##### Table of Contents



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 June 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
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)100 Philips Parkway, Montvale, New Jersey
    
    07645(Address of Principal Executive Offices)
    
    (Zip Code)
 (Registrants Telephone Number, Including Area Code)
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 þ o
  o o þ
 o þ




---



##### 



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 4. Controls and Procedures
    
    
    26Part II. Other Information
    
    
    27Item 1A. Risk Factors
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32EX-10.4: SECOND AMENDMENT TO AMENDED AND RESTATED STRATEGIC ALLIANCE AGREEMENTEX-10.5: AMENDED AND RESTATED COLLABORATION AND LICENSE AGREEMENTEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MEMORY PHARMACEUTICALS CORP.
 
 BALANCE SHEETS
 (unaudited)
 (in thousands, except for share and per share amounts)
 June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    51,285
    
    
    $
    50,849Marketable securities
    
    
    53
    
    
    
    474Receivables
    
    
    64
    
    
    
    Prepaid and other current assets
    
    
    1,268
    
    
    
    1,397Total current assets
    
    
    52,670
    
    
    
    52,720Deferred financing costs, net
    
    
    542
    
    
    
    Property and equipment, net
    
    
    6,656
    
    
    
    7,413Restricted cash
    
    
    505
    
    
    
    509Total assets
    
    $
    60,373
    
    
    $
    60,642LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,339
    
    
    $
    741Accrued expenses
    
    
    5,258
    
    
    
    6,179Current portion of loan payable
    
    
    301
    
    
    
    Current portion of equipment notes payable
    
    
    471
    
    
    
    744Deferred revenue  current
    
    
    5,429
    
    
    
    6,801Total current liabilities
    
    
    14,798
    
    
    
    14,465Warrant liability
    
    
    
    
    
    
    8,724Loan payable, less current portion
    
    
    9,243
    
    
    
    Equipment notes payable, less current portion
    
    
    197
    
    
    
    345Deferred revenue  long-term
    
    
    13,275
    
    
    
    13,906Total liabilities
    
    
    37,513
    
    
    
    37,440Stockholders equity:Common stock, $0.001 par value per share; 175,000,000 shares authorized; and 72,582,840
and 67,655,132 issued and outstanding at June 30, 2007, and December 31, 2006 respectively
    
    
    73
    
    
    
    68Additional paid-in capital
    
    
    223,675
    
    
    
    206,372Accumulated deficit
    
    
    (200,888
    )
    
    
    (183,227
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (11
    )Total stockholders equity
    
    
    22,860
    
    
    
    23,202Total liabilities and stockholders equity
    
    $
    60,373
    
    
    $
    60,642
  3




---



##### Table of Contents



MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except for share and per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    2,728
    
    
    $
    1,944
    
    
    $
    5,418
    
    
    $
    4,724Operating expenses:Research and development
    
    
    11,258
    
    
    
    6,379
    
    
    
    21,108
    
    
    
    13,220General and administrative
    
    
    2,593
    
    
    
    2,063
    
    
    
    4,846
    
    
    
    4,301Total operating expenses
    
    
    13,851
    
    
    
    8,442
    
    
    
    25,954
    
    
    
    17,521Loss from operations
    
    
    (11,123
    )
    
    
    (6,498
    )
    
    
    (20,536
    )
    
    
    (12,797
    )Change in fair value of warrants (Note 7)
    
    
    
    
    
    
    7,753
    
    
    
    
    
    
    
    5,493Interest:Income
    
    
    649
    
    
    
    418
    
    
    
    1,279
    
    
    
    856Expense
    
    
    (209
    )
    
    
    (49
    )
    
    
    (287
    )
    
    
    (109
    )Interest income, net
    
    
    440
    
    
    
    369
    
    
    
    992
    
    
    
    747Income/(loss) before income taxes
    
    
    (10,683
    )
    
    
    1,624
    
    
    
    (19,544
    )
    
