of
general and administrative expenses and $0.3 million was a component of research and
development expenses. For the three months ended September 30, 2006, we recognized
compensation expense for stock-based compensation plans of $0.7 million, of which $0.3 million
was a component of general and administrative expenses and $0.4 million was a component of
research and development expenses.The compensation expense recognized in the Statements of Operations for the nine months ended
September 30, 2007 for our stock-based compensation plans was $2.3 million, of which $0.9
million was a component of general and administrative expenses and $1.4 million was a
component of research and development expenses. For the nine months ended September 30, 2006,
we recognized compensation expense for stock-based compensation plans of $2.1 million, of
which $1.0 million was a component of general and administrative expenses and $1.1 million was
a component of research and development expenses.The weighted-average fair value of the stock option awards granted during the nine-month
periods ended September 30, 2007 and September 30, 2006 was $2.24 per share and $1.44 per
share, respectively, and was estimated on the date of grant using the Black-Scholes option
valuation model and the assumptions noted in the following table.
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Nine months Ended
    
    Nine months EndedSeptember 30, 2007
    
    September 30, 2006Expected life
    
    
    5.56 to 10 years
    
    
    
    5.56 to 10 yearsExpected volatility
    
    87.5% to 89.5%
    
    78.9% to 81.5%Risk-free interest rate
    
    4.41% to 5.03%
    
    4.39% to 5.19%Dividend yield
    
    0%
    
    0%
 For employee awards, the expected life of the stock options was calculated using the shortcut
method allowed by the provisions of Statements of Financial Accounting Standards (SFAS) No.
123R, Share-Based Payment(SFAS No. 123R), and interpreted by Staff Accounting Bulletin (SAB)
No. 107. For non-employee awards, the expected life of the stock options was based on the
life of the stock option. The expected volatility is based on the historic volatility of our
publicly-traded stock which we believe will be representative of the volatility over the
expected term of the options. The risk-free interest rate is based on the rates paid on
securities issued by the U.S. Treasury with a term approximating the expected life of the
option.A summary of the stock option activity under our 1998 Plan and our 2004 Plan during the nine
month period ended September 30, 2007 is presented below. All grants indicated in the table
below were made pursuant to our 2004 Plan.
 Exercise Price
    
    
    Weighted-AverageShares
    
    
    Per Share
    
    
    Exercise PriceOutstanding at December
31, 2006
    
    
    5,276,852
    
    
    $
    0.30  $9.82
    
    
    $
    3.03Granted
    
    
    1,880,325
    
    
    $
    1.94  $3.81
    
    
    
    2.97Exercised
    
    
    (236,529
    )
    
    $
    0.30  $2.70
    
    
    
    0.97Cancelled / Forfeited
    
    
    (118,843
    )
    
    $
    0.75  $9.82
    
    
    
    4.94Outstanding at
September 30, 2007
    
    
    6,801,805
    
    
    $
    0.30  $9.82
    
    
    
    3.07
 As of September 30, 2007, there was $5.5 million of total unrecognized compensation cost
related to unvested stock options, which is expected to be recognized over a remaining
weighted-average vesting period of 2.7 years. The total grant-date fair value of stock options
vested during the three and nine months ended September 30, 2007, was $0.7 million and $2.0
million, respectively.We apply the provisions of Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services(EITF No. 96-18) to our non-employee stock-based awards. Under
EITF No. 96-18, the measurement date at which the fair value of the stock-based award is
measured is equal to the earlier of (1) the date at which a commitment for performance by the
non-employee to earn the equity instrument is reached or (2) the date at which the
non-employees performance is complete. We recognize stock-based compensation expense for the
fair value of the awards in our consolidated statements of operations. Application of EITF No.
96-18 requires us to measure the fair value of the awards as of each reporting date up to and
including the final vesting date. During the nine months ended September 30, 2007, we issued
stock options to purchase 130,000 shares of common stock to non-employees.
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(3)
    
    Net Loss Per ShareBasic net loss per share of common stock is calculated by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted net loss per
share of common stock is computed by dividing net loss by the weighted-average number of shares
of common stock outstanding during the period plus all additional dilutive shares of common
stock equivalents. Dilutive common stock equivalents include the dilutive effect of
in-the-money options or warrants, which is calculated based on the average share price for each
period using the treasury stock method. Under the treasury stock method, the exercise price of
a share, the average amounts of unrecognized compensation cost, if any, for future service, and
the amount of tax benefits that would be recorded in additional paid-in-capital, if any, when
the share is exercised, are assumed to be used to repurchase shares in the current period.Since we had a net loss for the three and nine months ended September 30, 2007, and for the
three and nine months ended September 30, 2006, basic and diluted net loss per share of common
stock is the same. As a result, the computation of diluted net loss per share of common stock
excludes the effect of the potential exercise of stock options and warrants to purchase shares
of common stock because the effect would be anti-dilutive.Potential common stock equivalents consist of stock options and warrants. The weighted average
anti-dilutive shares for the three and nine month periods ended September 30, 2007 and September
30, 2006 are summarized as follows:
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Common stock options
    
    
    6,524,981
    
    
    
    5,208,849
    
    
    
    6,296,233
    
    
    
    4,772,565Warrants
    
    
    6,744,769
    
    
    
    5,913,267
    
    
    
    6,971,845
    
    
    
    5,913,267Total
    
    
    13,269,750
    
    
    
    11,122,116
    
    
    
    13,268,078
    
    
    
    10,685,832
 (4)
    
    Marketable SecuritiesOur marketable securities are debt securities primarily consisting of government obligations,
mortgage-backed securities, and corporate debt securities. We classify all of our marketable
securities as available-for-sale, as defined by SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Available-for-sale securities are carried at fair value, with
unrealized gains and losses reported as a component of stockholders equity in accumulated other
comprehensive loss. Interest income, realized gains and losses, and declines in value judged to
be other-than-temporary on securities are included in our Statements of Operations.The following is a summary of our available-for-sale investments in debt securities that we
include in current assets on our balance sheets at fair value:
 September 30, 2007
    
