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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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(I.R.S. Employer(State of incorporation)
    
    identification number)
 100 Philips Parkway
Montvale, New Jersey 07645
(201) 802-7100
 Securities registered pursuant to Section 12(b) of the Act:
 Securities registered pursuant to Section 12(g) of the Act:
 o þ
 o þ
 þ o
 £
 o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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MEMORY PHARMACEUTICALS CORP.
2005 FORM 10-K ANNUAL REPORT
 TABLE OF CONTENTS
 PagePART
I
    
    
    1Item 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    23Item 2. Properties
    
    
    34Item 3. Legal Proceedings
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34PART II
    
    
    35Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    35Item 6. Selected Financial Data
    
    
    36Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    37Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 8. Financial Statements and Supplementary Data
    
    
    46Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    67Item 9A. Controls and Procedures
    
    
    67Item 9B. Other Information
    
    
    67PART III
    
    
    68Item 10. Directors and Executive Officers of the Registrant
    
    
    68Item 11. Executive Compensation
    
    
    71Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    77Item 13. Certain Relationships and Related Transactions
    
    
    80Item 14. Principal Accountant Fees and Services
    
    
    81PART IV
    
    
    82Item 15. Exhibits and Financial Statement Schedules
    
    
    82




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This Annual Report on Form 10-K , including the sections labeled Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains forward-looking statements that
you should read in conjunction with the financial statements and notes to financial statements that
we have included elsewhere in this report. These statements are based on our current expectations,
assumptions, estimates and projections about our business and our industry, and involve known and
unknown risks, uncertainties, and other factors that may cause our or our industrys results,
levels of activity, performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied in, or contemplated by, the
forward-looking statements. We generally identify these statements by words or phrases such as
believe, anticipate, expect, intend, plan, will, may, should, estimate,
predict, potential, continue, or the negative of such terms or other similar expressions. Our
actual results and the timing of events may differ significantly from the results discussed in the
forward-looking statements, and you should not place undue reliance on these statements. Factors
that might cause such a difference include those discussed below under the heading Risk Factors,
as well as those discussed elsewhere in this Annual Report on Form 10-K . We disclaim any intent or
obligation to update any forward-looking statements as a result of developments occurring after the
period covered by this report or otherwise.
 
 PART I
 
 Item 1. Business
 OVERVIEW
     Ø
    
    our extensive knowledge of the pathways we believe are involved in memory formation
and other cognitive functions;Ø
    
    our understanding of neurological and psychiatric disorders;Ø
    
    an interdisciplinary drug discovery and development approach; andØ
    
    our focus on conducting in vivoand safety screening at early stages of the drug discovery process.




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MARKET OVERVIEW
      SCIENTIFIC BACKGROUND
 Central nervous system and memory
   2




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Memory and cognitive disorders
  UNMET THERAPEUTIC NEEDS
   THE MEMORY PHARMACEUTICALS DRUG DEVELOPMENT APPROACH
   3




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Ø
    
    We use our extensive knowledge of the neuronal pathways involved in memory formation
to identify highly relevant targets in the cascade of events leading to long-term memory
formation.Ø
    
    We have created a dynamic, interdisciplinary environment in which experts in
neuroscience, molecular biology, medicinal chemistry and preclinical drug development
work closely together to screen, identify and optimize drug candidates.Ø
    
    We conduct iterative tests on our compounds to determine their pharmacokinetics,
including their ability to be absorbed, distributed and metabolized in the body and
their toxicity levels. In addition, we measure their biochemical and physiological
effects in the body and their mechanisms of action, such as their ability to penetrate
the blood-brain barrier.Ø
    
    Beginning at the earliest stages of drug discovery and continuing throughout the drug
development process, we screen our compounds to eliminate those that are not specific to
an identified target and therefore either exhibit increased side effects or cannot be
optimized for a particular disease. In this process we use many neurobehavioral animal
models and other sophisticated screening tools.Ø
    
    We complement our scientific disciplines with leadership by individuals who have
extensive expertise and experience in drug discovery and development, related
technologies and collaboration management.
  THE MEMORY PHARMACEUTICALS STRATEGY
  Ø
    
    Aggressively pursue the discovery and development of drug candidates in large disease
markets in which there are significant unmet medical needs. We are initially focused on
the discovery and development of drug candidates for major CNS disorders for which the
market opportunities are extensive and current therapies generally provide limited
effectiveness and undesirable side effects. These diseases include Alzheimers disease,
schizophrenia, bipolar disorder and depression. We intend to apply our expertise in the
future to encompass a wider spectrum of neurological and psychiatric disorders by
expanding the application of existing compounds and optimizing new compounds for these
and other disorders such as vascular dementia, mild cognitive impairment (MCI),
Parkinsons disease, age associated cognitive decline, memory impairment from coronary
artery bypass grafting, attention deficit hyperactivity disorder, chemotherapy-induced
cognitive impairment, obsessive compulsive disorder and alcohol-induced cognitive
impairment.Ø
    
    Leverage our extensive understanding of neuronal pathways and our interdisciplinary,
accelerated drug development approach to yield multiple promising drug candidates.We
use our knowledge of the critical pathways involved in memory formation to identify
multiple targets that we believe are highly relevant to many different CNS disorders. We
optimize compounds to act on targets that affect neuronal signaling pathways which are
involved in multiple CNS disorders. We also seek to optimize compounds against multiple
targets implicated in the same disorder. For example, for the treatment of Alzheimers
disease, we have multiple drug candidates in preclinical and clinical development that
act on different targets, including regulating cAMP, regulating neuronal calcium and
acting as a partial agonist of the nicotinic alpha-7 receptor. In addition, one of
these drug candidates regulating calcium is also being evaluated as a candidate for the
treatment of bipolar disorder. Compounds in our PDE10 inhibitor program target the
regulation of cAMP and cGMP and may be useful in the treatment of various neurological
and psychiatric disorders.Ø
    
    Establish collaborations with leading pharmaceutical and biotechnology companies to
advance our drug candidates through clinical development and commercialization. We seek
to leverage our pipeline of early-stage development candidates through collaborations
with leading pharmaceutical and biotechnology companies. We believe that our focus on
drug candidates with large market opportunities helps us secure these types of
collaborations. We also believe that our
 4




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rigorous approach to preclinical testing enables us to partner our programs relatively
early in the development process and on terms more in line with those achieved at later
stages of clinical development. We have collaborations with Roche for our PDE4
inhibitors and nicotinic alpha-7 agonists and with Amgen for our PDE10 inhibitors. We
are exploring the potential for additional collaborations for the development of MEM 1003
and MEM 1414 and/or MEM 1917.Ø
    
    Seek to selectively in-license or acquire additional compounds. We seek to
selectively augment our internal drug discovery program through the selective
in-licensing or acquisition of preclinical and clinical development stage compounds that
we believe are relevant to the pathways involved in memory formation and cognition or
that otherwise complement our development pipeline. We believe that our expertise in
these pathways enables us to identify promising compounds that can be converted to
promising CNS drug candidates.
 OUR DRUG DEVELOPMENT PROGRAMS
  Stage ofDrug candidate
    
    Mechanism
    
    Target indication
    
    developmentMEM 1003
    
    Neuronal L-type
calcium channel
modulator
    
    Alzheimers disease 
Bipolar
disorder
    
    Phase 2a 
Phase 2a readyMEM 3454
    
    Nicotinic
alpha-7 partial
agonist
    
    Schizophrenia
and/or Alzheimers
disease
    
    Phase 2a readyMEM 1414
    
    PDE4 inhibitor
    
    Alzheimers disease
    
    Phase 1
completedMEM 1917
    
    PDE4 inhibitor
    
    Alzheimers disease
    
    Preclinical
completedMEM 63908
    
    Nicotinic alpha-7
partial agonist
    
    Alzheimers disease
    
    Preclinical
 5




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MEM 1003 for the treatment of Alzheimers disease and bipolar disorder
 Overview of Alzheimers disease
      Current therapies for the treatment of Alzheimers disease
    6




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MEM 1003 for the treatment of Alzheimers disease
          7




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Overview of bipolar disorder
    Current therapies for the treatment of bipolar disorder
  MEM 1003 for the treatment of bipolar disorder
     MEM 3454 for the treatment of schizophrenia and/or Alzheimers disease
 Overview of schizophrenia
  8




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Current therapies for the treatment of schizophrenia
  MEM 3454
       9




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MEM 1414 for the treatment of Alzheimers disease
     MEM 1917 for the treatment of Alzheimers disease and depression
    10




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MEM 63908 for the treatment of Alzheimers disease
     PDE10 Inhibitor Program
   Drug Discovery Programs
 in vitro
 RESEARCH AND DEVELOPMENT
   11




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Target selection
  CNS chemistry
  Animal model screening processes
  Preclinical safety and pharmacokinetics
   Bioinformatics and information technology systems
  12




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COLLABORATIONS, DEVELOPMENT AGREEMENTS AND IN-LICENSES
   2002 Roche Agreement
       13




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Amended and Restated 2003 Roche collaboration
     14




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2005 Amgen Agreement
      15




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The Stanley Medical Research Institute Development Agreement
    Bayer AG In-license
    16




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INTELLECTUAL PROPERTY
    MEM 1003
  PDE4 inhibitors
  17




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Nicotinic alpha-7 agonists
  PDE10 inhibitors
  General research tools
  COMPETITION
        Ø
    
    efficacy, safety and reliability of our drug candidates;
 18




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Ø
    
    the speed at which we or our collaborators develop drug candidates;Ø
    
    completion of clinical development and laboratory testing of our drug candidates;Ø
    
    timing and scope of regulatory approval of our drug candidates;Ø
    
    our or our collaborators ability to manufacture and sell commercial quantities of approved products in the market;Ø
    
    product acceptance by physicians and other health care providers;Ø
    
    skills of our employees and our ability to recruit and retain skilled employees;Ø
    
    protection of our intellectual property; andØ
    
    availability of capital resources to fund development and commercialization activities by us and our collaborators.
 GOVERNMENT REGULATION
  US regulatory approval
  Ø
    
    preclinical laboratory and animal tests performed under the FDAs Good Laboratory
Practices regulations;Ø
    
    submission and acceptance of an IND application, which must become effective before
clinical trials may begin in the US;Ø
    
    adequate and well-controlled human clinical trials to establish the safety and
efficacy of the drug candidate in our intended use;Ø
    
    development of manufacturing processes which conform to FDA-mandated current Good
Manufacturing Practices (GMPs); andØ
    
    FDA review and approval of a New Drug Application (NDA) prior to any commercial sale
or shipment of a product.
  Preclinical tests
  19




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The IND process


Clinical trials
  Ø
    
    Phase 1: The drug candidate is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption, distribution, excretion
and metabolism.Ø
    
    Phase 2: The drug candidate is introduced into a limited patient population to: (1)
assess the efficacy of the drug in specific, targeted indications; (2) assess dosage
tolerance and optimal dosage; and (3) identify possible adverse effects and safety
risks.Ø
    
    Phase 3: These are commonly referred to as pivotal studies. If a drug candidate is
found to have an acceptable safety profile and to be potentially effective in Phase 2
trials, new clinical trials will be initiated to further demonstrate clinical efficacy,
optimal dosage and safety within an expanded and diverse patient population at
geographically dispersed clinical study sites.
  The NDA process
   20




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Manufacturing and post-marketing requirements
    Foreign regulatory approval
     Other regulatory matters
  21




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MANUFACTURING
  EMPLOYEES
  RESEARCH AND DEVELOPMENT EXPENSES
  CORPORATE INFORMATION
  ADDITIONAL INFORMATION AND WHERE TO FIND IT
  
 22




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Item 1A. Risk Factors.
 Investing in our common stock involves a high degree of risk. You should consider carefully the
risks and uncertainties described below and the other information contained in this report. If any
of the following risks or uncertainties actually occur, our business, prospects, financial
condition and operating results would likely suffer, possibly materially. In that event, the
market price of our common stock could decline and you could lose part or all of your investment.
 Risks Relating to our Business
 We
expect to continue to incur substantial losses, and we may never
achieve profitability.
   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 from our collaborations with Roche and Amgen;Ø
    
    whether we are able to enter into a collaboration with regard to MEM 1003 and the terms of any such collaboration;Ø
    
    the scope and results of our and our collaborators clinical trials;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 compounds for clinical trial supply;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.
  23




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Our drug candidates and programs are novel and in the early stages of development. As a result, it
is difficult to predict accurately if and when we will achieve the development goals we establish
for these drug candidates and programs.
   The diseases we are targeting are poorly understood, which increases our chances of failure.
  Our preclinical and clinical testing results may not be predictive of future trial results and may
not be sufficient to support regulatory approval of future clinical trials. If subsequent study or
trial results are unfavorable or insufficient, we may be forced to stop developing drug candidates
that we currently believe are important to our future.
   If our clinical trials or those of our collaborators are unsuccessful, or if we experience
significant delays in these trials, our ability to commercialize our products will be impaired.
   24




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Ø
    
    any preclinical test or clinical trial may fail to produce safety and efficacy
results satisfactory to the FDA or foreign regulatory authorities;Ø
    
    preclinical and clinical data could be interpreted in different ways, which could
delay, limit or prevent regulatory approval;Ø
    
    negative or inconclusive results from a preclinical test or clinical study or adverse
medical events during a clinical trial could cause delays in the completion of the
preclinical test or clinical study, or could cause a preclinical study or clinical trial
to be repeated, additional tests to be conducted or a program to be terminated, even if
other studies or trials relating to the program are successful;Ø
    
    the FDA or foreign regulatory authority could impose conditions on the scope or
design of a clinical trial;Ø
    
    the FDA or foreign regulatory authority could place a clinical hold on a trial if,
among other reasons, it requires further information regarding certain results or events
during preclinical tests or clinical trials, or it finds that patients enrolled in the
trial are or would be exposed to an unreasonable and significant risk of illness or
injury;Ø
    
    the FDA or foreign regulatory authority might not approve the manufacturing processes
or facilities that we utilize, or the processes or facilities of our collaborators;Ø
    
    we may encounter delays in obtaining IRB approval to conduct a clinical trial at a
prospective study site or in revising a clinical trial protocol after the clinical trial
has commenced;Ø
    
    any regulatory approval we ultimately obtain may be limited or subject to
restrictions or post-approval commitments that render the product not commercially
viable;Ø
    
    we or our collaborators may encounter delays based on changes in regulatory agency
policies during the period in which we develop a drug or the period required for review
of any application for regulatory agency approval;Ø
    
    our clinical trials may not demonstrate the safety and efficacy of our compounds or
result in marketable products; andØ
    
    we or our collaborators may encounter delays in obtaining a sufficient supply of a
drug candidate for use in our clinical trials either due to the amount of time required
to manufacture a sufficient supply for larger clinical trials or as a result of
manufacturing or quality assurance issues.






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.






25



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We are dependent upon our collaboration partners to conduct clinical trials and to manufacture,
market and sell our products.
    Our collaborations are subject to many risks, which could prevent us from developing and
commercializing our drug candidates.
  Ø
    
    our collaborators may develop and commercialize, either alone or with others,
products and services that are similar to or competitive with the products that are the
subject of the collaboration with us;Ø
    
    collaborators may underfund or not commit sufficient resources to the testing,
marketing, distribution or other development of our products;Ø
    
    our collaborators may not properly maintain or defend our intellectual property
rights or they may utilize our proprietary information in such a way as to invite
litigation that could jeopardize or potentially invalidate our proprietary information
or expose us to potential liability;Ø
    
    our collaborators may encounter conflicts of interest, changes in business strategy
or other business issues which could adversely affect their willingness or ability to
fulfill their obligations to us (for example, pharmaceutical and biotechnology companies
historically have re-evaluated their priorities following mergers and consolidations,
which have been common in recent years in these industries); andØ
    
    disputes may arise between us and our collaborators delaying or terminating the
research, development or commercialization of our drug candidates, resulting in
significant litigation or arbitration that could be time-consuming and expensive, or
causing our collaborators to act in their own self-interest and not in the interest of
our stockholders.
 26




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In addition to our collaborations, we are dependent on certain license relationships.