    
    (6,557
    )Income taxes
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    Net income/(loss)
    
    $
    (10,689
    )
    
    $
    1,624
    
    
    $
    (19,550
    )
    
    $
    (6,557
    )Income/(loss) per common share:Basic
    
    $
    (0.15
    )
    
    $
    0.04
    
    
    $
    (0.27
    )
    
    $
    (0.17
    )Diluted
    
    $
    (0.15
    )
    
    $
    0.04
    
    
    $
    (0.27
    )
    
    $
    (0.17
    )Shares used in calculation of net
income/(loss) per common share:Basic
    
    
    72,098,338
    
    
    
    37,836,343
    
    
    
    71,121,965
    
    
    
    37,790,868Diluted
    
    
    72,098,338
    
    
    
    38,415,846
    
    
    
    71,121,965
    
    
    
    37,790,868
  4




---



##### Table of Contents



MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Six Months EndedJune 30,2007
    
    
    2006Cash flows used in operating activities:Net loss
    
    $
    (19,550
    )
    
    $
    (6,557
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,155
    
    
    
    1,032Non-cash stock based compensation
    
    
    1,656
    
    
    
    1,389Unrealized gain on warrants
    
    
    
    
    
    
    (5,493
    )Changes in operating accounts:Receivables
    
    
    (64
    )
    
    
    1,562Prepaid and other current assets
    
    
    129
    
    
    
    (174
    )Other assets
    
    
    4
    
    
    
    Accounts payable
    
    
    2,598
    
    
    
    214Accrued expenses
    
    
    (1,229
    )
    
    
    (1,855
    )Deferred revenue
    
    
    (2,003
    )
    
    
    (1,365
    )Net cash used in operating activities
    
    
    (17,304
    )
    
    
    (11,247
    )Cash flows provided by investing activities:Purchases of marketable securities
    
    
    
    
    
    
    (988
    )Sales of marketable securities
    
    
    410
    
    
    
    4,905Additions to property and equipment
    
    
    (236
    )
    
    
    (178
    )Net cash provided by investing activities
    
    
    174
    
    
    
    3,739Cash flows provided by financing activities:Proceeds from issuance of common stock
    
    
    7,248
    
    
    
    161Proceeds from issuance of loan payable and warrants
    
    
    11,000
    
    
    
    Deferred financing costs
    
    
    (261
    )
    
    
    Principal repayment of equipment notes payable
    
    
    (421
    )
    
    
    (694
    )Net cash provided by / (used in) financing activities
    
    
    17,566
    
    
    
    (533
    )Net increase / (decrease) in cash and cash equivalents
    
    
    436
    
    
    
    (8,041
    )Cash and cash equivalents, beginning of period
    
    
    50,849
    
    
    
    39,533Cash and cash equivalents, end of period
    
    $
    51,285
    
    
    $
    31,492Supplemental cash flow information:Cash paid for interest
    
    $
    265
    
    
    $
    109Cash paid for taxes
    
    $
    
    
    
    $
    3
  5




---



##### Table of Contents



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 June 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 June 30, 2007 for our stock-based
compensation plans was $0.8 million, of which $0.3 million was a component of general and
administrative expenses and $0.5 million was a component of research and development expenses.
For the three months ended June 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 six months ended
June 30, 2007 for our stock-based compensation plans was $1.7 million, of which $0.6 million
was a component of general and administrative expenses and $1.1 million was a component of
research and development expenses. For the six months ended June 30, 2006, we recognized
compensation expense for stock-based compensation plans of $1.4 million, of which $0.7 million
was a component of general and administrative expenses and $0.7 million was a component of
research and development expenses.The weighted-average fair value of the stock option awards granted during the six-month
periods ended June 30, 2007 and June 30, 2006 was $2.61 per share and $1.71 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.
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2007
    
    
    June 30, 2006Expected life
    
    
    5.56 to 10 years
    
    
    