    December 31, 2006Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Loss
    
    Value
    
    Loss(in thousands)Corporate debt securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Obligations of US government agencies
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Mortgage-backed and asset-backed securities
    
    
    38
    
    
    
    
    
    
    
    474
    
    
    $
    Marketable securities due over 90 days
    
    $
    38
    
    
    $
    
    
    
    $
    474
    
    
    $
    Commercial paper
    
    $
    
    
    
    $
    
    
    
    $
    21,885
    
    
    $
    11Obligations of US government agencies
    
    
    
    
    
    
    
    
    
    
    804
    
    
    
    Marketable securities due in 90 days or less *
    
    $
    
    
    
    $
    
    
    
    $
    22,689
    
    
    $
    11Total marketable securities
    
    $
    38
    
    
    $
    
    
    
    $
    23,163
    
    
    $
    11
 
 *
    
    Classified as cash and cash equivalents on the balance sheets 8




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The amortized cost and fair value of our available-for-sale investments in debt securities by
stated maturity at September 30, 2007 is as follows:
 Cost
    
    
    Fair value(in thousands)Due in 90 days or less *
    
    $
    
    
    
    $
    Due after two years
    
    $
    38
    
    
    $
    38Total marketable securities
    
    $
    38
    
    
    $
    38
 
 *
    
    Classified as cash and cash equivalents on the balance sheets We evaluate declines in the fair value of our investments in available-for-sale marketable
securities to determine if these declines are other-than-temporary. If a decline in fair value
is determined to be other-than-temporary, an impairment charge would be recorded and a new cost
basis in the investment would be established. Gain or loss on the sale of marketable securities
is determined using the specific identification method.(5)
    
    Comprehensive Income/LossComprehensive income/loss includes net income/loss and unrealized gains and losses on
available-for-sale marketable securities. Cumulative unrealized gains and losses on
available-for-sale marketable securities are reflected as accumulated other comprehensive loss
in stockholders equity on our balance sheets. For the three months ended September 30, 2007,
comprehensive loss was $6.2 million since there was no unrealized gain or loss on marketable
securities. For the three months ended September 30, 2006, comprehensive loss was $9.8 million,
including an unrealized gain on marketable securities of $1,900. For the nine months ended
September 30, 2007, comprehensive loss was $25.7 million, and for the nine months ended September 30, 2006, comprehensive
loss was $16.4 million, including an unrealized gain on marketable securities of $16,000.(6)
    