We face intense competition in the development and commercialization of our drug candidates.
  We depend on our key scientific and other key personnel and have recently experienced turnover in
our key senior management. If we are not able to retain our key scientific and other key personnel
or recruit additional scientific and technical personnel, our business will suffer.
  27




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If third-party contract research organizations do not perform in an acceptable and timely manner,
our preclinical testing or clinical trials could be delayed or unsuccessful.
   If we or our collaborators fail to obtain regulatory clearance for our current or future drug
candidates, we will be unable to market and sell any products and therefore may never be able to
generate product revenue or be profitable.
   Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our
products abroad.
  28




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Our potential products may not be commercially viable if we or our collaborators fail to obtain an
adequate level of reimbursement for these products by Medicare and other third-party payors or if
the pricing for these products is set at unsatisfactory levels by foreign countries.
   If physicians and patients do not accept our product candidates, we may be unable to generate
significant revenue.
  We have no manufacturing capacity and depend on third parties to supply us with the compounds under
development, to develop effective formulations and to manufacture our products.
  Manufacturing of our products must meet applicable regulatory standards.
  29




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We face the risk of product liability claims and may not be able to obtain insurance.
  Our or our collaborators products could be subject to restrictions or withdrawal from the market.
We or they may be subject to penalties if we or they fail to comply with post-approval regulatory
requirements or experience unanticipated problems with any approved products.
  Ø
    
    product recalls;Ø
    
    revocation of previously granted approvals;Ø
    
    the need to conduct additional clinical trials; andØ
    
    fines and other censures.
  Our business activities require compliance with environmental laws. If we violate these laws, we
could be subject to significant fines, liabilities or other adverse consequences.
  30




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Risks
Relating to Intellectual Property
 If we are unable to obtain intellectual property protection for our chemical compounds and research
tools, the value of our technology and products will be adversely affected.
   We rely on trade secrets and other confidential information to maintain our proprietary position.
   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.
   31




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Third parties may own or control patents or proprietary rights that are infringed by our
technologies or drug candidates.
   Risks Related to our Common Stock
 Our executive officers, directors and their affiliates have the ability to significantly influence
all matters submitted to stockholders for approval.
  32




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Our stock price is subject to fluctuation, which may cause an investment in our stock to suffer a
decline in value.
  Ø
    
    announcements regarding the results of preclinical tests or clinical studies involving our drug candidates;Ø
    
    disputes, modifications, terminations or other developments regarding our collaborations;Ø
    
    announcements regarding new collaborations or changes to current collaborations;Ø
    
    announcements regarding technological innovations or new products by us, our
collaboration partners or our competitors;Ø
    
    changes in the market valuations of similar companies;Ø
    
    conditions or trends in the biotechnology and pharmaceutical industries;Ø
    
    developments relating to patents and other intellectual property rights, including
disputes with licensors or other third parties, litigation matters and our ability to
obtain patent protection for our chemical compounds or technologies;Ø
    
    FDA or international regulatory actions;Ø
    
    additions to or departures of our key personnel;Ø
    
    actual or anticipated variations in quarterly operating results;Ø
    
    changes in financial estimates by, or expectations of securities analysts; andØ
    
    sales of our common stock.
  Antitakeover provisions that we have in place could entrench our management team and delay or
prevent an acquisition. These provisions could adversely affect the price of our common stock
because purchasers cannot acquire a controlling interest.
  Ø
    
    a classified Board of Directors;Ø
    
    limitations on the removal of directors;Ø
    
    limitations on stockholder proposals at meetings of stockholders;Ø
    
    the inability of stockholders to act by written consent or to call special meetings; andØ
    
    the ability of our Board of Directors to designate the terms of and issue new series
of preferred stock without stockholder approval.
 33




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If there are substantial sales of our common stock, our stock price could decline.
  Because we do not intend to pay dividends, you will benefit from an investment in our common stock
only if it appreciates in value.
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  34




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  High
    
    LowYear Ended December 31, 2005:Fourth Quarter
    
    $
    3.25
    
    
    $
    1.91Third Quarter
    
    
    4.49
    
    
    
    1.75Second Quarter
    
    
    4.70
    
    
    
    1.80First Quarter
    
    
    5.72
    
    
    
    3.92Year Ended December 31, 2004:Fourth Quarter
    
    $
    7.75
    
    
    $
    4.99Third Quarter
    
    
    9.71
    
    
    
    6.56Second Quarter
    
    
    10.90
    
    
    
    6.52
  Dividend Policy
  Equity Compensation Plan Information
  WeightedNumber of
    
    
    Average
    
    
    Number of SecuritiesSecurities
    
    
    Exercise Price
    
    
    Remaining Available forto be Issued Upon
    
    
    of
    
    
    Future Issuance UnderExercise
    
    
    Outstanding
    
    
    Equity Compensationof Outstanding
    
    
    Options,
    
    
    Plans (ExcludingOptions,
    
    
    Warrants
    
    
    Securities ReflectedPlan Category
    
    Warrants and Rights
    
    
    and Rights
    
    
    in Column (a))(a)
    
    
    (b)
    
    
    (c)Equity Compensation
Plans Approved by
Security Holders
(1)
    
    
    4,108,058
    (2)
    
    $
    3.47
    
    
    
    729,088
    (3)Equity Compensation
Plans Not Approved
by Security Holders
(4)
    
    
    4,167
    
    
    $
    7.03Total
    
    
    4,112,225
    
    
    $
    3.47
    
    
    
    729,088
 
 (1)
    
    Includes options to purchase shares of our common stock under our Amended and Restated 2004
Stock Incentive Plan (the 2004 Plan) and shares of common stock issued under our 2004
Employee Stock Purchase Plan (the ESPP). Under the 2004 Plan, the 35




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total number of shares available for issuance automatically increases on January 1 of each year
by an amount equal to the lesser of (x) 1,750,000 shares (an increase of 250,000 shares); (y) 5%
of our outstanding shares on January 1 of each year; or (z) an amount to be determined by our
Board of Directors.(2)
    
    Excludes purchase rights accruing under the ESPP, which has a stockholder-approved reserve of
145,480 shares of common stock as of December 31, 2005. Under the ESPP, eligible employees
may purchase shares of our common stock through payroll deductions of up to 10% of their
eligible compensation. The price paid by the employee is 85% of the fair market value on the
offering date or the last day of the purchase period. There are two purchase periods per
year. For the year ended December 31, 2005, the offering periods commenced on February 1 and
August 1.(3)
    
    Represents shares available as of December 31, 2005 for future issuance under the 2004 Plan
and the ESPP.(4)
    
    Represents warrants to purchase 4,167 shares of common stock at an exercise price of $5.25
per share, which expire in March 2010. 
 Item 6. Selected Financial Data
  Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(in thousands, except per share data)Statements of Operations Data:Revenue
    
    $
    11,111
    
    
    $
    9,780
    
    
    $
    7,618
    
    
    $
    1,183
    
    
    $
    Research and development expenses
    
    
    33,684
    
    
    
    26,975
    
    
    
    22,626
    
    
    
    21,951
    
    
    
    10,711General and administrative
expenses
    
    
    8,443
    
    
    
    7,393
    
    
    
    7,111
    
    
    
    4,489
    
    
    
    3,421Interest income / (expense), net
    
    
    750
    
    
    
    243
    
    
    
    (3
    )
    
    
    115
    
    
    
    276Net loss
    
    
    (31,686
    )
    
    
    (24,096
    )
    
    
    (21,786
    )
    
    
    (25,163
    )
    
    
    (13,856
    )Redeemable convertible preferred
stock dividends, accretion, and
beneficial conversion feature
    
    
    
    
    
    
    2,022
    
    
    
    7,493
    
    
    
    5,889
    
    
    
    2,962Net loss attributable to common
stockholders
    
    
    (31,686
    )
    
    
    (26,118
    )
    
    
    (29,279
    )
    
    
    (31,052
    )
    
    
    (16,818
    )Basic and diluted net loss per
share of common stock
    
    
    (1.20
    )
    
    
    (1.67
    )
    
    
    (30.07
    )
    
    
    (48.10
    )
    
    
    (30.67
    )Weighted average shares
outstanding  basic and diluted
    
    
    26,350,193
    
    
    
    15,605,985
    
    
    
    973,637
    
    
    
    645,615
    
    
    
    548,431
 36




---



##### 



December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(in thousands)Balance Sheet Data:Cash, cash equivalents and marketable
securities
    
    $
    44,079
    
    
    $
    41,096
    
    
    $
    30,107
    
    
    $
    29,474
    
    
    $
    7,282Working capital
    
    
    31,943
    
    
    
    28,740
    
    
    
    21,038
    
    
    
    22,761
    
    
    
    3,873Total assets
    
    
    56,313
    
    
    
    53,397
    
    
    
    43,434
    
    
    
    39,797
    
    
    
    14,557Equipment notes payable
    
    
    2,392
    
    
    
    3,520
    
    
    
    3,787
    
    
    
    3,986
    
    
    
    2,805Accumulated deficit
    
    
    (152,120
    )
    
    
    (120,434
    )
    
    
    (94,316
    )
    
    
    (65,037
    )
    
    
    (33,985
    )Total stockholders equity / (deficit)
    
    
    20,951
    
    
    
    27,442
    
    
    
    (89,457
    )
    
    
    (64,556
    )
    
    
    (33,922
    )
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
     37




---



##### 



REVENUE
  38




---



##### 



RESEARCH
AND DEVELOPMENT EXPENSE
     Inception toStage of
    
    
    Year Ended December 31,
    
    
    December 31,Drug
candidate
    
    Mechanism
    
    
    Target
indication
    
    
    development
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2005(in thousands)MEM
1003
    
    Neuronal L-type calcium channel
modulator
    

Alzheimers diseaseBipolar disorder
    
    Phase 2aPhase 2a ready
    
    $
    8,749
    
    
    $
    3,449
    
    
    $
    2,708
    
    
    $
    4,762
    
    
    $
    19,934MEM 3454
    
    Nicotinic alpha-7 partial agonist
    
    Schizophrenia and/or
Alzheimers disease
    
    Phase 2a ready
    
    
    4,856
    
    
    
    3,980
    
    
    
    1,126
    
    
    
    196
    
    
    
    10,158MEM 1414
    
    PDE4 inhibitor
    
    Alzheimers disease
    
    Phase 1 completed
    
    
    125
    
    
    
    147
    
    
    
    1,081
    
    
    
    1,390
    
    
    
    2,743MEM 1917
    
    PDE4 inhibitor
    
    Alzheimers disease
    
    Preclinical completed
    
    
    42
    
    
    
    370
    
    
    
    522
    
    
    
    84
    
    
    
    1,018MEM 63908
    
    Nicotinic alpha-7 partial agonist
    
    Alzheimers disease
    
    Preclinical
    
    
    119
    
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    303Total
    
    $
    13,891
    
    
    $
    8,130
    
    
    $
    5,437
    
    
    $
    6,432
    
    
    $
    34,156
  39




---



##### 



Ø
    
    the number of sites included in the trials;Ø
    
    the cost associated with recruiting patients;Ø
    
    the length of time required to enroll suitable patients;Ø
    
    the number of patients that participate in the trials;Ø
    
    the duration of patient follow-up that seems appropriate in view of results; andØ
    
    the efficacy and safety profile of the drug candidates.
   GENERAL AND ADMINISTRATIVE EXPENSE
  RESULTS OF OPERATIONS
 Year Ended December 31, 2005 compared to Year Ended December 31, 2004
 Revenue
   40




---



##### 



December 31,2005
    
    
    2004
    
    
    2003(in thousands)2002 Roche AgreementAmortization of the upfront license payment and milestone payments
    
    $
    1,081
    
    
    $
    1,649
    
    
    $
    1,386Funding of the research collaboration
    
    
    3,500
    
    
    
    3,500
    
    
    
    5,149Amended and Restated 2003 Roche Agreement
Amortization of the upfront payment and quarterly research payments
    
    
    5,321
    
    
    
    4,631
    
    
    
    1,0832005 Amgen AgreementAmortization of the upfront license payment and milestone payments
    
    
    521
    
    
    
    
    
    
    
    Funding of the research collaboration
    
    
    688
    
    
    
    
    
    
    
    $
    11,111
    
    
    $
    9,780
    
    
    $
    7,618
 Research and development expense
   General and administrative expense
  Unrealized loss on warrants
  Interest income and interest expense
  Income taxes
  Preferred stock dividends and accretion
  41




---



##### 



Year Ended December 31, 2004 compared to Year Ended December 31, 2003
 Revenue
  Research and development expense
   General and administrative expense
  Interest income and interest expense
  Income taxes
  Preferred stock dividends and accretion
  LIQUIDITY AND CAPITAL RESOURCES
  42




---



##### 



Payments due inContractual obligations
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011-2014
    
    
    Total(in thousands)Operating lease payments
    
    $
    1,941
    
    
    $
    1,975
    
    
    $
    2,009
    
    
    $
    2,044
    
    
    $
    2,080
    
    
    $
    8,315
    
    
    $
    18,364Equipment notes payable
    
    
    1,303
    
    
    
    744
    
    
    
    279
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    2,392Contract research organization obligations
    
    
    5,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,022Total
    
    $
    8,266
    
    
    $
    2,719
    
    
    $
    2,288
    
    
    $
    2,110
    
    
    $
    2,080
    
    
    $
    8,315
    
    
    $
    25,778
    Ø
    
    the number of compounds and drug candidates that we advance through the development process;
 43




---



##### 



Ø
    
    the funding we receive from our collaborations;Ø
    
    whether we are able to enter into a collaboration with regard to MEM 1003, and the terms of any such collaboration;Ø
    
    the scope and results of our and our collaborators clinical trials;Ø
    
    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 compounds for clinical trial supply;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.
  CRITICAL ACCOUNTING POLICIES
   Revenue recognition
   44




---



##### 



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
clinical supply of our drug candidates.
  Research and development expense
  45




---



##### 



Stock-based compensation
 Accounting for Stock
Issued to Employees Accounting for Stock-Based
Compensation Accounting for Stock-Based Compensation,
Transition and Disclosure, and related pronouncements
  Recently issued Accounting Standard
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 8. Financial Statements and Supplementary Data
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of KPMG LLP, Independent Registered Public Accounting Firm
    
    
    47Balance Sheets as of December 31, 2005 and 2004
    
    
    48Statements of Operations for the years ended December 31, 2005, 2004 and 2003
    
    
    49Statements of Changes in Stockholders Equity / (Deficit) for the years ended December 31, 2005, 2004 and 2003
    
    
    50Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
    
    
    51Notes to Financial Statements
    
    
    52
 46




---



##### 



Report of Independent Registered Public Accounting Firm
      
 47




---



##### 



MEMORY PHARMACEUTICALS CORP.
 
 BALANCE SHEETS
 (in thousands, except for share and per share amounts)
 December 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    39,533
    
    
    $
    31,220Marketable securities
    
    
    4,546
    
    
    
    9,876Receivables
    
    
    1,562
    
    
    
    875Prepaid and other current assets
    
    
    1,000
    
    
    
    538Total current assets
    
    
    46,641
    
    
    
    42,509Property and equipment, net
    
    
    9,167
    
    
    
    10,376Restricted cash
    
    
    505
    
    
    
    505Other assets
    
    
    
    
    
    
    7Total assets
    
    $
    56,313
    
    
    $
    53,397LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    759
    
    
    $
    1,691Accrued expenses
    
    
    3,839
    
    
    
    3,177Current portion of equipment notes payable
    
    
    1,303
    
    
    
    1,806Deferred revenue  current
    
    
    8,797
    
    
    
    7,095Total current liabilities
    
    
    14,698
    
    
    
    13,769Warrant liability
    
    
    8,477
    
    
    
    Equipment notes payable, less current portion
    
    
    1,089
    
    
    
    1,714Deferred revenue  long-term
    
    
    11,098
    
    
    
    10,472Total liabilities
    
    
    35,362
    
    
    
    25,955Stockholders equity:Common stock, $0.001 par value per share;
100,000,000 shares authorized and 37,714,703
issued and outstanding at December 31, 2005,
and 20,547,442 shares issued and outstanding
at December 31, 2004;
    
    
    38
    
    
    
    21Additional paid-in capital
    
    
    173,195
    
    
    
    148,182Accumulated deficit
    
    
    (152,120
    )
    
    
    (120,434
    )Accumulated other comprehensive loss
    
    
    (23
    )
    
    
    (45
    )Deferred compensation
    
    
    (139
    )
    
    
    (282
    )Total stockholders equity
    
    
    20,951
    
    
    
    27,442Total liabilities and stockholders equity
    
    $
    56,313
    
    
    $
    53,397
  48




---



##### 



MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF OPERATIONS
 (in thousands, except for share and per share amounts)
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Revenue
    
    $
    11,111
    
    
    $
    9,780
    
    
    $
    7,618Operating expenses:Research and development
    
    
    33,684
    
    
    
    26,975
    
    
    
    22,626General and administrative
    
    
    8,443
    
    
    
    7,393
    
    
    
    7,111Total operating expenses
    
    
    42,127
    
    
    
    34,368
    
    
    
    29,737Loss from operations
    
    
    (31,016
    )
    
    
    (24,588
    )
    
    
    (22,119
    )Other income
    
    
    5
    
    
    
    
    
    
    
    150Unrealized loss on warrants
    
    
    (1,641
    )
    
    
    
    
    
    
    Interest:Income
    
    
    1,029
    
    
    
    665
    
    
    
    450Expense
    
    
    (279
    )
    
    
    (422
    )
    
    
    (453
    )Interest income (expense), net
    
    
    750
    
    
    
    243
    
    
    
    (3
    )Net loss before income taxes
    
    
    (31,902
    )
    
    
    (24,345
    )
    
    
    (21,972
    )Income taxes
    
    
    (216
    )
    
    
    (249
    )
    
    
    (186
    )Net loss
    
    
    (31,686
    )
    
    
    (24,096
    )
    
    
    (21,786
    )Less redeemable convertible preferred stock dividends,
accretion, and beneficial conversion feature
    
    
    
    
    
    
    2,022
    
    
    
    7,493Net loss attributable to common stockholders
    
    $
    (31,686
    )
    
    $
    (26,118
    )
    
    $
    (29,279
    )Basic and diluted net loss per share of common stock
    
    $
    (1.20
    )
    
    $
    (1.67
    )
    
    $
    (30.07
    )Basic and diluted weighted average number of shares
of common stock outstanding
    
    
    26,350,193
    
    
    
    15,605,985
    
    
    
    973,637
  49




---



##### 



MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF STOCKHOLDERS EQUITY / (DEFICIT)
 (in thousands, except for share amounts)
 AccumulatedotherCommon stock
    
    
    Additional
    
    
    Accumulated
    
    
    comprehensive
    
    
    DeferredShares
    
    
    Amount
    
    
    paid in capital
    
    
    deficit
    
    
    loss
    
    
    compensation
    
    
    TotalBalance at December 31, 2002
    
    
    730,818
    
    
    $
    1
    
    
    $
    480
    
    
    $
    (65,037
    )
    
    $
    
    
    
    $
    
    
    