    5.56 to 6.25 yearsExpected volatility
    
    87.8% to 89.5%
    
    80.7% to 81.5%Risk-free interest rate
    
    4.52% to 5.03%
    
    4.39% to 4.97%Dividend yield
    

    0%

    
    0%
 Share-Based Payment
 6




---



##### Table of Contents



Exercise Price
    
    
    Weighted-AverageShares
    
    
    Per Share
    
    
    Exercise PriceOutstanding at December 31,
2006
    
    
    5,276,852
    
    
    $
    0.30$9.82
    
    
    $
    3.03Granted
    
    
    1,116,250
    
    
    $
    2.00$3.81
    
    
    $
    3.44Exercised
    
    
    (235,984
    )
    
    $
    0.30$2.70
    
    
    $
    0.98Cancelled / Forfeited
    
    
    (49,336
    )
    
    $
    0.75$9.82
    
    
    $
    3.00Outstanding at June 30, 2007
    
    
    6,107,782
    
    
    $
    0.30$9.82
    
    
    $
    3.18
 As of June 30, 2007, there was $4.8 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 2.67 years. The total grant-date fair value of stock options vested during
the three and six months ended June 30, 2007, was $0.7 million and $1.3 million, respectively.We apply the provisions of 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 six months ended June 30, 2007, we issued stock options to purchase
130,000 shares of common stock to non-employees.(3)
    
    Net Loss Per ShareBasic net loss per share of common stock is calculated by dividing net income/(loss) by the
weighted average number of shares of common stock outstanding during the period. Diluted net
income per share of common stock is computed by dividing net income 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 six months ended June 30, 2007, and for the six months
ended June 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.For the three months ended June 30, 2006, we reported net income of $1.6 million and diluted net
income per common share of $0.04. The dilutive calculation includes 579,503 of additional
in-the-money options and warrants. Net income resulted from a significant reduction in the
market price of our common stock causing our warrant liability to reverse by approximately $7.8
million for the three months ended June 30, 2006.For the three months ended June 30, 2006, basic and diluted net income per share of common stock
were computed as follows:
 7




---



##### Table of Contents



Three Months EndedJune 30, 2006EPS Numerator  BasicNet income
    
    $
    1,623,590EPS Denominator  BasicWeighted-average common shares outstanding
    
    
    37,836,343EPS Numerator  DilutedNet income
    
    $
    1,623,590EPS Denominator  DilutedWeighted-average common shares outstanding
    
    
    37,836,343Effect of dilutive securities  stock options
    
    
    579,503Dilutive potential common shares
    
    
    38,415,846Basic net income per common share
    
    $
    0.04Diluted net income per common share
    
    $
    0.04
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Common stock options
    
    
    6,135,598
    
    
    
    4,234,914
    
    
    
    6,181,858
    
    
    
    4,554,423Warrants
    
    
    6,527,755
    
    
    
    5,913,267
    
    
    
    7,085,383
    
    
    
    5,913,267Total
    
    
    12,663,353
    
    
    
    10,148,181
    
    
    
    13,267,241
    
    
    
    10,467,690
 (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.
 8




---



##### Table of Contents



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:
 June 30, 2007
    
    
    December 31, 2006Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss(in thousands)Mortgage-backed and asset-backed securities
    
    $
    53
    
    
    
    
    
    
    $
    474
    
    
    
    Marketable securities due over 90 days
    
    $
    53
    
    
    $
    
    
    
    $
    474
    
    
    $
    Commercial paper
    
    
    
    
    
    
    
    
    
    
    21,885
    
    
    
    Obligations of US government agencies
    
    
    
    
    
    
    
    
    
    
    804
    
    
    
    11Marketable securities due in 90 days or less *
    
    $
    
    
    
    $
    
    
    
    $
    22,689
    
    
    $
    11Total marketable securities
    
    $
    53
    
    
    $
    
    
    
    $
    23,163
    
    
    $
    11
 
 *
    
    Classified as cash and cash equivalents on the balance sheets  Cost
    
    
    Fair value(in thousands)Due in 90 days or less *
    
    
    