    License Agreements and CollaborationsBayer AG In-LicenseIn June 2001, we entered into an agreement with Bayer for an exclusive, worldwide,
sub-licensable license under certain Bayer patents and know-how to MEM 1003 for the treatment of
human peripheral and CNS-related disorders. As of September 30, 2007, we have paid $2.0 million
in upfront and milestone payments to Bayer. We are required to make additional payments of up to
$18.0 million upon our achievement of specified milestones. We are also obligated to pay
royalties during the term of the agreement based on a specified percentage of worldwide net
sales of products covered by the license agreement, which increases at increasing net sales
levels and varies depending on whether the sales are made by us or by a sub-licensee.Hoffmann-La Roche (PDE4 Inhibitor Program)In July 2002, we entered into a collaboration with F. Hoffman-La Roche Ltd./Hoffman-La Roche,
Inc., or Roche, for the development of PDE4 inhibitors for the treatment of neurological and
psychiatric indications, and potentially other indications (the 2002 Roche PDE4 Inhibitor
Agreement). Under the 2002 Roche PDE4 Inhibitor Agreement, we granted Roche a worldwide,
exclusive, sub-licensable license to our patent rights and know-how with respect to any PDE4
inhibitor for the prevention and treatment of diseases, in all indications, for either human or
veterinary use. Under this agreement, Roche provided us with research and development funding,
initially for a two-year period, which was extended in August 2004 for an additional two years.
In August 2005, we amended the 2002 Roche PDE4 Inhibitor Agreement to reacquire the right to
develop and commercialize MEM 1414 and MEM 1917, following Roches earlier decision not to
pursue further clinical development of these candidates, and Roche received an option,
exercisable following the completion of Phase 2 clinical trials for each drug candidate, to
continue that drug candidates development and commercialization.In June 2007, in conjunction with an amendment to our Amended and Restated 2003 Roche Nicotinic
Alpha-7 Agonist Agreement (as defined below), we amended and restated the 2002 Roche PDE4
Inhibitor Agreement to reacquire all development and commercialization rights to our PDE4
Inhibitor Program (the Amended and Restated 2002 Roche PDE4 Inhibitor Agreement). Under the
terms of the Amended and Restated 2002 Roche PDE4 Inhibitor Agreement, the following
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have been terminated: (i) the license granted by us to Roche to our patent rights and know-how
with respect to PDE4 inhibitors to be developed under the 2002 Roche PDE4 Inhibitor Agreement
and certain of the parties related rights and obligations, (ii) the PDE4 research collaboration
and certain of the parties related rights and obligations, and (iii) Roches option to obtain
an exclusive license to MEM 1414 and/or MEM 1917. Under the terms of the Amended and Restated
2002 Roche PDE4 Inhibitor Agreement, we are obligated to make milestone payments to Roche if we
achieve specified development, regulatory and commercialization milestones for any PDE4
inhibitors covered under the 2002 Roche PDE4 Inhibitor Agreement. We are also obligated to pay
royalties to Roche for such PDE4 inhibitors based on a specified percentage of net sales of
products, which increases at increasing net sales levels, during the term of the Amended and
Restated 2002 Roche PDE4 Inhibitor Agreement. Royalty payments will expire on a
country-by-country basis ten years following the date of launch in each country.Through the date we entered into the Amended and Restated Roche PDE4 Inhibitor Agreement, Roche
paid us a total of $26.0 million in connection with our PDE4 Inhibitor Program, comprised of an
upfront license fee of $8.0 million, research and development funding of $14.0 million and
milestone payments totaling $4.0 million.Under the terms of our 2002 Roche PDE4 Inhibitor Agreement, because we had licensed to Roche
certain intellectual property and we had continuing performance obligations, we recognized the
non-refundable upfront license fees and milestone payments received thereunder as revenue
ratably over the period of our continuing performance obligations with respect to the first
compound to be developed under that collaboration. Solely for purposes of revenue recognition
under our 2002 Roche PDE4 Inhibitor Agreement, we estimated the relevant period of our
continuing performance obligations under that collaboration as ending in the second quarter of
2014.The amendment and restatement of the 2002 Roche PDE4 Inhibitor Agreement in June 2007 was
predicated on the execution of the amendment to the Amended and Restated 2003 Nicotinic Alpha-7
Agonist Agreement. Effective upon the execution of those agreements in June 2007, we began
recognizing the remaining $6.3 million of deferred revenue relating to the non-refundable
upfront license fees and milestone payments received under the 2002 Roche PDE4 Inhibitor
Agreement as revenue ratably over the period of our continuing performance obligations with
respect to the first compound to be developed under the terms of the Amended and Restated 2003
Roche Nicotinic Alpha-7 Agonist Agreement. Solely for purposes of revenue recognition under the
Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement, we have estimated the
relevant period of our continuing performance obligations as ending in the third quarter of
2013. We periodically review the estimated development periods and our estimated research
efforts under our collaborations and, to the extent such estimates change, the impact of such
change is recorded prospectively.We recognized revenue of $0.3 million in connection with the Amended and Restated Roche PDE4
Inhibitor Agreement during each of the three month periods ended September 30, 2007 and 2006.
During the nine months ended September 30, 2007 and 2006, we recognized revenue of $0.7 million
and $1.5 million, respectively, in connection with the Amended and Restated Roche PDE4 Inhibitor
Agreement.Hoffmann-La Roche (Nicotinic Alpha-7 Agonist Program)In August 2003, we entered into a collaboration with Roche for the development of nicotinic
alpha-7 agonists for the treatment of neurological and psychiatric indications, and potentially
other indications (the 2003 Roche Nicotinic Alpha-7 Agonist Agreement). The 2003 Roche
Nicotinic Alpha-7 Agonist Agreement was amended and restated on February 27, 2006 (the Amended
and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement). Under the terms of the Amended
and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement, we granted to Roche a worldwide,
exclusive, sub-licensable license to all of our patent rights and know-how with respect to our
nicotinic alpha-7 agonists, other than MEM 3454, for the prevention and treatment of diseases,
in all indications, for either human or veterinary use. We are collaborating with Roche in
conducting certain early stage research and development activities with respect to compounds,
other than MEM 3454, being developed under this agreement, and we are responsible for conducting
Phase 1 clinical trials for such compounds. Roche is responsible for clinical development from
Phase 2a onwards and for commercialization of such compounds. We are eligible to receive
milestone payments upon our achievement of specified development, regulatory and
commercialization milestones (including sales level milestones) for compounds that are developed
under the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement. With respect to
MEM 3454, Roche retained the option granted under the 2003 Roche Nicotinic Alpha-7 Agonist
Agreement to secure a license to MEM 3454 upon the completion of the first Phase 2a clinical
trial of MEM 3454 and other predefined events.
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In June 2007, we further amended the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist
Agreement to, among other changes, provide that we would conduct and pay for a Phase 2a clinical
trial of MEM 3454 for the treatment of cognitive impairment associated with schizophrenia, or
CIAS (the CIAS Clinical Trial), and to include a potential milestone payment by Roche related
to the completion of the CIAS Clinical Trial. Pursuant to the June 2007 amendment, if Roche
exercises its option to secure a license to MEM 3454, then, in order to maintain its rights to
MEM 3454, Roche would also have to make a milestone payment to us upon the completion of the
CIAS Clinical Trial (the CIAS Milestone Payment).In connection with our Nicotinic Alpha-7 Agonist Program, we will receive an additional $0.9
million (based on 1 USD: 1.17 CHF) in research and development funding from Roche in the fourth
quarter of 2007. In connection with the commencement of the Phase 1 program for MEM 63908 in
August 2007, Roche made a milestone payment to us of $2.0 million in the third quarter of 2007.Roche has paid us a total of $35.4 million through September 30, 2007 in connection with our
Nicotinic Alpha-7 Agonist Program, comprised of an upfront license fee of $10.0 million, an
equity investment of $10.0 million, research and development funding of $9.4 million and
milestone payments totaling $6.0 million.In accordance with EITF Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables(EITF No. 00-21), we are recognizing the non-refundable
upfront license fees, milestone payments, and research and development funding received under
the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement and the remaining
deferred revenue from the Amended and Restated 2002 Roche PDE4 Inhibitor Agreement as a single
unit of accounting over the period of our continuing performance obligations with respect to the
first compound to be developed under the Amended and Restated 2003 Roche Nicotinic Alpha-7
Agonist Agreement. Solely for purposes of revenue recognition under the Amended and Restated
2003 Roche Nicotinic Alpha-7 Agonist Agreement, we have estimated the relevant period of our
continuing performance obligations as ending in the third quarter of 2013. We periodically
review the estimated development periods and our estimated research efforts under our
collaborations and, to the extent such estimates change, the impact of such change is recorded
prospectively.During the three months ended September 30, 2007 and 2006, we recognized revenue of $0.4 million
and $0.3 million, respectively, in connection with our Nicotinic Alpha-7 Agonist Program.
During the nine months ended September 30, 2007 and 2006, we recognized revenue of $1.2 million
and $0.8 million, respectively, in connection with our Nicotinic Alpha-7 Agonist Program.Amgen Inc. (PDE10 Inhibitor Program)On October 14, 2005, we entered into a collaboration with Amgen Inc., or Amgen, for the
development of PDE10 inhibitors for neurological and psychiatric disorders (the Amgen PDE10
Inhibitor Agreement). We have received
a $5.0 million upfront fee, a $2.0 million milestone payment and $7.1 million in research and
development funding from Amgen over the two-year term of the collaboration during which we and Amgen
conducted a collaborative preclinical research program relating to
PDE10 inhibitors. Under the terms of the Amgen PDE10 Inhibitor
Agreement, Amgen
remains obligated to make milestone payments to us upon the achievement of pre-specified
research, development, regulatory approval and sales milestones relating to PDE10 inhibitors.We are recognizing revenue under the Amgen PDE10 Inhibitor Agreement over the two-year period of
the collaboration based on the level of actual research efforts expended in a period as compared
to our estimated efforts over the full period.During the three months ended September 30, 2007 and 2006, we recognized revenue of $2.1 million
and $1.5 million, respectively, under the Amgen PDE10 Inhibitor Agreement. During the nine
months ended September 30, 2007 and 2006, we recognized revenue of $6.3 million and $4.4
million, respectively, under the Amgen PDE10 Inhibitor Agreement.The Stanley Medical Research Institute (MEM 1003 in Bipolar Disorder)On December 20, 2005, we entered into a development agreement with The Stanley Medical Research
Institute, or SMRI, pursuant to which we have conducted a Phase 2a bipolar disorder clinical
trial of MEM 1003 (the SMRI Development Agreement). We have received an aggregate of $3.2
million in funding from SMRI, the full amount that we were eligible to receive under the SMRI
Development Agreement. We received $1.0 million of this funding in exchange for the issuance of
440,367 shares of our common stock and a warrant to purchase 154,128 shares of our common stock
at an exercise price of $2.62 per share that expires on December 19, 2010 and the remainder in
the form of milestone payments.
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In accordance with EITF No. 00-21, we are recognizing the milestone payments received from SMRI
as a single unit of accounting. As of September 30, 2007, all of our obligations and all of
SMRIs predefined milestone payment obligations under the SMRI Development Agreement were
satisfied. Accordingly, we recognized the aggregate milestone payments received from SMRI of
$2.2 million as revenue during the third quarter of 2007.NPS Allelix Corp. (5-HT6Antagonist Program)Our preclinical development pipeline includes a 5-HT6 Antagonist Program. We
have internally developed a portfolio of novel, potent and selective 5-HT6
antagonists, which includes compounds that are covered by intellectual property licensed from
NPS Allelix Corp., or NPS. We are evaluating several lead compounds from this portfolio as
potential development candidates.In October 2003, we entered into a License Agreement with NPS, which we amended and restated in
April 2007 (the Amended and Restated 2003 NPS 5-HT6 Antagonist Agreement). Under
the terms of the Amended and Restated 2003 NPS 5-HT6 Antagonist Agreement, we have an
exclusive, sub-licensable license under certain NPS patents and know-how to 5-HT6
antagonists for the treatment of diseases, in all indications, for either human or veterinary
use. As of September 30, 2007, we have paid $50,000 in upfront and milestone payments to NPS
(after credit for patent costs). We are required to make additional payments to NPS upon our
achievement of specified development and regulatory milestones. We also are obligated to pay
royalties to NPS during the term of the agreement based on a specified percentage of worldwide
net sales of products that include 5-HT6 antagonist compounds independently developed
by us, or NPS compounds covered by the Amended and Restated 2003 NPS 5-HT6 Antagonist
Agreement. Royalty payments will expire generally on a country-by-country basis ten years
following the launch of the product in that country. Payments under the Amended and Restated
2003 NPS 5-HT6 Antagonist Agreement are subject to reduction under certain
circumstances. In the event we sublicense our rights under the Amended and Restated 2003 NPS
5-HT6 Antagonist Agreement, we are required to make a one-time payment to NPS, not to
exceed a predefined maximum amount.(7)
    