    $
    (64,556
    )Fair value of Roche warrants
    
    
    
    
    
    
    
    
    
    
    584
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    584Beneficial conversion feature on Series Roche preferred stock
    
    
    
    
    
    
    
    
    
    
    584
    
    
    
    (584
    )
    
    
    
    
    
    
    
    
    
    
    Employee stock awards
    
    
    15,000
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97Deferred compensation awards to employees
    
    
    
    
    
    
    
    
    
    
    2,197
    
    
    
    
    
    
    
    
    
    
    
    (2,197
    )
    
    
    Amortization of deferred compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,645
    
    
    
    1,645Compensation expense in connection with issuance of stock
options and warrants to non-employees
    
    
    
    
    
    
    
    
    
    
    1,208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,208Issuance of shares of common stock upon exercise of stock options
    
    
    392,385
    
    
    
    
    
    
    
    260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260Accrued dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,457
    )
    
    
    
    
    
    
    
    
    
    
    (6,457
    )Accretion of preferred stock to liquidation value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (452
    )
    
    
    
    
    
    
    
    
    
    
    (452
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,786
    )
    
    
    
    
    
    
    
    
    
    
    (21,786
    )Balance at December 31, 2003
    
    
    1,138,203
    
    
    
    1
    
    
    
    5,410
    
    
    
    (94,316
    )
    
    
    
    
    
    
    (552
    )
    
    
    (89,457
    )Issuance of compensatory stock options, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    836
    
    
    
    
    
    
    
    
    
    
    
    (836
    )
    
    
    Amortization of deferred compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,106
    
    
    
    1,106Issuance of shares of common stock upon exercise of stock
options and conversion of certain warrants
    
    
    355,993
    
    
    
    1
    
    
    
    268
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    269Issuance of shares of common stock under the employee stock
purchase plan
    
    
    7,819
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Issuance of shares of common stock in an initial public offering
    
    
    5,750,000
    
    
    
    6
    
    
    
    35,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,344Conversion of preferred stock to common stock in conjunction
with the initial public offering
    
    
    13,295,427
    
    
    
    13
    
    
    
    106,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,298Accrued dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,862
    )
    
    
    
    
    
    
    
    
    
    
    (1,862
    )Accretion of preferred stock to liquidation value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    
    
    
    
    
    
    
    
    (160
    )Unrealized loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,096
    )
    
    
    
    
    
    
    
    
    
    
    (24,096
    )Balance at December 31, 2004
    
    
    20,547,442
    
    
    
    21
    
    
    
    148,182
    
    
    
    (120,434
    )
    
    
    (45
    )
    
    
    (282
    )
    
    
    27,442Issuance of compensatory stock options, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    1,293
    
    
    
    
    
    
    
    
    
    
    
    (1,293
    )
    
    
    Amortization of deferred compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,436
    
    
    
    1,436Issuance of shares of common stock under the employee stock
purchase plan
    
    
    46,701
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126Issuance of shares of common stock in the September 2005 Private
Placement
    
    
    16,112,158
    
    
    
    16
    
    
    
    22,155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,171Issuance of shares of common stock upon option exercises
    
    
    568,035
    
    
    
    1
    
    
    
    479
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    480Issuance of shares of common stock and warrants to an investor
    
    
    440,367
    
    
    
    
    
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Unrealized gain on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    22Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,686
    )
    
    
    
    
    
    
    
    
    
    
    (31,686
    )Balance at December 31, 2005
    
    
    37,714,703
    
    
    $
    38
    
    
    $
    173,195
    
    
    $
    (152,120
    )
    
    $
    (23
    )
    
    $
    (139
    )
    
    $
    20,951
  50




---



##### 



MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF CASH FLOWS
 (in thousands)
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Cash flows used in operating activities:Net loss
    
    $
    (31,686
    )
    
    $
    (24,096
    )
    
    $
    (21,786
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    2,183
    
    
    
    2,050
    
    
    
    1,803Gain on sale of equipment
    
    
    (5
    )
    
    
    
    
    
    
    Non-cash stock based compensation
    
    
    1,436
    
    
    
    1,106
    
    
    
    2,950Unrealized loss on warrants
    
    
    1,641
    
    
    
    
    
    
    
    Changes in operating accounts:Receivables
    
    
    (687
    )
    
    
    1,144
    
    
    
    (2,019
    )Prepaid and other current assets
    
    
    (462
    )
    
    
    1,126
    
    
    
    (929
    )Other assets
    
    
    7
    
    
    
    47
    
    
    
    193Accounts payable
    
    
    (932
    )
    
    
    (63
    )
    
    
    (606
    )Accrued expenses
    
    
    662
    
    
    
    74
    
    
    
    738Deferred revenue
    
    
    2,328
    
    
    
    (2,405
    )
    
    
    12,280Net cash used in operating activities
    
    
    (25,515
    )
    
    
    (21,017
    )
    
    
    (7,376
    )Cash flows from investing activities:Purchases of marketable securities
    
    
    (23
    )
    
    
    (10,546
    )
    
    
    (7,993
    )Sales of marketable securities
    
    
    5,375
    
    
    
    13,848
    
    
    
    10,181Additions to property and equipment
    
    
    (969
    )
    
    
    (3,341
    )
    
    
    (2,092
    )Change in restricted cash
    
    
    
    
    
    
    
    
    
    
    40Net cash provided by / (used in) investing activities
    
    
    4,383
    
    
    
    (39
    )
    
    
    136Cash flows provided by financing activities:Proceeds from issuance of common stock and warrants
    
    
    30,573
    
    
    
    35,659
    
    
    
    260Proceeds from issuance of redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    10,000Proceeds from equipment notes payable
    
    
    775
    
    
    
    1,963
    
    
    
    1,543Principal repayment of equipment notes payable
    
    
    (1,903
    )
    
    
    (2,230
    )
    
    
    (1,742
    )Net cash provided by financing activities
    
    
    29,445
    
    
    
    35,392
    
    
    
    10,061Net increase in cash and cash equivalents
    
    
    8,313
    
    
    
    14,336
    
    
    
    2,821Cash and cash equivalents, beginning of period
    
    
    31,220
    
    
    
    16,884
    
    
    
    14,063Cash and cash equivalents, end of period
    
    $
    39,533
    
    
    $
    31,220
    
    
    $
    16,884Supplemental cash flow information:Cash paid for interest
    
    $
    279
    
    
    $
    422
    
    
    $
    453Cash paid for taxes
    
    
    12
    
    
    
    12
    
    
    
    20Accrued dividends on redeemable convertible preferred stock
    
    
    
    
    
    
    1,862
    
    
    
    6,457Accretion of redeemable convertible preferred stock to
liquidation value
    
    
    
    
    
    
    160
    
    
    
    452Beneficial conversion feature on Series Roche preferred stock
    
    
    
    
    
    
    
    
    
    
    584
  51




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##### 



MEMORY PHARMACEUTICALS CORP.
 
 NOTES TO FINANCIAL STATEMENTS
 1)
    
    ORGANIZATION AND BUSINESS OVERVIEWMemory Pharmaceuticals Corp. was incorporated on March 19, 1997 under the laws of the State
of Delaware and commenced operations on January 1, 1998. Except as expressly indicated or
unless the context otherwise requires, as used herein, the Company, we, us, our, or
similar terms means 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 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.We have an accumulated deficit of $152.1 million at December 31, 2005. We intend to continue
research toward the development of commercial products in order to generate future revenue
from our current and future collaboration agreements. We financed our initial operations
through the sale of redeemable convertible preferred stock and subsequent to that we sold
common stock as part of an initial public offering on April 5, 2004 and again as part of our
September 2005 Private Placement. Refer to: Note 7, September 2005 Private Placement, Note
8, Initial Public Offering of Common Stock, and Note 9, Redeemable Convertible Preferred
Stock, for further details.We face certain risks and uncertainties which are present in many emerging biopharmaceutical
companies. We have not completed development of any drugs and we do not expect that any
drugs resulting from our research and development efforts will be commercially available for
a significant number of years, if at all. We will continue to seek collaboration partners to
fund a substantial portion of our research operations over the next several years. In
addition, we face risks and uncertainties regarding future profitability, ability to obtain
future capital, protection of patents and property rights, competition, rapid technological
change, government regulations including the need for product approvals, changes in the
health care marketplace, recruiting and retaining key personnel and the performance of
contract research organizations.2)
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Use of Estimates
 The preparation of the financial statements requires us to make a number of estimates and
assumptions relating to the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the period. Significant items subject to such
estimates and assumptions include the fair value of our equity securities, carrying amount of
property, plant and equipment, valuation allowances for deferred income tax assets,
obligations related to employee benefits, the estimated development period for revenue
recognition under our collaborations and estimated liabilities for services provided by
contract research organizations. Actual results could differ from those estimated.
 Revenue Recognition
 We recognize revenue relating to our collaborations in accordance with the SECs Staff
Accounting Bulletin No. 104, Revenue Recognition. Revenue under our collaborations may
include the receipt of non-refundable upfront license fees, milestone payments and research
and development funding. Deferred revenue consists of payments received in advance of revenue
recognition under our collaborations.Given the various types of payments to us under our collaboration agreements, we must
evaluate these agreements to determine units of accounting for revenue recognition purposes.
Under the terms of our 2002 Roche Agreement, because we have licensed to Roche certain
intellectual property and have continuing performance obligations, we are recognizing the
non-refundable upfront license fees and performance milestone payments as revenue ratably
over the period in which we expect to obtain FDA approval of the first compound to be
developed under the collaboration. As a result of Roches decision, in April 2005, not to
pursue further development of the two named drug candidates under our PDE4 inhibitor
collaboration, MEM 1414 and its back-up MEM 1917, we have reassessed the expected period for
the development of the first compound under the 2002 Roche Agreement. Solely for purposes of
revenue recognition under our 2002 Roche Agreement, we have estimated the period until
approval by the FDA of the first compound under that collaboration as ending in the second
quarter of 2014.
 52




---



##### 



We are applying the provisions of EITF No. 00-21 Accounting for Revenue Arrangements
with Multiple Deliverables, prospectively to the original Roche 2003 Agreement using a
single unit of accounting, since Roche had the right to enter into a license under this
agreement. Revenue was recognized over the original five-year period that Roche had to
obtain a sub-licensable license to our patent rights and know-how for any nicotinic alpha-7
that we developed. Revenue was being recognized over the five-year period based on the level
of efforts expended in a period as compared to our estimated efforts over the full period.
Milestone payments received under the agreement were recognized prospectively over the
remaining term of the agreement based on level of effort. This agreement was amended and
restated on February 27, 2006. Under the terms of the Amended and Restated 2003 Roche
Agreement, we have 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 currently evaluating the prospective impact of the terms of the
Amended and Restated 2003 Roche Agreement on revenue recognition, including the period over
which revenue will be recognized under the amended agreement.Under the terms of our 2005 Amgen Agreement, we are recognizing the non-refundable upfront
license fee and performance milestone payments as revenue ratably over the term of the
research collaboration under the agreement. We will recognize revenue over the two-year term
of the research collaboration under the agreement based on the level of efforts expended in a
period as compared to our estimated efforts over the full period.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. Payments received from our collaboration partners for research
and development activities performed by us that are deemed to be a separate unit of
accounting, as defined by EITF No. 00-21, are recognized as revenue as research and
development services are performed. Otherwise, the payments are recognized as revenue over
the term of the applicable collaboration agreement or the expected period for the first
compound to be developed under the agreement.
 Concentrations of Credit Risk
 Financial instruments that subject us to credit risks are cash, cash equivalents and
marketable securities. We invest our cash in money market funds and highly rated commercial
paper. Our cash equivalents consist primarily of money market funds and other debt
investments. Our marketable securities are debt securities primarily consisting of
government obligations, mortgage-backed securities, and corporate debt securities.All of our revenue recognized during 2005, 2004 and 2003 was pursuant to our 2005 Amgen
Agreement, our Amended and Restated 2003 Roche Agreement and our 2002 Roche Agreement. Refer
to Note 11, License Agreements and Collaborations.
 Cash and Cash Equivalents
 We consider all highly liquid investments with maturities of three months or less at the time
of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds
and other debt investments that are carried at cost, which approximates fair value.
 Marketable Securities
 Our 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
(deficit) 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 consolidated Statements of Operations.
 Property and Equipment
 We record property and equipment at cost. Leasehold improvements represent capital
improvements made to our leased property. Laboratory and computer equipment, furniture and
fixtures are stated at cost and are depreciated on a straight-line basis over the estimated
useful life of the respective asset, which is approximately three to seven years. Leasehold
improvements are stated at cost and are amortized on a straight-line basis over the remaining
term of the facility lease agreement, which approximates nine years. Maintenance and repairs
that do not extend the useful life of the asset are expensed as incurred. Refer to Note 16,
Commitments and Contingencies.
 53




---



##### 



Research and Development
 All research and development costs are charged to operations as incurred. Research and
development costs include an allocation of indirect costs of $6.2 million, $5.8 million, and
$4.7 million for the years ended December 31, 2005, 2004, and 2003, respectively. Indirect
costs principally represent facility and information technology costs. These costs are
allocated to research and development based on the approximate usage of our facility and
information technology by our research and development departments.
 Restricted Cash
 Restricted cash represents letters of credit of an aggregate of $505,000 as of December 31,
2005 and December 31, 2004, which are required as security for the performance of our
obligations under the lease agreement for our Montvale, New Jersey facility. The letters of
credit are collateralized by interest-bearing certificates of deposit.
 Income Taxes
 Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the amounts of existing assets and liabilities carried on
the financial statements and their respective tax bases and the benefits arising from the
realization of operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation allowance is established
when necessary to reduce deferred tax assets to the amount expected to be realized.
 Warrant Liability
 In connection with our September 2005 Private Placement we issued warrants to purchase an
aggregate of 5,639,232 shares of our common stock at an exercise price of $2.22 per share.
In accordance with EITF No. 00-19, the warrants have been recorded as a liability and valued
at fair value on the date of issuance. Subsequent changes in fair value are recorded in our
statement of operations. Refer to Note 7, September 2005 Private Placement.
 Stock-based Compensation
 We apply the intrinsic-value based method of accounting prescribed by APB Opinion No. 25, and
related interpretations including FASB Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in
March 2000, to account for our fixed-plan employee stock options. Under this method,
compensation expense is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation, Transition
and Disclosure, established accounting and disclosure requirements using a fair-value based
method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123
and No. 148, we have elected to continue to apply the intrinsic-value based method of
accounting for employee stock options described above, and have adopted only the disclosure
requirements of SFAS No. 148.We account for stock options and warrants granted to non-employees based on the fair value of
the stock option or warrant. Fair market value is determined using the Black-Scholes
option-pricing model based on assumptions for expected stock price volatility, expected term
of the option, the risk-free interest rate and expected dividend yield at the grant date.
Prior to April 5, 2004, our common stock was not publicly traded. As a result, in valuing our
common stock, stock options and warrants issued prior to this date, we considered the pricing
of private equity sales, company-specific events, independent valuations, economic trends and
the rights and preferences of the security being valued.The following table illustrates the effect on net loss attributable to common stockholders if
the fair-value based method had been applied to all outstanding and unvested awards each
period. The assumptions used to value the awards are included below. Because options granted
during 2005, 2004, and 2003 vest over several years and additional awards are expected to be
issued in the future, the pro forma results shown below are not likely to be representative
of the effects on future years of the application of the fair-value based method.
 54




---



##### 



Year Ended December 31,2005
    
    
    2004
    
    
    2003(in thousands, except for per share amounts)Net loss attributable to common stockholders, as reported
    
    $
    (31,686
    )
    
    $
    (26,118
    )
    
    $
    (29,279
    )Add: Stock-based employee compensation expense included in
reported net loss
    
    
    1,436
    
    
    
    482
    
    
    
    1,705Deduct: Employee stock-based compensation expense under
fair-value based method
    
    
    (2,316
    )
    
    
    (1,329
    )
    
    
    (1,873
    )Deduct: Employee stock-based compensation relating to option
modification
    
    
    (17
    )
    
    
    
    
    
    
    Deduct: Employee compensation for 2004 Employee Stock Purchase
Plan under fair-value based method
    
    
    (131
    )
    
    
    (97
    )
    
    
    Pro forma net loss attributable to common stockholders
    
    $
    (32,714
    )
    
    $
    (27,062
    )
    
    $
    (29,447
    )Pro forma basic and diluted net loss per share of common stock
    
    $
    (1.24
    )
    
    $
    (1.73
    )
    
    $
    (30.24
    )
 The fair values of these option grants were calculated using weighted averages of assumptions
for the multiple stock options granted during the years ended December 31, 2005, 2004, and
2003.
 December 31,2005
    
    2004
    
    2003Expected stock price volatility
    
    
    80
    %
    
    
    62
    %
    
    
    60
    %Expected term until exercise
    
    5 years
    
    5 years
    
    5 yearsRisk-free interest rate
    
    
    4.07
    %
    
    
    3.56
    %
    
    
    3.11
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 The per share weighted average fair value of stock options granted during 2005, 2004 and 2003
was determined using the Black-Scholes option-pricing model. These assumptions resulted in
weighted average fair values of $1.60, $5.33 and $3.91 per share for stock options granted in
2005, 2004, and 2003 respectively.
 Recently Issued Accounting Standard
 In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment, SFAS 123R
which addresses the accounting for share-based awards to employees, including those made
under employee stock purchase plans. SFAS 123R requires companies to recognize the fair
value of stock options and other stock-based compensation to employees in their Statements of
Operations. The effective date of SFAS 123R for us is January 1, 2006. Because we currently
account for our stock-based compensation plans in accordance with APB Opinion No. 25, the
adoption of SFAS 123R will have a material effect on our consolidated financial statements
beginning in the first quarter of 2006.
 Net Loss Per Share
 Basic net loss per share is calculated by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock outstanding during the
period. Diluted net loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock and the dilutive
potential common stock equivalents then outstanding. Potential common stock equivalents
consist of stock options, warrants and redeemable convertible preferred stock.Since we had a net loss in each of the periods presented, basic and diluted net loss per
share is the same, because the effect of including potential common stock equivalents would
be anti-dilutive. Therefore, diluted weighted average shares outstanding exclude shares
underlying the stock options, warrants and redeemable convertible preferred stock. These
potential common stock equivalents are summarized as follows:
 55