    
    
    
    Due after two years
    
    $
    53
    
    
    $
    53$
    53
    
    
    $
    53
 
 *
    
    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 June 30, 2007,
comprehensive loss was $10.7 million, including an unrealized gain on marketable securities of
$3,000, and for the three months ended June 30, 2006, comprehensive income was $1.6 million,
including an unrealized gain on marketable securities of $5,000. For the six months ended June
30, 2007, comprehensive loss was $19.5 million, including an unrealized gain on marketable
securities of $11,000 and for the six months ended June 30, 2006, comprehensive loss was $6.6
million, including an unrealized gain on marketable securities of $14,000.(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 June 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
 9




---



##### Table of Contents



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 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, and consequently, we will now be 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.During the three months ended June 30, 2007 and 2006, we recognized revenue of $0.2 million in
connection with our PDE4 Inhibitor Program. During the six months ended June 30, 2007 and 2006,
we recognized revenue of $0.5 million and $1.3 million, respectively, in connection with our
PDE4 Inhibitor Program.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
 10




---



##### Table of Contents



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.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), which we currently plan to commence in the fourth quarter of
2007, 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 following the completion of our ongoing Phase 2a Alzheimers
disease clinical trial of 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 $1.7
million (based on 1 USD: 1.20 CHF) in research and development funding from Roche in the second
half of 2007.Roche has paid us a total of $32.6 million through June 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 $8.6 million and
milestone payments totaling $4.0 million.In accordance with 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.During the three months ended June 30, 2007 and 2006, we recognized revenue of $0.4 million in
connection with our Nicotinic Alpha-7 Agonist Program. During the six months ended June 30,
2007 and 2006, we recognized revenue of $0.8 million and $0.5 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). Under the terms of the Amgen PDE10 Inhibitor Agreement, we received a
$5.0 million upfront fee in November 2005 and are receiving research and development funding.
We and Amgen are conducting a collaborative preclinical research program relating to PDE10
inhibitors for a two-year period in accordance with a predefined research workplan. Subject to
Amgens right to terminate the agreement or terminate specified rights thereunder, 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 $13.1 million through June 30, 2007, in connection with our Amgen
PDE10 Inhibitor Agreement, consisting of a $5.0 million upfront fee, a $2.0 million milestone
payment and research and development funding of $6.1 million. We are recognizing revenue 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 June 30, 2007 and 2006, we recognized revenue under the Amgen
PDE10 Inhibitor Agreement consisting of $2.1 million and $1.5 million, respectively. During the
six months ended June 30, 2007 and 2006, we recognized revenue under the Amgen PDE10 Inhibitor
Agreement of $4.2 million and $3.0 million, respectively.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
 11