    2005 Private PlacementOn September 23, 2005, we completed a private placement, which we refer to as our 2005 Private
Placement, in which we issued 16,112,158 shares of common stock, at a price of $1.90 per share,
and warrants to purchase an aggregate of 5,639,232 shares of common stock, resulting in gross
proceeds of $31.0 million.As required under the terms of the Securities Purchase Agreement, pursuant to which the private
placement was consummated, we filed a registration statement with the SEC to register for
resale the shares of common stock and the shares of common stock issuable upon the exercise of
the warrants sold in the 2005 Private Placement. The registration statement became effective on
November 7, 2005. Under the terms of the Securities Purchase Agreement, our obligation to keep
the registration statement effective expired on September 23, 2007. Accordingly, on September
25, 2007, we filed a post-effective amendment to that registration statement to deregister all
of the shares that remain unsold from the 2005 Private Placement. The post-effective amendment
was declared effective by the SEC on September 26, 2007.In December 2006, the Financial Accounting Standards Board (FASB) issued EITF Issue No. 00-19-2, Accounting for Registration Payment Arrangements(EITF No. 00-19-2),
which amends the previously issued accounting related to financial instruments issued with
material penalty provisions for failure to file or maintain an effective registration statement
with the SEC or to be listed on a nationally recognized stock exchange. The warrants issued in
our 2005 Private Placement include certain penalty provisions related to maintaining
registration, and therefore, prior to the adoption of EITF No. 00-19-2, were classified as a
liability and recorded at fair value at each reporting date. EITF No. 00-19-2 requires
liability recognition for registration payment arrangements, only if it is probable that these
requirements will not be met, and only to the extent of any material penalties for not meeting
the requirements. EITF No. 00-19-2 was adopted by us on January 1, 2007, and, accordingly, the
effect on our financial statements was a reclassification of the value of the warrants as of
December 31, 2006. The $8.7 million warrant liability was reclassified as a $6.8 million
increase in additional paid-in capital and a $1.9 million reduction to accumulated deficit.The warrants are currently exercisable, have a five-year term and an exercise price per share
of $2.22. The fair value of the warrants on the date of issuance was $6.8 million and was
determined using the Black-Scholes model with the following assumptions: dividend yield of 0%,
estimated volatility of 80%, risk free interest rate of 4.07%, and an expected life of five
years.
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(8)
    