---



##### 



Year Ended December 31,2005
    
    2004
    
    2003Stock options
    
    
    4,108,058
    
    
    
    2,989,538
    
    
    
    2,395,613Warrants
    
    
    5,913,267
    
    
    
    119,907
    
    
    
    162,293Redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    13,295,427Total
    
    
    10,021,325
    
    
    
    3,109,445
    
    
    
    15,853,333
 Refer to Note 9, Redeemable Convertible Preferred Stock, for the details of the conversion
of the redeemable convertible preferred stock.
 Pro Forma Net Loss per Share (UNAUDITED)
 Pro forma net loss per share is calculated using the weighted average number of shares of
common stock outstanding, including the pro forma effects of the automatic conversion of all
outstanding redeemable convertible preferred stock into shares of our common stock effective
upon the closing of our initial public offering, as if such conversion had occurred at the
date of the original issuance.The following table sets forth the calculation of basic and diluted net loss per share and
pro forma basic and diluted net loss per share for the years ending December 31, 2005, 2004,
and 2003. The pro forma basic and diluted net loss per share gives effect to the conversion
of the redeemable convertible preferred stock as if converted at the date of original
issuance:
 Year Ended December 31,2005
    
    
    2004
    
    
    2003(in thousands, except for share and per share amounts)Basic and diluted:Net loss
    
    $
    (31,686
    )
    
    $
    (24,096
    )
    
    $
    (21,786
    )Preferred stock dividends, accretion to
redemption value and beneficial conversion
feature
    
    
    
    
    
    
    (2,022
    )
    
    
    (7,493
    )Net loss attributable to common stockholders
    
    
    (31,686
    )
    
    
    (26,118
    )
    
    
    (29,279
    )Basic and diluted weighted average number of
shares of common stock outstanding
    
    
    26,350,193
    
    
    
    15,605,985
    
    
    
    973,637Basic and diluted net loss per share
    
    $
    (1.20
    )
    
    $
    (1.67
    )
    
    $
    (30.07
    )Pro forma basic and diluted:Net loss
    
    
    (31,686
    )
    
    
    (24,096
    )
    
    
    (21,786
    )Basic and diluted weighted average number of
shares of common stock outstanding
    
    
    26,350,193
    
    
    
    15,605,985
    
    
    
    973,637Weighted average number of shares of common
stock outstanding assuming the conversion of
all redeemable convertible preferred stock
and exercise of certain warrants at the date
of original issuance
    
    
    
    
    
    
    3,324,241
    
    
    
    12,652,464Pro forma basic and diluted weighted average
shares of common stock outstanding
    
    
    26,350,193
    
    
    
    18,930,226
    
    
    
    13,626,101Pro forma basic and diluted net loss per share
    
    $
    (1.20
    )
    
    $
    (1.27
    )
    
    $
    (1.64
    )
 Comprehensive Loss
 Comprehensive loss is calculated in accordance with SFAS No. 130, Reporting Comprehensive
Income and includes our net 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 / (deficit) on our balance sheet. For the year ended December 31, 2005,
comprehensive loss was $31.7 million, which includes our net loss of $31.7 million, and an
unrealized gain on available-for-sale marketable securities of $22,000. For the year ended
December 31, 2004, our comprehensive loss was $24.1 million, which includes our net loss of
$24.1 million, and an unrealized loss on available-for-sale marketable securities of $45,000.
For the year ended December 31, 2003, our comprehensive loss was the same as our reported
net loss.
 56




---



##### 



3)
    
    MARKETABLE SECURITIESThe following is a summary of our available-for-sale investments in debt securities that we
include in current assets on our balance sheet at fair value:
 December 31,2005
    
    2004Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Loss
    
    Value
    
    Loss(in thousands)Corporate debt securities
    
    $
    1,003
    
    
    $
    6
    
    
    $
    7,902
    
    
    $
    43Obligations of US government agencies
    
    
    2,399
    
    
    
    3
    
    
    
    1,302
    
    
    
    2Mortgage-backed and asset-backed securities
    
    
    1,144
    
    
    
    8
    
    
    
    672
    
    
    
    Marketable securities due over 90 days
    
    $
    4,546
    
    
    $
    17
    
    
    $
    9,876
    
    
    $
    45Commercial paper
    
    
    19,156
    
    
    
    6
    
    
    
    4,887
    
    
    
    Obligations of US government agencies
    
    
    12,289
    
    
    
    
    
    
    
    11,079
    
    
    
    Marketable securities due in 90 days or less *
    
    $
    31,445
    
    
    $
    6
    
    
    $
    15,966
    
    
    $
    Total marketable securities
    
    $
    35,991
    
    
    $
    23
    
    
    $
    25,842
    
    
    $
    45
 
 *
    
    Classified as cash and cash equivalents on the balance sheet. The amortized cost and fair value of our available-for-sale investments in debt securities by
stated maturity at December 31, 2005 is as follows:
 Cost
    
    
    Fair value(in thousands)Due in 90 days or less *
    
    $
    31,453
    
    
    $
    31,445Due after 90 days, up to one year
    
    
    2,299
    
    
    
    2,299Due after one year, up to two years
    
    
    503
    
    
    
    501Due after two years
    
    
    1,759
    
    
    
    1,746$
    36,014
    
    
    $
    35,991
 
 *
    
    Classified as cash and cash equivalents on the balance sheet. We evaluate declines in 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.
 57




---



##### 



4)
    
    PROPERTY AND EQUIPMENTProperty and equipment consists of the following:
 December 31,2005
    
    
    2004(in thousands)Laboratory equipment
    
    $
    7,770
    
    
    $
    7,192Leasehold improvements
    
    
    7,319
    
    
    
    7,098Computer equipment
    
    
    2,202
    
    
    
    2,137Furniture, fixtures and equipment
    
    
    962
    
    
    
    92418,253
    
    
    
    17,351Less accumulated depreciation and amortization
    
    
    (9,086
    )
    
    
    (6,975
    )$
    9,167
    
    
    $
    10,376
 The cost of equipment subject to equipment loan financing was $10.3 million as of December
31, 2005 and $9.6 million as of December 31, 2004. Depreciation expense relating to such
equipment was approximately $1.5 million, $1.4 million, and $1.3 million for the years ended
December 31, 2005, 2004 and 2003, respectively.Depreciation and amortization of property and equipment was $2.2 million, $2.1 million, and
$1.8 million and for the years ended December 31, 2005, 2004, and 2003, respectively.5)
    
    ACCRUED EXPENSESAccrued expenses consist of the following:
 December 31,2005
    
    
    2004(in thousands)Accrued salaries and employee benefits
    
    $
    1,236
    
    
    $
    1,194Accrued research costs
    
    
    1,493
    
    
    
    1,048Accrued professional costs
    
    
    93
    
    
    
    44Other
    
    
    1,017
    
    
    
    891$
    3,839
    
    
    $
    3,177
 6)
    
    STOCK-BASED COMPENSATIONSTOCK OPTIONSOur 2004 Plan was adopted in April 2004. The 2004 Plan permits the granting of both
incentive stock options and non-qualified stock options. Options are exercisable over a
period determined by the Board of Directors, but such period cannot be longer than ten years
after the grant date. The exercise price is the closing market price of our stock at the
date of grant.Our 1998 Employee, Director and Consultant Stock Option Plan (the 1998 Equity Plan), was
adopted in March 1998. Both incentive stock options and non-qualified stock options were
granted under the 1998 Equity Plan. Options granted under the 1998 Equity Plan are
exercisable over a period of ten years after the grant date. Our Board of Directors
determines the exercise price at the time of grant of such options.
 58




---



##### 



Stock option transactions under the 1998 Equity Plan and 2004 Plan are summarized as follows:
 Exercise price per
    
    
    Weighted averageShares
    
    
    share
    
    
    exercise priceOutstanding at December 31, 2002
    
    
    2,618,635
    
    
    $
    0.30 - $0.75
    
    
    $
    0.72Granted
    
    
    249,558
    
    
    
    0.75  2.70
    
    
    
    2.43Exercised
    
    
    (392,373
    )
    
    
    0.30  2.70
    
    
    
    0.66Cancelled / Forfeited
    
    
    (80,293
    )
    
    
    0.75  0.75
    
    
    
    0.75Outstanding at December 31, 2003
    
    
    2,395,527
    
    
    $
    0.30 - $2.70
    
    
    $
    0.93Granted
    
    
    1,278,368
    
    
    
    2.70 - $9.82
    
    
    
    7.95Exercised
    
    
    (352,820
    )
    
    
    0.30  2.70
    
    
    
    0.76Cancelled / Forfeited
    
    
    (331,537
    )
    
    
    0.75  9.82
    
    
    
    4.35Outstanding at December 31, 2004
    
    
    2,989,538
    
    
    $
    0.30 - $9.82
    
    
    $
    3.57Granted
    
    
    1,879,750
    
    
    
    2.24  5.03
    
    
    
    2.54Exercised
    
    
    (568,035
    )
    
    
    0.30  2.70
    
    
    
    0.84Cancelled / Forfeited
    
    
    (193,195
    )
    
    
    0.75  9.82
    
    
    
    3.69Outstanding at December 31, 2005
    
    
    4,108,058
    
    
    $
    0.30 - $9.82
    
    
    $
    3.47
 As of December 31, 2005, there were 583,608 shares available for future grant under the 2004
Plan.The following table summarizes information about stock options outstanding at December 31,
2005:
 OPTIONS OUTSTANDING
    
    
    OPTIONS EXERCISABLEWeighted average
    
    
    WeightedNumber of
    
    
    remaining years
    
    
    average
    
    
    Number
    
    
    Weighted averageRange of exercise prices
    
    options
    
    
    of contractual life
    
    
    exercise price
    
    
    of options
    
    
    exercise price$0.30 - $0.30
    
    
    8,000
    
    
    
    2.6
    
    
    $
    0.30
    
    
    
    8,000
    
    
    $
    0.30$0.31 - $0.75
    
    
    1,069,134
    
    
    
    5.4
    
    
    $
    0.75
    
    
    
    1,004,195
    
    
    $
    0.75$0.76 - $2.70
    
    
    1,896,504
    
    
    
    8.8
    
    
    $
    2.39
    
    
    
    411,869
    
    
    $
    2.54$2.71 - $7.56
    
    
    485,187
    
    
    
    8.1
    
    
    $
    6.15
    
    
    
    238,036
    
    
    $
    6.77$7.57 - $9.82
    
    
    649,233
    
    
    
    7.6
    
    
    $
    9.12
    
    
    
    296,505
    
    
    $
    9.06Outstanding at
December 31, 2005
    
    
    4,108,058
    
    
    
    7.7
    
    
    $
    3.47
    
    
    
    1,958,605
    
    
    $
    3.11
 At December 31, 2004, there were stock options to purchase 1,732,743 shares of common stock
exercisable at a weighted average exercise price of $1.99 and at December 31, 2003, there
were stock options to purchase 1,407,389 shares of common stock exercisable at a weighted
average exercise price of $1.05.During 2005, we recognized $1.3 million of compensation expense related to the modification
of a former executive officers stock option agreement in accordance.Upon the closing of our initial public offering, we granted a non-employee, pursuant to a
consulting agreement, stock options to purchase 117,187 shares of common stock with an
exercise price equal to the initial public offering price of $7.00, as a result, we
recognized compensation expense of $437,000 during the year ended December 31, 2004, as these
stock options vested immediately. The fair value of the stock option granted was based on
the Black-Scholes option-pricing model using the following assumptions: 60% volatility,
expected dividend yield of 0%, expected life of five years and risk-free interest rate of
3.2%During 2003, we granted stock options to purchase 91,727 shares of common stock at an
exercise price of $2.70 per share to a non-employee pursuant to a consulting agreement. We
recognized compensation expense of $1.1 million in 2003, which was attributable to the fair
value of the stock options, as the stock options vested immediately. The fair value of the
stock
 59




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##### 



options granted was based on the Black-Scholes option-pricing model using the following
assumptions: 60% volatility, expected dividend yield of 0%, expected life of five years and
risk-free interest rate of 2.9%.STOCK AWARDSWe issued stock awards of 15,000 shares of our common stock during 2003. We recognized
$97,000 of compensation expense during 2003, as such awards vested immediately.FORFEITURE OF CERTAIN STOCK OPTIONSIn January 2004, we granted a stock option to purchase 100,000 shares of common stock to an
employee at an exercise price of $2.70 per share. Deferred compensation expense of $1.1
million attributable to the intrinsic value of the options granted was measured at the
measurement date for the grant. Compensation expense was being recognized ratably over the
four-year vesting period. We had recognized $212,000 of total compensation expense during
2004 related to this option grant. This employee resigned in December 2004. Deferred
compensation has been adjusted by $918,000 to reflect the forfeiture of the unvested portion
of this stock option grant.EMPLOYEE STOCK PURCHASE PLANIn 2004, we created a plan for all eligible employees to purchase our stock bi-annually at
85% of the fair market value, with funds deducted from their wages, subject to certain
limitations. The purchase price is based on the market price at the date of the purchase or
the price of our common stock at the beginning of the offering period, if lower. Employees
are permitted to cancel participation before each bi-annual purchase date and obtain a refund
of amounts withheld from their wages. Under SFAS 123R, we believe our plan will be
compensatory, and therefore we will begin to recognize compensation expense for this plan
beginning in the first quarter of 2006. The ESPP has a stockholder approved reserve of
145,480 shares of common stock as of December 31, 2005.7)
    
    SEPTEMBER 2005 PRIVATE PLACEMENTOn September 23, 2005, we completed a 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 net proceeds of $29.0 million.The warrants are currently exercisable, have a five-year term and an exercise price per share
of $2.22. In accordance with EITF No. 00-19, the warrants have been recorded as a long-term
liability and valued at fair value on the date of issuance. 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 a contractual life of five years.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 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 two years after the effective date of the registration
statement or 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 private placement
for each 30-day period during which such registration statement is suspended or otherwise not
effective.In accordance with EITF No. 00-19, we recorded the estimated fair value of the warrants as of
the closing date of our private placement at $6.8 million and recorded it as a warrant
liability on our consolidated balance sheet. The fair value of the warrant liability is
recalculated at each balance sheet date, with the non-cash change in the fair value reported
on the consolidated statement of operations. We have recorded an unrealized loss on the
warrants of $1.6 million for the period ended December 31, 2005. This amount will be
adjusted at the end of each quarter to reflect any change in fair value at such
 60




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date. Upon the earlier of the exercise of the warrants, or the expiration of the period for
which liquidated damages may be assessed against us, the fair value of the warrant liability
will be reclassified to additional paid-in capital.8)
    
    INITIAL PUBLIC OFFERING OF COMMON STOCKIn April 2004, we sold 5,000,000 shares of our common stock in our initial public offering at
a price of $7.00 per share. We also issued an additional 750,000 shares of common stock
through an over-allotment option exercised by our managing underwriters in April 2004, at
$7.00 per share. After deducting underwriting discounts and expenses and estimated
offering-related expenses, the initial public offering resulted in net proceeds to us of
approximately $35.3 million. In connection with the initial public offering, all of the
outstanding shares of the Companys redeemable convertible preferred stock were automatically
converted into shares of our common stock as described in Note 9, Redeemable Convertible
Preferred Stock. Our registration statement on Form S-1, as amended (File No. 333-111474),
was declared effective by the SEC on April 5, 2004.9)
    
    REDEEMABLE CONVERTIBLE PREFERRED STOCKUpon the closing of our initial public offering in April 2004, all of the outstanding shares
of our redeemable convertible preferred stock, including accrued but unpaid dividends, were
automatically converted into 13,295,427 shares of common stock.Common stock issued upon automatic conversion is as follows:
 CommonShares
    
    
    Carrying
    

    Conversion
    
    
    StockSeries
    
    Date Issued
    
    Outstanding
    
    
    Amount
    

    Ratio
    
    
    IssuedA
    
    April 1998, December 1998
    
    
    1,000,000
    
    
    $
    987,000
    


    0.3333
    
    
    
    
    333,332B
    
    March 1999
    
    
    6,142,857
    
    
    
    10,732,000
    

    0.3333
    

    
    
    
    2,047,615C(1)
    
    June, August 2000
    
    
    10,000,000
    
    
    
    24,976,000
    


    0.3559
    
    
    
    
    3,558,521D
    
    March, April 2002
    
    
    19,290,130
    
    
    
    40,541,000
    


    0.3333
    
    
    
    
    6,430,033Roche(2)
    
    September 2003
    
    
    2,777,778
    
    
    
    9,522,000
    


    0.3333
    
    
    
    
    925,926$
    86,758,000
    
    
    
    
    
    

    13,295,427
 
 (1)
    