---



##### Table of Contents



Agreement). Under the terms of the SMRI Development
Agreement, we are eligible to receive an aggregate of up to
$3.2 million in funding from SMRI to support the development of MEM 1003 for the treatment of
bipolar disorder or schizophrenia over the development term of three years, which term may be
extended for additional one-year periods. 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.
As of June 30, 2007, we have received milestone payments of $1.6 million. We are eligible to
receive the final milestone payment of $0.6 million if we deliver the final report related to
the Phase 2a trial in bipolar disorder to SMRI before December 31, 2007. If we fail to deliver
the final report, we will be required to refund to SMRI the milestone payments made by SMRI as
of that date. In addition, we are required to refund to SMRI any portion of the milestone
payments received from SMRI that have not been applied to the Phase 2a clinical trial in bipolar
disorder by December 31, 2007, although we do not expect there to be any refunds. No revenue
will be recognized under the SMRI Development Agreement until all predefined milestones have
been met.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 June 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.Unless it is earlier terminated, the Amended and Restated 2003 NPS 5-HT6 Antagonist
Agreement will terminate on the date of expiration of all royalty and other payment obligations,
at which time our license will become fully paid-up. Upon providing notice as set forth in the
Amended and Restated 2003 NPS 5-HT6 Antagonist Agreement: (i) either party may
terminate the agreement upon the failure of the other party to cure a material breach (ii) NPS
may terminate the agreement upon our failure to comply with our diligence obligations and (iii)
we may terminate if we determine that there are scientific, technical, economic or business
problems relating to the development or commercialization of 5-HT6 antagonists. We
will not be relieved of our obligation to pay accrued but unpaid royalties to NPS in the event
of a termination as described in clauses (i)-(iii) above. If the Amended and Restated 2003 NPS
5-HT6 Antagonist Agreement is terminated prior to the date on which all royalty and
other payment obligations thereunder expire, the applicable licenses granted by NPS to us will
terminate. Upon any such termination, we would be required to transfer to NPS, at our cost,
certain filings, rights, approvals, agreements and data relating to products containing NPS
compounds and, if requested by NPS, we would have certain obligations to supply or cause to be
supplied to NPS or its licensees clinical and/or commercial supplies of the products for a
period of time upon terms mutually agreed upon by the parties. If following such termination,
NPS or its licensee were to commercialize a product containing an NPS compound, we would be
entitled to predefined royalties on net sales of such product in an amount dependent on its
stage of development. Further, if following such termination we or our licensee were to
commercialize a product containing our compound, our obligation to pay royalties to NPS relating
to this product would not terminate and would continue as provided in the Amended and Restated
2003 NPS 5-HT6 Antagonist Agreement.(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.
 12




---



##### Table of Contents



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.In addition, we agreed to use our reasonable best efforts to keep the registration statement
effective until the earlier of September 23, 2007 and the date on which the shares of common
stock and the shares of common stock issuable upon exercise of the warrants become eligible for
resale pursuant to Rule 144(k) under the Securities Act of 1933, as amended. If we suspend or
otherwise fail to maintain effectiveness, we will have to pay each purchaser liquidated damages
in an amount equal to 1.0% of the purchase price paid by such purchaser for the securities in
the 2005 Private Placement for each 30-day period during which such registration statement is
suspended or otherwise not effective.In December 2006, the Financial Accounting Standards Board (FASB) issued Emerging Issues Task
Force (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. We have determined that it is not probable that we will not meet the
registration requirements of the 2005 Private Placement. 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.(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 3.9 million 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 shall be used to fund the CIAS Clinical Trial.
 13




---



##### Table of Contents



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.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.(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. 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. We also have the option to request the remaining $4.0 million
available under the Hercules Loan Agreement from September 15, 2007 through December 31, 2007.
The principal balance of each advance under the Hercules Loan Agreement will bear 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 each of the advances made to date is 11.45%. 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. 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
 14




---



##### Table of Contents



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 have 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.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.(12)
    
    Subsequent EventsOn July 10, 2007, we filed a registration statement with the SEC (a)
registering for resale the shares of common stock (i) issued to SMRI in
connection with the SMRI Development Agreement, (ii) issued in the 2007
Private Placement, and (iii) underlying the Warrants issued to Hercules and
(b) pursuant to which we may, from time to time, offer and sell shares of
our common stock, preferred stock and/or warrants to purchase any of such
securities, either individually or in units, in one or more offerings, with
a total value of up to $75.0 million, at prices and on terms to be
determined by market conditions at the time of any offering made under the
registration statement. The registration statement was declared effective on
August 7, 2007.At our 2007 Annual Meeting of stockholders, held on
July 19, 2007, our stockholders approved an
amendment to our Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of common stock by 75,000,000 shares, bringing the total number of authorized
shares of common stock to 175,000,000.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  15