    2006 Private PlacementOn October 5, 2006, we entered into an agreement to issue and sell in a private placement,
which we refer to as our 2006 Private Placement, 28,232,202 shares of our common stock, at a
price of $1.11 per share and warrants to purchase an aggregate of 7,058,042 shares of our
common stock, at a purchase price of $0.125 per underlying share of common stock. The warrants
issued had an exercise price of $1.33 per share. The securities were sold in two tranches.
The first tranche, consisting of the sale of 23,245,724 shares of common stock and all
7,058,042 warrants, closed on October 16, 2006 and resulted in gross proceeds of $26.7 million.
The second tranche, consisting of the sale of 4,986,478 shares of common stock, closed on
December 18, 2006 and resulted in gross proceeds of $5.5 million.On November 10, 2006, certain of the investors in the 2006 Private Placement exercised their
warrants on a net share settlement basis resulting in the issuance of 1,499,224 shares of our
common stock. On February 15, 2007, we exercised our right to require the exercise of the
warrants issued in connection with the 2006 Private Placement pursuant to a provision contained
in the warrants that permitted us to accelerate their exercise period if the closing price of
our common stock was above $3.00 for 30 consecutive trading days. During the quarter ended
March 31, 2007, all of the remaining warrants issued in the 2006 Private Placement were
exercised, some on a cashless basis, resulting in gross proceeds to the Company of $5.0 million
and the issuance of an additional 3,903,369 shares of common stock.(9)
    
    2007 Private PlacementOn June 18, 2007, we entered into a definitive Stock Purchase Agreement with SMRI and The Sylvan
C. Herman Foundation for the sale of an aggregate of up to $6.0 million of our common stock in
three equal tranches. We refer to this as our 2007 Private Placement. Under the terms of the
2007 Private Placement, the net proceeds are required to be used to fund the CIAS Clinical
Trial.The first tranche of the 2007 Private Placement closed on June 20, 2007, and we sold an
aggregate of 694,444 shares of our common stock at a price of $2.88 per share (which, pursuant
to the terms of the Stock Purchase Agreement, was equal to 117% of the average closing sale
price of our common stock on the NASDAQ Global Market for the ten trading days ending on the
trading day immediately preceding the effective date of the Stock Purchase Agreement). We have
the option, in our sole discretion, to sell the remaining $4.0 million of our common stock to
the purchasers in the 2007 Private Placement in two tranches of $2.0 million each, if we achieve
predefined milestones related to the CIAS Clinical Trial, and if we have no intention, at that
time, of terminating the CIAS Clinical Trial. The price of any common stock sold in the second
and third tranches will be equal to 117% of the average closing sale price of our common stock
on the NASDAQ Global Market for the ten trading days ending on the trading day immediately
preceding our achievement of each milestone.Under the terms of the Stock Purchase Agreement, we agreed to file, within 90 days after the
first closing, a registration statement with the SEC to register for resale the shares issued at
the first closing, which registration statement is required to become effective within 180 days
following the first closing. In addition, to the extent any shares of common stock sold in the
second and third tranches cannot be included in the first registration statement, we have agreed
to file a second registration statement with the SEC within 180 days after the completion of the
CIAS Clinical Trial, which registration statement is required under the terms of the Stock
Purchase Agreement to become effective within 270 days following the completion of the CIAS
Clinical Trial. We are required to maintain the effectiveness of the registration statement(s)
for a period of two years from the last issuance of shares of common stock under the Stock
Purchase Agreement or, if earlier, until all registered shares of common stock may be sold
within any 90 day period under Rule 144, which we refer to as the Registration Period. We will
be required to pay certain cash penalties if we do not meet our registration obligations under
the Stock Purchase Agreement.On July 10, 2007, we filed a registration statement with the SEC registering for resale the shares of common stock issued in the 2007 Private Placement. The registration statement was
declared effective on August 7, 2007.In addition to the registration rights described above, we have granted piggyback registration
rights, during the Registration Period, to the holders of securities acquired in the 2007
Private Placement.We have determined that it is not probable that we will not meet the registration requirements
of the 2007 Private Placement and therefore, in accordance with EITF No. 00-19-2, we have not
recognized a liability related to such requirements.
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(10)
    