    As a result of our issuance of Series D redeemable convertible preferred stock,
at a price per share less than $2.50, the conversion ratio of the number of shares of
common stock into which each share of Series C is convertible was adjusted so that each
share of Series C is convertible into 0.3559 shares of common stock. Pursuant to this
anti-dilution provision, the conversion of Series C would result in the issuance of an
additional 225,195 shares of common stock. We recorded a deemed dividend of $169,000 during
2002 to recognize the value attributable to the increase in conversion ratio based on an
estimated fair value of the common stock.(2)
    
    We issued 2,777,778 shares of Series Roche redeemable convertible preferred
stock and 115,740 warrants to purchase common stock at $12.96 per share to Roche for $10.0
million. The proceeds of $10.0 million was allocated to redeemable convertible preferred
stock and additional paid-in capital based on the relative fair value of the preferred
stock and the warrants. We also recorded a beneficial conversion feature of $584,000,
which increased the net loss attributable to common stockholders during the year ended
December 31, 2003. Accrued DividendsDividends on the Series A, Series B, Series C, Series D and Series Roche redeemable
convertible preferred stock accrued at an annual rate of 8%, whether or not funds were
legally available or dividends were declared by the Board of Directors. Upon the closing of
our initial public offering on April 8, 2004, all of our preferred stock converted into
common stock, and all related accrued dividends in the amount of $19.5 million were
forfeited.
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10)
    
    STOCKHOLDERS EQUITYWARRANTS During 2005, in connection with the September 2005 Private Placement, we issued warrants to
purchase 5,639,232 shares of our common stock at an exercise price of $2.22 per share. The
warrants are currently exercisable and have an expiration date of September 22, 2010. Refer
to Note 7, September 2005 Private Placement.In December 2005, in connection with the consummation of our development agreement with SMRI,
we issued warrants to purchase 154,128 shares of our common stock at an exercise price of
$2.62 per share to SMRI. These warrants become exercisable on June 17, 2006 and expire on
December 18, 2010. Refer to Note 11, License Agreements and Collaborations.During 2003, in connection with the issuance of the Series Roche redeemable convertible
preferred stock, we issued warrants to purchase 115,740 shares of our common stock to Roche
at an exercise price of $12.96 per share. The warrants are exercisable immediately and
expire on August 19, 2008. Refer to Note 9, Redeemable Convertible Preferred Stock.At December 31, 2005, the lessor of our facility held warrants to purchase 4,167 shares of
our common stock at an exercise price of $5.25 per share. These warrants expire on March 8,
2010.Additionally, 1,536 shares of common stock were issued upon the net share settled exercise of
warrants, which occurred immediately prior to the closing of our initial public offering.11)
    
    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 MEM1003 for the treatment
of human peripheral and CNS-related disorders. As of December 31, 2005, we have made an
upfront payment of $250,000 to Bayer, as well as milestone payments of $750,000 upon the
initiation of Phase 1 clinical trials for MEM 1003 and $1.0 million upon the commencement of
Phase 2a AD clinical trials for MEM 1003. 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-LaRoche (2002 Roche Agreement)In July 2002, we entered into an agreement with Roche for the development of PDE4 inhibitors
for the treatment of neurological and psychiatric indications, and potentially other
indications. Under this 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 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. If Roche exercises its option to obtain an
exclusive license to MEM 1414 and/or MEM 1917 and continues the development and
commercialization of either drug candidate, we will be entitled to receive
development-related milestone payments for specified events occurring after the initiation of
Phase 3 clinical trials and royalties based on worldwide sales. In addition, under certain
circumstances, we will have the option to co-promote MEM 1414 and MEM 1917 in the US or in
the US and the EU. Roche maintains its exclusive, worldwide license to develop and
commercialize all other drug candidates from our PDE4 inhibitor program. In February 2006,
in connection with an amendment to our original 2003 Roche collaboration, we further amended
the 2002 Roche Agreement to terminate Roches obligation to make research and development
funding payments in support of the PDE4 research collaboration.Roche has paid us a total of $25.1 million through December 31, 2005 under the 2002 Roche
Agreement, comprised of an upfront license fee of $8.0 million, research and development
funding of $13.1 million and milestone payments totalling $4.0 million. Roche is obligated to
make future payments to us if specified developmental milestones are achieved.
 62




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During the years ended December 31, 2005, 2004, and 2003, we recognized revenue of $4.6
million, $5.1 million and $6.5 million, respectively, under the 2002 Roche Agreement,
representing the upfront license payment and milestone payments, which are being amortized
over the expected period for the development of the first compound under the 2002 Roche
Agreement, and research and development funding.Hoffmann-LaRoche (Amended and Restated 2003 Roche Agreement)In August 2003, we entered into a second collaboration with Roche for the development of
nicotinic alpha-7 agonists for the treatment of CNS indications including schizophrenia and
Alzheimers disease. This agreement was amended and restated on February 27, 2006. Under
the terms of the Amended and Restated 2003 Roche Agreement, we have 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. With respect
to MEM 3454, Roche has the option to obtain a license following our completion of the Phase
2a clinical trial for this drug candidate. Under the terms of the Amended and Restated 2003
Roche Agreement, we will receive an aggregate of $1.75 million of research and development
funding in 2006. Subject to the determination by the parties that certain specified
preclinical criteria have been achieved, we will be eligible to receive an aggregate of
approximately $2.3 million (based on 1USD: 1.31 CHF) in research and development funding in
2007. We are currently evaluating the prospective impact of the terms of the Amended and
Restated 2003 Roche Agreement on revenue recognition, including the period over which revenue
will be recognized under the amended agreement.Roche has paid us a total of $28.0 million through December 31, 2005 under the Amended and
Restated 2003 Roche Agreement, comprised of an upfront license fee of $10.0 million, an
equity investment of $10.0 million, research and development funding of $6.0 million and a
milestone payment of $2.0 million. Roche is obligated to make future payments to us if
specified developmental milestones are achieved. During the years ended December 31, 2005,
2004, and 2003, we recognized revenue of $5.3 million, $4.6 million and $1.1 million,
respectively, under the Amended and Restated 2003 Roche Agreement, representing the upfront
license payment, research and development funding and milestone payments.Amgen Inc. (2005 Amgen Agreement)On October 14, 2005, we entered into a Collaboration and License Agreement with Amgen for the
development of PDE10 inhibitors for neurological and psychiatric disorders. Under the terms
of the agreement, we received a $5.0 million up-front fee in November 2005 and are receiving
research and development funding as well. 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 are entitled to receive (i) $3.3 million in
research funding during the first year of the research collaboration and, (ii) a minimum of
$1.8 million in research funding during the second year of the research 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.We will recognize revenue over the two-year period based on the level of actual research
efforts expended in a period as compared to our estimated efforts over the full period.
During the year ended December 31, 2005, we recognized revenue of $1.2 million representing
the upfront license payment.The Stanley Medical Research Institute (SMRI Development Agreement)On December 20, 2005, we entered into a development agreement with SMRI for the development
of MEM 1003 as a treatment for bipolar disorder or schizophrenia. Under the terms of the
SMRI Agreement, we are eligible to receive 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.
As of December 31, 2005, we received $960,000 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 becomes exercisable on June 17, 2006 and expires on
December 19, 2010. We are eligible to receive the remaining $2.24 million as milestone
payments upon the achievement of certain milestones related to the Phase 2a trial in bipolar
disorder, which we plan to commence in the first half of 2006. If we fail to achieve the
third milestone by December 31, 2007, then we will be required to refund to SMRI the portion
of the $2.24 million of development funding advanced by SMRI as of that date.
 63




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12)
    
    CONSULTING AGREEMENTSIn April 1998, we entered into a consulting agreement with one of our founders for an initial
term of four years, with the option to automatically extend the term for additional one-year
periods. Under the consulting agreement, we are obligated to pay a consulting fee during
each of the one-year terms. Additionally, we were required to grant additional options to the
consultant upon our issuance of new securities to ensure that the founder maintained a
4.9216% ownership in the Company, which obligation expired upon the completion of our initial
public offering. Upon the closing of our initial public offering, we issued this consultant
an option to purchase 117,187 shares of common stock with an exercise price equal to the
initial public offering price of $7.00, as a result of which we recognized compensation
expense of $437,000 during the year ended December 31, 2004.Under this consulting agreement, we had issued an aggregate of 703,255 non-qualified stock
options as of December 31, 2003, including 91,726 at an exercise price of $2.70 per share in
December 2003 and 308,861 at an exercise price of $0.75 per share in April 2002 in connection
with the Series D financing. The options issued in 2003 and 2002 had a fair value of
approximately $1.2 million and $130,000 respectively using the Black-Scholes option-pricing
model. The fair value of the options is included as general and administrative expense in
the accompanying statement of operations.We have entered into consulting arrangements with research consultants and scientific
advisory board members for various services which generally require us to pay consulting fees
on a monthly or quarterly basis as services are provided.13)
    
    INCOME TAXESOur 2005 tax benefit of $216,000 consists of proceeds of $229,000 received for the sale of
$3.2 million of state net operating loss carryforwards, offset by $12,000 in state
alternative minimum taxes. Our 2004 tax benefit of $249,000 consisted of proceeds of
$258,000 received for the sale of $3.6 million of state net operating loss carryforwards,
offset by $9,000 in state alternative minimum taxes.Our deferred tax assets as of December 31, 2005, and 2004, respectively, consisted of the
following:
 2005
    
    

2004(in thousands)Deferred tax assets:Net operating loss carryforwards
    
    $
    40,173
    
    
    $
    29,535Start-up expenditures
    
    
    1,177
    
    
    
    1,924Research and development credit carryforwards
    
    
    7,337
    
    
    
    2,202Deferred income
    
    
    7,958
    
    
    
    7,027Other, net
    
    
    716
    
    
    
    511Total
    
    
    57,361
    
    
    
    41,199Valuation allowance
    
    
    57,348
    
    
    
    41,042Net deferred tax assets
    
    
    13
    
    
    
    157Deferred tax liabilities:Depreciation
    
    
    (13
    )
    
    
    (157
    )Net deferred taxes
    
    $
    
    
    
    $
    
 A valuation allowance for 2005 and 2004 has been applied to offset the respective deferred
tax assets in recognition of the uncertainty that such tax benefits will be realized based on
our history of operating losses. A valuation allowance is provided when we believe it is
more likely than not that some portion of the deferred tax assets will not be realized.At December 31, 2005, we had available net operating loss carryforwards for federal and state
income tax reporting purposes of approximately $102.5 million and $88.6 million respectively,
and we had available research and development credit carryforwards for federal and state
income tax reporting purposes of approximately $4.2 million and $3.1 million respectively,
that are available to offset future taxable income and tax, if any. The net operating loss
carryforwards begin to expire in 2018 for federal purposes and 2007 for state purposes. The
research and development credit carryforwards begin to expire in 2018 for federal purposes
and 2013 for state purposes. Our ability to use such net operating loss and research and
development credit carryforwards may be limited by change of control provisions under Section
382 of the Internal Revenue Code.
 64




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##### 



14)
    
    EQUIPMENT FINANCING AGREEMENTSAs of December 31, 2005 we financed $10.3 million of equipment purchases through equipment
financing. The interest rate is set at the time of the borrowing. There was $2.4 million
outstanding under this equipment financing agreement as of December 31, 2005. The effective
interest rate on the borrowings as of December 31, 2005 is approximately 11.5% per annum.The maturities of the equipment loans vary through 2009 and require monthly payments. A
summary of future principal payments for equipment notes payable at December 31, 2005 is as
follows:
 (in thousands)2006
    
    $
    1,3032007
    
    
    7442008
    
    
    2792009
    
    
    66Total
    
    $
    2,392
 15)
    
    RETIREMENT PLANEffective January 1, 1999, we established a 401(k) Retirement Plan (the 401(k) Plan) which
covers substantially all of our employees. All eligible employees may elect to contribute a
portion of their wages to the 401(k) Plan, subject to certain limitations. In 2004, we began
to match 50% of the employees pre-tax contributions, up to plan limits. For 2005, $202,000
has been charged to operations for the matching feature of the 401(k) plan.16)
    
    COMMITMENTS AND CONTINGENCIESLEASE AGREEMENTIn June 1999, we entered into a lease agreement for occupancy in our Montvale facility, which
includes laboratory and office space. Pursuant to subsequent amendments to the lease
agreement in 2000, 2001, and 2004, total occupancy space has been increased to approximately
66,200 square feet. Our current lease agreement expires in 2014 with options to renew
thereafter.Annual minimum rental payments as of December 31, 2005 are as follows:
 (in thousands)2006
    
    $
    1,9412007
    
    
    1,9752008
    
    
    2,0092009
    
    
    2,0442010
    
    
    2,0802011 and subsequent
    
    
    8,315Total
    
    $
    18,364
 Rent expense was approximately $2.1 million in 2005, $2.0 million in 2004 and $1.5 million in
2003.
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EMPLOYMENT ARRANGEMENTSWe provide a severance arrangement for our executives and key employees, which include salary
continuance and health benefits for up to one year.During 2002, we issued interest free loans to two of our executive officers in the aggregate
amount of $400,000, to enable each to purchase a residence near our facility located in
Montvale, New Jersey. The loans were forgiven over three years based on continued
employment. We paid all income taxes incurred by executives in connection with the
forgiveness of these loans. Compensation expense related to these loans, including the
payment of related taxes of $190,000, was recognized in 2002. As of December 31, 2002, there
was $300,000 outstanding, which was forgiven during 2003, and $547,000 including the payment
of related taxes was recognized as compensation expense in 2003.COMMITMENTSWe have entered into various contract research agreements and supply agreements in connection
with preclinical, Phase 1, and Phase 2 clinical trials of our drug candidates.LITIGATIONThere are no legal proceedings pending against us.INSURANCE RISKSWe are exposed to the risk of product liability claims that is inherent in the development of
drugs. If any of our drug candidates harm participants in our clinical trials, we may be
subject to costly and damaging product liability claims. We have product liability insurance
that covers our clinical trials up to an aggregate of $10.0 million annually, with a
deductible of $25,000 per claim. We believe that this coverage is consistent with industry
practice, but we cannot predict all of the possible harms or side effects that may result
and, therefore, the amount of insurance coverage we currently hold may not be adequate to
cover all liabilities we might incur. If we are sued for any injury allegedly caused by our
drug candidates during clinical trials, our liability could exceed our total assets and our
ability to pay the liability.17)
    
    QUARTERLY OPERATING RESULTS (UNAUDITED)
 Quarter EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,(in thousands)2005:Revenue
    
    $
    2,430
    
    
    $
    2,491
    
    
    $
    2,490
    
    
    $
    3,700Net loss
attributable to
common
stockholders
    
    $
    (8,449
    )
    
    $
    (8,408
    )
    
    $
    (11,183
    )
    
    $
    (3,646
    )Basic and
diluted net loss
per share of
common stock
    
    $
    (0.41
    )
    
    $
    (0.40
    )
    
    $
    (0.42
    )
    
    $
    (0.10
    )2004:Revenue
    
    $
    2,371
    
    
    $
    2,549
    
    
    $
    2,430
    
    
    $
    2,430Net loss
attributable to
common
stockholders
    
    $
    (6,749
    )
    
    $
    (5,924
    )
    
    $
    (6,609
    )
    
    $
    (6,836
    )Basic and
diluted net loss
per share of
common stock
    
    $
    (5.89
    )
    
    $
    (0.29
    )
    
    $
    (0.32
    )
    
    $
    (0.33
    )
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Change in internal control over financial reporting
  Limitations on the effectiveness of controls
  
 Item 9B. Other Information
  67




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##### 



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
  Name
    
    Age
    
    
    PositionTony Scullion
    
    
    54
    
    
    Chairman of the Board of DirectorsAnthony B. Evnin, Ph.D(1) (2)(3)
    
    
    65
    
    
    DirectorJonathan Fleming(2)(3)
    
    
    48
    
    
    DirectorWalter Gilbert, Ph.D(1)
    
    
    74
    
    
    DirectorRobert I. Kriebel(1)
    
    
    63
    
    
    DirectorMichael E.
Meyers, M.P.H.(2)
    
    
    37
    
    
    DirectorPeter F. Young(1)
    
    
    56
    
    
    DirectorJames R. Sulat
    
    
    55
    
    
    President, Chief Executive Officer and DirectorDavid A. Lowe, Ph.D.
    
    
    59
    
    
    Chief Scientific Officer and DirectorJzaneen Lalani
    
    
    33
    
    
    Vice President, Legal Affairs and Corporate SecretaryJoseph M. Donabauer
    
    
    43
    
    
    Vice President, Controller and Treasurer
 
 (1)
    
    Member of the Audit Committee(2)
    
    Member of the Compensation Committee(3)
    
    Member of the Nominations Committee Information Concerning Directors
 Directors Whose Terms Expire in 2006  Class II Directors
 Anthony B. Evnin, Ph.D
 David A. Lowe, Ph.D
 Peter F. Young
 68




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##### 



Directors Whose Terms Expire in 2007  Class III Directors
 Jonathan J. Fleming
 Walter Gilbert, Ph.D
 Tony Scullion
 Directors Whose Terms Expire in 2008  Class I Directors
 Robert I. Kriebel
 Michael E. Meyers, M.P.H
 James R. Sulat
 69




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##### 



Information Concerning Executive Officers
 Jzaneen Lalani
 Joseph M. Donabauer
 Audit Committee and Audit Committee Financial Expert
  Procedure for Submission of Director Nominees by Stockholders
  Section 16(a) Beneficial Ownership Reporting Compliance
   70




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##### 



Code of Ethics
  
 Item 11. Executive Compensation
 SUMMARY COMPENSATION TABLE
  Long-TermAnnual Compensation
    
    CompensationOther Annual
    
    Securities
    
    All OtherSalary
    
    
    Bonus(*)
    
    Compensation
    
    Underlying
    
    CompensationName and Principal Position
    
    Year
    
    
    ($)
    
    
    ($)
    
    ($)
    
    Options
    
    ($)Tony Scullion
    
    
    2005
    
    
    
    427,779
    
    
    
    
    
    
    
    38,716
    (2)
    
    
    
    
    
    
    14,530
    (3)Former Executive Chairman and
    
    
    2004
    
    
    
    414,302
    
    
    
    118,675
    
    
    
    40,406
    (4)
    
    
    
    
    
    
    14,530
    (3)Former
Chief Executive Officer(1)
    
    
    2003
    
    
    
    376,823
    
    
    
    195,000
    
    
    
    383,341
    (5)
    
    
    65,657
    
    
    
    14,530
    (3)James R. Sulat
    
    
    2005
    
    
    
    249,384
    
    
    
    
    
    
    
    3,760
    (7)
    
    
    1,025,000
    
    
    
    President & Chief Executive
Officer(6)David A. Lowe, Ph.D.
    