---



##### Table of Contents



OVERVIEW
  6
  Ø
    
    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. We are currently conducting a multi-center, randomized, double-blind,
placebo-controlled Phase 2a study to evaluate the safety and efficacy of MEM 1003 in patients
with mild to moderate Alzheimers disease. 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 are completing 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 have an exclusive worldwide, sub-licensable license to MEM 1003 from Bayer for the
treatment of human peripheral and CNS-related disorders. As of June 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.We conducted the Phase 2a bipolar disorder clinical trial of MEM 1003 with funding support
from SMRI. We received $1.0 million of 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. As of June 30, 2007, we have received
 16




---



##### Table of Contents



milestone payments of $1.6 million from SMRI based on our achievement of pre-defined
milestones related to the clinical trial, and we remain eligible to receive the final
milestone payment of $0.6 million if we deliver the final report related to the Phase 2a
trial in bipolar disorder to SMRI before December 31, 2007. If we fail to deliver the final
report, we will be required to refund to SMRI the milestone payments made by SMRI as of that
date.Ø
    
    Nicotinic Alpha-7 Agonist ProgramMEM 3454, a partial agonist of the nicotinic alpha-7 receptor, is the lead candidate from
this program and is being developed for the treatment of Alzheimers disease and
CIAS. We are currently conducting a Phase 2a multi-center, randomized, double-blind,
placebo-controlled study in Alzheimers disease to evaluate the safety, tolerability and
cognitive effects of MEM 3454. We also currently expect to commence a Phase 2a clinical
trial of MEM 3454 in CIAS in the fourth quarter of 2007 (the CIAS Clinical Trial). 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 currently plan to
commence a Phase 1 clinical trial program of MEM 63908 in the third
quarter of 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.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. If Roche exercises its option to secure a license to MEM 3454 following
the completion of the MEM 3454 Phase 2a AD clinical trial, then,
in order to maintain its rights to MEM 3454, Roche would have to make a milestone payment to
us upon the completion of the CIAS Clinical Trial.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 June 30, 2007, Roche has paid us a total
of $32.6 million under this collaboration, comprised of an upfront license fee of $10.0
million, research and development funding of $8.6 million, milestone payments of $4.0 million
and a $10.0 million equity investment.The CIAS Clinical Trial will be 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 pre-defined 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 at a 17% premium to the market price at the time the
milestone is achieved.Ø
    
    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
 17




---



##### Table of Contents



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.Ø
    
    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 are conducting a
collaborative preclinical research program with Amgen relating to PDE10 inhibitors for a
two-year period in accordance with a predefined research work plan. Subject to Amgens right
to terminate the agreement or terminate specified rights thereunder, 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 $13.1 million through June 30, 2007, comprised of a $5.0
million upfront fee, $6.1 million in research and development funding and a $2.0 million
milestone payment.Ø
    
    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 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.
     18




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   Use of estimates
  Revenue recognition
 Revenue Recognition Accounting for Revenue
Arrangements with Multiple Deliverables
  19




---



##### Table of Contents



20




---



##### Table of Contents



Accrued expenses
  Ø
    
    professional service fees, such as attorneys and accountants fees;Ø
    
    preclinical and clinical contract research organization fees;Ø
    
    fees to be paid to data management organizations and investigators in conjunction with clinical trials; andØ
    
    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
  Share-Based Payment Arrangements
 Share-Based Payment Share-Based Payment
   21




---



##### Table of Contents



RESULTS OF OPERATIONS
 Three Months Ended June 30, 2007 compared to Three Months Ended June 30, 2006
 Revenue
   Research and development expense
  General and administrative expense
  Change in fair value of warrants
   Interest income and interest expense
  Income taxes
  Six Months Ended June 30, 2007 compared to Six Months Ended June 30, 2006
 Revenue
  22




---



##### Table of Contents



Research and development expense
  General and administrative expense
  Change in fair value of warrants
   Interest
income and interest expense
  Income taxes
  Liquidity and capital resources
    23