    Hercules FinancingOn March 16, 2007, we entered into a $10.0 million term loan agreement with Hercules Technology
Growth Capital, Inc., or Hercules. Pursuant to the Loan and Security Agreement, dated as of
March 16, 2007 (the Original Hercules Loan Agreement), Hercules advanced us $6.0 million on
March 19, 2007 (the First Advance). On June 18, 2007, we amended the Hercules Loan Agreement
to increase the aggregate amount that we may borrow thereunder from $10.0 million to $15.0
million (the Hercules Amendment, together with the Original Hercules Loan Agreement, the
Hercules Loan Agreement). In connection with the Hercules Amendment, Hercules advanced to us
an additional $5.0 million on June 20, 2007 (the Second Advance) and the remaining $4.0
million on October 2, 2007 (the Third Advance).The principal balance of each advance under the Hercules Loan Agreement bears interest from the
advance date at an interest rate equal to the prime rate on the date the advance is requested
plus 3.20%. The interest rate for the First and Second Advance is 11.45% and the interest rate
for the Third Advance is 10.95%. The Hercules Loan Agreement allows for interest-only payments
on a monthly basis until May 2008. All amounts outstanding under the Hercules Loan Agreement as
of May 16, 2008 are required to be repaid in 30 equal monthly installments beginning on the
first business day of June 2008. The repayment period will be extended to 33 months if we
satisfy certain milestones prior to March 16, 2008. The Hercules Loan Agreement allows us to
prepay the outstanding principal amount and all accrued but unpaid interest and fees, subject to
a payment of a prepayment premium equal to (i) 2.5% of the principal prepaid if paid on or
before June 16, 2008, and (ii) 1.5% of the principal prepaid if paid any time after June 16,
2008 but before the maturity date. Once repaid, we may not reborrow any advances. Hercules may
require that all amounts outstanding under the Hercules Loan Agreement be prepaid upon a change
of control or sale of substantially all of our assets. Hercules right to require prepayment is
a derivative security, the fair value of which we have deemed to be immaterial as of September
30, 2007. Our obligations under the Hercules Loan Agreement are collateralized by substantially
all of our assets, now owned or hereafter acquired, other than our intellectual property. The
Hercules Loan Agreement contains customary covenants that, among other things, restrict our
ability to incur indebtedness and pay cash dividends on our capital stock. The Hercules Loan
Agreement also provides for customary events of default, following which Hercules may, at its
option, accelerate the amounts outstanding under the Hercules Loan Agreement. Events of default
include, but are not limited to, an event that has a material adverse effect, as defined in the
Hercules Loan Agreement.In connection with the Original Hercules Loan Agreement, we issued Hercules a five-year
warrant to purchase 598,086 shares of our common stock at an exercise price of $2.09 per share
(the First Warrant). In connection with the Hercules Amendment, we issued to Hercules a
five-year warrant to purchase 325,521 shares of our common stock at an exercise price per share
of $1.92 (the Second Warrant together with the First Warrant, the Warrants).At the date of the initial advance, the fair value of the First Warrant was $0.9 million,
and this amount was credited to additional paid-in capital. At the date of the second advance,
the fair value of the Second Warrant was $0.6 million. The amount allocated to the Warrants
reduced the carrying value of the debt. The debt discount is being accreted over the term of
the outstanding loan using the effective interest method. The fair value of the Warrants was
determined using the Black-Scholes model. The following assumptions were used for the First
Warrant: dividend yield of 0%, estimated volatility of 87.78%, risk free interest rate of 4.47%,
and an expected life of five years. The following assumptions were used for the Second Warrant:
dividend yield of 0%, estimated volatility of 89.85%, risk free interest rate of 5.07%, and an
expected life of five years.The loan includes a deferred interest payment of 3% of the amount borrowed under the Hercules
Loan Agreement, which is payable on the maturity date. We include this amount in deferred
financing costs and amortize it to interest expense over the term of the loan. In connection
with the Hercules Loan Agreement, we incurred $0.3 million of additional deferred financing
costs. These costs are also being amortized over the term of the loan.Under the terms of the Second Warrant, we agreed to file, within 90 days of the date of the
Hercules Amendment, a registration statement with the SEC to register for resale the shares of
common stock underlying Warrants issued by us to Hercules in connection with entering into the
Hercules Loan Agreement. Under the terms of the Second Warrant, the registration statement is
required to become effective within 180 days following the date of the Hercules Amendment and,
except as otherwise permitted under the Hercules Amendment, must remain effective through June
18, 2009 or, if earlier, until all registered shares of common stock may be sold under Rule 144
during any 90 day period. We will be required to pay certain cash penalties if we do not meet
our registration obligations under the Second Warrant.
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On July 10, 2007, we filed a registration statement with the SEC registering for resale the shares of common stock underlying the Warrants issued to Hercules. The registration statement
was declared effective on August 7, 2007.We have determined that it is not probable that we will not meet the registration requirements
set forth in the Second Warrant and therefore, in accordance with EITF No. 00-19-2, we have not
recognized a liability related to such requirements.(11)
    
    Income TaxesIn July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
- an Interpretation of FASB Statement No. 109(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes(FASB No. 109). The interpretation
prescribes a recognition threshold and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. The
provisions of FIN 48 were effective for us on January 1, 2007. The application of FIN 48 did
not have a material effect on our financial position, results from operations, or cash flows.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   OVERVIEW
   6
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
    