    
    2005
    
    
    
    330,230
    
    
    
    90,750
    
    
    
    6,150
    (7)
    
    
    240,000
    
    
    
    53,647
    (9)Chief Scientific Officer(8)
    
    
    2004
    
    
    
    83,769
    
    
    
    77,844
    (10)
    
    
    1,523
    (7)
    
    
    150,000
    
    
    
    83,455
    (11)Gardiner F. H. Smith
    
    
    2005
    
    
    
    256,049
    
    
    
    72,767
    
    
    
    2,898
    (13)
    
    
    80,000
    (14)
    
    
    Former Chief Business Officer(12)
    
    
    2004
    
    
    
    217,137
    
    
    
    52,294
    
    
    
    2,898
    (13)
    
    
    35,000
    (14)
    
    
    2003
    
    
    
    201,119
    
    
    
    65,000
    
    
    
    2,898
    (13)
    
    
    4,333
    
    
    
    Jzaneen Lalani
    
    
    2005
    
    
    
    219,461
    
    
    
    78,125
    
    
    
    6,150
    (7)
    
    
    85,000
    
    
    
    Vice President, Legal Affairs(15)
    
    
    2004
    
    
    
    107,648
    
    
    
    37,406
    
    
    
    2,850
    (7)
    
    
    50,000
    
    
    
    Joseph M. Donabauer
    
    
    2005
    
    
    
    180,230
    
    
    
    45,000
    
    
    
    5,400
    (7)
    
    
    40,000
    
    
    
    Vice President and Controller(16)
    
    
    2004
    
    
    
    143,572
    
    
    
    37,500
    
    
    
    5,387
    (7)
    
    
    25,900
    
    
    
    2003
    
    
    
    118,169
    
    
    
    9,775
    
    
    
    
    

    
    
    350
    
    
    
    
 
 *
    
    Unless otherwise noted, amounts in the Bonus column generally represent bonuses
attributable to performance in the stated fiscal year. Bonuses are paid in the next following
fiscal year.(1)
    
    Mr. Scullion served as our Chief Executive Officer until May 17, 2005 and then as our
Executive Chairman through February 17, 2006. Since February 17, 2006, Mr. Scullion has
served as Chairman of our Board of Directors.(2)
    
    Represents $9,467 in employer-paid disability insurance premiums, $10,714 in an automobile
allowance, $12,385 in employer-paid tax preparation fees, and $6,150 in matching contributions
under our 401(k) plan.(3)
    
    Represents insurance premiums for a life insurance policy. 71




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##### 



(4)
    
    Represents $9,467 in employer-paid disability insurance premiums, $13,859 in an automobile
allowance, $10,930 in employer-paid tax preparation fees, and $6,150 in matching contributions
under our 401(k) plan.(5)
    
    Represents $200,000 in loan forgiveness, $156,824 in tax payment reimbursements, $9,467 in
employer-paid disability insurance premiums, and $10,800 in an automobile allowance. In
January 2003, Mr. Scullion was issued a stock award of 8,333 shares of common stock that was
valued at $6,250.(6)
    
    Mr. Sulats employment with us commenced in May 2005.(7)
    
    Represents matching contributions under our 401(k) plan.(8)
    
    Dr. Lowes employment with us commenced in October 2004.(9)
    
    Represents $40,340 for reimbursement of relocation and temporary housing expenses and a
$13,307 gross-up payment for taxes incurred by Dr. Lowe in connection with this reimbursement.(10)
    
    Includes a one-time bonus of $50,000, as set forth in Dr. Lowes letter agreement of
employment.(11)
    
    Represents $58,418 for reimbursement of relocation and temporary housing expenses and a
$25,037 gross-up payment for taxes incurred by Dr. Lowe in connection with this reimbursement.(12)
    
    From January 2002 to May 2005, Mr. Smith served as our Vice President of Business Development. Thereafter, Mr. Smith served as our Chief Business Officer.
Mr. Smith resigned as our Chief Business Officer effective March 3, 2006.(13)
    
    Represents employer-paid disability insurance premiums.(14)
    
    On the effective date of Mr. Smiths resignation we cancelled the unvested portion of these
stock options, which represented stock options to purchase an aggregate of 63,126 shares of
our common stock and the unvested portion of the stock options granted to Mr. Smith in prior years.(15)
    
    Ms. Lalanis employment with us commenced in June 2004.(16)
    
    Mr. Donabauer became an executive officer in December 2003. STOCK OPTION INFORMATION FOR THE YEAR-ENDED DECEMBER 31, 2005
  72




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##### 



STOCK OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 2005


Individual Grants% of TotalNumber of
    
    
    Options
    
    
    
    
    
    
    
    
    
   
    Potential Realizable Value atShares
    
    
    Granted to
    
    
    Exercise
    
    
    
    
    
    
   
   Assumed Annual Rates ofUnderlying
    
    
    Employees
    
    
    Price Per
    
    
    
    
    
    
    Stock Price Appreciation forOptions
    
    
    in Fiscal
    
    
    Share
    
    
    Expiration
    
    
    
    Option Term(2)Name
    
    Granted
    
    
    Year(1)
    
    
    ($)
    
    
    Date
    
    
    
    5%


    
    
    
    10%Tony Scullion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    26.60
    
    
    
    2.45
    
    
    
    5/16/2015
    
    
    
    $770,396
    
    
    
    $1,952,335James R. Sulat
    
    
    525,000
    
    
    
    27.93
    
    
    
    2.24
    
    
    
    8/14/2015
    
    
    
    739,580
    
    
    
    1,874,241100,000
    
    
    
    5.32
    
    
    
    5.03
    
    
    
    3/2/2015
    
    
    
    316,334
    
    
    
    801,65255,000
    
    
    
    2.93
    
    
    
    2.39
    
    
    
    5/11/2015
    
    
    
    82,668
    
    
    
    209,497David A. Lowe, Ph.D.
    
    
    85,000
    
    
    
    4.52
    
    
    
    2.38
    
    
    
    10/10/2015
    
    
    
    127,225
    
    
    
    322,41445,000
    (3)
    
    
    2.39
    
    
    
    2.39
    
    
    
    6/3/2006
    
    
    
    67,638
    
    
    
    171,407Gardiner F.H. Smith
    
    
    35,000
    (3)
    
    
    1.86
    
    
    
    2.71
    
    
    
    6/3/2006
    
    
    
    59,651
    
    
    
    151,16635,000
    
    
    
    1.86
    
    
    
    2.39
    
    
    
    5/11/2015
    
    
    
    52,607
    
    
    
    133,317Jzaneen Lalani
    
    
    50,000
    
    
    
    2.66
    
    
    
    2.38
    
    
    
    10/10/2015
    
    
    
    74,838
    
    
    
    189,65530,000
    
    
    
    1.60
    
    
    
    2.39
    
    
    
    5/11/2015
    
    
    
    45,092
    
    
    
    114,271Joseph M. Donabauer
    
    
    10,000
    
    
    
    .53
    
    
    
    2.38
    
    
    
    10/10/2015
    
    
    
    14,968
    
    
    
    37,931





|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | During the year ended December 31, 2005, we granted our employees stock options to
purchase an aggregate of 1,879,750 shares of our common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(2) |  | The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated assuming that the stock price on the
date of grant appreciates at the indicated annual rate, compounded annually for the
entire term of the option, and that the option is exercised and sold on the last day
of its term for the appreciated stock price. SEC rules specify the 5% and 10% assumed
annual rates of compounded stock price appreciation, which do not represent our
estimate or projection of our future common stock prices. Actual gains, if any, on
stock option exercises depend on the future performance of our common stock and
overall stock market conditions. The amounts reflected in the table above may not
necessarily be achieved.
|   
|(3) |  | On the effective date of Mr. Smiths resignation, we cancelled the unvested
portion of the stock options that Mr. Smith was granted in 2005, which represented stock options to purchase 54,375
shares of our common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR


AND FISCAL YEAR-END STOCK OPTION VALUES




Value of UnexercisedNumber of Shares Underlying
    
    In-the-Money Options atShares
    
    Value
    
    Unexercised Options at Fiscal
    
    December 31, 2005(2)Acquired on
    
    Realized
    
    Year End
    
    ($)Name
    
    Exercise (#)
    
    ($)(1)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableTony Scullion
    
    
    135,800
    
    
    
    485,848
    
    
    
    549,055
    
    
    
    25,604
    
    
    
    741,010

    
    
    
    37,765James R. Sulat
    
    
    
    
    
    
    
    
    
    
    95,312
    
    
    
    929,688
    
    
    
    1,312
    
    
    
    19,688David A. Lowe, Ph.D.
    
    
    
    
    
    
    
    
    
    
    107,499
    
    
    
    382,501
    
    
    
    
    
    
    
    Gardiner F.H. Smith
    
    
    
    
    
    
    
    
    
    
    133,082
    
    
    
    94,583
    (3)
    
    

    146,306
    
    
    
    19,442Jzaneen Lalani
    
    
    
    
    
    
    
    
    
    
    27,500
    
    
    
    167,500
    
    
    
    
    
    
    
    Joseph M. Donabauer
    
    
    
    
    
    
    
    
    
    
    19,920
    
    
    
    79,834
    
    
    
    4,143
    
    
    
    1,753 (1)
    
    The value realized was calculated based on the market price of the purchased shares
on the exercise date, less the applicable option exercise price per share, multiplied by
the number of shares underlying the option.(2)
    
    The value of unexercised in-the-money options was calculated based on the closing
selling price per share of our common stock on the Nasdaq National Market on December
31, 2005, $2.28, less the option exercise price per share, multiplied by the number of
shares underlying the option.(3)
    
    On the effective date of Mr. Smiths resignation,
we cancelled the unvested portion of the stock options granted to
Mr. Smith since he commenced employment with us, which represented stock options to purchase 69,064 shares
of our common stock.
 73




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##### 



Director Compensation




Board of Directors




Audit Committee




Compensation Committee




Nominations
Committee




Option Grants




74



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##### 



Executive Employment Agreements
  Tony Scullion
   James R. Sulat
  75




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##### 



David A. Lowe, Ph.D.
  Gardiner F.H. Smith
  Jzaneen Lalani
  Joseph M. Donabauer
  76




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##### 



Compensation Committee Interlocks and Insider Participation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 Security Ownership of Certain Beneficial Owners and Management
    Shares Beneficially Owned*Number
    
    PercentName of Beneficial Owner
    
    Of Shares
    
    (%)DirectorsAnthony B. Evnin, Ph.D.(1) (16)
    
    
    2,624,929
    
    
    
    6.89Jonathan Fleming(2) (14) (15)
    
    
    6,112,001
    
    
    
    15.72Walter Gilbert, Ph.D.(3)
    
    
    217,685
    
    
    
    *Robert I. Kriebel(4)
    
    
    15,025
    
    
    
    *David A. Lowe, Ph.D.(5)
    
    
    211,150
    
    
    
    *Michael E. Meyers(6)
    
    
    48,826
    
    
    
    *James R. Sulat(7)
    
    
    438,734
    
    
    
    1.15Tony Scullion(8)
    
    
    765,698
    
    
    
    2.00Peter F. Young(9)
    
    
    9,950
    
    
    
    *Named Executive OfficersGardiner F.H. Smith(10)
    
    
    158,601
    
    
    
    *Jzaneen Lalani(11)
    
    
    49,238
    
    
    
    *Joseph M. Donabauer(12)
    
    
    35,499
    
    
    
    *All current directors and executive
officers as a group (11 persons)(13)
    
    
    10,528,735
    
    
    
    26.04Five Percent StockholdersOxford Bioscience Partners II Entities(14)
    
    
    2,546,071
    
    
    
    6.71Oxford Bioscience Partners IV Entities(15)
    
    
    3,552,630
    
    
    
    9.18Venrock Associates(16)
    
    
    2,362,945
    
    
    
    6.89Special Situations Funds(17)
    
    
    4,285,724
    
    
    
    11.03SF Capital Partners Ltd.(18)
    
    
    2,016,340
    
    
    
    5.26
 
 *
    
    Represents less than 1%.(1)
    
    Includes 184,211 shares of common stock issued to Anthony B. Evnin, Ph.D., 13,300 shares
of common stock issuable to Dr. Evnin upon the exercise of options vested as of 60 days
following March 15, 2006 and warrants to purchase 64,473 shares
of common stock. Also includes 2,362,945 shares of common stock
owned by Venrock Associates. See footnote 15. 77




---



##### 



(2)
    
    Includes 13,300 shares of common stock issuable to Mr. Fleming upon the exercise of
options vested as of 60 days following March 15, 2006. Also
includes 2,546,071 shares of common stock owned by Oxford
Bioscience Partners II Entities and 3,552,630 shares of
common stock owned by Oxford Biosciences
Partners IV Entities. See footnotes 13 and 14.(3)
    
    Includes 13,300 shares of common stock issuable to Walter Gilbert, Ph.D. upon the exercise
of options vested as of 60 days following March 15, 2006. Also includes 66,666 shares of
common stock issued to Dr. Gilbert, 66,666 shares of common stock issued to Celia Gilbert, the
wife of Dr. Gilbert and 52,632 shares of common stock and warrants to purchase 18,421 shares
of common stock issued to a charitable remainder trust of which Dr. Gilbert and his spouse are
the trustees and the beneficiaries.(4)
    
    Includes 5,000 shares of common stock issued to Robert I. Kriebel, 8,275 shares of common
stock issuable to Mr. Kriebel upon the exercise of options vested as of 60 days following
March 15, 2006 and warrants to purchase 1,750 shares of common stock.(5)
    
    Includes 26,316 shares of common stock issued to David A. Lowe, Ph.D., 175,624 shares of
common stock issuable to Dr. Lowe upon the exercise of options vested as of 60 days following
March 15, 2006 and warrants to purchase 9,210 shares of common stock.(6)
    
    Includes 26,316 shares of common stock issued to Michael E. Meyers, 13,300 shares of
common stock issuable to Mr. Meyers upon the exercise of options vested as of 60 days
following March 15, 2006 and warrants to purchase 9,210 shares of common stock.(7)
    
    Includes 2,139 shares of common stock issued to James R. Sulat, 223,437 shares of common
stock issuable to Mr. Sulat upon the exercise of options vested as of 60 days following March
15, 2006, and 157,895 shares of common stock and warrants to purchase 55,263 shares of common
stock issued to a revocable trust of which Mr. Sulat and his spouse are the trustees and the
members of Mr. Sulats immediate family are the beneficiaries.(8)
    
    Includes 178,030 shares of common stock issued to Tony Scullion, currently exercisable
options to purchase 573,853 shares of common stock issuable to Mr. Scullion upon the exercise
of options vested as of 60 days following March 15, 2006 and warrants to purchase 13,815
shares of common stock.(9)
    
    Represents shares of common stock issuable to Peter F. Young upon the exercise of options
vested as of 60 days following March 15, 2006.(10)
    
    Represents 158,601 shares of common stock issuable to Gardiner F.H. Smith upon the
exercise of options vested as of 60 days following March 15, 2006. Mr. Smith resigned as our
Chief Business Officer effective March 3, 2006. All of Mr. Smiths unexercised options will
expire on June 3, 2006.(11)
    
    Includes 3,613 shares of common stock issued to Jzaneen Lalani and 45,625 shares of
common stock issuable to Ms. Lalani upon the exercise of options vested as of 60 days
following March 15, 2006.(12)
    
    Includes 3,018 shares of common stock issued to Joseph M. Donabauer and 32,481 shares of
common stock issuable to Mr. Donabauer upon the exercise of options vested as of 60 days
following March 15, 2006.(13)
    
    Includes: Messrs. Fleming, Kriebel, Meyers, Scullion, Sulat, Young and Donabauer, and
Drs. Evnin, Gilbert and Lowe, and Ms. Lalani.(14)
    