---



##### Table of Contents



Ø
    
    the number of compounds and drug candidates that we advance through the development process;Ø
    
    the funding we receive from our currently existing or any new collaborations;Ø
    
    the scope and results of our and our collaborators clinical trials;Ø
    
    the potential in-licensing or acquisition of other compounds or technologies;Ø
    
    the costs involved in utilizing third party contract research organizations for preclinical studies and clinical trials;Ø
    
    the timing of, and the costs involved in, obtaining regulatory approvals;Ø
    
    the availability of third parties, and the cost, to manufacture our drug candidates
for preclinical and clinical trial supply;
 24




---



##### Table of Contents



Ø
    
    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; andØ
    
    the cost of commercialization activities, including product marketing, sales and
distribution.
   Contractual Obligations
  New Accounting Pronouncements
 The Fair
Value for Financial Assets and Financial Liabilities
 Fair Value Measurements
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  25




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Change in internal control over financial reporting
  Limitations on the effectiveness of controls
  26




---



##### Table of Contents



PART II. OTHER INFORMATION.
 
 Item 1A. Risk Factors
 In addition to the other information set forth in this report, you should carefully consider the
risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2006, which could materially affect our business, financial condition
or future results. The risks described in our Annual Report on Form 10-K, as updated by our
quarterly reports on Form 10-Q, are not the only risks facing our Company. Additional risks and
uncertainties not currently known to us, or that we currently deem to be immaterial, may also
materially adversely affect our business, financial condition and/or operating results. To the
extent that the risk factors set forth below appear in our Annual Report on Form 10-K, the risk factors set forth below replace in their entirety those
risk factors with the same titles contained in such previously filed reports.
 Risks Relating to Our Business
 We will need additional financing, which may be difficult to obtain. Our failure to obtain
necessary financing would adversely affect our development programs and other operations.
    Ø
    
    the number of compounds and drug candidates that we advance through the development process;Ø
    
    the funding we receive from our currently existing or any new collaborations;Ø
    
    the scope and results of our and our collaborators clinical trials;Ø
    
    the potential in-licensing or acquisition of other compounds or technologies;Ø
    
    the costs involved in utilizing third party contract research organizations for preclinical studies and clinical trials;Ø
    
    the timing of, and the costs involved in, obtaining regulatory approvals;Ø
    
    the availability of third parties, and the cost, to manufacture supply of our drug
candidates for preclinical and clinical testing;Ø
    
    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
 27




---



##### Table of Contents



Ø
    
    the cost of commercialization activities, including product marketing, sales and
distribution.
   We may not be able to succeed in our business model of seeking to enter into collaborations at
early stages of development. We currently do not have a collaboration partner for MEM 1003, our
most clinically advanced drug candidate, or for our PDE4 inhibitor program, which we recently
reacquired all of the development and commercialization rights to from Roche.
    We are dependent upon our collaboration partners to conduct clinical trials and to manufacture,
market and sell our products.
  28




---



##### Table of Contents



Risks
Relating to Intellectual Property
 We may be involved in lawsuits to protect or enforce our patents or the patents of our
collaborators or licensors, which could be expensive and time consuming.
    6
 29




---



##### Table of Contents



Risks Relating to our Common Stock
 Our executive officers, directors and their affiliates have the ability to significantly influence
all matters submitted to stockholders for approval.
  If we do not maintain effectiveness of our registration statements covering the resale of certain
shares of our common stock, we may be required to pay certain liquidated damages, which could be
material in amount.
  If there are substantial sales of our common stock, our stock price could decline.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  Proposal One.
 Name of Nominee
    
    Total Votes For
    
    Total Votes WithheldJonathan J. Fleming 
Walter Gilbert, Ph.D.
    