    L-Type Calcium Channel Modulator  MEM 1003MEM 1003 is a neuronal L-type calcium channel modulator being developed for the treatment of
Alzheimers disease. In October 2007, we reported top-line results from a multi-center,
randomized, double-blind, placebo-controlled Phase 2a study that evaluated the safety and
efficacy of MEM 1003 in patients with mild to moderate Alzheimers disease. The trial
enrolled 183 subjects at over 40 centers in the United States and included monotherapy
subjects and subjects on stable doses of cholinesterase inhibitors. The trial failed to meet
its primary endpoint, which was a twelve-week mean change in the Alzheimers disease
Assessment Scale  Cognitive subscale (ADAS  cog) score in the overall population. The
negative results were largely driven by an unusually large placebo response in the subgroup
of monotherapy subjects. In the subgroup of subjects receiving cholinesterase inhibitors,
the change in ADAS-cog favored treatment over placebo, although this difference was not
statistically significant. Similarly, in this subgroup, numeric improvements were seen in
all of the four secondary endpoints: Mini-Mental State Exam, the Alzheimers Disease
Cooperative Study  Activities of Daily Living, the Clinician Interview-Based Impression of
Change with Caregiver Input and the Neuropsychiatric Inventory. We are currently reviewing
these results and evaluating the potential for further development of this drug candidate.In March 2007, we announced that we had completed a Phase 2a trial of MEM 1003 in bipolar
mania and that MEM 1003 did not prove effective in that trial. We have completed a full
analysis of the data from that trial and do not, at this time, have plans to proceed with
further clinical trials of MEM 1003 in bipolar disorder. We conducted the Phase 2a bipolar
disorder clinical trial of MEM 1003 with funding support from SMRI in the aggregate amount of
$3.2 million. Under the agreement, we received $1.0 million of this funding in exchange for
the issuance of 440,367 shares of our common stock and a warrant to purchase 154,128 shares
of our common stock at an exercise price of $2.62 per share that expires on December 19, 2010
and the remainder in the form of milestone payments.We have an exclusive worldwide, sub-licensable license to MEM 1003 from Bayer for the
treatment of human peripheral and CNS-related disorders. As of September 30, 2007, we had
paid $2.0 million in upfront and milestone payments to Bayer under this agreement. We are
required to make additional payments to Bayer of up to $18.0 million in the event that we
achieve specified milestones and to pay royalties on sales of any products incorporating MEM
1003.
    
    Nicotinic Alpha-7 Agonist ProgramMEM 3454, a partial agonist of the nicotinic alpha-7 receptor, is the lead candidate from
our nicotinic alpha-7 agonist program and is being developed for the treatment of Alzheimers disease and CIAS. In November 2007, we announced positive
top-line data from the randomized, placebo-controlled, multi-center Phase 2a proof-of-concept
trial evaluating three oral daily doses of MEM 3454 (5 mg, 15 mg, and 50 mg) in 80 patients
with mild to moderate Alzheimers disease over an eight week treatment period (the MEM 3454
Phase 2a AD clinical trial). The primary endpoint of the trial was the change from baseline
in the Quality of Episodic Secondary Memory (QESM) factor score of the Cognitive Drug
Research (CDR) battery. For the eight hour post-dose time points over the treatment period,
subjects receiving 5 mg and 15 mg of MEM 3454 demonstrated a statistically significant effect
on the QESM compared to placebo. MEM 3454 also achieved statistical significance on certain
key secondary endpoints from the CDR battery.We intend to commence a Phase 2a clinical trial of MEM 3454 in CIAS (the CIAS Clinical
Trial) by the end of 2007. MEM 63908 is the second drug candidate to be nominated from our
nicotinic alpha-7 agonist program and is also a partial agonist of the nicotinic alpha-7
receptor. We commenced a Phase 1 program for MEM 63908 in August 2007.In August 2003, we entered into a collaboration with Roche for the development of nicotinic
alpha-7 agonists (the 2003 Roche Nicotinic Alpha-7 Agonist Agreement), which was
subsequently amended and restated in February 2006 (the Amended and Restated 2003 Nicotinic
Alpha-7 Agonist Agreement). Under the terms of the Amended and Restated 2003 Roche
Nicotinic Alpha-7 Agonist Agreement, we have granted to Roche a worldwide, exclusive,
sublicensable license to all of our patent rights and know-how with respect to our nicotinic
alpha-7 agonists, other than MEM 3454, for the prevention and treatment of diseases, in all
indications, for either human or veterinary use. We are collaborating with Roche in
conducting certain early stage research and development activities with respect to compounds
being developed under this agreement and we are responsible for conducting Phase 1 clinical
trials for such compounds. Roche is responsible for clinical development from Phase 2a
onwards and for commercialization of such compounds. We are eligible to receive milestone
payments upon our achievement of specified development, regulatory and commercialization
milestones (including sales level milestones) for compounds that are developed under the
agreement.
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In June 2007, we further amended the Amended and Restated 2003 Roche Nicotinic Alpha-7
Agonist Agreement to, among other changes, provide that we would conduct and pay for the CIAS
Clinical Trial. With respect to MEM 3454, Roche has the option to obtain a license following
our completion of the first Phase 2a clinical trial for this candidate and certain other
predefined events, including the delivery of certain information to Roche regarding the
trial. We expect to deliver this information to Roche during the first half of 2008. If
Roche exercises its option to license MEM 3454, it is obligated to make a milestone payment
to us at that time, and in order to maintain its license to MEM 3454, it will also be
obligated to make a second milestone payment upon completion of the CIAS Clinical Trial that
we plan to start later this year.Under the terms of the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement,
we will receive an aggregate of approximately $2.5 million (based on 1 USD: 1.20 CHF) in
research and development funding in 2007. Through September 30, 2007, Roche has paid us a
total of $35.4 million under this collaboration, comprised of an upfront license fee of $10.0
million, research and development funding of $9.4 million, milestone payments of $6.0 million
and a $10.0 million equity investment.The CIAS Clinical Trial is being funded in part through our securities purchase agreement
with SMRI and The Sylvan C. Herman Foundation, pursuant to which we have agreed to sell up to
an aggregate of $6.0 million of our common stock in three equal tranches. We refer to this
as our 2007 Private Placement. The first tranche of the 2007 Private Placement closed in
June 2007, and upon our achievement of certain predefined milestones related to the CIAS
Clinical Trial and provided we have no current intention of terminating that trial, we have
the option, in our sole discretion, to sell to SMRI and The Sylvan C. Herman Foundation the
remaining $4.0 million of common stock in two tranches of $2.0 million each, at a 17% premium
to the market price at the time the respective milestones are achieved.
    