    Based on a Schedule 13G/A filed with the SEC on February 14, 2006 (the Oxford 13G)
by Oxford Bioscience Partners II L.P. (OBP II), Oxford Bioscience Partners (Adjunct) II L.P.
(OBP Adjunct II), Oxford Bioscience Partners (GS-Adjunct) II L.P. (OBP GS-Adjunct II),
Oxford Bioscience Partners II (Annex) L.P. (OBP Annex II), Oxford Bioscience Partners
(Bermuda) II Limited Partnership (OBP Bermuda II), OBP Management (Bermuda) II Limited
Partnership (OBP Management Bermuda II), OBP Management (Bermuda) II Ltd. (OBP Bermuda II
Ltd.), and OBP Management II L.P. (OBP Management II, together with OBP II, OBP Adjunct II,
GS-Adjunct II L.P., OBP Annex II, OBP Bermuda II, OBP Management Bermuda II, OBP Bermuda II
Ltd., the Oxford II Entities), OBP II holds 357,715 shares of common stock, OBP Bermuda II
holds 267,844 shares of common stock, OBP Adjunct II holds 100,306 shares of common stock, OBP
GS-Adjunct II holds 352,679 shares of common stock and OBP Annex II holds 1,283,317 shares of
common stock and warrants to purchase 184,210 shares of common stock. By virtue of their
relationship as affiliated limited partnerships, whose sole general partners share individual
general partners, OBP II, OBP Adjunct II, OBP GS-Adjunct II, OBP Annex II and OBP Bermuda II
may be 78




---



##### 



deemed to share voting power and the power to direct the disposition of the shares of common
stock which each partnership holds. OBP Management II (as the general partner of OBP II, OBP
Adjunct II, OBP GS-Adjunct II and OBP Annex II) and OBP Management Bermuda II (as the general
partner of OBP Bermuda II) may also be deemed to own beneficially the shares of OBP II, OBP
Adjunct II, OBP GS-Adjunct II, OBP Annex II and OBP Bermuda II. OBP Bermuda II Ltd., as the
corporate general partner of OBP Management Bermuda II, may also be deemed to own beneficially
the shares of OBP II, OBP Adjunct II, OBP GS-Adjunct II, OBP Annex II and OBP Bermuda II.
Messrs. Fleming, Edmund M. Olivier, Cornelius T. Ryan and Alan G. Walton (the Individual
General Partners) are general partners of both OBP Management II and OBP Management Bermuda
II. Therefore each of the Individual General Partners may be deemed to beneficially own the
shares held by OBP II, OBP Adjunct II, OBP GS-Adjunct II, OBP Annex II and OBP Bermuda II;
however, each Individual General Partner and each of the entities disclaims beneficial
ownership of these shares except any shares held directly of record. The Oxford II Entities
and the Individual General Partners (with the exception of Mr. Olivier and Mr. Walton) are
located at 222 Berkeley Street, Suite 1650, Boston, MA 02116. Mr. Oliviers address is 650
Town Center Drive, Costa Mesa, CA 92626. Mr. Waltons address is 315 Post Road West,
Westport, CT 06880.(15)
    
    Based on a Schedule 13D filed on October 4, 2005 (the Oxford 13D) by Oxford
Bioscience Partners IV L.P. (Oxford IV) and mRNA Fund II L.P. (mRNA II), OBP Management IV
L.P. (OBP IV, together with Oxford IV and mRNA II, the Oxford IV Entities), and Jeffery T.
Barnes, Mark P. Carthy, Michael E. Lytton and Messrs. Fleming and Walton (each a General
Partner and collectively the General Partners), OBP IV holds 2,605,437 shares of common
stock and warrants to purchase 911,902 shares of common stock and mRNA II holds 26,142 shares
of common stock and warrants to purchase 9,149 shares of common stock. By virtue of their
relationship as affiliated limited partnerships which share a sole general partner (OBP IV),
Oxford IV and mRNA II may be deemed to share voting power and the power to direct the
disposition of the shares of common stock which each partnership owns of record. OBP IV, as
the general partner of Oxford IV and mRNA II, may also be deemed to own beneficially the
shares of Oxford IV and mRNA II. The General Partners may also be deemed to own beneficially
the shares held by Oxford IV and mRNA II. Oxford IV, OBP IV and the General Partners
expressly disclaim beneficial ownership of the shares held by mRNA II, except to the extent of
their respective pecuniary interest therein, and mRNA II, OBP IV, and the General Partners
expressly disclaim beneficial ownership of the shares held by Oxford IV, except to the extent
of their respective pecuniary interest therein. The Oxford IV Entities and the General
Partners (excluding Mr. Walton) are located at 222 Berkeley Street, Suite 1650, Boston, MA
02116. Mr. Waltons address is 315 Post Road West, Westport, CT 06880.(16)
    
    Based on a Schedule 13D filed with the SEC on October 4, 2005 (the Venrock 13D) by
Venrock Associates (Venrock), Venrock Associates II, L.P. (Venrock II), and Venrock
Entrepreneurs Fund, L.P. (Entrepreneurs Fund, together with Venrock and Venrock II, the
Venrock Entities), Venrock owns 859,207 shares and warrants to purchase 113,289 shares of
common stock, Venrock II owns 1,213,190 shares and warrants to purchase 163,026 shares of
common stock and Entrepreneurs Fund owns 14,233 shares of our common stock. According to the
Venrock 13D, Venrock Management LLC (Management) is the general partner of Entrepreneurs
Fund and a general partner of Venrock and Venrock II. The members of Management are Anthony
B. Evnin, Ph.D. and Messrs. Michael C. Brooks, Eric S. Copeland, Bryan E. Roberts, Ray A.
Rothrock, Anthony Sun and Michael F. Tyrrell (each a Managing Member and collectively, the
Managing Members). According to the Venrock 13D, each Managing Member is also a general
partner of each of Venrock and Venrock II. Each of the Venrock Entities has the sole power to
dispose or direct the disposition of the common stock, shared power to vote or to direct the
vote of 2,086,630 shares of common stock and shared power to direct the disposition of
2,086,630 shares of the common stock. Management may be deemed to beneficially own the shares
owned by Entrepreneurs Fund and the Managing Members may be deemed to beneficially own the
shares owned by the Venrock Entities; however, each Venrock Entity and each Managing Member
disclaims beneficial ownership of these shares except to the extent of his or its
proportionate pecuniary interests therein. Venrock Associates is located at 30 Rockefeller
Plaza, New York, New York 10112.(17)
    
    Based on a Schedule 13G filed with the SEC on February 15, 2006 (the Marxe/Greenhouse
13G), Austin W. Marxe (Marxe) and David M. Greenhouse (Greenhouse). Marxe and Greenhouse
share sole voting and investment power over (i) 421,053 shares of common stock and warrants to
purchase 147,368 shares of common stock held by Special Situations Cayman Fund, L.P.
(Cayman), (ii) 135,732 shares of common stock and warrants to purchase 47,506 shares of
common stock held by Special Situations Fund III, L.P. (SSF3), (iii) 1,548,479 shares of
common stock and warrants to purchase 541,967 common stock owned by Special Situations Fund
III QP. (SSFQP), (iii) 789,474 shares of common stock and 276,315 warrants held by Special
Situations Private Equity Fund, L.P. (SSPE), and (iv) 285,725 shares of common stock and
warrants to purchase 92,105 shares of common stock held by Special Situations Life Sciences
Fund (SSLS together with SSF3, SSFQP, Cayman, and SSPE, the Special Situations Funds).
Marxe and Greenhouse are the controlling principals of AWM Investment Company, Inc. (AWM),
the general partner of and investment adviser to Cayman. AWM also serves as the general
partner of MGP Advisers Limited Partnership (MGP), the general partner of and investment
adviser to SSF3 and 79




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##### 



SSFQP. Marxe and Greenhouse are members of MG Advisers L.L.C. (MG), the general partner of
and investment adviser to Special Situations Private Equity Fund, L.P. (SSPE). Marxe and
Greenhouse are also members of LS Advisers L.L.C. (LS), the general partner of and
investment adviser to SSLS. Through their control of AWM, MGP, and LS, Messrs. The principal
business address for Marxe and Greenhouse is 527 Madison Avenue, Suite 2600, New York, NY
10022.(18)
    
    Based on a Schedule 13G/A filed with the SEC on February 14, 2006, by Michael A. Roth
(Roth) and Brian J. Stark (Stark), Roth and Stark are the Managing Members of Stark
Offshore Management, LLC (Stark Offshore), which acts as investment manager and has sole
power to direct the management of SF Capital. Through Stark Offshore, Roth and Stark possess
voting and dispositive power over 1,463,709 shares of common stock and warrants to purchase
552,631 shares of common stock, which are held by SF Capital Partners Ltd. (SF Capital);
however, Roth and Stark disclaim beneficial ownership of these shares and warrants. The
principal business address for Roth and Stark is 3600 South Lake Drive, St. Francis, WI 53235. Securities Authorized for Issuance Under Equity Compensation Plans
  
 Item 13. Certain Relationships and Related Transactions
    Number of Shares
    
    
    Common StockPurchased
    
    
    Underlying WarrantsDirectorsAnthony B. Evnin, Ph.D.
    
    
    184,211
    
    
    
    64,473David A. Lowe, Ph.D.
    
    
    26,316
    
    
    
    9,210Michael E. Meyers M.P.H
    
    
    26,316
    
    
    
    9,210Robert I. Kriebel
    
    
    5,000
    
    
    
    1,750Tony Scullion
    
    
    39,474
    
    
    
    13,8155% StockholderOxford Bioscience Partners II (Annex) L.P.(1)
    
    
    526,316
    
    
    
    184,210Venrock Associates(2)
    
    
    323,684
    
    
    
    113,289Venrock Associates II, L.P.(2)
    
    
    465,789
    
    
    
    163,026AffiliatesKeyes/Sulat Revocable Trust(3)
    
    
    157,895
    
    
    
    55,263mRNA Fund II L.P.(4)
    
    
    26,142
    
    
    
    9,149Oxford Bioscience Partners IV L.P.(4)
    
    
    2,605,437
    
    
    
    911,902Walter and Celia Gilbert 1994 Unitrust #2, dated 10/11/94 (5)
    
    
    52,632
    
    
    
    18,421
 
 (1)
    
    Prior to the closing of the September 2005 Private Placement, the
sole general partner of Oxford Bioscience Partners II (Annex) L.P. (OBP
II (Annex)), was the beneficial owner of more than 5% of our common
stock. Jonathan Fleming, a member of our Board of Directors, is
affiliated with OBP II (Annex) and its sole general partner. 80




---



##### 



(2)
    
    Anthony B. Evnin, Ph.D., a member of our Board of Directors, is a
general partner of each of Venrock Associates and Venrock Associates II,
L.P. Dr. Evnin is also a Managing Member and General Partner of Venrock
Entrepreneurs Fund, L.P. (collectively with Venrock Associates and Venrock
Associates II, L.P., the Venrock Funds), our stockholder prior to the
September 2005 Private Placement. The Venrock Funds collectively held more
than 5% of our common stock prior to the September 2005 Private Placement.(3)
    
    Mr. Sulat, our President and Chief Executive Officer, and his spouse
are the Trustees of the Keyes/Sulat Revocable Trust and the members of Mr.
Sulats immediate family are the beneficiaries of the Trust.(4)
    
    Oxford Bioscience Partners IV L.P. and mRNA Fund II L.P. are
affiliated with Mr. Fleming. Mr. Fleming is a general partner of OBP
Management IV L.P., the general partner of Oxford Bioscience Partners IV
L.P. and mRNA Fund II L.P.(5)
    
    Dr. Gilbert, a member of our Board of Directors, and his spouse are
the trustees and the beneficiaries of the Walter and Celia Gilbert 1994
Unitrust #2, dated 10/11/94. 
 Item 14. Principal Accountant Fees and Services
  Type of Fee
    
    2005
    
    
    2004Audit Fees(1)
    
    $
    152,000
    
    
    $
    355,000Audit-Related Fees
    
    
    23,000
    
    
    
    Tax Fees(2)
    
    
    15,000
    
    
    
    16,100All Other Fees
    
    
    
    
    
    
    Total Fees for Services Provided
    
    $
    190,000
    
    
    $
    371,100
 
 (1)
    
    Audit fees represent fees for professional services rendered
for the audit of our financial statements, review of interim financial
statements and services normally provided by the independent auditor in
connection with regulatory filings, including our Form S-1 filing for our
initial public offering.(2)
    
    Represents fees for consultation on federal and state tax
returns and for the preparation of such tax returns. Pre-approval Policies and Procedures
  81




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##### 



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)
    
    The following documents are being filed as part of this report:
 (1)
    
    The following financial statements of the Company and the Report of Independent
Registered Public Accounting Firm are included in Part II, Item 8 of this Annual Report
on Form 10-K:Report of KPMG LLP, Independent Registered Public Accounting FirmBalance Sheets as of December 31, 2005 and 2004Statements of Operations for the years ended December 31, 2005, 2004 and 2003Statements of Changes in Stockholders Equity / (Deficit) for the years ended December 31,
2005, 2004 and 2003Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003Notes to Financial Statements
 (c)
    
    Exhibits.
  ExhibitNumber
    
    Description3.1
    
    Form of Amended and Restated Certificate of
Incorporation of the Registrant, which became effective
on April 8, 2004. Incorporated herein by reference to
Exhibit 3.2 to the Registrants Registration Statement
on Form S-1/A, No. 333-111474, filed on March 2, 2004.3.2
    
    Form of Amended and Restated Bylaws of the Registrant,
which became effective on April 8, 2004. Incorporated
herein by reference to Exhibit 3.4 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.4.1
    
    Specimen Certificate evidencing shares of common stock.
Incorporated herein by reference to Exhibit 4.1 to the
Registrants Registration Statement on Form S-1/A, No.
333-111474, filed on March 2, 2004.4.2
    
    Warrant to purchase 12,500 shares of common stock,
$0.001 par value per share, dated March 8, 2000, issued
by the Registrant to Alexandria Real Estate Equities,
L.P. Incorporated herein by reference to Exhibit 4.2
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.4.3
    
    Warrant to purchase 12,500 shares of common stock,
$0.001 par value per share, dated March 8, 2000, issued
by the Registrant to Alexandria Real Estate Equities,
L.P. Incorporated herein by reference to Exhibit 4.3
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.4.4
    
    Warrant to purchase 347,222 shares of common stock,
$0.001 par value per share, dated September 11, 2004,
issued by the Registrant to Hoffmann-La Roche Inc.
Incorporated herein by reference to Exhibit 4.4 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2004.4.5
    
    Fourth Amended and Restated Investor Rights Agreement
dated as of September 11, 2003, among the Registrant
and the parties listed therein. Incorporated herein by
reference to Exhibit 4.5 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23. 2003
 82




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##### 



ExhibitNumber
    
    Description4.6
    
    Registration Rights Agreement dated July 22, 1998
between the Registrant and the Trustees of Columbia
University in the City of New York. Incorporated
herein by reference to Exhibit 4.6 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.4.7
    
    Form of Amendment to the Investor Rights Agreement
dated as of February 27, 2004. Incorporated herein by
reference to Exhibit 4.7 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.4.8
    
    Form of Amendment to the Investor Rights Agreement
dated as of April 1, 2004. Incorporated herein by
reference to Exhibit 4.8 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on April 2, 2004.4.9
    
    Waiver and Third Amendment to Investor Rights
Agreement, dated as of September 21, 2005 among the
Registrant and the investors set forth on the signature
page thereto. Incorporated herein by reference to
Exhibit 10.2 of Registrants Current Report on Form
8-K, filed on September 23, 2005.4.10
    
    Form of Warrant issued to The Stanley Medical Research
Institute. Incorporated herein by reference to Exhibit
10.3 of Registrants Current Report on Form 8-K, filed
on December 19, 2005.10.1**
    
    1998 Employee, Director and Consultant Stock Option
Plan. Incorporated herein by reference to Exhibit 10.1
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.2**
    
    Amended and Restated 2004 Stock Incentive Plan.
Incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed on July
28, 2005.10.3**
    
    2004 Employee Stock Purchase Plan. Incorporated herein
by reference to Exhibit 10.3 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.10.4
    
    Lease Agreement dated as of June 4, 1999, between
ARE-100 Philips Parkway, LLC and the Registrant.
Incorporated herein by reference to Exhibit 10.4 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2003.10.5
    
    First Amendment to Lease dated as of February 4, 2000,
between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to
Exhibit 10.5 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.6
    
    Second Amendment to Lease dated as of November 15,
2000, between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to
Exhibit 10.6 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.7
    
    Third Amendment to Lease dated as of September 15,
2001, between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to
Exhibit 10.7 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.8*
    
    License Agreement dated as of June 13, 2001, between
Bayer AG and the Registrant. Incorporated herein by
reference to Exhibit 10.8 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.
 83




---



##### 



ExhibitNumber
    
    Description10.9*
    
    Collaboration and License Agreement dated as of July
29, 2002, among F. Hoffmann-La Roche Ltd, Hoffmann-La
Roche Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.9 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2004.10.10*
    
    Strategic Alliance Agreement dated as of August 19,
2003, among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche
Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.10 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.11
    
    Letter Agreement dated as of October 22, 2003, amending
the Collaboration and License Agreement dated July 29,
2002, among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche
Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.11 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.12**
    
    Employment Letter Agreement dated as of July 6, 2001,
between Anthony Scullion and the Registrant.
Incorporated herein by reference to Exhibit 10.16 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.13**
    
    Amendment to Employment Agreement dated as of August 6,
2001, between Anthony Scullion and the Registrant.
Incorporated herein by reference to Exhibit 10.17 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.14**
    
    Letter Agreement dated as of March 4, 2002, between
Anthony Scullion and the Registrant. Incorporated
herein by reference to Exhibit 10.18 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2003.10.15**
    
    Employment Letter Agreement dated as of December 18,
2001, between Gardiner F.H. Smith and the Registrant.
Incorporated herein by reference to Exhibit 10.20 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.16
    
    Consulting Agreement dated as of April 1, 1998, between
Dr. Eric Kandel and the Registrant. Incorporated
herein by reference to Exhibit 10.21 to the
Registrants Registration Statement on Form S-1/A, No.
333-111474, filed on February 3, 2004.10.17
    