    53,435,774
44,727,952
    
    348,736
9,056,558
  30




---



##### Table of Contents



Proposal Two.
 Total Votes For
    
    
    Total Votes Against
    
    
    Total Votes AbstainedTotal Shares Voted
    
    
    52,855,996
    
    
    
    851,581
    
    
    
    76,933
   Proposal Three.
 Total Votes For
    
    
    Total Votes Against
    
    
    Total Votes AbstainedTotal Shares Voted
    
    
    53,529,808
    
    
    
    242,172
    
    
    
    12,529
   
 Item 5. Other Information
  
 Item 6. Exhibits
 3.1
    
    Amended and Restated Certificate of Incorporation (as amended)(1)4.1
    
    Warrant, dated June 18, 2007, by and among the Registrant and Hercules
Technology Growth Capital, Inc. (2)10.1
    
    Second Amendment to Loan and Security Agreement dated June 18, 2007, by and
among Hercules Technology Growth Capital, Inc. and the Registrant.
(3)10.3*
    
    Stock Purchase Agreement, dated June 18, 2007, by and among the Registrant,
The Stanley Medical Research Institute and the Sylvan C. Herman
Foundation.(4)10.4*
    
    Second Amendment to Amended and Restated Strategic Alliance Agreement, dated
June 18, 2007, by and among the Registrant and F. Hoffmann-La Roche Ltd and
Hoffmann-La Roche Inc.10.5*
    
    Amended and Restated Collaboration and License Agreement, dated as of June
19, 2007, between the Registrant and F. Hoffmann-La Roche Ltd. and
Hoffman-La Roche Inc.31.1
    
    Certification by the Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934
 31




---



##### Table of Contents



31.2
    
    Certification by the Principal Financial 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.(1)
    
    Incorporated by reference to Exhibit 3.1 of
Amendment No. 1 to the Registrants Registration
Statement on Form S-3 (No. 144467) filed with the SEC
on July 23, 2007.(2)
    
    Incorporated by reference to Exhibit 4.1 of the
Registrants Current Report on Form 8-K filed with the
SEC on June 21, 2007.(3)
    
    Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed with the
SEC on June 21, 2007.(4)
    
    Incorporated by reference to Exhibit 10.2 to
Amendment No. 1 of the Registrants Registration
Statement on Form S-3 (No. 333-144467) filed with the
SEC on July 10, 2007. 
 SIGNATURES
  MEMORY PHARMACEUTICALS CORP.By:
    /s/ Joseph M. DonabauerJoseph M. DonabauerVice President & Controller
(Principal Financial and Accounting Officer and Duly
Authorized Officer)  32




---



##### Table of Contents



Exhibit Index
 3.1
    
    Amended and Restated Certificate of Incorporation (as amended)(1)4.1
    
    Warrant, dated June 18, 2007, by and among the Registrant and Hercules
Technology Growth Capital, Inc. (2)10.1
    
    Second Amendment to Loan and Security Agreement dated June 18, 2007, by and
among Hercules Technology Growth Capital, Inc. and the Registrant.
(3)10.3*
    
    Stock Purchase Agreement, dated June 18, 2007, by and among the Registrant,
The Stanley Medical Research Institute and the Sylvan C. Herman
Foundation.(4)10.4*
    
    Second Amendment to Amended and Restated Strategic Alliance Agreement, dated
June 18, 2007, by and among the Registrant and F. Hoffmann-La Roche Ltd and
Hoffmann-La Roche Inc.10.5*
    
    Amended and Restated Collaboration and License Agreement, dated as of June
19, 2007, between the Registrant and F. Hoffmann-La Roche Ltd. and
Hoffman-La Roche Inc.31.1
    
    Certification by the Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 193431.2
    
    Certification by the Principal Financial 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.(1)
    
    Incorporated by reference to Exhibit 3.1 of
Amendment No. 1 to the Registrants Registration
Statement on Form S-3 (No. 333-144467) filed with the SEC
on July 23, 2007.(2)
    
    Incorporated by reference to Exhibit 4.1 of the
Registrants Current Report on Form 8-K filed with the
SEC on June 21, 2007.(3)
    
    Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed with the
SEC on June 21, 2007.(4)
    
    Incorporated by reference to Exhibit 10.2 to
Amendment No. 1 of the Registrants Registration
Statement on Form S-3 (No. 333-144467) filed with the
SEC on July 23, 2007. 33