    PDE4 Inhibitor ProgramIn July 2002, we entered into a collaboration with Roche for the development of PDE4
Inhibitors (the 2002 Roche PDE4 Inhibitor Agreement). During the course of this
collaboration, we named two drug candidates, MEM 1414, which has completed Phase 1 clinical
trials, and MEM 1917. In June 2007, we restructured the 2002 Roche PDE4 Inhibitor Agreement
to reacquire from Roche all rights to the PDE4 Inhibitor Program (the Amended and Restated
2002 Roche PDE4 Inhibitor Agreement). Through the date we entered into the Amended and
Restated Roche PDE4 Inhibitor Agreement, Roche paid us a total of $26.0 million in connection
with our PDE4 Inhibitor Program, comprised of an upfront license fee of $8.0 million,
research and development funding of $14.0 million and milestone payments totaling $4.0
million. Under certain circumstances, we are obligated to make milestone payments to Roche
in the future. We are currently evaluating alternatives for the further development of this
program, which could include taking the program forward, in whole or in part, on our own or
with a new collaboration partner.
    
    PDE10 Inhibitor ProgramIn October 2005, we entered into a collaboration with Amgen for the development of PDE10
inhibitors for neurological and psychiatric disorders (the Amgen PDE10 Inhibitor
Agreement). Under the terms of the Amgen PDE10 Inhibitor Agreement, we have conducted a
two-year collaborative preclinical research program with Amgen relating to PDE10 inhibitors
in accordance with a predefined research work plan. We will receive $3.9 million in research
and development funding in the second year of the collaboration. Amgen is also obligated to
make milestone payments to us upon the achievement of pre-specified research, development,
regulatory approval and sales milestones relating to PDE10 inhibitors. Amgen has paid us a
total of $14.1 million through September 30, 2007, comprised of a $5.0 million upfront fee,
$7.1 million in research and development funding and a $2.0 million milestone payment.
    
    5-HT6Antagonist ProgramOur preclinical development pipeline includes a 5-HT6 Antagonist Program. We
have internally developed a portfolio of novel, potent and selective 5-HT6
antagonists, which includes compounds that are covered by intellectual property licensed from
NPS Allelix Corp., or NPS. We are evaluating several lead compounds from this portfolio as
potential development candidates. In October 2003, we entered into a license agreement with
NPS, which we amended and restated in April 2007 (the Amended and Restated 2003 NPS
5-HT6 Antagonist Agreement). Under the terms of the Amended and Restated 2003
NPS 5-HT6 Antagonist Agreement, we have an exclusive, sub-licensable license under
certain NPS patents and
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know-how to 5-HT6 antagonists for the treatment of diseases, in all
indications, for either human or veterinary use. We are required to make payments to NPS
upon our achievement of specified development and regulatory milestones.
      CRITICAL ACCOUNTING POLICIES
   Use of estimates
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Revenue recognition
 Revenue Recognition Accounting for Revenue
Arrangements with Multiple Deliverables
      19




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Accrued expenses
  
    
    professional service fees, such as attorneys and accountants fees;
    
    preclinical and clinical contract research organization fees;
    
    fees to be paid to data management organizations and investigators in conjunction with clinical trials; and
    
    fees to be paid to contract manufacturers in conjunction with the production of the
supply of our drug candidates for preclinical and clinical trials.
  Research and development expense
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Share-Based Payment Arrangements
 Share-Based Payment Share-Based Payment
  Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services
 RESULTS OF OPERATIONS
 Three Months Ended September 30, 2007 compared to Three Months Ended September 30, 2006
 Revenue
   Research and development expense
  General and administrative expense
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Change in fair value of warrants
 Accounting for
Registration Payment Arrangements
 Interest income and interest expense
  Income taxes
  Nine Months Ended September 30, 2007 compared to Nine Months Ended September 30, 2006
 Revenue
   Research and development expense
  General and administrative expense
  Change in fair value of warrants
  22




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Interest income and interest expense
  Income taxes
  Liquidity and capital resources
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
    
    the number of compounds and drug candidates that we advance through the development process;
    
    the funding we receive from our currently existing or any new collaborations;
    
    the scope and results of our and our collaborators clinical trials;
    
    the potential in-licensing or acquisition of other compounds or technologies;
    
    the costs involved in utilizing third party contract research organizations for preclinical studies and clinical trials;
    
    the timing of, and the costs involved in, obtaining regulatory approvals;
    
    the availability of third parties, and the cost, to manufacture our drug candidates
for preclinical and clinical trial supply;
    
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other patent-related costs, including litigation costs and the results
of such litigation; and
    
    the cost of commercialization activities, including product marketing, sales and
distribution.
   Contractual Obligations
  New Accounting Pronouncements
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The Fair
Value for Financial Assets and Financial Liabilities
 Fair Value Measurements
 Accounting for Nonrefundable Advance Payments for Goods
or Services Received for Use in Future Research and Development Activities
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4T. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Change in internal control over financial reporting
  Limitations on the effectiveness of controls
  25




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PART II. OTHER INFORMATION.
 
 Item 5. Other Information
 Election of Director
      Adoption of Second Amended and Restated Bylaws
   
 Item 6. Exhibits
 3.1
    
    Second Amended and Restated Bylaws of the Registrant10.1*
    
    Amended and Restated License Agreement between NPS Allelix Corp. and the
Registrant, dated April 20, 2007.31.1
    
    Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
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32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Confidential treatment requested as to certain portions, which portions are omitted and filed
separately with the SEC. 27




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SIGNATURES
  MEMORY PHARMACEUTICALS CORP.By:
    /s/ James R. SulatJames R. SulatPresident and Chief Executive Officer

(Principal Executive Officer and Principal Financial
Officer and Duly Authorized Officer)  28




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Exhibit Index
 3.1
    
    Second Amended and Restated Bylaws of the Registrant10.1*
    
    Amended and Restated License Agreement between NPS Allelix Corp. and
the Registrant, dated April 20, 2007.31.1
    
    Certification by the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 193432.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Confidential treatment requested as to certain portions, which portions are omitted and filed
separately with the SEC. 29