    Amendment to Consulting Agreement dated as of June 20,
2000, between Dr. Eric Kandel and the Registrant.
Incorporated herein by reference to Exhibit 10.22 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 17, 2004.10.18
    
    Agreement dated as of December 18, 2003, among Dr. Eric
Kandel, the Registrant and the other parties listed
therein. Incorporated herein by reference to Exhibit
10.23 to the Registrants Registration Statement on
Form S-1/A, No. 333-111474, filed on February 3, 2004.10.19**
    
    Employment Letter Agreement dated as of May 18, 2004,
between Jzaneen Lalani and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended June 30, 2004.10.20**
    
    Employment Letter Agreement, dated as of September 9,
2004, between David A. Lowe, Ph.D. and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
September 16, 2004.
 84




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##### 



ExhibitNumber
    
    Description10.21**
    
    Form of Registrants Notice of Stock Option Grant, 24
months vesting. Incorporated by reference to Exhibit
10.2 of Registrants Current Report of Form 8-K, filed
on September 16, 2004.10.22**
    
    Form of Registrants Stock Option Agreement.
Incorporated by reference to Exhibit 10.3 of
Registrants Current Report of Form 8-K, filed on
September 16, 2004.10.23**
    
    Form of Registrants Notice of Initial Grant to members
of the Registrants Board of Directors. Incorporated
by reference to Exhibit 10.1 of Registrants Current
Report of Form 8-K, filed on September 30, 2004.10.24**
    
    Form of Registrants Notice of Subsequent Grant to
members of the Registrants Board of Directors.
Incorporated by reference to Exhibit 10.2 of
Registrants Current Report of Form 8-K, filed on
September 30, 2004.10.25
    
    Amendment to the Collaboration and License Agreement,
dated as of August 6, 2004, between F. Hoffmann-La
Roche Ltd., Hoffmann-La Roche Inc. and the Registrant.
Incorporated by reference to Exhibit 10.2 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.10.26**
    
    Form of Registrants Notice of Grant, 48 months
vesting. Incorporated by reference to Exhibit 10.3 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.10.27**
    
    Letter Agreement, dated as of August 2, 2005, between
Gardiner F. H. Smith and the Registrant. Incorporated
by reference to Exhibit 10.4 of Registrants Quarterly
Report of Form 10-Q, filed for the quarter ended
September 30, 2004.10.28
    
    Description of Board of Directors Compensation.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
December 16, 2004.10.29**
    
    Employment Letter Agreement dated as of March 3, 2005
between Joseph M. Donabauer and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on March
9, 2005.10.30
    
    Amendment to Strategic Alliance Agreement dated as of
February 28, 2005, among F. Hoffmann-La Roche Ltd,
Hoffmann-La Roche Inc. and the Registrant.
Incorporated herein by reference to Exhibit 10.40 of
Registrants Annual Report on Form 10-K for the year
ended December 31, 2004.10.31**
    
    Employment Letter Agreement, dated as of May 3, 2005,
between James R. Sulat and the Registrant. Incorporated
herein by reference to Exhibit 10.1 of Registrants
Current Report on Form 8-K, filed on May 10, 2005.10.32*
    
    Second Amendment to the Collaboration and License
Agreement, dated as of August 18, 2005, between F.
Hoffmann-La Roche Ltd., Hoffman-La Roche Inc. and the
Registrant. Incorporated herein by reference to
Exhibit 10.1 of Registrants Current Report on Form
8-K, filed on August 19, 2005.10.33
    
    Securities Purchase Agreement, dated September 21,
2005, by and among the Registrant and the purchasers
listed on Exhibit A thereto. Incorporated herein by
reference to Exhibit 10.1 of Registrants Current
Report on Form 8-K, filed on September 23, 2005.
 85




---



##### 



ExhibitNumber
    
    Description10.34¥
    
    Development Agreement, dated as of December 19, 2005,
by and between the Registrant and The Stanley Medical
Research Institute. Incorporated herein by reference
to Exhibit 10.1 of Registrants Current Report on Form
8-K, filed on December 23, 2005.10.35
    
    Securities Purchase Agreement, dated December 19, 2005,
by and between the Registrant and The Stanley Medical
Research Institute. Incorporated herein by reference
to Exhibit 10.2 of Registrants Current Report on Form
8-K, filed on December 23, 2005.10.36**
    
    Employment Agreement dated as of February 17, 2006
between Tony Scullion and the Registrant. Incorporated
herein by reference to Exhibit 10.1 of Registrants
Current Report on Form 8-K, filed on February 17, 2006.10.37*
    
    Third Amendment to the Collaboration and License
Agreement, dated as of February 27, 2006, between F.
Hoffman-LaRoche Ltd., Hoffman-LaRoche Inc. and the
Registrant. Incorporated herein by reference to
Exhibit 10.1 of Registrants Current Report on Form
8-K, filed on March 3, 2006.10.38¥
    
    Collaboration and License Agreement, dated as of
October 14, 2005, between Amgen Inc. and the
Registrant.10.39
    
    Exclusive License Agreement, dated as of October 14,
2005, between Amgen Inc. and the Registrant.23.1
    
    Consent of KPMG LLP.31.1
    
    Certification by the Chief Executive Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
1934.31.2
    
    Certification by the Chief Financial Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
1934.32.1
    
    Certification Pursuant to 18 USC. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
 
 *
    
    Confidential treatment granted as to certain portions, which portions have been omitted and filed
separately with the SEC.¥
    
    Confidential treatment requested as to certain portions, which portions are omitted and filed
separately with the SEC.**
    
    Indicates management contract or compensatory plan or arrangement. 86




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##### 



SIGNATURES
  MEMORY PHARMACEUTICALS CORP.By:

/s/
James R. SulatJames R. SulatPresident and Chief Executive Officer  Signature
    
    Title
    
    Date/s/
James R. Sulat
James R. Sulat
    
    President, Chief Executive
Officer and Director (Principal
Executive Officer)
    
    March 30, 2006/s/
Joseph M. Donabauer
Joseph M. Donabauer
    
    Vice President & Controller
(Principal Accounting and
Financial Officer)
    
    March 30, 2006/s/
Tony Scullion
Tony Scullion
    
    Chairman of the Board of Directors
    
    March 30, 2006/s/
Anthony B. Evnin
Anthony B. Evnin, Ph.D.
    
    Director
    
    March 30, 2006/s/
Jonathan Fleming
Jonathan Fleming
    
    Director
    
    March 30, 2006/s/
Walter Gilbert
Walter Gilbert, Ph.D.
    
    Director
    
    March 30, 2006/s/
Robert I. Kriebel
Robert I. Kriebel
    
    Director
    
    March 30, 2006/s/
David A. Lowe
David
A. Lowe, Ph.D.
    
    Director
    
    March 30, 2006/s/
Michael Meyers
Michael Meyers, MPH
    
    Director
    
    March 30, 2006/s/
Peter F. Young
Peter F. Young
    
    Director
    
    March 30, 2006
 87




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##### 



Exhibit Index
 ExhibitNumber
    
    Description3.1
    
    Form of Amended and Restated Certificate of
Incorporation of the Registrant, which became effective
on April 8, 2004. Incorporated herein by reference to
Exhibit 3.2 to the Registrants Registration Statement
on Form S-1/A, No. 333-111474, filed on March 2, 2004.3.2
    
    Form of Amended and Restated Bylaws of the
Registration, which became effective on April 8, 2004.
Incorporated herein by reference to Exhibit 3.4 to the
Registrants Registration Statement on Form S-1/A, No.
333-111474, filed on March 2, 2004.4.1
    
    Specimen Certificate evidencing shares of common stock.
Incorporated herein by reference to Exhibit 4.1 to the
Registrants Registration Statement on Form S-1/A, No.
333-111474, filed on March 2, 2004.4.2
    
    Warrant to purchase 12,500 shares of common stock,
$0.001 par value per share, dated March 8, 2000, issued
by the Registrant to Alexandria Real Estate Equities,
L.P. Incorporated herein by reference to Exhibit 4.2
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.4.3
    
    Warrant to purchase 12,500 shares of common stock,
$0.001 par value per share, dated March 8, 2000, issued
by the Registrant to Alexandria Real Estate Equities,
L.P. Incorporated herein by reference to Exhibit 4.3
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.4.4
    
    Warrant to purchase 347,222 shares of common stock,
$0.001 par value per share, dated September 11, 2004,
issued by the Registrant to Hoffmann-La Roche Inc.
Incorporated herein by reference to Exhibit 4.4 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2004.4.5
    
    Fourth Amended and Restated Investor Rights Agreement
dated as of September 11, 2003, among the Registrant
and the parties listed therein. Incorporated herein by
reference to Exhibit 4.5 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23. 20034.6
    
    Registration Rights Agreement dated July 22, 1998
between the Registrant and the Trustees of Columbia
University in the City of New York. Incorporated
herein by reference to Exhibit 4.6 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.4.7
    
    Form of Amendment to the Investor Rights Agreement
dated as of February 27, 2004. Incorporated herein by
reference to Exhibit 4.7 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.4.8
    
    Form of Amendment to the Investor Rights Agreement
dated as of April 1, 2004. Incorporated herein by
reference to Exhibit 4.8 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on April 2, 2004.4.9
    
    Waiver and Third Amendment to Investor Rights
Agreement, dated as of September 21, 2005 among the
Registrant and the investors set forth on the signature
page thereto. Incorporated herein by reference to
Exhibit 10.2 of Registrants Current Report on Form
8-K, filed on September 23, 2005.4.10
    
    Form of Warrant issued to The Stanley Medical Research
Institute. Incorporated herein by reference to Exhibit
10.3 of Registrants Current Report on Form 8-K, filed
on December 19, 2005.
 88




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##### 



ExhibitNumber
    
    Description10.1**
    
    1998 Employee, Director and Consultant Stock Option
Plan. Incorporated herein by reference to Exhibit 10.1
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.2**
    
    Amended and Restated 2004 Stock Incentive Plan.
Incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed on July
28, 2005.10.3**
    
    2004 Employee Stock Purchase Plan. Incorporated herein
by reference to Exhibit 10.3 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.10.4
    
    Lease Agreement dated as of June 4, 1999, between
ARE-100 Philips Parkway, LLC and the Registrant.
Incorporated herein by reference to Exhibit 10.4 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2003.10.5
    
    First Amendment to Lease dated as of February 4, 2000,
between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to
Exhibit 10.5 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.6
    
    Second Amendment to Lease dated as of November 15,
2000, between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to
Exhibit 10.6 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.7
    
    Third Amendment to Lease dated as of September 15,
2001, between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to
Exhibit 10.7 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.8*
    
    License Agreement dated as of June 13, 2001, between
Bayer AG and the Registrant. Incorporated herein by
reference to Exhibit 10.8 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.9*
    
    Collaboration and License Agreement dated as of July
29, 2002, among F. Hoffmann-La Roche Ltd, Hoffmann-La
Roche Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.9 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2004.10.10*
    
    Strategic Alliance Agreement dated as of August 19,
2003, among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche
Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.10 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.11
    
    Letter Agreement dated as of October 22, 2003, amending
the Collaboration and License Agreement dated July 29,
2002, among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche
Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.11 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.12**
    
    Employment Letter Agreement dated as of July 6, 2001,
between Anthony Scullion and the Registrant.
Incorporated herein by reference to Exhibit 10.16 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.13**
    
    Amendment to Employment Agreement dated as of August 6,
2001, between Anthony Scullion and the Registrant.
Incorporated herein by reference to Exhibit 10.17 to
the
 89




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##### 



ExhibitNumber
    
    DescriptionRegistrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.14**
    
    Letter Agreement dated as of March 4, 2002, between
Anthony Scullion and the Registrant. Incorporated
herein by reference to Exhibit 10.18 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2003.10.15**
    
    Employment Letter Agreement dated as of December 18,
2001, between Gardiner F.H. Smith and the Registrant.
Incorporated herein by reference to Exhibit 10.20 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.16
    
    Consulting Agreement dated as of April 1, 1998, between
Dr. Eric Kandel and the Registrant. Incorporated
herein by reference to Exhibit 10.21 to the
Registrants Registration Statement on Form S-1/A, No.
333-111474, filed on February 3, 2004.10.17
    
    Amendment to Consulting Agreement dated as of June 20,
2000, between Dr. Eric Kandel and the Registrant.
Incorporated herein by reference to Exhibit 10.22 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 17, 2004.10.18
    
    Agreement dated as of December 18, 2003, among Dr. Eric
Kandel, the Registrant and the other parties listed
therein. Incorporated herein by reference to Exhibit
10.23 to the Registrants Registration Statement on
Form S-1/A, No. 333-111474, filed on February 3, 2004.10.19**
    
    Employment Letter Agreement dated as of May 18, 2004,
between Jzaneen Lalani and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended June 30, 2004.10.20**
    
    Employment Letter Agreement, dated as of September 9,
2004, between David A. Lowe, Ph.D. and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
September 16, 2004.10.21**
    
    Form of Registrants Notice of Stock Option Grant, 24
months vesting. Incorporated by reference to Exhibit
10.2 of Registrants Current Report of Form 8-K, filed
on September 16, 2004.10.22**
    
    Form of Registrants Stock Option Agreement.
Incorporated by reference to Exhibit 10.3 of
Registrants Current Report of Form 8-K, filed on
September 16, 2004.10.23**
    
    Form of Registrants Notice of Initial Grant to members
of the Registrants Board of Directors. Incorporated
by reference to Exhibit 10.1 of Registrants Current
Report of Form 8-K, filed on September 30, 2004.10.24**
    
    Form of Registrants Notice of Subsequent Grant to
members of the Registrants Board of Directors.
Incorporated by reference to Exhibit 10.2 of
Registrants Current Report of Form 8-K, filed on
September 30, 2004.10.25
    
    Amendment to the Collaboration and License Agreement,
dated as of August 6, 2004, between F. Hoffmann-La
Roche Ltd., Hoffmann-La Roche Inc. and the Registrant.
Incorporated by reference to Exhibit 10.2 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.
 90




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##### 



ExhibitNumber
    
    Description10.26**
    
    Form of Registrants Notice of Grant, 48 months
vesting. Incorporated by reference to Exhibit 10.3 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.10.27**
    
    Letter Agreement, dated as of August 2, 2005, between
Gardiner F. H. Smith and the Registrant. Incorporated
by reference to Exhibit 10.4 of Registrants Quarterly
Report of Form 10-Q, filed for the quarter ended
September 30, 2004.10.28
    
    Description of Board of Directors Compensation.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
December 16, 2004.10.29**
    
    Employment Letter Agreement dated as of March 3, 2005
between Joseph M. Donabauer and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on March
9, 2005.10.30
    
    Amendment to Strategic Alliance Agreement dated as of
February 28, 2005, among F. Hoffmann-La Roche Ltd,
Hoffmann-La Roche Inc. and the Registrant.
Incorporated herein by reference to Exhibit 10.40 of
Registrants Annual Report on Form 10-K for the year
ended December 31, 2004.10.31**
    
    Employment Letter Agreement, dated as of May 3, 2005,
between James R. Sulat and the Registrant. Incorporated
herein by reference to Exhibit 10.1 of Registrants
Current Report on Form 8-K, filed on May 10, 2005.10.32*
    
    Second Amendment to the Collaboration and License
Agreement, dated as of August 18, 2005, between F.
Hoffmann-La Roche Ltd., Hoffman-La Roche Inc. and the
Registrant. Incorporated herein by reference to
Exhibit 10.1 of Registrants Current Report on Form
8-K, filed on August 19, 2005.10.33
    
    Securities Purchase Agreement, dated September 21,
2005, by and among the Registrant and the purchasers
listed on Exhibit A thereto. Incorporated herein by
reference to Exhibit 10.1 of Registrants Current
Report on Form 8-K, filed on September 23, 2005.10.34¥
    
    Development Agreement, dated as of December 19, 2005,
by and between the Registrant and The Stanley Medical
Research Institute. Incorporated herein by reference
to Exhibit 10.1 of Registrants Current Report on Form
8-K, filed on December 23, 2005.10.35
    
    Securities Purchase Agreement, dated December 19, 2005,
by and between the Registrant and The Stanley Medical
Research Institute. Incorporated herein by reference
to Exhibit 10.2 of Registrants Current Report on Form
8-K, filed on December 23, 2005.10.36**
    
    Employment Agreement dated as of February 17, 2006
between Tony Scullion and the Registrant. Incorporated
herein by reference to Exhibit 10.1 of Registrants
Current Report on Form 8-K, filed on February 17, 2006.10.37*
    
    Third Amendment to the Collaboration and License
Agreement, dated as of February 27, 2006, between F.
Hoffman-LaRoche Ltd., Hoffman-LaRoche Inc. and the
Registrant. Incorporated herein by reference to
Exhibit 10.1 of Registrants Current Report on Form
8-K, filed on March 3, 2006.10.38¥
    
    Collaboration and License Agreement, dated as of
October 14, 2005, between Amgen Inc. and the
Registrant.
 91




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##### 



ExhibitNumber
    
    Description10.39
    
    Exclusive License Agreement, dated as of October 14,
2005, between Amgen Inc. and the Registrant.23.1
    
    Consent of KPMG LLP.31.1
    
    Certification by the Chief Executive Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
1934.31.2
    
    Certification by the Chief Financial Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
1934.32.1
    
    Certification Pursuant to 18 USC. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
 
 *
    
    Confidential treatment granted as to certain portions, which portions have been omitted and
filed separately with the SEC.¥
    
    Confidential treatment requested as to certain portions, which portions are omitted and filed
separately with the SEC.**
    
    Indicates management contract or compensatory plan or arrangement. 92